Several choices of frozen food and low calorie microwave foods exist in the market today. In the past, many people could not afford to buy microwave foods but the improving income level has made people to go for easier lifestyle. Microwave foods are normally easy to prepare and this makes people to shift from using traditional cooking methods to the use of microwave foods. Some of the major competitors in the microwave food industry are Lean Cuisine and Health Choice organizations. Lean Cuisine was started in 1981 and has today increased its market to cover US, Canada and Australia. The company is owned by Nestle and offers various frozen foods making it to be considered as one of the leading producers of low calorie frozen food. Health Choice organization is a very strong competitor in the microwave food industry. It is a product of ConAgra.
Outline a plan that will assess the effectiveness of the market structure for the company’s operations. Note: In Assignment 1, the assumption was that the market structure [or selling environment] was perfectly competitive and that the equilibrium price was to be determined by setting QD equal to QS. You are now aware of recent changes in the selling environment that suggest an imperfectly competitive market where your firm now has substantial market power in setting its own “optimal” price.
The low calorie frozen microwave food industry operates under an oligopolistic market structure. The presence of few dominant firms and many competitive fringe firms defines the oligopolistic market structure of low calorie microwave foods. Lean Cuisine, Healthy Choice and Smart Ones are some of the major firms in this industry. It is noted that they control around 42.9% of the overall market share. They dominate the market in the presence of other firms such as Kashi, Michelina’s, Trader Joe’s, etc.
Determining the substitutability of different products in the market is one of the ways that the effectiveness of the market can be assessed. The products should be close to but not perfect substitutes. There are several substitutes in the low calorie foods considering the fact that they can be prepared based on the consumer’s preference and wants. Another way of assessing the market structure effectiveness is by determining if entry into the market is easy or difficult (Cravens & Nigel, 2006). If transparent and difficult to overcome barriers exists, then it may indicate the presence of a different market structure. The companies should be properly acquainted with the prices and level of competition in the market. In the low calorie food market, the prices vary largely with unlimited quantity. This is because of the fact that every company wants to price their products in a way that will attract customers (Certo, 2003). It is a clear indication that this type of market structure is essential for profitability and growth. Lastly, audience analysis will be very critical as well.
Given that business operations have changed from the market structure specified in the original scenario in Assignment 1, determine two (2) likely factors that might have caused the change. Predict the primary manner in which this change would likely impact business operations in the new market environment.
Recent market surveys indicate changes in the market structure from a perfect competitive to imperfect market structure. Changes in the income of consumers and consumer taste and preferences are some of the major factors that caused a change in the market structure (Certo, 2003). These factors are closely associated to the demands and needs of the market. When the consumers start earning more, they tend to start buying more products and further opt for even expensive ones. Income level therefore affects the ability to purchase. If the income level of people is low, they will tend to restrict the amount and type of products they purchase in the market (Cravens & Nigel, 2006). This means that the size of sales revenue is dependent on the purchasing capability of the consumers. The taste and preference of consumers is another factor that has caused a change in the market structure. If a particular product fits the taste and preference of a consumer, he/she will definitely buy it regardless of the price. They will buy more and more of the product. It is critical to note that consumer income is a factor that cannot be controlled by the company but they have the power to determine the taste and preference of consumers. The company should thus design their products according to what the consumers wants and consider a good pricing strategy. Basically, it should take note of the two factors mentioned above to create a customer oriented business.
Analyze the major short run and long cost functions for the low-calorie, frozen microwaveable food company given the cost functions below. Suggest substantive ways in which the low-calorie food company may use this information in order to make decisions in both the short-run and the long-run.
In a monopolistic competition, price is normally greater than the marginal cost (Varian, 2011). This may to result to profit generation but in the short run. An increase in the supply quantity may occur as new entries into the market increases making the equilibrium price to fall. This decline can be reflected in the demand curve. Free entry and exit is exhibited in this market structure as well as price fluctuation and demand for the product fluctuations. In the long run, marginal revenue tends to equal marginal cost. In this case, the profits are zero and the consumers are looking elsewhere. Price should basically be greater than the average total price cost for the company to make profit (Slack & Lewis, 2003). The prices of the company’s products should meet the average variable cost, particularly in the short run. In the long run, the average total cost should be met for the business to continue with its operations.
The cost function is TC = 160,000,000 +100Q +0.0063212Q2
VC = 100Q + 0.0063212Q2
MC= 100+ 0.0126424Q
At a profit maximizing out, the MR is equal to MC.
TC = 160,000,000 + 100Q + 0.0063212Q2
VC = 100Q + 0.0063212Q2
MC= 100 + 0.0126424Q
Based on assignment 1, QD = 350,000 -100 P
QS = -7909.89 + 79.0989P
ATC = TC/Q
= (160,000,000/Q) + (100Q + 0.0063212Q2)/Q
= (160,000,000/Q) + 100 + 0.0063212Q
AFC = 160, 000, 000/Q
AVC = 100 + 0.0063212Q.
