Introduction
Strategic interdependence is the primary feature of an oligopoly market form. In our previous analysis we found that our microwaveable frozen food company is an oligopolist. Thus it is very important for the firm to constantly upgrade its strategic decisions based on the market and economic conditions. The firm has to combat the challenges that come its way with effective counter moves. The managers have to be prepared for any changes. It is also important to keep close watch on the economy to make an estimate of the possible changes. In this analysis we discuss how the frozen food producing firm can be prepared for anticipated changes in the market or government policies or internal conflicts. We discuss strategies that the firm can take in such a situation or to avoid such situations. Let us now discuss the situations one by one.
Rising Input Prices
Since the firm is producer of food items it has to depend on agricultural inputs. But agricultural production is often subject to fluctuations due to weather conditions. With low production or crop destruction due to bad weather the price goes up. The price of other inputs may also rise for other reasons. To be prepared for such a situation the firm should frequently upgrade its production technology. An efficient production technology will make optimum use of resources. Thus higher production will be possible from small amount of inputs if the production technology is efficient enough .
The firms should also choose the production technique in such a manner that there is substitution possibility for inputs. If one input becomes scarce or costly it can be substituted by some other product. This is one way to control the cost of production when input costs rise. A cheaper input can be used in place of the high priced input without compromising with quality.
Apart from the supply side the firm also has to make demand side management to tackle the situation of rising costs. Effective product promotion campaign can make the product more attractive and acceptable to the consumers. In addition to this, the firm should engage in product innovations. This requires some regular investments in research and development. With more new products the demand tends to be high. Increase in consumer preference towards the firm’s product will make the demand more price-inelastic. In such a case a rise in price induced by increased cost will not reduce demand to any big extent . The firm’s revenue earnings will increase. Thus the firm will not face a loss making situation even in the case of rising production costs if the demand side is managed well through product innovation and product promotion.
Government Policies
There are two primary policy mechanisms that the government follows to foster growth and increase employment and also maintain price stability, the fiscal policy and the monetary policy. The fiscal policy measure uses fiscal tools like tax and government expenditure to affect the real macroeconomic variables like aggregate demand, supply, employment and growth. The monetary policy tools include interest rate and open market operations. The objective of monetary policy is to affect growth and price level through the control of demand and supply of money.
A fall in tax rate or increase in government expenditure leads to increase in aggregate demand. This in turn raises the price level inducing more production. Higher production results in more job creation. Thus growth and employment increases due to expansionary fiscal policy. If the tax rate is increased and government expenditure is reduced output level will fall and unemployment will tend to increase.
The monetary policy tools also affect the real economic variables. Decrease in the interest rate or purchase of bonds by the central bank in the open market results in more credit flow in the economy. Investment rises leading to rise in output and employment. By similar reasoning increase in interest rate or sale of bonds in the open market will lead to fall in output and employment .
When the central bank reduces interest rate or purchases government bonds our firm will be benefited as investment becomes cheaper. The firm can take up expansion plans in such a situation. If the taxes are low the firms production cost falls and so profits tend to rise. The firm can increase production in such a situation.
Government Intervention in Market Economy
Even in a ‘laissez faire’ economy the role of the government cannot be completely ruled out. Government policies and regulations are aimed at ensuring fairness in the market operations . Moreover, the overall welfare is at the core of government policies. We often find in a market economy that some firms tend to acquire more market power by collusion or merger and acquisitions or other such strategies. In this situation the government tends to intervene to foster competition in the market for the benefit of the consumers and small producers. The US anti-trust laws are example of such market interventions by the government.
Sometimes a few products prove to be harmful for health or for the environment. In this situation the government has to intervene to restrict the production and consumption of such products. For example there is restriction on tobacco products as tobacco consumption is injurious to health. The tobacco products are required to carry a mandatory warning on the packages and advertisements to make people aware of its harmful effects.
Expansion of Operation
We have already mentioned that when the government follows easy money policy it would be a prudent decision on the part of the firm to make investment plans to expand the firm’s operations. But such expansion plans involve some amount of risks. Since the expansion leads to a stream of future returns the situation that arises in the future will affect the return that the firm expects to receive. The firm should make prior calculation before launching a capital expansion project. These calculations involve expectations about future demand conditions, estimation of the future market conditions and assessment of government policies. Thus expansion plans involve a number of complex parameters embedded in uncertainty. The firm should involve all the parameters and take up a project that gives maximum returns with minimum risk involved.
Internal Conflicts
The decision of capital expansion gives result to conflicts of interest between the managers of the firm and the stockholders. While the managers express their interest in expanding the area of operation of the firm onto new markets the shareholders have an interest on the increased returns for the firm. While the managers want to increase their salaries and perks the stockholders prefer higher profit for higher dividends. This difference in interests gives rise to the typical principal-agent problem . When such a problem arises it is difficult to take up long term investment decisions.
Studies on managerial economics suggest that the convergence of the interest and goals of the principal and agent, in this case managers and stockholders, can lead to a solution to the conflict. If the managers are offered shares of the company as incentive for good work they have a share in the profit of the company. In such a case the managers will also have an incentive to increase the profit for the company. Thus when managers are also shareholders the interests of the managers and shareholders converge removing all conflicts on the path of long-term decision making.
Conclusion
The discussion in this paper was centered round the firm’s strategic steps on the anticipated future hurdles and opportunities that come on the way of operation of the firm. We have included a number of possible situations that our frozen food company may face. We have included situations like increasing input costs, government policy changes and interventions. We have discussed about the complexities involved in long term decision taking and finally we have also delved into the problem of internal conflicts. From our discussion it is clear that a firm should make an assessment of the possible future situations it has to face and be prepared for these future changes so that the challenges, however strong they may be, will not be able to topple the firm from its position in the market.
References
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