What Is Marginal Analysis?

What is marginal analysis? Marginal analysis identifies changes within the organization and within the products or services sold by an organization in relation to the current price changes relative to other similar products and services sold by the same organization. It is a cost-benefit analysis that focuses on how changing the price of a product or service can yield additional profits.

Marginal cost analysis is the study of costs and prices of a company’s operation relative to other similar companies. The study is critical when companies wish to determine whether or not they are getting the maximum value out of scarce resources. In contrast, companies must also make sure that changes in the supply of materials result in increased profits for high profit levels.

This analysis is an important aspect of the analysis of a company’s production because it allows for decisions concerning the allocation of resources, which leads to the production of more efficient and economical products and services. For instance, a company could use a marginal analysis to establish if a particular product is being overproduced, if there is a need for an increase in the amount of the product produced per unit of cost, or if there is a need to invest in a better resource for the same product or services at a lower cost.

As mentioned above, this type of analysis is typically performed in relation to the company’s overall production. An example of this would be when a company produces a large amount of widgets, it may want to identify whether or not the company could produce more widgets by changing the process to reduce costs and maximizing profits. However, such a change will require a significant increase in labor costs, which may have negative effects on a company’s profitability as well as its bottom line.

When a company performs this type of analysis, it does so to identify areas within the company’s operations that could benefit from a decrease in overall costs. This type of analysis could include a reduction in the amount of materials used in manufacturing, the production of a different product, the use of resources which are more beneficial in the production process, or the elimination of some of the current processes or product lines in the company.

The study of marginal analysis helps to identify areas in the business where additional costs could be reduced without reducing the value of existing operations or reducing the value of goods or services that a company has currently sold. When a company determines the extent to which additional costs could be reduced, it is able to create a plan to eliminate these costs while still maintaining or improving current revenue or profitability. This type of analysis is very important, especially when considering the purchase or sale of a company’s assets.

Marginal Analysis provides a company with an understanding of whether or not a specific change could possibly reduce costs and/or increase profitability for the business and is used for planning purposes when making purchases, mergers, acquisitions and for the evaluation of a sale or investment proposal. A business that can show that a proposed change could be profitable will typically obtain a better deal from investors or a business owner than a company that cannot show a positive effect on overall profits but has a higher chance of securing financing or an advantage in acquiring funding.

The study of marginal analysis helps to determine whether the costs and/or benefits of a change in operations, products or services can be significantly reduced without increasing the profit margin or reducing the market share or customer base of the business. In addition to determining whether a proposed change can produce a positive impact on the bottom line, marginal analysis also examines whether or not the business can pass on these savings to customers by increasing sales and profit margins. Marginal Analysis provides a company with an opportunity to identify the best use of its resources while reducing costs without sacrificing quality or adversely affecting the customer base or market share of its competitors.

Life-enriching AI tech could have negative impact for users, unless marketers step in

Lifestyle-enhancing AI services such as fitness trackers, dating apps, smart speakers and photo editors, designed to make consumer’s lives easier, healthier and happier may be failing to create the positive impact their developers say they are, according to a new study from the Rotterdam School of Management Erasmus University.

The study, led by Professor Stefano Puntoni, along with colleagues Prof Rebecca Walker Reczek of Ohio State University, Prof Markus Giesler of York University in Canada and Prof Simona Botti of London Business School, focuses on the growing influence these advanced technologies are having on our day-to-day lives, and the realities of the customer experience.

Whilst software developers position AI as a neutral tool, and evaluate it on its efficiency and accuracy, the researchers argue this approach does not consider the social and individual challenges that can occur when AI is deployed into lifestyle-enhancing products.

The researchers believe that firms need to develop a customer-centric view of AI that focuses not just on its technological capability, but also on how these are actually experienced by consumers – particularly the potential costs that accompany the benefits.

The researchers developed a framework that breaks down the four core experiences consumers have with AI; data capture, classification, delegation and social, to identify the sociological and psychological tensions involved.

For example, AI’s ability to capture and analyse personal data from social media users in order to make advertising recommendations, which then infiltrate what users believe to be their private user experience, can cause upset and mistrust or, conversely, influence future activities or purchasing decisions.

Professor Puntoni of the Rotterdam School of Management says,

“Not only are technology companies continually required to find new ways to make monitoring and surveillance palatable to consumers by linking it to convenience, productivity, safety, or health and well-being, they must also constantly push the boundaries of what private information consumers should share through a complex landscape of notifications, reminders, and nudges intended to initiate behavioral change. Thus, AI can transform consumers into subjects who are complicit in the commercial exploitation of their own private experience.”

Published in the Journal of Marketing, the study seeks to bridge the divide between the technological expertise of software designers – whose focus is to create highly capable technology and the human-focused values of marketers, whose priority is to ensure a meaningful consumer experience.

By identifying the consumer experience pressure points that commonly exist in AI services, the study provides important guidance and recommendations for the computer scientists charged with advancing these technologies in the future, to ensure consumer’s wellbeing is well-considered at every level of development.

