Assignment Three: Long-Term Investment Decisions
ECO 550- Managerial Economics and Globalization
Introduction/Plan for Pricing Strategies
In anticipation of rising prices it is critical that managers form an effective plan in order to stay competitive within the market will also not effecting the brands quality or view to consumers. The managers of a low-calorie frozen, microwavable food company can anticipate changes in the pricing of their product. However, the company wants to choose the pricing strategy in which will make their product less elastic to the changes in price. Inelastic markets typically do not see react fluctuations in sales when prices of goods increase or decrease (Inelastic, n.d.). Within this environment it is critical to have a differentiated product in order to establish a brand within the market. Due to a shift in demand by consumers, it would be ideal to incorporate fresh foods and ingredients into the product in order to appeal to younger generations (Willets, 2015). This product differentiation will result in slight higher than average product prices; however, establishing the company as low calorie, frozen all natural foods will appeal to a large share of the market and attract buyers. Buyers typically view slightly higher prices in reference to the quality of the product they are purchasing. This is known as premium pricing (Pettinger, 2013). Due to the inelasticity of the market, lightly higher prices will not affect the overall purchase of goods; however, this will result in a larger market share in combination with natural ingredients. Differentiation as an all-natural alternative to typical low-calorie frozen meals allows the company to minimize replacement goods, in turn, further reducing the elasticity of the market. Establishing the company’s brand(s) and associating appropriate prices and distribution channels is key to reducing price elasticity and attacking consumers to the brand.
Governmental Policy Effects on Production and Employment
Several governmental organizations are involved in the production, marketing, and distribution of goods and services within the food industry. The Food and Drug Administration (FDA) is one of the largest policy holders in regards to this market. The Center for Food Safety and Applied Nutrition (CFSAN) is the segment of the FDA that is in charge of ensuring that all foods are safe, sanitary, wholesome, and honestly labeled (FDA, n.d.). Changes in regulations in regards to ingredients or labeling could greatly effect a company within the food industry. Sanitation is also a key point of the CFSAN and the FDA overall. Foods that result in the illness or even death of a consumer are often traced back to the manufacturer. If it is found that products have been contaminated with bacteria or other items then the company also is at risks for legal proceedings and large losses of profits due to contaminated inventory. Take for example Blue Bell Ice Cream during 2015. After several individuals contracted Listeria monocytogenes after eating Blue Bell products, the FDA discovered a link to contaminated products within manufacturing centers (FDA, 2015). After these contaminations were discovered multiple manufacturing facilities voluntarily closed; the company has since entered into an agreement that includes rigorous sanitation of facilities revised production protocols, and great employee training (FDA, 2015). It is still unknown when the effected production facilities can reopen or the overall cost and effects that Blue Bell will face due to this problem. If the FDA or other governmental agencies choose to pass new regulations or guidelines for food production and distribution, then the company may see increased costs of production. Regulations of imports and exports of goods could also affect the production and cost of the overall product.
Governmental Regulation within Industry
The role of the government within a market economy is to provide legal structure, maintain competition, redistribution of income, promoting growth and stability, and the provision of public and quasi-public goods (Aly, 2008). It is important for the government to maintain these roles within a market economy in order to ensure proper policies and procedures are followed and maintained by companies within the market. There was a collapse of many financial systems during 2007-2009 that brought to light various regulations and policies that were not being implemented or maintained by the government within the market. In order to prevent the market structure from failing the government must involve various agencies to ensure the strength and structure of the market (Aly, 2008). Governmental agencies such as the FDA are in place to provide legal structure within the market. Laws such as the Sherman Act of 1890 and the Clayton Act of 1913 are in place to prevent monopolistic markets and promote fair competition. Programs such as Welfare and Medicaid are in place to redistribute income to citizens who fall below the poverty level or meet certain criteria to receive governmental assistance. Educational and Judicial systems are public and quasi-public goods that are provided by governmental agencies to ensure the well-being of the overall public. Fiscal policies are implemented by the Federal Reserve in order to promote growth and stability within the market (Aly, 2008). If one segment of the government fails within this type of market structure, it is likely that several others will also be effected. It is also critical that the government does not over regulate markets preventing growth, stability, and competition.
Expansion via Capital Projects
A capital project is, “a long-term investment made in order to build upon, add or improve on a capital-intensive project. A capital project is any undertaking which requires the use of notable amounts of capital, both financial and labor, to undertake and complete. Capital projects are often defined by their large scale and large cost relative to other investments requiring less planning and resources” (Capital Project, n.d.). Expansion via capital projects greatly reduces cash on hand for a company and is also likely to increase the company’s debt levels. This can result in losses of profits or bankruptcy if the expansion does not produce as expected. The company must also be able to provide the required inputs for the specific outputs of an expansion.
