Value Pricing in Food Industry - Research Paper Example

Part A 1. Factors affecting food prices In general, the demand for a product largely depends on its price. But price is not the only factor that influences demand. The demand for a product also depends on factors such as income available with consumers for spending, price of related goods, expectations regarding future prices, consumer preferences and the number of buyers in the market. This principle applies even to the global food industry. Over the past two years, food prices all across the globe rose tremendously. Apart from demand and supply factors alone, economic factors have also been responsible for this price hike. The economic environment has a tremendous impact, as the most crucial factor determining a market’s potential, is undoubtedly income. World economy has undergone a significant change in the recent past. The competitive front has taken a new shape, with companies facing global competition in the place of local competition. The major factors, which influence the economic environment, are the GDP and GNP, the disposable income, inflation rate, the cost of energy and its availability, infrastructure capabilities, etc. Generally, there are three categories of economies operating in the world; capitalist, socialist and mixed economies (Williams, 2006). This categorization if influenced by the resource allocation in the system. The resource allocation is done in three ways – market allocation, in which the customer is given maximum preference and the goods and services are produced according to the choice of the customers. In command allocation method, the government plays a prominent role in deciding what and how much is to be produced while in the mixed economy, resources are allocated on the basis of combination of both market allocation and command allocation methods. World markets can also be divided according to the GNP per capita by segmenting them into high income countries, upper-middle income countries, lower-middle income countries and low income countries. Inflation is one more factor that has been responsible in the increase of global food prices. When aggregate demand is higher than the aggregate supply the price level increases generally. Demand pull factors create inflation. The major factors under this category are increase in money supply, the government budget deficit, increase in export earnings etc. Cost push factors would also have been responsible for inflation. When the cost of production factors increases, the producers or manufacturers that supply the food reduce the supply. The aggregate demand however remains the same. However, the producers of the food items gain largely from inflation. They gain from inflation because the prices grow faster than the cost of production. In the short run, value of inventory appreciates while the cost of production remains same. They have a chance of creating artificial scarcity of the goods in the market, raise prices and generate profits. Big farmers who have marketable surplus can hoards the crops and sell them later at higher prices. However, small farmers who are engaged in subsistence farming are not affected much from inflation. Inflation decrease the purchasing power of money and savers feel that their capital is eroding. Other factors which were responsible were the increased energy cost, the weakening dollar value and policy changes (Trostle, 2008). 2. Wheat is one food commodity whose supply has dropped and this in turn has led to the increase of commodities which use wheat as a major ingredient. The main reason behind the drop in production of wheat is the droughts which were caused by the global climatic change. Another important factor that has been responsible for the shortage of wheat is the increasing population (Gutierrez, 2008). This hike in population coupled with the increased consumption of meat is one reason for the decreased supply and production of wheat. This can be related to the consumer behavior. It is important to understand the difference between preference and choice. The consumers may have preference when they have a range of products to choose from. Preferences depend upon the consumers’ likes and dislike but the final decision is dependent on budget constraints. In order to maximize the satisfaction, consumers have to choose the alternatives for which the net benefit is more. “Increasing demand from Egypt to India and weather damage to global crops has driven up prices in Chicago by 79 percent this year. Users including Kellogg, the biggest U.S. cereal maker, General Mills Inc, Sara Lee Corp. and PT Indofood Sukses Makmur, the world's biggest producer of instant noodles, are responding by raising prices, fueling inflation(Rossingh, 2007).” Also, the increased cost of energy is yet another factor that has lead to the increase of wheat prices. If the cost of energy increases, then it would lead to increase in input costs. Input costs can be in terms of pesticides, fertilizers etc. Apart from this, higher costs of transportation and higher costs of processing also have lead to cost affects of food shipping (Corey, 2008). The growing demand for the particular commodity is one more factor that can be considered. The increased demand for wheat is evident in countries like China, Middle East and Southeast Asia. “As the middle classes are growing in these regions, they want to eat more food and are all entering the international market at the same time. When the new middle class gets new income, they want to spend it on food in much of the developing world, so the demand-side growth for food is on a rapid growth curve right now (Corey, 2008).” The demand for the particular commodity under discussion also depends upon government policies. For example, a few countries recently have shut off exports totally. Change in government policies may also have a negative impact on the demand for the product. This is also responsible for the price hike. The countries have closed exports completely in order to keep the domestic prices