In the prevoius cases, we analysed about the pricing and various output for the low calorie frozen microwavable food company. Now, in this paper we will be analyzing about various plans that the manager of this food company can follow. The various pricing strategies shall be adopted by the manager to make their products responsive towards the price change. The impact of various government policies on the product and employement needs to be accessed. In the summary, this paper will access various strategies that managers needs to undertake to mark the substantial impact on the market and access the impact of governmental regulations and complexities of expansion via capital projects needs to be understood.
Assume that the low-calorie frozen, microwavable food company from Assignments 1 and 2 wants to expand and has to make some long-term capital budgeting decisions. The company is currently facing increases in the costs of major ingredients.
1. Outline a plan that managers in the low-calorie, frozen microwaveable food company could follow in anticipation of raising prices when selecting pricing strategies for making their products response to a change in price less elastic. Provide a rationale for your response.
In modern times, frozen microwavable meals such as Healthy Choice and Lean Cuisine are an easy option available to people with hectic life schedules, and this food acts as an easy diet solution. Due to this reason, there are two leading competitors in the low-calorie frozen, microwavable food industry. Even though there are similar features in their product such as types of product, nutritional level and price, both the company Lean Cuisine and Healthy Choice had witnessed a drop in their sales due to the fall in frozen single-serve meal category. According to Watrous (2014), the producers of Healthy Choice ConAgra stated that the company aimed to enhance the profitable purchases through the baby boomers as they consume 60% of the volume in that category. She further highlighted the fact that the company is looking for a more effective marketing approach to reach to its consumers through competitive pricing.
The producer of Lean Cuisine i.e. Nestle has also witnessed a fall in profit due to reduced demand of the low calorie frozen microwavable food industry. They are planning to improve the brand with new product being added to their product line. The company has already initiated the producing and selling a new line of their product which is based on all natural ingredients and no preservatives as well as salad additions. Based on Gelski (2014), due to the low growth in the organic industry which showed a lower price, the company leveraged the cheaper input in order to fulfill the expectation of the value-conscious consumers of today’s time. The company, along with the organic ingredient, invested heavy for their brand to provide strong volume growth as well as bring improvement to their operating margin.
The low-calorie frozen microwavable food industry works in a monopolistic market structure. The industry is believed to be monopolistic because they deliver a product with its unique features as well as have different prices relating to its uniqueness.
The recent market outlook suggests a contraction in the market, so the firms are continuously improving their processes as well as strategic plans. This will allow them to remain competitive in the industry. The frozen microwavable food industry can be competitive by adopting product differentiation strategy and competing based on their endorsements and capabilities. Lean Cuisine has already endorsed its brand with Jenny Craig. A segmented product line can be developed by giving it a different price level. With the product differentiation, the industry can target premium price due to the product image which is aligned with the success of the brand (McGuigan, Moyer, & Harris, 2011).
2. Examine the major effects that government policies have on production and employment. Predict the potential effects that government policies could have on your company.
There are several people who believe that the government must regulate the market. If the market is not regulated, then it is called the unregulated market. There is always essential to have some sort of regulation in the market. Government regulation plays a vital role. In many instances, the trend has been towards criticizing the government as a pointless entity without analyzing the critical impact government has in few areas compared to that of private industry. The government functions to handle externalities, supply public goods, enforce contracts, and supply the medium of exchange which is done better by the government sector than the private sector.
There must be discussions regarding where to restrict the government and what activities must fall within the government sector. The condition based on not having government or governments being in charge of all the economic activities are not ideal economic climate. The basic reasons for involving government in the market economy are to establish rules for exchange and to use the power to enforce. The government also reduces uncertainty and provides support to the people who are less fortunate such as poor, poor health conditions, bad luck, job losses, etc. The market economy does provide several opportunities for people, but there are risks attached to it.
3. 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.
