Low Calorie Products
Investment Decision Case Study
A low calorie or healthy option microwavable food is a fresh concept which has gained a lot of interest among consumers. A majority of consumers are evaluating the food products provided in the market and consideration is given to the healthiest diet. Thus, introduction of microwavable products made up of low calorie has gain a high market due to consumer’s health concerns. To cater for the needs of the market, managers must formulate methods that will increase the product’s market share and profitability while increasing value to consumers.
As such, the intention of this paper is to outline a plan for managers in anticipation of rising prices, examine the major effects the government have on production and employment, determine whether government regulations are fair in the food industry, examine the major complexities under expansion via capital projects, and lastly suggest how a company could create convergence between the interests of stock holders and managers. The Company aims to keep the prices of its products as inelastic as possible.
Low calorie dietary is the new form of healthy foods and it has gained a lot of popularity among the consumers. In schools, homes, and restaurants, the concept of healthy feeding is not new. With the emergence of many chronic diseases, people desire to live healthy lives and lifestyles, thus the need for low calorie diets as will be produced and sold by Lean.
The purpose of this paper is to assess the main impacts the government has on production and employment, if government policies and laws facilitate fairness, determine the complications of expansion, and finally, offer recommendation on the merger of a company’s stakeholders and the management. For sustainable growth and profitability, the firm seeks to have the prices of its products as inelastic as it possibly can (Sullivan and Sheffiran 2013).
It therefore means that the strategy used for pricing should have no effect on the way consumers recognize and purchase the commodities. In general, the type of demand occurs only for products that are essential for the normal living of consumers. However, the situation is not the same for food products that are microwavable. Elasticity of demand for low calorie products highly depends on the offered price, availability of substitutes, expenditure on promotions, income level of consumers, and prevailing economic conditions.
Considering the demand function and elasticity, low calorie products are favorable in a monopolistically dominated market. In a monopolistic competitive market, buyers and sellers are usually few. Therefore, if one company raises its prices, consumers shifts to another brand. As thus, firms in this market increase demand for their products through differentiation.
ThProfit (NP) = Total revenue (TR) Total Cost (TC)
According to the FOC of profit maximization,
=Marginal Revenue =Marginal Cost = 0
So Marginal Revenue = Marginal Cost
By applying the elasticity of 1.9, it was stipulated that demand for low calorie microwavable processed products is low. Since the company purposes to keep the prices of the products inelastic, it will strategize on differentiation to obtain a competitive advantage in the market. Differentiation is important since consumers will be able to pick the product from other substitutes hence increasing the sales. More so, it is proved that when product differentiation is noticeable to competitors, a firm’s market power and leadership increases. As such, it is advisable for the firm to strategize on product differentiation to increase the rate of returns.
Globally, the government usually has the mandate of regulating the market to protect consumers and the firms. However, whether markets are regulated or unregulated they are always influenced by the forces of demand and supply. As such, government regulation is critical for stability. For instance, the government handles externalities through provision of public utilities such as roads, contracts enforcements, and supply of currency (Wall and Griffin 2013). All theses aspects are better done by the government compared to private firms whose main aim is profit making.
A lot of discussion has been made on determination of the activities that the government is limited. Though regulations are important, extreme policies and laws are adverse to the growth of an economy. An ideal economic climate is only possible when government regulations are in accordance with the prevailing market conditions. The main reasons that the government involves itself in a market are enactment of policies and rules to facilitate exchange between buyers and sellers, and enforcement of the policies.
In the area of employment government sets rules for employers to follow when selecting, recruiting, and compensation. No employee should be paid below the set minimum wage rate, they are to be treated humanely and allowed to interact and work freely without fear of intimidation. Labor unions and other industrial agencies set regulations for firms follow failure to which employees have the right of suing the firm.
The government also limits production through the taxation rates, production costs, and prices for raw materials (Frank 2013). When terms are favorable, firms are able to produce to full capacity but when there is over production, the government sets higher terms to stabilize the market. As such, the effects the government will have on the company are limitation of production capacity and selling prices, employment, and eventually profitability since regulations are costly to the firm.
