Low-Calorie Frozen Microwavable Food Company: Long-Term Investment Decisions - Case Study Example

Low Calorie Frozen Microwavable Food Company: Long Term Investment Decisions due Low Calorie Frozen Microwavable Food Company: Long Term Investment Decisions Pricing policy plan Low-calorie food industry is an imperfect market that allows firms to adjust prices. However, following the fact that demand in this industry is relatively elastic (price elasticity of demand = -1.19), then any pricing policy resulting to an increase in price is irrational. Factually revenue increase due to an increase in price is outdone by the revenue lost from the more than proportionate reduction in sales. Shockingly, there is an increase in cost of ingredients and hence firms must either reduce wages or increase prices to maintain their profitability. Reduction in wages de-motivates employees reducing their effectiveness in production. Secondly, existence of labour unions, government minimum wage policies among other wage reduction restricting factors, firms can only remain profitable by increasing prices. In an effort to raise price, firms in the low-calorie food industry ought to increase price inelasticity first. Note that, microwavable food has become a necessity whose market demand is relatively high. The high elasticity results from the high number producers. Therefore, the firm should emphasize on reducing the closeness of available substitutes. Total elimination of substitutes might not be achievable, but product differentiation, branding and persuasive advertising can increase a firms competitive advantage (McConnell & Brue, 2009). Increasing the amount of noticeable differences between the firm’s products and substitutes makes consumers perceive the product as more satisfying than the latter hence increasing customer’s rigidity to shift. Quality improvement, i.e. reduction of calorie, increasing expiry dates can increase the product’s reputation. With many sellers in the market, a firm can increase its market share by branding. Involvement in Corporate Social Responsibility can increase the firm’s brand name’s reputation in the minds of existing and potential customers. Though differentiation and branding instil extra costs to production, the nature of low –calorie food industry mandates them. A mixture of the two reduces elasticity of demand as customers view to the particular firm’s products as more satisfying than its substitutes. Additionally persuasive advertising might also corrupt consumers to the seller’s advantage. Having reduced elasticity of demand to a value less than one (in absolute terms), the firm can then increase prices Effects of government policy In business, the government lays a major role in regulating industries to ensure mutual benefit amongst buyers and sellers amongst other stakeholders. The food industry is not an exception and thus firms operating in this industry experience direct or indirect impact from government policies (FDA n.d). As matter of fact, food industry is highly monitored by the government possibly due to the prospected damage that would result from producers unethical actions. The most influential policies in the food industry are the food safety regulation policies. The government, via agencies such as FDA, ensures that every food processed meets the required safety standards. The types of additives, preservatives and other ingredients used in making microwavable food must also meet the governments set standards otherwise the producing firm risks being terminated. Rationally, food safety regulation is both beneficial to customers and producers. The fact that customers cannot easily discover any harmful components in microwavable foods reduces the producers’ incentive to ensure safety. Not that increasing food safety increases costs and thus a rational producer can overlook safety precautions that are not visible to consumers to minimise cost, without affecting consumer preference. However, lack of safety assurance reduces consumer confidence on the particular product. Microwavable food is not purely a necessity and can be easily substituted non-frozen foods. Therefore, safety regulations are a ‘necessary evil’ as they increase consumer confidence hence increase demand for microwavable frozen foods, despite increasing production costs (Ralston, 2001). Secondly, informing customers that products meet the governments safety requirements can be used as a marketing tool. Secondly, regulators demand that labelling contains a list of ingredients, preservatives and additives as well as their respective percentages. Perfect information about the product ought to flow from the producer to the consumer. The law requires that advertisements are also made in utmost good faith. This mandatory exposition of information enables customers make an informed decision and hence directly affect demand. Therefore, to gain competitive advantage, firms must use the most preferred combination of ingredients. Moreover, maintaining calorie compositions at the lowest level possible is necessary as FDA has recently mandated calorie information exemplification (FDA n.d). Industries are inter-linked and therefore policies governing other industries have spill over effects on microwavable food industry. For instance, many state governments subsidize agricultural industry. Consequently, the cost of inputs unfrozen food industry reduces in particular states and can translate to either reduced prices or increase in quantity supplied. Opposite results are expected in areas where agricultural sector is highly taxed. For this reason the US government has maintained subsidies despite high levels of profitability in the agricultural sector. Labour laws play a significant role in the industry. The minimum wage policies as well as improved working conditions see the firm spend more on internal customers than in