There are numerous similarities between a perfectly competitive market structure and a monopolistic structure. The reasons that caused for the change of the market from perfect competition to a monopolistic competition were the emergence of product differentiation in the market which in the case of perfect competition is not possible. The goods are perfectly substitutable in perfect competition. The price in the market was higher than the marginal cost of the additional good produced. This suggested that suppliers had an influence on the price and had market power. However, in perfect competition, the producers are the price takers.
The other factor that led to the change in the market structure could be that price being higher than marginal cost creates barriers for any other firm to enter or exit the market. The price of the product in a monopolistic competition will have few barriers to entering and exit but in perfect competition, there are no barriers so that firms can enter or leave the industry at any time given their level of profit in the market.
Average Total Cost = TC / Q = 160,000,000 /Q + 100Q + 0.0063212Q2/ Q
= 160,000,000 / Q + 100 + 0.0063212Q
Average Variable Cost= TVC /Q = 100Q /Q + 0.0063212Q2 /Q
= 100 + 0.0063212Q
Find the minimum ATC, where ATC = MC
160,000,000 / Q + 100 + 0.0063212Q = 100 + 0.0126424Q
- 100 + 0.0063212Q – 100 - 0.0063212Q
Q * 160,000,000 / Q = 0.0063212Q *Q
160,000,000 / 0.0063212 = 0.0063212Q2 /0.0063212
25,311,649.686.77 = Q2
Q = 159,096.35 units
This is the level of quantity that the firm must produce that will minimize the average total cost in the long-run. The short- run is no longer necessary in the competitive environment.
Average Total Cost = 160,000,000 / 159,096.35 + 100 + 0.0063212 * 159,096.35
= 1,005.68 + 100 +1,005.68
= 2111.36 cents
= $21.11
If the market value remains the same, the firm will stay feasible, but in case, the more firms are entering the market, the price level in the market will fall. If the price goes below $21.11 in the long run scenario, few firms in the market will exit. This will lead the firms to produce the best level of output in the long run.
4. 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.
The firm must focus on discontinuing its operations in the short run period in case the price is lower than the shutdown point and in the long run, the price is lower than its break-even point. In a monopolistic market, the firms will experience short-term loss when the average total cost is greater than the price level that the monopolist charges at the output that maximizes the profit. In the case of reduction of firm’s price below than the average variable cost, the loss for the firm will be higher than the minimum level of fixed cost.
Even though the firm will or will not make a profit in the short run, the firm must opt to set prices when marginal revenue is equivalent to the marginal cost. This will enable the opportunity for the firm to earn economic dollars per unit of output (McGuigan, Moyer, & Harris, 2011). The management of the company must focus on maximizing the profit margin. The profit is maximized based on the quantity of output at the level where marginal revenue for the last unit produced will be equivalent to its marginal cost.
5. 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 profitability of such a convergence. Provide two (2) examples of instances that support your response.
The equation,
Quantity demanded = 350,000 – 100P
Q = 350,000 – 100P
Q – Q + 100P = 350,000 – 100P + 100P – Q
100P = 350,000 – Q
100P/100 = 350000/100 – Q/100
Price = $3500 – 0.5748
Total revenue = P * Q
= (3500 – 0.5748Q) *Q
= 3500Q / Q – 0.5748Q2 / Q
Marginal revenue = 3500 – 0.5748Q
In order to maximize profit;
Marginal Revenue = Marginal Cost
3500 – 0.5748Q = 100 + 0.0126424Q
3500 – 0.5748Q + 0.5748Q -100 = 100 + 0.0126424Q -100 + 0.5748Q
3400 / 0.5748= 0.5748Q /5748
Q = 5915.10 units
It is better to adopt competitive pricing strategy which will help low-calorie, frozen microwavable food companies to maximize the profit margin of the firm. In order to maximize profit, the firm can reduce its price to get more consumers, match the price with its competitors’ level of pricing or increase their price level above that of their competitors in order to gain market share based on brand and product loyalty (Constantinides, Harris, & Stulz, 2003). When the firm makes an attempt to increase its price more than that of its competitors, the firm’s product need to have additional features and facilities which is not provided in the market to make it premium good.
