1. Plan for the assessment of Market structure Effectiveness for Operations of the Company.
It can be easily asserted that the performance of the company as well as the market scenario changes whenever there are changes in the demand for a certain product over a period of time. It was observed that there is increasing trend in demand for microwave category. With the pressure and increase in complexity of individual lives and their living standards, the attitude and perception of people towards microwave food seems to be favorable. Such microwave food is also increasingly demanded as a result of a variety of choices offered by the firms along with saving time which is vital for people following a hectic lifestyle. The value for the consumer was further enhanced due to its multi-purpose use.
Furthermore, there are additional reasons for the increase in the use of such products. Such products generate greater satisfaction for the consumers considering its beneficial aspects. The major issue arising in the present time is the concern for increased nutrition proportion in food and the level of calories. There are two most influential players in this product’s industry. They are Healthy Choice and Lean Cuisine. These two companies have a strong background as well as high market share since they have been dominating the market from the 1980s.
The market can be segmented or profiled in several ways. The ways for segmenting could be based on psychographic or behavioral profiling. The task of segmenting market i.e. choosing a target market through different aspect i.e. behavioral or psychographic can help to enhance the quality of decision-making centered on that group. Differentiation of the product along with another customer-centered advancement can be identified and matched with the need of target audience and their basic characteristics. An economic equilibrium suggests a point in which the price and quantity are equal.
For the product, the following calculation indicates the equilibrium level price and quantity.
Quantity Demanded (QD) = - 5200 - 42P + 20PX + 5.2I + .20A + .25M
QD = - 5200 - 42P + 20*600 + 5.2*5500 + .20*10000 + .25*5000
QD = -42P + 38650
Quantity Supplied (QS) = -7909.89 + 79.1P
Here,
26770 -42P = -7909.89 + 79.0989P
Or, P = $286.38
The quantity demanded is 14742 units
Therefore, the equilibrium level is at a point where Price= $286.38and Quantity= 14742
In this scenario, the importance of customer profiling and segmentation cannot be underestimated. There should be proper identification of factors, which enables to understand their profiles clearly. There might be several factors that affect the demand for the product. Those factors must be seriously identified and taken into the consideration because those factors will bring the huge effect in the performance of the company. The target market for the whole industry comprises of target customers for each firm. It also helps to determine the size of the entire industry (Wedel & Kamakura, 2000).
As the microwave industry has been categorized under a low-cost industry, there are numerous factors, which indicate its survival and growth. Some of the factors are adequate capital and inventory, the favorable condition of supply, demand and business growth, which creates differentiation of the firm, etc. It will be difficult for companies to survive without these crucial factors. Another vital factor could be inclusive price strategy (Audretsch & Mahmood, 1993). The expansion of the company as well as the effectiveness of its operations is dependent on all of these major factors.
The level of profit of the company can also be determined by the prices that it sets for their products and services. It is a crucial factor and needs to be dealt carefully. The most suitable price should be selected considering the value of the consumer in the product. The price must be selected to affect the purchasing behavior as well as the intention of the consumers. The key element to trigger the behavior of consumer is through promotion and advertising. The company must also take elasticity into consideration. The elasticity of various sources of revenues, as well as cost, plays an important role. The elasticity of various factors and product in the market determines the level of success of various marketing strategies and tactics.
2. Likely factors that might have caused the change
In the case of monopolistic competition, the price-based competition is a quintessential feature of the market. This directly indicates the decrement in prices will lead to reduced profits. The process of product differentiation was the key to the success of the company. There are several factors leading to changing demand. The change could be brought due to change in the income level which directly enhances the purchasing ability of the consumers. It can be due to the new strategy adopted by the competitor or the increase in the price of raw materials. There is a change in demand if the structure of the market changes.
3. Analysis of the major short run and long cost functions for the low-calorie, frozen microwaveable food company.
In a monopolistic competition market, the condition seen in the short run is that the price curve tends to line above the marginal cost curve. The price can then be minimized. The supply in such a competition tends to increase over time after the entrance of each new player (Diffen.com, 2015). The price is also reduced due to a greater supply of the product in the market. The currently dominant firms in the market face a risk if they are unable to establish a level of loyalty among its consumers. It can easily be the case that a new player establishes itself in the market through product differentiation when there is no promotion done in that market by existing firms. It can grab the market of existing firms through their marketing tactics. The high-profit margin can be a pulling factor for the new firm.
In the same market, the long run condition shows that the marginal revenue and marginal cost is equivalent. Even though the number of players is enhanced, the division of profit after the new entrant will also create nominal profit for all the firms in the market. Since the profit is divided, the level of super profit or abnormal profit does not remain. If the price is more than the total cost of the firm, the firm will definitely be in profit due to greater revenue. The chances to survive in the industry are enhanced.
Taking the variables and the equation,
Total Cost (TC) = 160,000,000 +100Q + 0.0063212Q2
Variable Cost (VC) = 100Q+ 0.0063212Q2
Marginal Cost (MC) =100+ 0.0126242Q
Average Total Cost (ATC) =160,000,000/Q +100 +0.0063212Q
We have,
QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M
QD = - 5200 - 42P + 20*600 + 5.2*5500 + .20*10000 + .25*5000
QD = -42P + 38650
P = $920.24 - Q/42
Then,
TR = P*Q
TR = 920.24Q – Q2/42
The condition for optimal profits is,
MC = MR
100 + 0.0126424Q = 920.24 – Q/21
Q = 13666.6 units
P = $594.61
Average Total Cost value:
ATC =160,000,000/13666.6+100+0.006312*13666.6
ATC = 11707.4+100+86.26
= $11893.66
Average Variable Cost (AVC) = 100 +0.0063212*13666.6
=$186.26
4. Possible circumstances under which the company should discontinue operations:
There are certain situations that arise out of uncertainty, lack of resources, greater risk, etc. which directly impacts our ability to continue our current operations. Some of those situations for discontinuation of operation are:
Lack of capacity and ability to compete with other players in the market due to their advantage of product differentiation, advertising mix, and pricing strategies. The company might lack adequate conceptual skills as well as resources to compete with such players.
