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Research Analysis for Business

ECO/561

April 5, 2017

Wells Fargo and Company Advisory

In most cases, firms apply economic concepts such as models and other tools of economics to determine the output, pricing and profit maximization. As a business consultant, I will be analyzing Well Fargo & Company. The company is an American bank that provides international banking and financial services. I will also give advice and create recommendations on how the firm can achieve its future achievements in its current market.

Market Structure

The market structure of Wells Fargo & Company operates in monopolistic competition. Banking industries contain many procedures that display a difference in their services as compared to their competitor. Thus, every firm should provide quality service to achieve its competitive advantage. Wells Fargo & Company can offer a price charged by its competitors and do away with the impact that its price has on rivals. A financial industry is a competitive platform, and every company must experience these competitions from other banks, credit unions, finances companies, insurance companies, mutual funds companies, saving and loans associations and investment banks. The main competitor of Wells Fargo & Company includes JPMorgan Chase, Bank of America and Citigroup. These are the four major banks in the United States and hold large market share in the country (www.bea.gov, 2017). Wells Fargo is approximated to have 50million customers by the end of 2016 which is estimated to be one of the largest figures.

However, several barriers can influence the entry of the new firm into the market structure especially for banking. These barriers include level of competition within the market structure, power of suppliers, government regulations and advertising.

Competition level: From the graph above, there is a stiff competition from different firms within the same market structure. This competition may scare new firms from entering the market. Also, some firms have a monopolistic benefit on certain services thus tightening the nature of competition.

Advertising: this is another strategy Wells Fargo & Company is using to counteract any competition within its market structure. The firm spends heavily on advertising its services. These costs pose a greater challenge for the new firms to join the market structure.

Government regulations: These regulations by the rule of law pose high cost of obtaining a license for the firm intending to carry the same business can also act as a barrier to entry for new firms.

The Power of Suppliers: Capital is the main resource of any bank and this constitute of four major suppliers. These include customer deposits, mortgages, and loans, loans from other financial institutions and mortgage-backed securities. These suppliers may restrict other firms from entering the market since it requires huge amount of capital

However, the main problem here is the fluctuation and inconsistent market share over the years.

There is inconsistency from the graph above regarding maintaining the consumer base where even though there is a slight hope in the year 2016, the market share begins to fall in 2016.The trends in microeconomics in the United States from the last three years have a significant impact on the performance of Wells Fargo & Company.

· Current stage of the business cycle- The country has been in expansion cycle since the economic recession, and the economy has been growing at rates of 2% to 3%

· Real gross domestic product (GDP) - The GDP has been gradually increasing from the year 2014 to reach 18, 561.93 from 17, 393.1 trillion US dollars (www.esa.doc, 2017)

· Inflation, as measured by the consumer price index (CPI) - It, has been fluctuating over time where it falls in the year 2015 before rising again in 2016

· Unemployment rate- The unemployment rates have gradually fallen from over 6 percent to rates just above four percent.

· Federal funds rate- The Federal Funds rates have gradually increased to rates of almost 0.75% (www.bea.gov, 2017)

· The current rate for borrowing funds- The prime rates have increased to 3.75% which means that more people are now consistently accessing short-term credit facilities from financial institutions.

The general demand for goods and service industries has been increasing over the last three years. Wells Fargo & Company which provides service to customers has progressively increase and experienced decrease in demand for its services as the banking sector continue to recovery steadily. The profitability of firms in the banking industry has been increasing significantly, and the revenues of Fargo & Company are increasing gradually. Also, the services such as loans in the company and the entire industry were demanded, and this was increasing over the past three years. ( www.usa.gov,2017 ).

The loan demand and supply of Well Fargo & Company has been increasing over last few years. Most of the financial institutions depend on loans to bring enormous profits and thus, more appropriate strategies should be put in place to ensure more borrowing. I believe that low-interest loans can be an attractive strategy to borrowers. Most borrowers evaluate the institutions providing loans and regard the low-interest loans offered as their best term. Therefore, it is more advisable for the firm to reduce its loans' interest rates to improve on discounts and collateral services.

The firm provides various types of loans such as personal loans, commercial loans, and Auto loans among others. Suppose their pricing is not attractive to customers, they will always seek assistance from other loan substitutes. They can choose to factor their accounts like accounts receivable, a technique they acquire finances by selling these accounts to financial institutions. The other substitute is peer to peer lending where individuals can acquire loans from their friends and families (Makinen & Library of Congress, 2016). Furthermore, businesses can choose to give up some future equity instead of borrowing loans or still borrow money from their customers instead of borrowing loans. To determine the price elasticity of demand for loans provided by Wells Fargo & Company, I will make use of loan pricing tool. One can be able to forecast the way customers will behave. However, this can never be 100%. In this case, I can determine the inverse relationship between the price and demand and advocate for an appropriate action. Businesses will always determine the appropriate prices to be set such as them maximize profit and at the same time satisfy the customers with prices when they choose to use price elasticity of demand for loans.

The level of outputs produced by any business is influenced by variable costs and fixed costs. For a firm like Well Fargo & Company will have fixed costs such as salaries payroll, vehicle expenses, security services, Insurance, Telephone and internet expenses, marketing and advertising expenses. Sometimes, these costs may change with a change in sales, but they are more fixed than variable. Also, the variable costs are costs that keep on varying. These costs include hourly wages, commissions, and supplies. Variable costs vary with changes in sales (Makinen & Library of Congress, 2016). Therefore, these costs allow the company to set their optimal pricing and accurate forecasting of expenses and the company can choose to lower the utility bills and take advantage of free technology such as cloud computing to minimize maintenance costs.

Conclusion

As Wells Fargo & Company operates in a monopolistic type of market, it has a freedom to fix its prices although it must consider its rivals' prices; thus, exhibiting some degree of combination of monopoly and perfect competition. Since the firm's market share is declining. The decline can be associated with poor services offered as compared to that of its competitors. I recommend that the company should counteract its competitors by eliminating these negative responses by taking actions such as reducing their loan interest rates. Besides, the firm has a huge financial base. To increase its revenue, the firm can choose to set up branches in other Nations since with its successful history; it can thrive in any market. Furthermore, the macro and micro factors are key determinants of business success and businesses should be able to cope with them (Armcher &Pate, 2013). Wells Fargo & Company is among four biggest financial institutions in the United States, and it can use its economies of scale to gain a competitive advantage over others. In this case, it can choose to offer loans at the lowest interest rates, and best terms minimize on avoidable costs and portray creativity to be ahead of its competitors.

References

Armcher. R &Pate.J (2013). Principles of Macroeconomics: San Diego: Bridgepoint Education, Inc

Makinen, G. E., & Library of Congress. (2016). Current economic conditions and selected forecasts. Washington, D.C.: Congressional Research Service, Library of Congress.

www.esa.doc.gov (February 11, 2017) Economic and Statistics Administration GDP, Retrieved from http://www.esa.doc.gov/

www.bea.gov (February 11, 2017) U.S. Economic Accounts, retrieved from https://www.bea.gov/

www.usa.gov (February 11, 2017) Data and Statistics about the United States, retrieved from https://www.usa.gov/statistics

The reference page always begins on the top of the next page after the conclusion.