Disadvantages of Privatization

Disadvantages of Privatization

Disadvantages of privatization are creation of monopoly, failure to manage the organization, decline in quality of service, unemployment, misuse of disposal receipt and purchase of future sale. These disadvantages has been explained below

1.    Creation of Monopoly

Privatization may result in creation of monopoly in the economy; monopoly is created where major competitor buys the public organization. Monopoly is not in the best interest of the people for many reasons. (Monopoly earn abnormal profits)

2.    Failed to Manage

New management may not be able to run the large organization, it is noted that public organization normally are very large, because those organization are created for a larger group of people. Therefore, it is not easy to run such organization with limited skills.

3.    Decline in Quality of Service

Privatization may result in decline of quality of service, because businessman or investor is more interested in profit than quality, where government is more interested in quality than profits.

4.    Unemployment

Other disadvantage of privatization is unemployment, because new investor would be interested to run with minimum labour source, where public organization normally over staffed, therefore some staff may lose their jobs.

5.    Misuse of Disposal of Receipt

One of the main disadvantages of privatization is to use the receipt of disposal in non productive projects.

6.    Purchase for future Sale

Privatization should not be future sale, but for improvement of services and competitive environment. It means that buyer should not sell the shares in stock exchange at higher prices by manipulating profit and earn easy profit.

Disadvantages of Money

Disadvantages of Money

Disadvantages of money or monetary system can be expressed in terms of artificial shortage created in the market, unequal distribution of income, and trade cycles at regular intervals, fluctuation in the money value, and creation of speculative market etc.

1.    Artificial Hike in Price

Artificial price hike by creating artificial shortage is possible in Monterrey system. Producer can store value in money for future production, and thus current production level may be reduced to create artificial shortage.

2.    UN Equal Income Distribution Issues

UN equal distribution of wealth is another disadvantage of monetary system. People are able to accumulate wealth in monetary system, moreover, in monetary system investment opportunities are only available to wealthy people, and thus they can create more wealth by using money.

3.    Trade Cycles at regular interval

Economy is not in a stagnant position, and changing its position regularly. Economy takes many positions i.e. Trade cycle. The economy is moving from one trade cycle to another i.e. boom, decline, recession, recovery.

4.    Value of money Changes

Though money stores the value, however, it is not a perfect medium of storage and money value tends to fall over the period of time. This is primarily due to inflation in the economy.

5.     Speculation is created

Money has ability to create a speculative demand for the product. This is especially is case, where the interest rate is low and money can be invested in speculative markets. Speculation has many disadvantages.

6.    Black Economy

Money has encouraged the establishment of black economy in the world. Due to easy transfer ability of money, the illegal activity can be easily funded by the money.

Disadvantages of Market Penetration Pricing

Disadvantages of market penetration Pricing Strategy

1.    High growing market

This strategy will not work in high growing market and competitor will react accordingly. The new entry cannot be avoided with low prices if the market has a lot of growth opportunity for example the telecom sector almost in every country of the world four to five companies can get their share even by offering higher prices than competitors.

2.    Price is only one factor

The price is only one of the factors for capturing the market. There are also other factors for example a brand name if branded competitor enter in the market even with the high price there is fair chance that he will lead the market. The other factor is product quality and features for example if your competitor enters in the market with improved product with same price or relatively high price then competitor will get his share from the market.

3.    Low price may result in high loses

The lower prices are possible by keeping the profit margin low. This situation may result in heavy losses if there is fall in demand. The profit margin should be sufficient enough to cover the fixed cost as well. Some company’s takes into account only the marginal cost for pricing decision and this situation may lead for heavy losses if the due consideration is not given to fixed cost.

Disadvantage of skimming pricing strategy

Disadvantage of skimming pricing strategy

1.    Brand image is at stake

The charging very high prices will bring a bad image of the brand for charging unnecessary high price for the product.

2.    Future product launch problems

The charging very high prices and then lowering down with the passage of time will have negative impact on future launch of product. The customer will not willing to pay high price for next product with a view that prices will come down sharply after sometime.