Going further, the researchers make recommendations outlining the organisational learnings that tech firms must engage in to better lead the deployment of consumer AI, and outline concrete steps they should take to ensure such technologies can provide a truly valuable and life-enriching service in the future.

Creating a Simple Framework to Achieve Supply Chain Sustainability

 Over the past decade, the ability to operate sustainably has become a top priority for large enterprises, specifically around areas such as plastic elimination and carbon reduction. In fact, if an organisation has a poor sustainability performance, as measured in environmental and social impact, this can considerably slow its growth ambitions and impact shareholder value.

To make and sell goods, consumer businesses need affordable, reliable supplies of energy, as well as natural resources and a sustainable supply chain, and of course the permission from consumers, investors, and regulators to do business. But companies can no longer take those enabling factors for granted. Indeed, scientific consensus, along with pledges by governments and business leaders—including the leaders of some of the largest consumer companies—calls for dramatic improvements in sustainability performance.

Likewise, ensuring internal operations are sustainable is no longer enough; businesses must implement strategies to ensure sustainability ambitions are being supported throughout all tiers of the supply chain. However, promoting sustainability throughout a complex supply chain is incredibly challenging, therefore in this article, I have outlined a simple framework that will help organisations to start to address this issue.

Supplier collaboration plays a critical role in developing a sustainable supply chain. Developing collaborative partnerships with key partners will enable enterprises to manage the impacts and risks of their operations whilst capitalising on opportunities to create value. By aligning projects with UN Sustainable Development Goals (SDGs), collaboration can promote incremental efficiency gains and transformational changes to business models that create a more sustainable economy.

Reducing the carbon footprint of your supply chain

The reduction of carbon emissions is part of several SDGs, and many companies have initiated programmes that aim to reduce the carbon footprint of their supply chains. This is not surprising. Research from the Carbon Disclosure Project (CDP) found that the average business’ supply chain generates approximately 5.5 times more carbon emissions than its direct operations, with the retail industry producing 11 times the emissions.

However, opportunities do exist to collaborate with suppliers and reduce emissions. For example, CDP research found that increasing renewable energy use within the supply chains of 125 large corporates by 20% would reduce emissions by over a gigaton. A big challenge for corporates is promoting such initiatives to a larger number of smaller suppliers, and through multiple supplier tiers to trigger change throughout the supply chain. This obstacle is well recognised, and some firms, such as L’Oréal, are making efforts to overcome this. Indeed, Alexandra Palt, Chief Corporate Responsibility Officer at L’Oréal, stated that the company was looking to collaborate with suppliers to drive emission reductions further down the supply chain.

Modern supply chains are very complex and managing risk and impacts whilst capturing opportunities to sustainably create value is challenging. However, the fundamentals for putting in place an effective framework are consistent across all organisations, regardless of industry. There are four logical steps: understand, plan, apply and evolve.

  1. Knowledge is power

Start with understanding. This is all about understanding the risks, opportunities, challenges, and capabilities within the supply chain. This is key for the creation of a supply chain programme to address sustainability and reveals opportunities for creating value via collaborative innovation. It is important to identify the drivers of risk and opportunity (for example, legislation, pricing, disruptive technology and more). Once identified, undertake scenario planning so that you can see how these drivers may develop, how they can be planned for and how revenue/costs might be affected. Once you have undertaken this exercise, outline the actions to capitalise on opportunities and mitigate risks.

  1. The importance of planning

I can’t emphasise enough how important it is to plan. Plan approaches that address the sustainability risks and opportunities that you have identified. Create ambitious sustainability targets that align with the wider business objectives and with the relevant UN SDGs. Segment your suppliers based on these targets, using your understanding of risks and opportunities. But most importantly, prioritise your goals and develop a plan of action that uses company resources and top tier suppliers.

  1. Apply your plan

Now establish the necessary processes, governance, and capabilities to execute on your strategy. Engage with suppliers on scalable pilot projects that demonstrate value. Then you will be able to scale up successful initiatives, enabling these projects to impact the value chain.

  1. Evolve your strategy

Programmes within a sustainability strategy have the potential to have very high impact. It is therefore important that organisations continuously learn from outcomes and adapt their strategy accordingly. This is best achieved through creating a learning loop that focuses on rapidly iterating, piloting and validating your sustainability initiatives.

The world population will reach 9.8 billion in 2050. The U.S. Energy Information Administration predicts energy consumption will increase by 50% between now and then, and natural resource use shows a similar trend. With this in mind, the supply chain is one area with plenty of room for improvement when it comes to sustainability. A successful approach will involve the use of supplier collaboration technologies and platforms to reduce impact, mitigate risks and capitalise on opportunities for innovating new products and processes. Employing best-in-class technology to do this will help not only help to drive sustainability but also profit margins.

 With today’s public being more socially conscious than ever, businesses must align themselves with this shift towards a sustainable supply chain or risk losing business as a result of inaction.