Low-Calorie Frozen, Microwavable Food Industry - Case Study Example

Low-Calorie Frozen, Microwavable Food Industry Market structure assessment The low calorie microwavable food industry is characterized by numerous sellers. Consequently, improvement in technology and increase in people’s income has increased the demand for microwaves hence raising microwavable food’s demand (Graf &Saguy, 2006). Despite having many sellers and buyers, the products happen to be differentiated, hence a monopolistic competition structure. Moreover, some firms are large and serve a relatively large market share. As noted in assignment 1, firms have some control on price and thus charge price relatively higher than the competitive market price, accruing to economic profits. Quality improvement in the industry involves reducing calorie to minimum levels attainable. Given the many different products in the market, consumers will opt for the healthiest choice. The market structure allows for product differentiation and hence firms can strategically improve quality to capture a higher market share. Note that, differentiation results to changes in marginal cost(Walter, 2012). However, since prices are not given, firms can adjust their prices in accordance with quality adjustments without significantly losing market share. As noted in assignment 1 change in competitors’ price have minimal effects on the firm’s sales (cross elasticity = 0.68 which is less than 1) and hence the firm’s power to adjust prices is less challenged by competitors’ decisions Factors contributing to change in market structure Low calorie microwavable food industry no longer operates in perfect market conditions. The market imperfections can be attributed to; product differentiation and change in consumer taste and preferences. Initially, food industry operated under perfect competitive structure. However, with invention of microwave technology, microwavable food, has undergone changes in its classification. First started as luxurious hence highly influenced by advertising (Graf &Saguy, 2006). Increased accessibility of microwaves changed consumers’ perception of microwavable food as luxurious opting for higher quality rather than price. Therefore, in determining business operations, the firm ought to consider the new market structure. Since purchasing behavior is relatively influenced by customers’ lifestyle and personality, use of psychographic segmentation can adversely improve the firms’ sales. The social standing has changed and so should the supplier’s options. Cost function analysis Cost functions show the relationship between costs of production and the firms output. Low-calorie food market experience a non-linear cost function. Generally, an increase in production/output raises the production costs although not proportionately due to fixed costs. Optimal production is achieved when the marginal cost equals marginal revenue, thus the firm makes maximum profit. As matter of fact, a rational producer can only produce when MC is greater or equal to change in average variable cost. I.e. the positively sloped part of the MC curve. In the short run, fixed costs exist and thus the firms TC differ from the average costs. Short run variable costs in food industry might include labor costs, cost of raw materials and advertising expenses. By evaluating the short-run costs, the firm can set a price that yields an economic profit to the existing firms. That is at point where MC=MR, MC is lower than average total costs. Note that new firms do not enter the market in the short run; and change in average total costs is not zero. In the long run, VC= TC, and new firms can enter the market. Therefore, firms in monopolistic competition will opt to produce at a point where average total costs equal marginal costs. Alternatively, the firms can adjust prices to ensure that economic profits are zero. Business discontinuation A firm will remain in industry as long as the current price is equal or larger than marginal cost, i.e. it’s making profits. Otherwise termination becomes a rational decision. A reduction in demand reduces total revenue and can result to losses. Given that prices reduce quantity demanded, the firm should ensure that any pricing strategy ensures a price either equal or higher than MR. In the short run, improper inventory management can lead to inequality between supply and demand. When firms supply is less than the demand, price tends to shift up and competitors can take advantage reducing the firm’s market share significantly. Note also lower production is accompanied by higher average costs. In the long-run, many factors affect the firm’s profitability. Barriers to entry in the industry are minimal and thus competition ought to be stiff in the long run. Lack of enough capital to expand can cause competitors to take over the market in the long run. To sustain potential customers the business ought to improve quality standards which call for extra cost. To curb this, the firm can strategically plan its further operations, inculcate latest technology, build on quality and sustain minimal