3.    Not suitable for low price product

This strategy will not work for the lower price product where there are many options available to the customer and lower prices offered to public will not attract the customer as the prices difference is not going to be material for the customer.

4.    Not suitable in competitive market

This strategy will not work in high competitive market because in the high competitive market the competitor is going to react quickly .The competitor will get the maximum share by reducing the prices. This strategy will only work in the high competitive market if your product offers some additional features as well.

Disadvantages of Marginal Cost plus Pricing

Disadvantages of Marginal Cost plus Pricing

In marginal cost plus pricing, only the variable cost is focused. There are number of disadvantages or limitation of using marginal cost plus pricing.

1.    Decision Making Needs

Marginal cost plus pricing is widely used for pricing decision. It is important to note that this pricing cannot be used for external reporting purposes i.e. in financial statements.

2.    Fixed Overhead cost is Material

Marginal cost plus pricing cannot be used in organization, where fixed overheads cost are material.

3.    Not Represent Actual Profit

Marginal cost plus pricing system does not reflect the actual profit from the product. Therefore marginal cost plus pricing may produce some misleading projections of profits.

4.    Market Factors are Important

Market factor are important for price determination. In this method demand & supply are not considered for price determination. it means that this pricing strategy ignores some fundamental factors.

5.    Competitor is Alive

Competitor prices in the market are not consider, which another great limitation of marginal cost plus pricing. In real business world prices cannot be decided without considering competitor prices in the market.

Disadvantages of Full Cost Plus Pricing

Disadvantages of Full Cost plus Pricing

1.    Competitor is ignored

In full cost plus pricing system competitor prices are ignored, which is a key factor for determining the price. Ignoring competition can bring huge losses to the organization.

2.    Market conditions are ignored

Full cost plus pricing system does not take into account the market condition i.e. demand & supply of the product, which again a key consideration for price determination.

3.    Profit Margin Decision

Management takes the profit margin decision, which could be very biased decision. There is no mechanism for profit margin. Biased decision making in this regard can bring heavy damage to the product.

4.    Full cost is difficult task

In many cases there is not possible to calculate the full cost of the product i.e. very small products, or different variety of product is being produced under same roof.

5.    No incentive for Cost Control

Profit is guaranteed in this method, therefore there is no incentive to control the cost.

6.    More Wastage is Expected

Due to guaranteed profit, there is no incentive to control wastage in the production process.

Disadvantages of Decentralization

Disadvantages of Decentralization

1.    Overall Direction is Ignored

In decentralization decision making, the overall direction of organization is lost. Local managers take into account only limited scenario. They see only operational advantage in decision making, which may be disadvantageous to overall direction.

2.    Control is Lost

In decentralization decision making, control of top management is lost. It is difficult to control the decision of of Local/Operational managers. This loss of control will increase the cost for the organization and some unwanted and costly decisions are made by the Local Management.

3.    Performance measurement

In decentralization system it is difficult to measure the performance, because there is not standard operating procedures in decentralization environment. Performance can only be measured against standard Procedures.

4.    No Economies of Scale

In decentralization system economies of scale is lost. Many purchases are made on local level and therefore organization cannot benefit from the economies of scale.

Disadvantages of Zero Based Budgets

Disadvantages of Zero Based Budgets

1.    Time Consuming

First disadvantage of zero based is that, it require a detail research by the relevant manager, therefore it require a lot of time of manager to prepare the budget.

2.    Too much Technical

Second advantages of zero based budgets are its data collection and analyses requirement. Data may noe be readily available to the manager, moreover, data analyses and drawing conclusion is very technical job.

3.    Pressure for accuracy

Third disadvantage of zero based budget is its un due pressure on manager for accuracy. Budget put extra pressure on manager for accuracy of estimates and then achievement of target set by themselves.

4.    Attempt of actual figures

Fourth disadvantage of zero based budgets is more focused on accuracy. Budget tries to prepare the budget with accuracy. The basic definition that budget is an estimate is ignored.

5.    Re inventing Wheel

Some people consider it to re invent the wheel every time. In many business the basic structure of the organization does not change for years, therefore zero based budgeting is not effective is such organization.