a free market structure (Ralston, 2001). Considering the increase in price in many inputs in the low-calorie food industry, profit maximising firms might have a low incentive to spend anything higher than reservation wage on employees. However, it’s worth noting that better working conditions increase per worker productivity yielding to higher quality, and efficiency, which in turn reduces average costs. Environmental regulations impact the mode of packaging. Polythene papers are highly discouraged. Importance of government regulation As mentioned earlier all policies have a positive impact on the industry. Generally all policies increase the producers’ incentive to increase product quality and consumer satisfaction. Note that government involvement in any business is aimed at protecting consumers from exploitation (Ralston, 2001). The only associated demise is the increase in production costs. However, though the benefits are hidden in most cases, it can precisely be noted that government policies increase consumer trust on the goods and hence boost sales leading to increased profits. With imperfect market conditions, firms are able raise prices higher than competitive market prices hence reaping economic profits Furthermore, microwavable food customers make their choice based on quality but not prices and hence are willing to pay higher prices provided the utility gain due to quality assurance is larger than the pain from the extra expenditure. Moreover, with the ability to alter prices collusion or amalgamation of the large firms can significantly the industry’s efficiency. Similar to the airline industry, the government ought to restrict mergers in the food calorie industry. Complexities in Capital Projects’ Expansion Capital project expansion enhances the advantage of economies of scale and hence can be viewed as a long term profitability strategy. However, in low calorie food industry, capital expansion requires extensive research and design; otherwise returns from the costs may not cover initialising costs. To start with, the industry is highly responsive to quality and any new project or product initiated must meet the quality requirements. New products initiated ought to satisfy both customers and regulating authorities. Secondly a flaw caused by new product, new technology used in production or maybe resulting from a wrong choice of an expansionary scheme, reduces the firm’s reputation. As mentioned earlier, customers are lured by brand name and thus a flaw in a single product affects all other products associated with the same brand (Hirschey, 2009). Therefore, as capital projects are long term and require heavy investments, successful firms in the industry must initiate sufficient research and pre-tests, not only based on financial goals but also aimed at improving customer value. With the current rate of technological advancement, customers’ tastes and preferences are no longer stable. This instability poses a great threat to long term investments in almost every industry. Logically, a rational firm the low calorie industry should opt to reduce costs via capital expansion since most the cost of variable inputs in the industry is increasing. Change in consumer taste not in favour with the set capital investment, can thus shock the company, giving an advantage to its competitors. Certainly, the uncertainty reduces low-calorie food firm’s creditworthiness as well as potential shareholders trust on the firms operation. For that reason, this firm’s access to capital for expansion is limited to reserves. Solutions to Principle Agent Problem The food calorie industry is risky, and long term profitability is not guaranteed. Managers understand these market uncertainty and therefore if not monitored might collapse the firm by focusing on their short term gains. According to the principle agent theory information asymmetry exaggerates the manager incentive to cheat shareholders. The only solution to the principle agent problem is creating a convergence in the two stakeholder’s interest. Mandating managers or even encouraging them to acquire shares in the firm easily aligns the interests. Evidently, the long term profitability of the Apple Inc. can be attribute the mandatory rule of manager sot own shares worth more than their annual salary (Gary, 2008). By the virtual of being shareholders, managers use their capabilities to ensure long-term profitability. Secondly, set rewards to managers upon achieving certain levels of profitability. For instance, Issuing of stock options, whose value increases with an increase in share value, to managers and other employees provokes them to maximise shareholders earnings. Strict monitoring and reduced information asymmetry between the principal and the agent can also increase the convergence of interests. If shareholders understand the best operations to increase stock value, then they can easily mandate their employees to initiate successful strategies, and even question managers is any fraud is detected. To increase information flow to shareholders, firms might consider selling more shares to Corporations than individuals (Gary, 2008). As matter of fact, corporate employ analysts and auditors to monitor firms in which they have shares. References FDA. (n.d.). Foods. Retrieved February 21, 2015, from http://www.fda.gov/Food/default.htm Ralston, K. (2001). How Government Policies and Regulations Can Affect Dietary Choices. Retrieved from http://www.ers.usda.gov/media/91084/aib750q_1_.pdf Gary, M. J. (2008). Solutions to Principal-Agent Problems in Firms. In C. Ménard & M. M. Shirley (Eds.), Handbook of new institutional economics (pp. 349-370). Berlin: Springer. McConnell, C. R., & Brue, S. L. (2007). Economics: Principles, problems, and policies. New York: McGraw-Hill. Hirschey, M. (2009). Managerial economics. Mason, OH: South-Western Cengage Learning. Read More