low. This ban on exporting also has influenced price scares and transportation problems. The devaluating dollar is also responsible for the price hike. Whenever there is a surge in the dollar price it will in turn lead to the increase in the prices of all the commodities which are dollar denominated. As the dollar became weak, the commodity prices increased. As already stated, the main reason for the increase in the prices of wheat related products is the surge in the production of the commodity. Production requires not only labor, capital and land but also time. Once capital equipment has been put in place, it is not economical to dismantle and move it to another location. Two different time periods are referred to namely short run and the long run. Short run is the period in which variable factors such as labor and material can be changed to adjust the production but it is not possible to change fixed factors such as capital. While long run is a period that is sufficient enough to change all factors of production including capital to adjust production levels. When an increase in all inputs leads to proportional increase in output or vice-versa, then constant returns to scale can be experienced. Consumption is influence by the income of a consumer. With every increase in the income of a consumer, the consumption of the consumer also changed. TO be specific, the purchasing power of the consumer increases. On the other hand, any increase in the price of a product reduces the purchasing power of the consumer. If a consumer expects a fall in the price of the product in the near future, then it is possible that the consumers reduced the present consumption. However, the extent to which he can reduce the present consumption depends on the nature of the product. 3. A recent article published in the New York Times speaks about the current global economic situation and its impact on consumers and nation. The article speaks about the decreased spending of the people of United States. This fact was evident from the recent report of United States of America’s GDP; the real spending rate of consumers had slumped in the third quarter approximately at a rate of 3.1% p.a. The report also revealed that the real spending on durable items like TVs and refrigerator too slumped at an annual rate of approximately 14%. The above situation of reduced spending of American consumer is very surprising as the people of the American economy never decreased their spending even in the past wherein situations like recession etc. took place. Even after the recession of the American economy in the year 2001, the consumer spending in the United States Economy continued to increase. Also, the economy has never experienced this kind of slump since the year 1980 during which the American economy was experiencing a double-digit inflation along with a serious recession. The above results were revealed in the third quarter report which is a little earlier than the collapse of Lehman Brothers and AIG and the severe plunge of the Dow Jones below 10,000 point mark. The collapse was related to what is known as “The Big Bank Theory” of finance and economics (PinoyMoney.com). According to this theory, no government across the globe will allow any big financial institution or a bank to collapse so easily. This is because the after effect or the consequences of such collapses would definitely be great and at time will be out of control to handle despite how big the economy in which the collapse occurred. Though according to the views of economists, the current situation of decreased spending by consumers of the American economy can be viewed as the offsetting of the increasing debt of the consumers with the continuously rising stock portfolios, it is hard to believe it when considered the worst situation of the economy. According to the principles of introductory macroeconomics, though consumers feel that they are doing the right thing by increasing their savings level, it can definitely have an adverse affect on the economy. This is because, if the consumers decrease their levels of spending and no other activity that can compensate this decreased spending takes place in the economy, then obviously the economy will slip into a recessionary situation and this will ultimately decrease the income levels in the economy. In order to handle the situation when consumers’ cutback their spending, the Federal Reserve would usually decrease the interest rates as this measure would not only save the economy from going into a recession state but also helps in increasing the investment levels. However, this measure may not be always possible to be taken by the Federal Reserve due to a variety of reasons. With this kind of situation of the economy, the government needs to address the issue of decreased consumer spending by bringing in revised economic policies. Consumers need to be motivated through new set of fiscal policies that encourage the levels of government spending. Part B. Monetary policy has got a strong influence on the overall economy. It is an important aspect of overall macro-economic objectives; monetary authorities employ various techniques (ICFAI Center for Management Research (ICMR), 2003). Monetary policy can be broadly defined as “the deliberate effort by the Central Bank to influence economic activity by variations in the money supply, in availability of credit or in the interest rates consistent with specific national objectives (Careerforum.in, 2008) (ICFAI Center for Management Research (ICMR), 2003).” The monetary policy of any country refers to the regulatory policy, whereby the monetary authority maintains its control over the supply of money for the realization of general economic objectives. The monetary policy varies according to the type of economy i.e. developing economy and open economy. Exchange rate is one aspect that guides the framing of the monetary policy in any country. Fluctuations in the exchange rate create troubles in the international commercial and financial relations of a country. In