Summarize a plan that managers in the low-calorie, frozen microwaveable food company could adopt in anticipation of raising prices. The pricing strategies should be selected such that products response to a change in price is inelastic. Give suitable justification for your answer.
In today’s context, people are more careful regarding their eating habits. They have become health conscious which enables them to seek for options such as low calorie or healthy food option that is dominating the market (Oraman, 2014). The low calorie frozen, microwavable food has become a reliable option for such target group to balance their hectic life as well as their healthy lifestyle. Such food is supplied by two major suppliers i.e. Healthy Choice and Lean Cuisine in the market. This paper will deal not only with the plans of manager to address the rise in price in the market but will also study the impact of government, challenges of expansion, fairness of governmental regulations, etc.
Despite the rise in healthy consciousness among people, the suppliers have faced a reduction in sales in the frozen food industry. Both Lean Cuisine and Healthy Choice supply similar product, nutritional level as well as price margin in their products. In the case of the Healthy Choice, the company has started giving special attention to their baby boomers consumers who consume the maximum amount of their single serve meal. The profit of the firm can be enhanced by executing the effective marketing strategy (Hood, 2013). The company intends to enhance its profit through an effective marketing strategy to reach out to more consumers by adopting competitive pricing.
Similarly, in the case of Lean Cuisine, they are also facing a reduced profit margin due to the overall drop in demand in the frozen food industry. In addition to this, the introduction of the new product with new features can increase the potential customers. A company can increase its customer base by introducing the new product in the market that the customers want (Vass, n.d.). The company aims to reach to larger consumer base through the introduction of new product in their product. The product will be natural ingredients based with no preservatives. So, the lower price in organic industry will support this initiative to minimize the cost.
As the market is monopolistic in nature, the products are different only based on unique characteristics which will enable the firms to charge different prices (Hunt, 2010). The consumers intend to shift from one brand to another with the change in price. The firms usually aim to make their product price insensitive which means the price will not have any impact on the quantity demanded in the market. Such price inelasticity is seen in goods that are the basic necessity for people. The low-calorie, frozen microwavable food industry shows a different scenario. The demand is affected by the price level, other substitutes available, etc.
In order to maximize profit, the marginal revenue must be equal to the marginal cost. The low-calorie, microwavable frozen food has an inelastic demand. The firms need to adopt product differentiation strategy to retain their consumers. As a product is different from another, the consumers are likely to choose that product. This will help in bringing price insensitivity among consumers. If the firms aim to make a large profit, the product must be highly differentiated than those currently available. Considering the existing two competitors of this industry, they are developing strategic plans to remain competitive in the market.
Examine the major effects that government policies have on production and employment. Predict the potential effects that government policies could have on your company.
Government involvement in the market economy
The government has always been viewed with skepticism regarding its efficiency in dealing with the market. It is debatable whether a government is essential or not for the functioning of the market. At present business environment, the government can be only viewed as a market regulator rather than being the seller in the market itself. It regulates the market with various rules and regulations developed at different course of time (Wang & Hu, 2001). The market can be segregated as being regulated i.e. under the control of the government or unregulated i.e. without the governmental intervention in the working of the market forces. It is quintessential to have the role of the government in the market. It enables a smooth operation of the market which might not be achieved if left alone to the private sector. The government has been most often criticized for making inefficient decisions which would have been better carried out by the private sector.
However, few roles carried by the government is better compared to that role carried by the private sector. The government is a crucial entity which focuses on externalities that need to be controlled if it is negative such as pollutions, public goods which are not rendered by the private sector, contracts i.e. enforcement of contracts is done under regulations of government, etc. The government is also a regulating body for money in the market in case of financial and economic fluctuations.
As the governmental role seems crucial in certain areas, there must be a boundary line set for the limitation in governmental activities. The government can either be handling all of the economic activities or can not intervene in any matter of the private sector. These extremes are not good for the economy (Etzioni, 2009). There must be a middle way to help the government formulate rules and power to enforce those in the market economy. The government aids in diminishing the uncertainty among people who are overlooked by the private sector. It has certainly been proved that private sector allows profitable and efficient resource allocations. But there are several risks attached if left alone to the private sector.
Determine whether or not government regulation to ensure fairness in the low-calorie, the frozen microwavable food industry is needed. Cite the major reasons for government involvement in a market economy. Provide two (2) examples of government involvement in a similar market economy to support your response.
The benefits of the market economy are well known. However, the government needs to intervene in the economy to regulate the uncertainty and risk brought in by the private sector. The government, merely having few roles, can help the economy foster economically, socially and legally by bringing balance among the private and public goods in the market, filling the gap of imperfect flow of information among people, and supporting people when they lack awareness about their best interest (Dardis, 1986). The governmental intervention in these areas will enable a right balance between the benefits of both market and government sector and reduce inefficiencies.
It plays a vital role to regulate the mergers and to control the impact of monopoly which abuses consumer’s need with their enormous power in order to gain profit. The monopoly, due to its dominance in the market, supplies poor quality goods at higher prices. These activities are controlled by the government sector. The environment for competition in the economy will enable in the supply of quality product at low prices. The government aims to maintain the price stability in the economy. In cases when the government is not powerful, the private firms will be centered on earning a profit by any means which lead to a reduction in quality to offer goods at the low price level.
