Introduction and company background
Formed in 1824 by Peter Degraves, Cascade Brewery stands out as one of the oldest companies located in Australia. The company is specifically located in Hobart, Tasmania. Peter Degraves was an entrepreneur who had moved to Australia as an immigrant following the crises that were facing England during the era. He started Cascade Brewery on his own property but the company later flourished and possession was granted to the Foster's Group that currently runs it. Remarkably, the company majors in production of apple cider, homebrew, beers, as well as non-alcoholic beverages such as blackcurrant syrup, apple juice, and carbonated beverages.
The company is unique among Tasmanians and rare among breweries worldwide since it operates in its own maltings manufacturing malt for its conventional beers from locally grown barley. In an effort to further strengthen its customer base and increase its sales, the company has adopted various stratagems aimed at promoting its products and creating awareness to members of the public. For instance, its manager oversaw the inception of an important sporting event popularly known as “The Cascade Cup.” Its brands are among the most consumed brands in Australia because its alcohol content lies within 2.0-6.0% thus making it consumable to a great portion of the population. Its established, quality brands have enabled the company to continue performing excellently against the odds and become an important contributor to the Australian economy.
In the 1880s, the company was performing excellently and goes to record as one of the companies that could afford to pay a healthy dividend of 10%. It was profitable and had some healthy industrial relation practices that ensured workers and consumer gratification. Its overwhelming success attracted stakeholders and was able to acquire James Boag’s Brewery in 1922. However, over the years competition continued increasing due to new entrants and emergence of substitutes. Major competitors such as Carlton & United Breweries, J. Boag & Sons, Hahn Brewery, Castle Maine Perkins, and SA Brewing Company have emerged and compromised the market share of Cascade Brewery. In the recent years, the company has experienced massive reduction in sales and consequently its profitability. The burden of tax is also increasingly becoming hard to bear while still maintaining relevancy in the highly competitive and rapidly changing brewing industry. Operational costs, production costs, and company overhead are continuously increasing thus compromising the profitability of the company and making it continuously difficult for the company to thrive in the market. Particularly, the apt modern technologies currently utilized by companies in the industry posts a major challenge to the existence of Cascade Brewery hence it must adopt strategies that will help it increase its profitability, sustain competition and remain relevant in the market.
Cost reduction as a strategy of increasing profits
Cascade Brewery experiences various costs that often compromise its profitability. However, the various cost reduction strategies that it has strived to utilize has often failed due to poor managerial coordination. Cascade Brewery needs to decrease its inventory. It currently holds huge stocks that are apparently costly to maintain due to storage charges, insurance costs, and general stock maintenance charges (Cowen & Tabarrok, 2013). Stock control is a good strategy to streamline any business. Reducing the level of inventory stocked significantly reduces the operational costs of a business and significantly reduces profits.
As a general,
π= TR-TC
However, TC= FC+VC.
Profit is maximum at point A where the difference between TC and TR is higher. If Cascade Brewery holds its sales (Revenue) constant and reduce its variable and fixed costs, it will significantly increase the π (profit). However, the company should ingeniously reduce the costs while bearing in mind that reducing the costs beyond a certain level will compromise the quality of its products and eventually the existence and public image of the company. The following are suicidal mistakes that Cascade Brewery should avoid when pursuing the cost reduction and profit maximization mission:
- Plummeting or eradicating its sales team
- Reducing or exterminating it’s marketing budget
- Dropping systems that make their operations more efficient
Committing any of the aforementioned mistakes will deteriorate the company’s performance and its competitiveness will be affected unsympathetically, therefore, giving its competitors a disproportionate opportunity to continue dominating the market.
Additionally, Cascade Brewery can increase its profitability by reducing direct and indirect costs. The direct costs can be reduced by having the right suppliers in place and employing labor up to a level where cost of labor will equate marginal product (Cowen & Tabarrok, 2013).
Maximize pQ - wL(w) - rK with respect to Q, w, and K
Q = f (L, K)
Where K- capital, w-wage, L- labor, Q- quantity produced
The company should realize that productivity is a function of labor and capital hence must utilize appropriate levels of labor to ensure that profit is maximized.
The company should compare the marginal cost and the marginal benefit of hiring any additional workers to avoid a scenario where workers are paid while they are not contributing to the productivity of the company. Notably, from the economic perspective as real wages increase, labor reduces up to a certain point beyond which an increase in real wage will have no effect on the units of labor. This is because of the diminishing marginal productivity of labor. The company should consider revising its current staffing policies where employees are outrageously employed and given random wages and consider paying only (w/p) wages that represents the point where the profits are highest.