financially weak countries, frequent fluctuations in the exchange rate leads to financial crisis (Careerforum.in, 2008). And it reduces the willingness of international investors to invest in those countries. As a result, large-scale withdrawal of short-term funds and capital flight can take place. Fiscal policy is an important instrument in the hands of the government to meet its financial requirements and relates to the management of finance by the government. Monetary policy, on the other hand, refers to the policies pursued by the Central bank of a country to regulate the growth of money and credit in the economy. Monetary policies are usually brought into play only to correct he adverse effects of the government’s fiscal policies. Monetary targeting is one measure that helps gain economies of scale. Monetary targeting refers to the practice of formulating monetary policy in terms of target growth of money stock. Keeping in view the need to regulate money supply in line with increases in output, a committee set up to review the working of the monetary system recommended that banks should adopts a system of monetary targeting with feedback. The basic objective of the monetary policy of a country is to attain the maximum level of sustained economic growth, along with domestic prices stability and realistic foreign exchange rates. A fluctuating foreign exchange rate accompanied by constant rises in the price level act as retarding factors in the process of capital formation by discouraging domestic savings and impeding the net inflow of foreign capital. This creates difficulties in the efficient allocation of resources and the realization of maximum possible output. On the other hand, suppressed inflation is more detrimental to the economy, as it diverts scarce resources from productive to unproductive channels, which gain retards economic growth in the long run. The maintenance of stringent foreign exchange controls, import licensing policies and unfavorable foreign exchange rates promote unproductive and speculative practices in the economy. Even fiscal policies aim to promote economic development of the country. The saving and investment activity is initiated by the taxation policy, public borrowings and public expenditure. The contribution of public expenditure to growth depends on its size as well as the ratio of productive expenditure to total expenditure. Great emphasis is laid on the development of infrastructure. To enhance the production of some specific items, subsidies are provided. Expansion of investment opportunities will have a positive effect on level of business activities leading to the economic growth. Fiscal policy also helps in ensuring price stability. When the economy is experiencing deflation, budgets should aim at increasing expenditures and creating incomes for the people have high propensity to consume. Similarly, during inflationary periods, there should be a cut in expenditure and spending capacity of people should be curbed. To curb non-essential expenditure government can impose different taxes. The purchasing power can also be reduced through compulsory saving. The government has the power to influence the purchasing power of consumers by affecting their disposable income. Stabilization policies are the policies undertaken by the governing authorities to maintain full employment and a reasonably stable price level. Similarly, when the economy is suffering from high inflationary pressures, government can engage in contractionary fiscal policies that will decrease government spending or increase taxes. The fall in government spending will restrain aggregate demand up to a particular level. It is important for an economy to have a high economic growth with stable prices. Higher economic growth does not only mean rising levels of GDP and per capita GDP but also includes the concept of egalitarian distribution of income. Though not a sufficient condition, it can be said that economic growth is a necessary condition for the fulfillment of other policy objectives. 2. The advent of globalization has opened up doors for today’s organizations to expand their presence across national borders and do business. This is how the evolution of international trade has taken place. This kind of expansion beyond national borders in necessitated by organizations because if they do not do so their survival in today’s competitive world will be at stake. In order to practically explain about firms going multinational, we consider Carlsberg Breweries which has been a major player in the country since the 1990s. The forthcoming paragraphs discuss the various challenges and risks that Multinational Enterprises face. The major problem in emerging economies like China is that the market is highly volatile because of fluctuating or frequently changing industry structures and the macro-economic structure. Though the economy of China grew dramatically as mentioned earlier, it was hit by the Asian Economic crisis which turned out to be a slump on the economy. Most of the industries are highly uneven. This fragmentation is because many small scale firms compete to gain maximum market share in the market. In such a situation, when MNEs enter the market, then the market experiences a sudden change in its structure and these results in uncertainty in market place. In order to compete or carry out business in a country like China, context-specific capabilities are required. Domestic firms which would be operating in the country since many years and they would develop capabilities and this would increase the restriction of entry into such markets by MNEs (Klaus E. Meyer, 2006). Another major challenge faced by the MNEs is that of the institutional frameworks. To be clear, the institutional frame works would require MNEs to interact in many different ways with the local authorities and other business partners. Apart from the above mentioned challenges, companies do face barriers related to political, economic, social, and cultural and communication aspects. Substantial differences