Disadvantages of imposed Budget

Disadvantages of imposed Budget

1.     Challenging Targets

First disadvantage of imposed budgeting is challenging target setting. Target set under this methods are too challenging and difficult to achieve. This situation may create resentment in junior management. This situation will also create UN necessary pressure on junior management to achieve un realistic target set by budget.

2.     Demoralization

Second disadvantage of imposed budget is demoralization of junior management. The moral of management will be low moral over non consultation. The junior management will feel powerless and this will adversely affect the performance.

3.     Poor Communication

Third disadvantage of imposed budget is communication gap between lower and higher management. Due to little communication between top management and the lower management many operational aspect will remain un incporated in the budget. There will be over focused on strategic objective and importance of operation in achieving the overall objective is ignored.

4.    Talent is not explored

Fourth disadvantages of imposed budget are limited exploration of operational management. In this technique due to little interaction between management and operational management, the talent of operation management does not exposed to top management.

5.    Operational aspect are ignored

Fifth disadvantage of imposed budget is ignorance of operational aspect of the organization. It means many operational aspects are not incorporated in budget. Therefore budget may be less accurate.

Disadvantages of ABC Costing

Disadvantages of ABC Costing

Disadvantages of activity based costing may be explained in terms of complexity, cost driver identification & selection, all cost coverage, and number of activities;

1.    Complex System

First disadvantage of ABC costing is its complexity. Activity based costing is a complex system of identification of activities and cost drivers and require extensive business experience and deep understanding of the business.

2.     Cost Driver Identification & Selection

Activity based costing implementation requires technical knowledge and extensive business experience. A number of factors are to be considered while deciding the appropriate cost driver. There may be more than cost driver for single activity, which may further complicate the selection of cost driver.

3.    Extension of absorption costing

Activity bases costing are just a complex extension of absorption costing and basic technique of absorption rate is still applicable in the activity based costing. There is more than one absorption rate in activity based costing as compared to single absorption rate in absorption costing.

4.    All Costs Coverage

In activity based costing, Identification of activities to cover all cost is difficult process. There are number of single costs in the organization. For example factory rent, and therefore identification & selection of activities of all those single costs are neither practical nor rational.

5.    Activities Number

In activity based costing, how many activities will cover the cost is difficult task. Too many activities will complex the absorption process, while too little number will not cover all the cost. A lot of experience and working is required to determine the exact number of activities.

Disadvantages of Marginal Costing

Disadvantages of Marginal Costing

Limitation of marginal costing may be explained in term of total cost & price setting, preparation of financial statement, fixed cost ignorance.

1.    Total Cost & Pricing

In marginal costing full cost of the product may not be determined. Therefore price cannot be set on the bases of marginal costing. If fixed costs are major cost, then wrong pricing decision may result in heavy losses.

2.    Financial Statement Preparation

Marginal costing does not support preparation of financial statement, because financial can only be prepared with accurate stock valuation.

3.    Fixed cost cannot ignored

In marginal costing fixed cost is not taking into account for product cost. This methodology is not rationale, because in many industries fixed cost forms a major portion of product cost.

Disadvantage of Absorption Costing

Disadvantage of Absorption Costing

Disadvantages of absorption costing may be explained in relation to limited use in decision making, profit manipulation, and selection of appropriate absorption rate.

1.    Limited use in Decision making

First disadvantage of absorption costing is its limited role in the decision making process. Absorption costing fails to establish a direct link between sales and profitability. Therefore management prefers to use marginal costing for decision making.

2.    Profit Manipulation

Second disadvantage of absorption costing is its ability to manipulate the profit. In absorption costing profit can be manipulated by changing the stock valuation i.e. by under or over stock. Due to overhead cost in stock valuation, margin of manipulation is high as compared to marginal costing.

3.    Appropriate Absorption rate

Third disadvantage of absorption costing is finding of appropriate absorption rate. In many cased there is no link between absorption rate used and overhead. It means that absorption rate is used are to general in nature. For example factor rent is absorbed by using machine hour make no sense.