Cascade Brewery can reduce indirect costs by minimizing wastage in the business. By use of modern technology, the company can recycle most its materials and expand its production capability. Competitors are utilizing modern technologies such as using specific softwares that monitor the movement of materials in and out of their stores to minimize costs. If Cascade Brewery wants to survive in the industry, it must implement technologies that are better than those utilized by competitors are (Cowen & Tabarrok, 2013). Application of modern technology will also enable it to save on expenditure on energy and utilize environmentally friendly energy sources. Such a move will also help in reducing the tax burden since the Australian government offers tax incentives to organizations that participate in environmental conservation and risks mitigation.
Cascade Brewery can also reduce its costs by changing its current operating model. Its current operating model is comparatively costly as compared to that used by its close competitors. It should not hesitate to look for new, lower cost functioning and conveyance models. The company can achieve this by considering production partners, new distribution partners, channels to market, and a new internal operating model that focus on the goods and services that meet the consumers’ tastes and preferences. Any activity that does not add value should be stopped and the internal efficiency maximized. Benchmarking should also be regular to monitor on costs and improve performance of the workers.
Differential pricing strategy
An effective pricing strategy is the core of the market economy because all characteristics of the product, such as quality, quantity, and options among others are weighed with respect to the price. Over the past few decades, the company had overlooked the significance of the differential pricing strategy. The differential marketing strategy involves selling similar products to different customers at different prices. The company argued that it is their moral obligation to treat their customers equally as if there are from homogenous market (Cowen & Tabarrok, 2013). The company fears the possibility that the customers might discover that the company is selling their similar products at different prices and, therefore, result to negative repercussions to the company. For example, the customers paying higher prices might develop negative attitude to the business and shift to the firm’s competitors in the market.
However, the previous studies on the contemporary market have indicated that firms are making profit through the use of the differential pricing strategy. In the contemporary world, the differential pricing approach is the most effective because the market is heterogeneous. In other words, this is where the needs of the customers are distinctive and different, and can be used to develop market segmentation. Customers cannot be treated equally because their abilities to obtain the product are not similar. The customers in the market with scarce resources are provided with the opportunity to buy the products that would be otherwise too expensive for them to obtain. The reduced prices charged on the “poor customers” are compensated with the high prices charged on the customers that have sufficient ability to purchase that product. Therefore, the firm should implement this form of price discrimination because it is a tool to balance the “abilities” of district consumer groups in the market. In this case, the goal of profit maximization can be easily achieved.
For the differential pricing strategy to be effective in the profit maximization, the second market discounting should be employed. This conception assumes that that there is a market segmentation, where two types of market exists, i.e. primary market and secondary market. In Tasmania, these two markets prevail where primary market contains consumers who can afford beer, wine and beverages at higher prices. On the other hand, the secondary marker targets the consumers that can afford lower prices because this it is more price elastic than the primary market. According to the economic concept, when the demand is price elastic, lower prices attract more consumers, hence increasing demand and maximization of the total revenue (Cowen & Tabarrok, 2013). The firm should, therefore, employ strategies to identify the level of desires embodied by customers and, therefore, charge them accordingly. For example in the wealthy suburbs, in Tasmania, higher prices should be charged compared to the poor suburbs that earn low income.
Expanding into the International market through e-commerce
Over the past several years, the world is gradually becoming a global market place, where globalization has been facilitated through the use of the internet connectivity, smartphones, tablets and computers. Online shopping through the computer apps such as Ebay can promote the sale of different merchandises of the breweries, therefore, leveraging the firm to acquire a wider customer base through the online market. According to the past survey, 75 percent of the American merchants use the online market to sell their products internationally.
Cascade breweries have been reluctant to adopt the overseas market through the internet technology because the market is accompanied by many challenges. These challenges include fraud management, language translation, legal and regulatory concerns, the intermediaries and the payment type preference. The online overseas market is usually challenging when the firm cannot be able to evaluate the appropriate ways to optimize for global success and improve their online business. The company must consider an effective payment acceptance because it is a critical aspect in enhancing favorable consumer experience, particularly when dealing with the international consumers who come from different cultures.
For the past decade, the management in the Cascade Breweries considers the electronic payment fraud as a costly phenomenon that can tarnish the company’s reputation with the consumers. Various studies have indicated that the payment fraud has been in the international transaction compared to the domestic market. Therefore, to counter this challenge, the company can engage in the online transactions with the payment processor that provides strong fraud management capabilities that regularly conducts the risk scoring analysis on the foreign transaction. In addition, the company should comply with the rules and regulations of the countries that are involved in the online business. The regulations include transaction reporting laws, processing payments, value added taxes (VAT) (Cowen & Tabarrok, 2013). The company should be strict because this regulation varies from one country to another.