in consumer tastes, preferences and practices, market structures, distribution channels and local regulations forced firms to give autonomy to their overseas subsidiaries and allow them to be self-sufficient in operations. In order to face these challenges, MNEs need to adopt various strategies that are market specific and that suit the market into which the Multinational Enterprises are making an entry. Coordinated Federation is a kind of strategy in which the company headquarters transfers technology and know-how to subsidiaries located in less advanced markets. The national units are highly dependent on the parent company for products and processes. Later, the subsidiaries may modify the imported products to suit local tastes and preference of consumers. Selection of entry strategies in international markets is one of the most important aspects of international marketing management. According to Frank Bradley and Michael Gannon, “Any injudicious selection of the entry mode may give rise to opportunity costs and in some cases thwart subsequent endeavors in international markets (Does the Firm's Technology and Marketing Profile Affect Foreign Market Entry?, 2000).” A thorough study of the pros and cons of each entry mode should be undertaken before taking a final decision. Firms seeking to enter international markets have to first check if there is a potential market for their products in foreign markets. The second step is to choose an appropriate country. Firms planning to enter international markets for the first time should ideally choose a friendly and easy-to-enter economy, and preferable on with which it has a common language. Then they have to decide the mode of entry. Firms should evaluate several dimensions of international environmental uncertainty before choosing an entry mode. This allows them to optimize their returns for the risk assumed. According to Agarwal and Ram swami a firms is expected to select an entry mode that offers the highest risk-adjusted return on investment (Choice of Foreign Market Entry Mode: Impact of Ownership, Location and Internalization Factors, 1992). Researchers have tried to identify the link between international entry modes and the performance of firms. A few researchers have used the multiple international risk measures suggested by Miller to choose superior performing entry modes (A framework for Integrated Risk Managemnt in International Business, 1994). They suggest that firms choosing a strategy that incorporated international risk performed better than those that did not take the risk into consideration. As already stated, the MNE that is considered for a practical examination is Carlsberg Breweries. The company first entered the Chinese economy through exports in the year 1987. However, the company until the year 2003 did not commit any major of its resources in China. It was in the year 1990 that the company started brewing in China. A company called Huizhou Brewery in Guangdong was licensed for the purpose of brewing and introducing its brand by Carlsberg Breweries. Within a short span of time, the company was able to acquire 99% of the equity in Huizhou Brewery. By 2006, the company was able to produce a local brand named Dragon 8 which over a period of time, became the main base of the brand of Carlsberg throughout China. Later in the year, 1998, Carlsberg Breweries, opened Greenfield Brewery in Shanghai. It was a US $ 80 million venture. Greenfield operations are a market entry strategy in which firms start business in international markets from scratch. This mode of entry offers firms the flexibility to choose their personnel, suppliers, distributors, technology, logistics, etc. However, this mode of entry faces both markets risks as well as political risks. To an extent these risks can be minimized by employing local people and sponsoring local sports and cultural events. This method of entry is preferred especially in emerging markets where it is difficult to find a good prospect for acquisition. But the venture of Carlsberg did not turn out to be profitable. Hence it sold off its stake to a company called Tsingadao which is located in the Northern region of China. After this, the company was in such a position that it was found nowhere in the Chinese economy. In order to handle this situation, Carlsberg Breweries adopted a new strategy called ‘go west’. The aim of adopting this strategy was to acquire equity stakes in the Western Provinces of the Chinese Economy. After adopting the above mentioned strategy, the company was able to penetrate most of the virgin territories of the global beer industry that are situated in the Western provinces of China. In the year 2003 – 2004, Carlsberg was able to acquire equity stake in five major companies and established a Joint Venture in a place called Qinghai. Kogut and Singh define joint ventures as “vehicles to share complementary but distinct knowledge which could not otherwise be shared or to co-ordinate a limited set of activities to influence the competitive positioning of the firm (The Effect of National Culture on the Choice of Entry Mode, 1988)”. “In contrast to licensing and franchising arrangements, joint ventures allow companies to own a stake and play a role in the management of the foreign operation. Joint Ventures require more direct investment and training, management assistance and technology transfer. Joint Ventures can be equity or non-equity partnerships. In some countries, a joint venture is the only way for a foreign company to set up operations (Brainmass.com, 2003).” By acquiring multiple companies, Carlsberg was able to acquire almost 50 local brands out of which two brands are famous at the national level. In the western provinces of China, Carlsberg promoted their global brad which was brewed at Guangdong as a new brand named ‘Carlsberg Chill’. Its target customers for this brand in that region were younger generation. Targeting strategies adopted by companies greatly influence the company’s performance. Targeting is the process of selecting the highest potential customers with whom the organization wants to do business. It can also be described as the process of eliminating the undesirable market segments while choosing a few. In the words of Warren J. Keegan, Targeting may be defined as “the act of evaluating and comparing the identified groups and then selecting one or more of them as the prospects with the highest potential.” After selecting the target markets, a suitable marketing mix is framed for those markets. This mix gives the organization the best returns while generating the maximum amount of value to the customers. So, global targeting can be explained as “identifying market segments throughout the world, targeting a few segments, and designing suitable marketing mix strategies for each of these segments (Esslemont, 1994).” 