Long-Term Investment Decisions - Essay Example

Long-term investment decisions The Company Profile The project is focused on planning long-term capital budgeting decisions for a frozen food company, Fitness Food. The company manufactures and sells low calorie frozen food that can be micro-waved for eating. According to the management, the company is delivering food services and solution to fitness conscious individuals and workaholics who want quick, healthy and tasty meals. The company has been performing well so far, until recently when cost of raw material started increasing and managers were asked to devise a plan in response to inelastic price change. The following sections provide an outline of ways to meets the price problem and other issues such as, government intervention in the industry. Response to price elasticity of demand Price elasticity of demand assesses sensitivity of quantity demanded with respect to change in price. Price elasticity is being considered in decision-making process of the company because with rise in price of food ingredients (raw material), it is naturally assumed that price of the final product will also increase. In this situation, managers need to analyze the impact of price change on product demand. The demand can be either elastic or inelastic. Elastic demand will alter with the price change, while inelastic demand tends to be static with price change. The demand of necessity product is usually inelastic in nature (Fibich, Gavious & Lowengart, 2005). For example, if the company is operating in a location where individuals are extremely busy, have no time to cook at home and are highly healthy conscious, then demand of the products of Fitness Food will be inelastic, unless the price change is unreasonably high. On the contrary, areas where fresh food is easily available and individuals have access to home-made food and fresh fruits, the demand will be negatively elastic in case of price change (Senauer, 2001). Optimal pricing strategy for price elasticity Keeping in view the problem that management is facing, application of a customized pricing strategy is essential to resolve problems related to price elasticity. Optimal pricing policy is otherwise known as perfect price discrimination; implementation of this policy would mean that Fitness Food will have to segment its consumer market in different groups and have to research the amount that consumers are willing to pay for packaged food. The company has to determine optimal price and volume, which is also referred as the price and volume of the product that will maximize its profit. Fitness Food has to determine preference of its consumers and their price sensitiveness with the help of distributors and retailers. Regular polls and survey can be advantageous in gathering requisite information (Sexton & Lavoie, 2001). Optimal pricing strategy is considered to be appropriate for Fitness Food because it has diverse consumer groups who are affected differently by price change. In this strategy, the company can charge in dissimilar manner to its different consumers. For example, in affluent neighborhoods and corporate work areas, company can charge its product comparatively high to the amount that is charged in middle-class localities. While deciding the price strategy, a few more aspects that the management should consider are quality and price of products of Fitness Food’s competitors and other substitutes (Fibich, Gavious & Lowengart, 2005). Implication of Government regulations on frozen food industry In recent years, it has been observed that threatened by government regulations and public criticism, some industries have taken measures of self-regulation. These measures include issue of public welfare statements and statutory warnings and expect it to be sufficient for public protection. However, it is impossible to upkeep public health, if quality of production in the food industry is poor. Food industry, especially those companies that manufacture frozen food, ready-to-eats and baby foods, must be regulated by either the government or a federal agency so that quality is assured in terms of production. The processed food is mainly prepared manually. Hence, it is quite vital to keep a check on kinds of employees that are being hired at production facilities (Brewster & Goldsmith, 2007). It is not an easy task to regulate the food industry, but efforts have been taken in this regards by various international associations and regulators such as, European Union, Food and Agricultural Organization of the United Nations, Food and Drug Administration, World Trade Organization and Association of South East Asian Nations. Alongside that, World Food Regulation Review is published every month that update companies about changes taking place in food industry regulations and control. Incorporation of regulations by these organizations has ensured improvement in quality of packaged food produced worldwide. In addition, regulations in the industry have forced various corporations to phase out because of low quality, lack of nutrition and presence of high level of unwanted additives in their packaged food products (Chau, Wu & Yen, 2007). There are a number of examples that explain that self-regulation is not sufficient in the food industry and the government and other federal organization need to intervene for ensuring food safety. In 2007, Natural Selection Foods of California recalled all its fresh spinach packages and ready-to-eat salads with spinach, when E.coil contamination was diagnosed in the same after about 