According to the Daly (2002), competitive pricing is accepted by businesses who supply similar products in the market as the services may differ from one firm to another but the basic characteristics of the product will be the same. This pricing tactic is used only after the product has been in the market for a long time period and after it has reached a level of equilibrium.
In addition to this,
We know,
Price = 3500 – 0.5748Q
Quantity Demand = 5915.10 units
P = 3500 – 0.5748(5915.10)
Price = $100.00
ATC = 160,000,000 / 5915.10 + 100 +0.0063212(5915.10)
ATC = 27049.42 + 100 + 37.39
ATC = 27186.81 or $271.81
In order to produce 5915.10 units, the average cost would be $271.81.
The profit margin that can be generated in this market structure is more than that in the perfect competition market structure. In the long run, if a firm enters into the market, the supply curve moves towards the right which will lead to the decrease in price unless it becomes zero. So, the firm needs to be careful in controlling the fall in price to maintain their positive profit margin through strategic barriers.
The companies belonging to this industry must discover measures to decrease their cost by managing the expenses more carefully and to avoid unnecessary waste i.e. maintaining an efficiency level (Bragg, 2010). The companies must look through their suppliers in order to understand whether they are getting the best services available in comparison to other suppliers. If not, they can combine the existing suppliers with a new supplier to expand their advantage. The companies can also look into their facilities to understand if they are able to get all they can from their space at a financial level. The firms may also look into their production unit in order to reduce the wastage and costs associated with other raw materials.
The other way to improve the profit margin will be to analyze the product being offered in the market, to collect information regarding the consumer profile and to determine the level of price to see if any changes need to be made. It is a great strategy for companies to look into the price of their product on a regular basis to adjust its product according to the change in the marketplace (Monroe, n.d.). Sometimes, the firm may also raise the price without affecting the risk of reduced sales. The profit can be enhanced by focusing on the loyal customer base of the product. The firm may target to expand in the market by taking on a new partner who will enable to reduce the risk and enhance the efficiency.
Conclusion
Hence, a manager must be prepared with various pricing strategies for various situations to make the product more responsive in the market. The manager must have the strategies to deal with various price changes and environmental changes in the market while he or she must be prepared to face the complexities of the situation that can be created by government policies. The government must make its policies in such a manner that it creates the fairness in the market. While the company needs to focus on developing the market, it must put its actions in such a manner that it promotes the business growth as well as the achievement of overall organizational and stakeholders’ goal.
References
Bragg, S. M. (2010). Cost reduction analysis: Tools and strategies. Hoboken, NJ: John Wiley & Sons.
Constantinides, G. M., Harris, M., & Stulz, R. M. (2003). Handbook of the economics of finance. Amsterdam: Elsevier/North-Holland.
Daly, J. L. (2002). Pricing for profitability: Activity-based pricing for competitive advantage. New York: Wiley.
Gelski, J. (2013, September 8). Nestle seeks to fatten up Jenny Craig Lean Cuisine profits | Food Business News. Retrieved from http://www.foodbusinessnews.net/articles/news_home/Financial-Performance/2013/08/Nestle_seeks_to_fatten_up_Jenn.aspx?ID=%7BD6AD78D0-5F26-40FA-A4D3-163828854B67%7D&cck=1
McGuigan, J. R., Moyer, R. C., & Harris, F. H. (2011). Economics for managers. Mason, OH: South-Western Cengage Learning.
Monroe, K. B. (n.d.). The pricing strategy audit: An in-company assessment to help create the best possible pricing strategy for your organization. Cambridge: Cambridge Strategy Publications.
Watrous, M. (2014, February 19). ConAgra seeking healthier sales for Healthy Choice | Food Business News. Retrieved from http://www.foodbusinessnews.net/articles/news_home/Business_News/2014/02/ConAgra_seeking_healthier_sale.aspx?ID=%7B28F5670D-F1CB-40B1-8756-383C061EE043%7D&cck=1