3. In order to manage international businesses in an effective manner, adopting a competitive strategy is the best method. Effective formulation of strategy needs clear understanding of competition. Competition in an industry is determined not only by existing competitors but also by other market forces such as customers, suppliers, potential entrants and substitute products. Managing business operations is indeed a great challenge that many organizations today are facing. International management of business operations requires organizations to carefully match and monitor many aspects like the market demographics, the growth potential of the particular market and also potential competition. If an organization successfully plans and maps all the above mentioned aspects, managing business operations at an international level would definitely be easy. A mature market poses the biggest challenge from the stand point of strategic management. This is because the mature market is already saturated. Strategic alliances are formed to maintain the leadership of the companies and also to protect their core business. Strategic alliances would make more sense in emerging markets because emerging markets go through a continuous phase of development. While forming a strategic alliance it is important that the companies look at mutually beneficial goals instead of individualizing them. Pricing the products and services might be a routine hob for most producers and retailers, but it involves a thorough and a deep understanding of the principles and practices governing the business environment. Adopting the right pricing strategy helps a company achieve its objective. To sustain and achieve its objectives in the competitive market, a company should adopt the most effective pricing mechanism. Thus, pricing is very important to a marketer. Before adopting a pricing strategy, certain factors like the demand for the product or service in the market, customers’ perception, the sustainable margin, the image of the company in the market etc. Pricing is a very important aspect of the firms’ existence and hence, firms must develop proper pricing strategies and convert them into effective competitive advantages. Pricing is the biggest challenge that marketers face, and quite often, they may feel that they have not set the right price. This may be due to several reasons. One of the most important is that prices are dependent on market factors. The sales of a product have an impact on the pricing mechanism. However, the sales of a product can increase because it has been priced too low and not because it has been priced right. Setting the right price can have a substantial impact on the profits of the firm. Some companies use the market penetration pricing strategy to attract customers. It is only a few products that can be called truly innovative products. Such products come into the market infrequently. Most of the times products introduced are copies of existing products with slight modifications. /firms try new approaches to attract customers who have many similar products to choose from. They employ sales promotions, membership cards, sponsorships, etc. to attract customers. Firms resort to price cuts, and offer products below their competitors’ prices to take away a large number of customers form their competitors. This is the strategy that some firms adopt. The expectation in offering products at low prices is that one customers use the product, they will develop an interest in the product and would be ready to pay a price that is equal to the competitors’ prices. Over time, customers may develop loyalty for the product and would be ready to pay a premium price. There are also some firms that have adopted a value pricing philosophy. The method of value pricing can be described as a process in which marketers offer low prices for high quality products or service. The idea of value pricing is to help the customers perceive that they are getting a high quality product at a low price. Value pricing is not implemented as a response to the pricing patterns of the competitors. On the contrary, it is an outcome of improved research and development that helps the company delivers high quality goods at low prices. In order to service the needs of customers and fulfill their expectations and to meet the organizations’ growth and profitability objectives, managers focus on improving the effectiveness of the supply chain. If an organization follows the principles of supply chain management, it can attain a balance between customers’ expectations and its growth and profitability objective. Bibliography A framework for Integrated Risk Managemnt in International Business. Miller, K.D. 1994. 2, s.l. : Journal of International Business Studies, 1994, Vol. 23. Brainmass.com. 2003. Starbucks' International Operations. Brainmass.com. [Online] Brainmass.com, 2003. [Cited: December 2, 2008.] http://www.brainmass.com/homework-help/business/management/89524. Careerforum.in. 2008. Eco Fundas. Careerforum.in. [Online] Careerforum.in, November 28, 2008. 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Williams, John F. 2006. Strategy Driver for Global and International Business. s.l. : Ravenwerks Information Center, 2006. Read More