The two cases which will support the view regarding the significance of government intervention are:
The government can intervene in the industry which produces an abundance of negative externalities such as pollutions, health hazards, disturbances, etc. The companies belonging to this industry might continue its operation with the objective of earning a profit if the government does not play a key role.
The government should also intervene in natural monopolies market and banking sector. The government plays a vital role to stop unfair or illegal activities conducted by monopolies or other companies to reduce competition through cartel or agreements. This will lead to inefficiency in the market. Such activities are controlled by the governmental body to protect the right of small businesses as well as to regulate the financial market of the country to maintain stability.
Examine the major complexities that would arise under expansion via capital projects. Propose key actions that the company could take in order to prevent or address these complexities.
In order to make a capital budgeting decision, it is essential to realize the cause before merging their operation with another firm, or extending their operation. To make an investment for a merger, the central focus should be on the cost, risk and benefit. The crucial difficulty will be to raise the needed capital (Holland, Torregrosa, & United States, 2008).
The major complexity that arises in the capital budgeting decision is the agency problem between managers and shareholders. The managers are likely to use shareholders’ reserves to supplement the investment which might or might not be accepted by the shareholders. There will be a power struggle among the two parties to decide whether to seek for personal interest or overall interest of the firm. The main elements that need to be considered are the cost of capital, availability of capital and holding return on capital.
For example, the movie rental industry can consider for merger or opt for self-expansion through capital projects to earn higher profits. In this industry, the firms can share resources and technologies which will reduce cost yet yield a greater profit. Without the merger, the firms will have difficulty expanding with the cost of new technologies, lack of adequate resources, lack of financial resources, etc. It seems efficient to merge in the movie rental industry rather than going for self-expansion. If the adequate resources and technology can be obtained through merger, the merger will be beneficial for movie rental industry in earning the maximum level of profit.
Suggest the substantive manner in which the company could create a convergence between the interests of stockholders and managers. Indicate the most likely impact on the profitability of such a convergence. Provide two (2) examples of instances that support your response conflict and convergence of manager’s and stockholder’s interests.
The stockholders are the people who invest in the company and bear the risk. There are the real owners of the company but have limited control in the working of the company. The stockholders appoint the manager as an agent to carry the functions on behalf of the shareholders ("Corporations. Rights of Stockholders, Payments to Preferred Stockholders in Liquidation under Public Utility Holding Company Act Not Limited to Amount of Liquidation Preference," 1946). The shareholders are themselves liable for the activities of the managers if done within the authority delegated to the manager.
There can be an agency problem between managers and the stockholders when their interest deviates. The manager might seek to maximize the income of the company which will lead to greater allowances for him/her and the employees. The stockholders might be interested in maximizing profit margin to get greater dividends i.e. return on their investment. The stockholders are risk averters as they have invested their money in the company. The two bodies can differ in their decision regarding the merger. This issue can be addressed if the manager earns a fixed portion from the company’s profit level. This will lead to the higher dividend for stockholders and higher income for the manager if there is higher profit.
There has also been a trend of unethical behavior among managers seeking personal interest over the growth of the firm. The managers must be able to control all the financial affairs of the company. If this is done properly, stockholders will have trust in the work of managers regarding the absence of any fraudulence in the financial statements.
The organizations must also opt for transparency in their activities. This leads the companies to submit financial position of the company on a yearly, semi-annually and quarterly basis to the Security and Exchange Commission.
Thus, the benefits generated from self-expansion through capital projects and via merger will be different. There are certain market forces which will enable the manager i.e. who run the daily operation of the company and the stockholders i.e. who have invested in the company to have a common interest.
References
Corporations. Rights of Stockholders. Payments to Preferred Stockholders in Liquidation under Public Utility Holding Company Act Not Limited to Amount of Liquidation Preference. (1946). Harvard Law Review, 59(7), 1159. doi:10.2307/1335171
Dardis, R. M. (1986). Government intervention and consumer welfare: The impact of international trade restrictions. J Consum Policy, 9(3), 243-260. doi:10.1007/bf00380296
Etzioni, A. (2009). The Free Market Versus a Regulating Government. Challenge, 52(1), 40-46. doi:10.2753/0577-5132520103
Holland, J., Torregrosa, D., & United States. (2008). Capital budgeting. Washington, D.C.: Congress of the U.S., Congressional Budget Office.
Hood, D. J. (2013). Competitive SME: Building competitive advantage through marketing excellence for small to medium sized enterprises. London: Kogan Page.
Hunt, S. D. (2010). The Theory of Monopolistic Competition, Marketing's Intellectual History, and the Product Differentiation Versus Market Segmentation Controversy. Journal of Macromarketing, 31(1), 73-84. doi:10.1177/0276146710382119
Oraman, Y. (2014). An Analytic Study of Organic Food Industry as Part of Healthy Eating Habit in Turkey: Market Growth, Challenges and Prospects. Procedia - Social and Behavioral Sciences, 150, 1030-1039. doi:10.1016/j.sbspro.2014.09.115
Vass, T. E. (n.d.). How a New Market Emerges from a New Radical Product Innovation. SSRN Electronic Journal. doi:10.2139/ssrn.1269643
Wang, S., & Hu, A. (2001). The Chinese economy in crisis: State capacity and tax reform. Armonk, NY: M.E. Sharpe.