prices. This should be done in manner that, price is relatively equal to competitors price as well as higher than the average total cost. Secondly, over expansion can lead to the firm’s failure. Although expansion is vital to firms increase in sales, the management should be capable of controlling all business operations effectively (Walter, 2012). Competitors tend to use the company’s weakness to create threats and hence can raid the easily transferable customers in cases of mismanagement. Therefore, though increasing the price and quality can be rational, the firm should consider the markets reactions. Too much advertisement will increase costs and thus reduce firm’s productivity. Contrarily, no advertising might result to consumers being raided by competitors who strategically create awareness of the available features. For that reason, the firm ought to improve quality, modify products to fit customers need, but maintain costs as low as possible to curb competitors (Bonnet &Réquillart, 2011). Pricing policy Operating in an imperfect market condition, food calorie firms possess market power to influence prices. This implies that the firm’s price can be set higher than MC, without interfering with the optimal quantity, hence boosting total revenues. Consider the demand function generated in the previous assignment: Hence holding all factors except price constant: Q= 38650 -42P And , Therefore TR = , . At maximum profit MR=MC Thus; = 100 + 0.012642Q 820.2381 = 0.0602 Q Q = 13625 And = 595 cents With the freedom to manipulate price, firms are able to reap higher revenue through price increase. Therefore, pricing using market decision could be a rational decision. Given that industry’s products are differentiated, the firm should study the market and understand its demand curve. The firm can therefore restrict quantity, therefore increasing price. Note that, at equilibrium quantity, when MC=MR, customers are willing to pay more, i.e P>MR =MC Financial performance evaluation Performance evaluation implies estimating how effective a firm utilizes the available resources. Profits and other related ratios can be used to evaluate a firm’s performance. Particularly, a profit maximizing firm could be performing relatively well, if other factors such as customer base growth are held constant. Notably performance is influenced by a firm’s strategy development and implementation. In the short run, profits π = P*Q –TC = 595* 13625 –(160,000,000 + 100*13625 + 0.0063212*136252) = 8,106,875 –162,535,971.5 = - 153066596.51875 The company makes losses in the short run; however, given that the losses occur due to high fixed costs (investments), the company can still continue operations. Notably the revenues are higher than variable costs and price offsets average variable cost. As matter of fact, the In the long run, the firm’s profits are guaranteed without expansion. Given that the industry is competitive, new entrants would be deterred by excessive investments required as well as the short-run losses. Therefore given the long run economic profits, the firm can focus on quality improvement, while maintaining high prices to ensure maximum profits. Long run profits π = 595* 13625 – (100*13625 + 0.0063212*136252) = 5570903.5 Actions to Improve Profitability and improve Stakeholder’s satisfaction The main objective of any organization is to maximize profit. This can be achieved via cost reduction or revenue maximization. To increase revenue, the company can improve its quality. Customers have complete information of the quality, thus they their purchases can only be increased by increasing their satisfaction. Note that, quality improvement adds to cost, but since the firm is a price setter, then profitability can be maintained by adjusting price. Notably, Lean Cuisine has maintained its customers despite the existence of various competitors offering lower prices. External customers make decision based on quality not price hence increasing both price and quality increases revenue. Cost reduction, might not fare well in this industry. Employees can only guarantee effectiveness if their efforts are well compensated. Therefore, given price increase, employees’ wages ought to be raised, to maintain their purchasing power. However, as advertising isn’t that vital (recall its elasticity in assignment 1). Then advertising costs can be substituted to encourage internal customers. References Bonnet, C., &Réquillart, V. (2011).Strategic Pricing and Health Price Policies. Graf, E., &Saguy, I. (2006).Food product development: From concept to the marketplace. Gaithersburg, Md: Aspen Publishers McGuigan, J. M. (2014). Pricing techniques and analysis. In J. M. McGuigan, Managerial economics: Applications, strategies and tactics (p. 500:531). Mason: Cengage Learning. Potter, N. N., & Hotchkiss, J. H. (2008). Food Science: Fifth Edition. Boston, MA: Springer US. Proctor, A. (2010). Alternatives to conventional food processing. London: Royal Soc. of Chemistry. Walter Nicholson, C. S. (2012). Microeconomic Theory: Basic Principles and Extensions. (11thed.). USA: Cengage Learning. Read More