Lack of fund in the company to try new techniques in the market.
Lack of availability of raw materials required for the production of the product.
Lack of required skills of the firm to analyze any changes in the market externally or internally and to internalize those changes to run the operation smoothly.
5. A pricing policy that will enable low-calorie, frozen microwavable food company to maximize profits.
For this industry and level of competition, it is better to use marginal cost pricing by the company. This pricing technique helps in adding the costs of additionally produced units to the price of the product (Accountingtools.com, 2016). It suggests that the additional cost incurred or any additional labor and raw material cost are taken by the consumer. The burden is shifted towards the consumer to pay for the increased cost. In the case of lower sales margin level, it can still work in favor of the company. In ordered to obtain sustained profit, the price must be greater than the average cost curves at the optimal level of output. These are some prerequisites that the company should bear in order to generate profit or financial stability in both short and long run.
We have,
Price = 920.24 - Q/42
Total Revenue= P x Q = 920.24Q – Q2/42
Marginal Revenue= dTR / dQ =920.24 – Q/21
Profit maximization occurs when,
Marginal Revenue (MR) = Marginal Cost (MC)
920.24 – Q/21 = 100 + 0.0126424Q
Q = 13611.4 units
P = 920.24 – 13611.4/42
P =$1244.33
It can be understood that the demand for the frozen products has minimal demand elasticity i.e. it is demand inelastic. When there is a reduction in price by a large amount, the demand only changes slightly i.e. less than the level of change in price.
6. Plan to evaluate financial performance:
In any type of organization which functions in any type of competition, the measure of its financial performance is made from its revenues and profits. In order to obtain greater profit margins, there are several new competitors entering in the monopolistic market while profits are then segregated among the players. The currently existing firms in that market become the victims as the profits are divided due to the new entrant. In order to retain their consumers along with their market share, the existing firms must develop advertising and promotions tactics. It can be the only measure for them to survive in such a market for a long time. In order to implement strategies effectively, the organization must consider both long and short term periods. The effect can be seen vividly as short run tends to create low-profit level while the long run tends to enhance the cost and expenses in the promotion techniques but retain the loyalty of the company’s consumers (Managementstudyguide.com, 2015).
The first change brought by the new entrant is on the price. There occurs a decrease in the price level as a result of increased supply from the new player. The costs that will incur will be paid off in the long term. The deadweight loss in both consumer and producer surplus needs to be made up by the advertising tactics that have an impression about the company and its product for the consumer.
Here,
Total Revenue equation = 920.24Q – Q2/42
Total Cost equation = 1600,000,000 +100Q + 0.0063212Q2
Producer Surplus = Total Revenue– Total Variable Cost
Variable Cost (VC) = 100Q + 0.0063212Q2
Producer surplus = 920.24Q – Q2/42- 100Q - 0.0063212Q2
= 820.24Q – 0.0301307Q2
= 820.24*13611.4 – 0.0301307 *13611.4 * 13611.4
Thus, Profit =$185270209.96
In order to generate profit in the long run in monopolistic market, the average total cost and the demand curve needs to be tangent in the long run.
Hence, Quantity= 13666.6 units
Average total cost:
160,000,000/13666.6+100 +0.0063212*13666.6 = 1333.26
115.56 + 0.01111 * 120,006 =1217.70 + 1333.26
=$11164448.37
7. Recommendations:
In order for an organization or company to foster effectively and successfully under a complex scenario with relatively high degree of uncertainty, there are several factors that should be analyzed and handled. One of such factors can be discovering an appropriate way to form a link with our target population. It can be achieved by making heavy investment on promotional activities in the short run in order to generate a favorable gain or outcome in the long run. In order to accomplish this effectively, the promotional activities should be backed up by market researched in time to time basis to capture the changes and trends of the market. The strategies developed must have a prolonged vision with the major focus on differentiation. The product line of the company must be enhanced by using various tactics under Segmentation, Targeting, and Positioning.
References
Audretsch, D. B., & Mahmood, T. (1993). Entry, growth, and survival: The new learning on firm selection and industry evolution. Empirica, 20(1), 25-33. doi:10.1007/bf01384138
Accountingtools.com,.(2016). Marginal Cost Pricing - AccountingTools. Retrieved 2 February 2016, from http://www.accountingtools.com/marginal-cost-pricing
Diffen.com,.(2015). Monopoly vs Oligopoly - Difference and Comparison | Diffen. Retrieved 7 November 2015, from http://www.diffen.com/difference/Monopoly_vs_Oligopoly
M. (2016). Economics: Marginal Cost and Average Cost curves.Economicsmicro.blogspot.com. Retrieved 2 February 2016, from http://economicsmicro.blogspot.com/2008/11/marginal-cost-and-average-cost-curves.htm
Managementstudyguide.com,.(2015). Objectives and Importance of Advertising. Retrieved 7 November 2015, from http://www.managementstudyguide.com/objectives-importance-of-advertising.htm
Spaulding, W. (2015). Monopolistic Competition: Short-Run Profits and Losses, and Long-Run Equilibrium. Thismatter.com. Retrieved 7 November 2015, from http://thismatter.com/economics/monopolistic-competition-prices-output-profits.htm
Wedel, M., & Kamakura, W. A. (2000). Market Segmentation: Conceptual and Methodological Foundations. Boston, MA: Springer US.