ATC = MC
(160,000,000/Q) + 100 + 0.0063212Q = 100 + 0.0126424Q
160,000,000/Q = 0.0063212Q
160,000,000 = 0.0063212Q2
Q=159,096.35
ATC = (160,000,000/Q) + 100 + 0.0063212Q
= (160,000,000/159,096.35) + 100 + 0.0063212(159,096.35)
= 1,005.68 + 100 + 1,005.68
= 2,111.36 = $21.1
This gives the company the pre-unit cost of production at the most efficient level. The company can use the above information to know whether the optimal price is changing or not. If not the optimum price then the company should think of making relevant changes. They can decide to reduce their prices to attract more customers and this will be very beneficial in the long run since it will increase sales.
Determine the possible circumstances under which the company should discontinue operations. Suggest key actions that management should take in order to confront these circumstances.
An organization can decide to terminate its business activities if they are not capable of competing effectively in the market, due to lack or insufficient funds, raw materials, labour and legal requirements ((McGuigan, Moyer & Harris, 2013). An organization may use short term and the long term costs functions to determine whether they are making enough revenue to see them remain competitive in the market or if they can cut their losses and discontinue operations. in this case, the ATC function will be useful in determining the point at which the company achieves a break-even point or where they will be forced to shut down their operations (Plunkett, Attner & Allen, 2008).
Using the ATC equations,
(160,000,000/159,096.35) + 100 + 0.0063212(159,096.35) = 2111.36 ($21.11).
A price reduction below $21.11 will mean that the company did not consider the total fixed cost. In the short run, the company can decide not to terminate discontinue its operations if they reduce the price in future. But when the company reaches a situation where the profits equalizes the negative total fixed cost then it would be advisable for it to shut down. The shutdown point would be π = (P*Q) – TFC- (AVC * Q). The company should develop sharp competitive strategies and produce quality products that can ensure their success in the market. They should as well recalculate the break-even point to actually know where they are to stay afloat or consider shutting down their business.
Suggest one (1) pricing policy that will enable your low-calorie, frozen microwavable food company to maximize profits. Provide a rationale for your suggestion.
In order to maximise their profits, the company should use the cost profit maximisation strategy where revenue compares to the marginal cost. This entail determining the best output and pricing that can ensure profit maximisation.
With regard to the demand function of QD=350,000-100P, the inverse demand function can be computed as -100P=350,000-Q
P= (350,000/100) - Q/100
= 3,500 - 0.01Q
Total Revenue (TR) = P*Q
= (3,500 – 0.01Q)*Q
= 3,500Q – 0.01 Q2
MR = TR/Q
= 3500-0.02Q.
MR = MC
3,500 - 0.02 Q = 100 + 0.0126424 Q
3,400 = 0.0326424Q
104,159.01 = Q
P = 3,500 - 0.01Q
= 3,500 - 0.01Q (104,159.01)
= 2,458.41 = $ 24.58
Outline a plan, based on the information provided in the scenario, which the company could use in order to evaluate its financial performance. Consider all the key drivers of performance, such as company profit or loss for both the short term and long term, and the fundamental manner in which each factor influences managerial decisions.
With the computations above, a combination of the selling price of $24.58 and the production units of 104, 151.01 places the company at a high profit function. With the existence of the market power, the combination places the company in the elastic part of the demand curve. A price increase will lead to a loss in the market while reducing the prices of the products will ensure increased profit.
The present financial performance at the production quantity of 104, 159.01 units can be computed as;
ATC = (160,000,000/Q) + 100 + 0.0063212Q
160,000,000/104,159.01+ 100+ 0.0063212(104,159.01)
2,294.52 = $22.95
The company is therefore producing their products at $22.95 and sells at $24.58 giving a profit of $1.63 for each unit. In this case, the short run profit is TR-TC
TR = P*Q
$24.58*104,159.01
$2,560,228.47
TC = ATC*Q
$22.95 *104,159.01
$2,390,449.28
Profit = $2,560,228.47 - $2,390,449.28
= $169,779.19
Recommend two (2) actions that the company could take in order to improve its profitability and deliver more value to its stakeholders. Outline, in brief, a plan to implement your recommendations
There are several things that the company can do to improve on its profitability besides the pricing strategy. One way of achieving this is by continuous quality upgrade. Investing on research and development can be a great attempt to improve the product quality to further enhance product popularity and reliability (Plunkett, Attner & Allen, 2008). Focusing on alternative healthier and more cost effective choices of production input will be a good strategy.
Secondly, effective advertising would another way I would recommend the company to consider. The company should opt for a more subtle manner of marketing its products to positively impact on its returns.
References
Certo, S. C. (2003). Modern Management (9th, Ed.). Upper Saddle River: Prentice Hall.
Cravens, D. & Nigel, P. (2006). Strategic Marketing (8th, Ed.). New York, NY: McGraw-Hall Irwin.
McGuigan, J., Moyer, R., & Harris, F. (2013). Managerial Economics: Applications, Strategies & Tactics (13th Ed.). Mason, OH: Cengage Learning.
Plunkett, W., Attner, R., & Allen, G. (2008). Management: Meeting & Exceeding Customer Expections (9th Ed.). Mason, OH: Thomson South-Western.
Slack, N. & Lewis, M. (2003). Operations Management: Critical Perspectives on Business and Management.
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