200 people got sick and three died. Another example that emphasizes on need of government regulation in food industry was when a manufacturer has to recall several peanut butter brands because of presence of salmonella in a batch. In addition to these micro-organisms, a number of illnesses can be caused by poor processing and under-cooking of food, inadequate packaging and unhygienic production conditions. Government interventions ensure that sufficient measures are taken in this regard (Worsfold & Griffith, 2003). In packaged food industry, especially in frozen food companies like, Fitness Food, government intervention is necessary and is expected by the management. Even so, the company assures that its products are of high quality and standardized measures are taken to prevent any kind of contamination. Hence, the company is not expected to face any major challenge in this aspect. The management further proclaimed that if company products need to undergo government surveillance, it would only improve company’s reputation in terms of their services and delivery (Chau, Wu & Yen, 2007). Managing complexities associated with expansion through capital projects In the era of growing competition and technological innovation, survival of the fittest has become a major constraint. This can be interpreted as survival probability of bigger companies is higher than that of smaller companies in food industry because cost of raw material and other direct and indirect expenses are increasing on a regular basis and companies need to undertake long-term capital intensive project to have cost advantage. Nevertheless, undertaking capital projects for expansion creates situations, where company needs to confront with complex strategic and financial decisions. Fitness Food is also facing the similar dilemma and seeking solution to overcome complexities. It has been observed that big corporations, despite having project management guidelines, have wasted a major share of their capital intensive project cost. Companies such as, Fitness Food, need structured collaboration to streamline their project cost and maximize profit. In long-term projects, the main problem does not stem from regulatory compliance and logistic and risk management, but mainly due to absence of sufficient productive information. Structured collaboration adds order to activities and brings out effectiveness. There are two key factors that management of the company needs to incorporate: structured collaboration ensures better decision-making through automatic delivery of information on project’s efficiency to employees as well as increased efficiency by way of flexible standardization. Structural collaboration is initiated through prioritizing and understanding the need of capital projects for expansion; the second step is to align necessary information sources so that no confusion exists regarding the same in the management. The company can commence with analyzing the most relevant opportunities necessary in risk management and project efficiency. Simultaneously, the company can determine weakest point of the process flow and take measures to resolve it. The final step is to implement standardized methods for maintaining consistency in the work progress (Kida, Moreno & Smith, 2001). Capital intensive projects involve long-term decisions and cost, which initiate inflow of return at least after a year. Thus, these decisions do not solely depend on the management, but also involve the company’s stakeholders. Involving shareholders in decision-making facilitates more experience and knowledge, which can be later streamlined as per need of the project. Every project must aim at maximizing its shareholders’ wealth; hence, their interests should be the company’s priority. The projects should be evaluated using various techniques of capital budgeting such as, determination of net present value, internal return of return and payback period. These methods act as assurance to shareholders and improve company’s credibility. Companies such as, Nestle, Nissin Foods, Danone and Amul, include shareholders in their decision making policies through Annual General Meetings, Quarterly and yearly financial reporting. This in turn improves accountability and credibility of the company’s management (Bierman Junior & Smidt, 2012). References Bierman Junior, H. & Smidt, S. (2012). The capital budgeting decision: economic analysis of investment projects. London: Routledge. Brewster, N. A. T., & Goldsmith, P. D. (2007). Legal systems, institutional environment, and food safety. Agricultural Economics, 36(1), 23-38. Chau, C. F., Wu, S. H. & Yen, G. C. (2007). The development of regulations for food nanotechnology. Trends in Food Science & Technology, 18(5), 269-280. Fibich, G., Gavious, A. & Lowengart, O. (2005). The dynamics of price elasticity of demand in the presence of reference price effects. Journal of the Academy of Marketing Science, 33(1), 66-78. Kida, T. E., Moreno, K. K. & Smith, J. F. (2001). The Influence of Affect on Managers Capital‐Budgeting Decisions. Contemporary Accounting Research, 18(3), 477-494. Senauer, B. (2001). The food consumer in the 21st century: new research perspectives. University of Minnesota: Retail Food Industry Centre. Sexton, R. J. & Lavoie, N. (2001). Food processing and distribution: an industrial organization approach. Handbook of agricultural economics, 1, 863-932. Worsfold, D. & Griffith, C. J. (2003). A survey of food hygiene and safety training in the retail and catering industry. Nutrition & Food Science, 33(2), 68-79. Read More