It is the mandate of the government to ensure the market is stable and at equilibrium for benefit of all stakeholders (MIT 2012). For instance, without intervention, big mergers and monopolistic conditions would be possible leading to excessive exploitation of the consumers. Thus, the government gets involved by limiting mergers and monopoly situations. It is fair for the government to get involved in the low calorie microwavable commodities to control prices, limit entrants and exit for fair market competition, and avoid emergence of monopolistic powers that would made the firm irrelevant.
When many unregulated firms are in the market, price wars would lead to consistent low prices causing the prices to be unstable. More so, unregulated market causes poor quality goods to be introduced as firms seek to minimize production costs for profits.
Thus, the major reasons for government involved are to control prices, ensure that the market is stable for protection of local firms, and protect consumers from exploitation. For microwavable foods, firms have to correctly label the contents of the products and they should be processed in certain measures to avoid provision of unhealthy contents. Moreover, regulations also assist in protection of the environment where firms are supposed to observe efficient waste management practices, as well as reduce usage of production methods that release poisonous gasses in the environment.
An example of government involvement is the control of industries in China which have the tendency of producing smog that forcing people to wear masks to avoid getting contaminated. These goods are exported to US and other countries and the government has set measures to control the packaging of the products, their distribution and usage. Additionally, the government enforces policies to regulate the banking and finance industry by setting minimum interest rates so that consumers are not exploited and for banks to remain in business.
Some capital projects that the firm could undertake are mergers or acquisitions for expansion purposes. The reason for the projects is to increase market share, share operational risks, and increase market leadership and profitability (Harris et al. 2014). However, these projects bring complexities such as collusion between the shareholders and management. Managers tend to get additional capital from the reserves or by requesting shareholders to top up using their savings.
Shareholders may not be willing to use their reserves or contribute extra capital due to uncertainty of the venture. To avoid the complexity, managers should undertake projects that have high chances of generating returns in the short run by carrying out comprehensive evaluation of the project. For instance, managers should acquire a brand that is already dominating in the market to avoid experiencing losses.
Convergence between managers and shareholders is created through a firm’s strategic decision making process and through the use of financial statements. Whereas the shareholders own the company, they have limited control over the decision making process and the actions of management. On the other hand, managers are responsible for controlling the affairs of the firm.
Managers seek for higher income and allowances irrespective of a firm’s performance while shareholders are usually interested in higher profits for increased dividends. As such, shareholders seek for firm’s growth through mergers. However, mergers may compromise manager’s job security and control leading to divergence between the interests of shareholders and managers.
Therefore, strategic decision making should be done such that managers get allowances and salaries depending on the generate profits. If profits are high, their salaries are high and vice versa. As a result, managers will become productive so as to get high profits and allowances and in the process, the interests of shareholders will be met and both parties will be satisfied. Therefore, convergence of shareholders and managers lead to higher profits since managers become preoccupied in generating high revenues so that they pay is high and when the revenues are high, dividends are also high.
Instances that bring convergence of the interests of managers and shareholders include: managers being employed on contractual terms such that their contracts are renewable if they perform as required, and application of commission terms whereby managers are paid depending on the income generated at a certain period.
It therefore shows that the government should get involved in microwavable food market to ensure products are of high quality, control monopoly activities, and stabilize the market. For better returns, managers and shareholders should have a common vision and the needs of each party considered. The firm is likely to excel and attain market leadership through product differentiation since demand is inelastic, ensure all the needs of stakeholders are met, and follow government conditions as they relate to production and employment.
References
Frank, R. (2013). Microeconomics and Behavior, (7th ed.). New York, NY: McGraw-Hill.
McGuigan, B. P., Moyer, R. C., &Harris, F. H. (2014).Managerial economics: Applications, strategies and tactics, (13th ed.). Stamford, CT: CengageLearning.
Mit. (2012). Government Regulations in the Market. University of Cambridge.
Sullivan, A. &Sheffrin, S. M. (2013). Economics: Principles in Action. Upper Saddle River, NJ: Pearson Prentice Hall.
Wall, S. & Griffiths, A. (2012).Economics for Business and Management.New York, NY: Financial Times Prentice Hall.
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