Economics: Mars Bar Market - Essay Example

Economics - Mars Bar market Section Ans. a Adam Smith defined Economics as science of wealth. Economists define wealth as one that has “Value in use” and “Value in exchange”. Economics is the study of how wants are satisfied and decisions made when faced with limited resources. Mars Inc. is a privately-held company, primarily engaged in the manufacture and sale of snack products, pet food products and main meal foods. It is known for snacks such as M&Ms, Snickers and the Mars bar. Company’s products are sold in over 100 countries. The company has a 16.1% (Datamonitor, 2006) market share in America’s confectionary market. Mars is challenged by biggies like Nestle, Ferrero, Cadbury etc. in the bars market. Sugar happens to be the one of the key ingredient as far as production of Mars Bars is concerned. In these competitive times profit margins have shown a shrinking trend. Now if the sugar supply falls short as a result of unfavorable weather conditions, the obvious fallout will be severe constraint in the procurement chain to maintain the levels of production. Sugar prices are bound to increase, resulting in an increase in production costs. Had there been no competition, Mars Inc would have resorted to a hike in prices of its bars. But the moment the company increases prices, competitors will grab the opportunity to further widen their market base, even if that meant subsidizing the product. Rival companies would resort to such a step, hoping that once the weather conditions improve, the supply will normalize and then they can fill the revenue gap by using the increased market base. As the adverse condition is a temporary occurrence, therefore, even under these conditions, Mars bars will continue to be made available with the same price tag. There could be somewhat less number of products in the market. Some amount of cost could be recovered by way of cutting advertisement and market communication costs, as the company would be content with effectively serving its existing market only. The shortage is worldwide therefore almost all companies in the business will be equally affected. If the shortage stays for longer then only the company will start thinking about a step like price increase. Ans. b The direct fallout of increased wages will of course be on the cost of production, which is bound to go up. As a result the profit margins will be under pressure and the company will have to try really hard to maintain the previous levels. But at the same time, increased wages will act as a motivational force for the workers who will now work with more zeal and energy, which is bound to result in more production and efficiency. To take the best out of the employees depends upon how effective the strategic moves of the management are over a period of time. Kaplan and Norton (2006) argue that ‘Strategic dreams often turn into nightmares if companies start engaging in expensive and distracting restructurings. It’s far more effective to choose a design that works reasonably well, than develop a strategic system to tune the structure to the strategy.’ Therefore management at Mars Inc. is expected to, put back the differences, if any, during the wage negotiations and start adapting to the newer situation. For any organization to prosper its people are a big asset. More than 75 percent of market value relies on intangible assets, like “human capital” – or people (Baron, 2003). This capital is most valuable but most volatile and mobile as well. Realization of its potential value rests on the ability to encourage people to share their talents freely with the organizations that employ them. Wages and working conditions happen to be the key elements for the employees to work for the betterment of their organization. Unions, if handled in a professional manner prove to be partners in the growth. Therefore the recent hike, resulting in rise of production costs need to be handled by the management as a new opportunity to solicit the fullest cooperation and support of its workforce, to improve production efficiency, and quality standards. Ans. c The general economic conditions, rate of inflation and the purchasing power of the customer affect the businesses in general. But as far as the market for bars and chocolates is concerned, except a positive ambience in the market, these factors are generally not known to have a direct effect on the market in a big way. Therefore, favorable economic conditions with an increase in the average household increase will no doubt result in better performances for the company. But for that Mars Inc will have to come out with attractive persuasive campaigns, so that the general consumer feels like consuming the stuff more. Similarly, some of the service industries like, Airlines and Tourism will put more of such bars and chocolates on offer for their own guests and customers. Improvement in general economic conditions will mean more business for service industries, hotels, retailers etc. which in turn will mean more procurement of goods and consumable items by these industries. Chocolates and sweets are often kept to welcome the visitors to a corporate office as well. More business means more of such visits and meetings. Mars bars form an integral part of the consumable items list being procured by these industries and companies, which will therefore result in more business for the company. Ans. d Loyalty is said to have two dimensions (Baumann et. al, 2004), behavioral and attitudinal. Behavior includes, for example, repeat purchases, share of wallet and word of mouth, while attitude consists of commitment, trust or emotional attachment. This is true for any product or service consumption. But loyalty comes into play mostly for the premium class products and services or when there’s not a big price difference for non-premium items. Therefore, when Rowntree Headley, decided to drop the price of its bar line by 10%, the company did so keeping in mind to attract more customers to its fold. Therefore it is bound to have a big adverse effect on the sales of Mars bars. The management of Mars bars will have to take cognizance of this development and must come out with matching pricing cuts to retain its share of customers. Ans. e Continuing research and development activities provides a competitive edge to any company. Mars bar is able to develop an improved system for manufacturing the bar which results in an increase in production by 20% per hour. Initially, implementing the newer system may not translate in better bargains, as the company will be in the process of recovering the costs of implementing the new system, but gradually, this will result in decreasing in the costs of production. Mars Inc will also be able to produce more with less human interaction and less number of people on the job, which further results in an increase figure of production per man-hour. This will provide the company leverage in dealing with competitors. Now the company can earn equal amount of revenue with lesser prices. Or the company can also earn more with the same price tag, as the costs have reduced. Therefore, now if any rival company resorts to price cuts in its product range, Mars bar can immediately match it with competitive price cuts, thus retaining the hold of its customer base. Section-2 In general changes in demand take place under two conditions1; i. Changes in demand as a result of changes in prices ii. Changes in demand due to other factors, regardless of the prices. Demand for any product or service arises out of; A desire for the product or service Customer’s ability to pay Customer’s willingness to pay for the product at the stated prices The law of demand comes into absolute effect only in cases when the demand for a commodity varies depending upon its prices. In such cases the law of demand states, “Higher the prices, lower the demand, and vice-versa, other things remaining the same”. Similarly the law of supply comes into effect from the supplier’s perspective. This law demonstrates2 the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This law states that higher the price, the higher the quantity supplied. Higher supplies result in an increase of revenues, so producers supply more at a higher price. With the environmentalists and anti-fur groups raising their voice against the product and harassment of people wearing fur coats, people in general will try to avoid wearing the coats. That will obviously result in tumbling of sales. Producers, suppliers and distributors having stocks of the products will try to sell the products at throwaway prices for two reasons; i. To avoid the inventory costs being incurred on stocking these items. ii. To avoid becoming a target of anti-fur activists. This becomes a case of inverse law supply and demand. Under such circumstances the prices are bound to fall. At one point of time if the environmentalists become very much vociferous and people join the movement in mass scale, there won’t be any takers for the product. This is shown with the help of figure-1 below. In this figure the demand is coming down from point A, and as it reaches point B, where the price is zero (theoretically) there are no takers for the commodity still left (depicted by PB). Quantity A Demand B P Price Fig-1: Reduction in demand and price for fur coats Now, with a decrease in demand for fur coats, demand of alternatives will increase. The alternative is found in Luxury woolens and angora coats. Since the demand for these items has increased all of a sudden, the supply is limited in the market, as a result the prices are bound to go up. Gradually the suppliers will also increase the supply to the market till it gets saturated. This is depicted in the figure-2. Here the demand starts from point A and goes on an increase. Price B Demand A Quantity Figure-2: Increased demand for alternatives to fur References: 1. Colchester, Nico (2001), Mars Bars revisited, http://specials.ft.com/nicocolchester/FT3XZDJSEIC.html (Feb 9, 2007) 2. Datamonitor (2006), Mars Inc. Company Profile, New York. 3. Kaplan, Robert S. and Norton, David P. (2006). How to Implement a New Strategy Without Disrupting Your Organization’, Harvard Business Review, Mar2006, Vol. 84 Issue 3. 4. Baron, Angela (2003), ‘Measuring human capital’, Development and Learning in Organizations Volume 17 Number 3. 5. Violet Crumble, available at http://en.wikipedia.org/wiki/Violet_Crumble 6. Baumann, Chris, Suzan Burton and Greg Elliott. Determinants of customer loyalty and share of wallet in retail banking, Henry Stewart Publications 1363–0539 (2005) Vol. 9, 3 231–248 Journal of Financial Services Marketing. 7. Supply and demand, available online at http://www.socialstudieshelp.com/Economics_SupplyDemand.htm (Feb 9, 2007) 8. Economics Basics: Demand and Supply, available at http://www.investopedia.com/university/economics/economics3.asp (Feb 9, 2007) Read More