In order to capture a wide customer base, which can help the company to collect more revenue Cascade Breweries must put into consideration the currency concern. The firm can encourage more customers to purchase their product on the online market through allowing the consumers to shop using the payment and pricing choices in their local currency. This can be done through the display of the currency exchange rate that can enable the consumers to make the appropriate decision when making their purchase. Consequently, this eliminates the conversion rate guesswork that challenges many consumers. Furthermore, the company’s site should be developed in a way that the global pricing catalogs are displayed to help the online shoppers on the currency concern.
Because of mitigating the e-commerce challenges, the company can be able to increase its revenue and hence profitability. This is because the online market helps the company to overcome the geographical limitation because the whole world provides a ready market for the firm’s products. Other benefits of engaging in e-commerce business included gaining new and wide customer base, quicker location of the products, remains open all the time, and facilitate customer relationship (Cowen & Tabarrok, 2013). Significantly, the cost of operating an e-commerce business is relatively lower than the operating cost of the multiple stores and breweries depots. In other words, the variable and fixed costs of operating physical stores are significantly higher than the operating cost used in the e-commerce stores. This can be used as an effective measure to minimize cost as a way of increasing profitability of the company.
Adoption of the value added strategy
In simple terms, the value added process involves adding values to the product taking the product from one level to another level. This can be an effective approach to increase the profitability of the Cascade Breweries, considering the increase of the enhanced competitiveness in the market. For instance, Tasmania is largely recognized for the tourism destination, and the tourists are mainly dependent of the value of the product. Therefore, the price charged on the product should be compensated by the high quality value of the product. It is, therefore, significant to provide the potential consumers with the features or elements that integrate a greater sense of value (Cowen & Tabarrok, 2013). As a result, the firm should engage in different approaches that facilitate the added value to the product. These approaches include innovation, coordination, and vertical integration.
The innovation involves improving the existing productivity processes, products, procedures and services, or developing the new ones. In this case, the value added concept should focus on the highly technical, geographically wide markets where there is a stiff competition. The value added can be enhanced through the technological improvement in the production so that quality can be of great concern in the company. Innovation can also be applied in the research and development of the alternative berries that take a shorter time to develop and are of equal quality. Using such innovation, the company can be able to reduce the cost of the raw materials and hence increase profitability.
The company should also adopt the vertical integration by controlling and aligning all the production and market segments under a single unit that can be considered as a king. The factors to be controlled and aligned include quality, quantity, price and transactional terms of exchange (Cowen & Tabarrok, 2013). A fully integrated system should ensure that quality prevails in all levels of production and marketing and reduce the intermediaries as a measure to reduce the cost of the product. This can be effective in reducing the prices of the wide variety of products offered by the company while maintaining a reasonable quality.
Increasing profitability through outsourcing
The beverages industry has recently witnessed a scenario where companies are thriving to in order to survive the stiff competition. Cascade Brewery should also consider outsourcing the selling and distribution of its products. Taking into account the endogenous growth theory and the advanced microeconomic growth model, Cascade Brewery will increase its sales and reduce its costs of marketing and labor costs by outsourcing the selling and distribution of its brands to oversee companies. It will also make a more efficient use of energy, information technology, and related resources. Tyle Cowen and Alex Tabarrok identify outsourcing as one of the best strategy of increasing an organization’s flexibility and its eventual profitability (Cowen & Tabarrok, 2013).
Flexibility is attained as fixed costs are transformed to variable costs since most services provided by outsourcing vendors are provided on a fee-for-service base. Obtaining a variable cost structure will enable Cascade Brewery to straightforwardly and promptly respond to changes in required capacity (Cowen & Tabarrok, 2013). Although Cascade Brewery currently outsources, it does it only to a limited level for fear that the companies will gain control over its operations and activities. However, the contractual agreements entered into during the process of allowing the other companies to distribute its products safeguard it against such risks and should consider outsourcing as a less chancy scheme. Through outsourcing, Cascade Brewery will bolster its core competency without being hampered by bureaucratic demands. Risks will also be spread and any market uncertainty will not have ruinous effects on the company’s profitability or existence.
Operating in an oligopolistic market, the consumers’ reaction to outsourcing will be integrated using parsimoniously molded customer utility functions thus Cascade Brewery will be in a position to provide services that meet the needs of its diverse customers. It should outsource the selling and distribution of its products by between 30-35%, but should ensure that the outsourcing practice does not lead to degradation of the quality of its products. Remarkably, profitability will increase as outsourcing minimizes market risks and operation costs.
Bibliography
Cowen, T., & Tabarrok, A. (2013). Modern principles of economics. New York, NY: Worth Publishers.