Convergence between Stockholder and Manager Interests
Stockholders, also referred to as shareholders, are the owners of a public company. Shareholders “have the potential to profit if the company does well;” this also means that if the company does not profit then the shareholder will take a financial loss as well (Shareholder, n.d.). A manager is defined as an individual who “has control or direction of an institution, business, etc., or a part of division, or phase of it” (Manager, n.d.). Managers are utilized within a business to maintain quality, train employees, manage financial data, and various other aspects of a company. The main goal of a manager is to insure that the company generates profits in order to return the investments of shareholders. Through mergers and company growth, the needs of both of them will be achieved. The lowered competitive rates that will be experienced will lead to the creation of extra business opportunities. The corporations will have the chance of relating effectively with other organizations in the course of mergers and expansions plans. This will lift the profit margins of the corporation elevating shareholder value (Yang, 2013).
There are also major complexities that would arise under expansion through capital projects. Due to the recovering economy borrowing funds for market expansion may be costly. The interest rates are still fairly high due to the improving economic status of the U.S. As a result, higher interest rates make for borrowing more costly for the company. The company should have an alternative borrowing source to invest into the market lined up just in case. The company investigating and performing research on tax rebates and tax credits may be in an alternative idea as well. These types of incentives achieved under specific conditions may alleviate some of the borrowing burden of the company. When a company expands it needs to worry about hiring new personnel to meet the demands of new production, marketing, financial recordkeeping, administrative needs and much more. The hiring process for any company can be extraneous, but more so for a company going through an expansion. The company needs to obtain and employ the staff needed to promote a positive image, vision and follows the mission of the company. The capital projects must reflect the future of the company. The types of products the company intends to offer to its current and future consumers. A specific image and vision needs to be kept in mind when investing in capital projects. The location and size of a new headquarters building must represent the past, present and future of the company. The image the company displays to its consumers can surely reflect upon the purchase of its products. It is critical that an expanding company readily plan capital projects and potential problems that can transpire during its time of growth.
The image the company displays to its consumers reflects upon its shareholders and managers within the company. Sometimes issues can arise between shareholders and managers due to the fact of stockholders are owners of the company. Managers of the company are directed by the company. Unless a manager owns stock within the company, they do not receive any direct profit from running the company. Managers in essence are the backbone of the shareholders. They perform the majority of the manual labor for the shareholders, and the shareholders reap the benefits. When seen this way, several difficulties can arise between the two groups and it is important to resolve those issues as promptly as possible. If there is no resolution on the issues, it could eventually begin to impact the performance of the company. One way to create a convergence between the interests of stockholders and managers is through profit sharing. When the managers are compensated well so are the shareholders. If profit sharing motivates the managers to assist the company to make more money, then the shareholders in the long run will make more money. Offering managers stock and making them stockholders creates an interest in seeing the company succeed. Stockholders can set certain goals and provide bonuses for their managers for meeting goals. When there is a convergence between managers and the shareholders, it is more likely that the company’s revenue will increase. As a result of increased revenue is an increase in the value of the company. The higher the company is valued the more profitable the shareholders become. Enticing the managers of the company to increase revenue and establishing goals to meet, assists in the entire process.
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Capital Project. (n.d.). Definition of Capital Project. Investopedia. Retrieved from http://www.investopedia.com/terms/c/capital-project.asp
FDA. (n.d.). Food. U.S. Food and Drug Administration. Retrieved from http://www.fda.gov/AboutFDA/Transparency/Basics/ucm195786.htm
FDA. (2015). FDA Investigates Listeria monocytogenes in Ice Cream Products from Blue Bell Creameries. U.S. Food and Drug Administration. Retrieved from http://www.fda.gov/Food/RecallsOutbreaksEmergencies/Outbreaks/ucm438104.htm
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Manager. (n.d.) Manager. Dictionary.com. Retrieved from http://dictionary.reference.com/browse/manager
Pettinger, Tejvan. (20013). Pricing Strategies. Economics Help. Retrieved from http://www.economicshelp.org/blog/1021/business/pricing-strategies/
Shareholder. (n.d.). Definition of Shareholder. Investopedia. Retrieved from http://www.investopedia.com/terms/s/shareholder.asp
Willets, Melissa. (2015). 4 Food Trends Moms Will Be Trying in 2015. Parenting. Retrieved from http://www.parenting.com/parenting-advice/mom/4-food-trends-moms-will-be-trying-2015
Yang, Jia. (2013). Maximizing shareholder value: The goal that changed corporate America. The Washington Post. Retrieved from http://www.washingtonpost.com/business/economy/maximizing-shareholder-value-the-goal-that-changed-corporate-america/2013/08/26/26e9ca8e-ed74-11e2-9008-61e94a7ea20d_story.html