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Products Cost and Profit
Outline of Plan
The plan for the company, which faces increases in costs of the major ingredients, is to lobby government for recognition of its products as important for consumers and intervene through fiscal policies like taxation to reduce the cost of ingredients.
Meanwhile, the firm will concentrate on product differentiation, which should allow it to have a unique value proposition to customers and increase the inelasticity of the product’s price. As for capital projects, the firm would consider outsourcing non-core responsibilities to reduce cost and achieve agility in response to market changes.
A Strategy for Making Products’ Response to Price Less Elastic and Rationale
The main reason for reducing the price elasticity of a product is the maximization of profits. An increase in price lowers the demand for a product in a perfect economy when the product is a normal good. However, when the product does not behave as a normal good, its price can increase and the demand stays the same or increases too. In essence, the product’s response to price becomes less elastic (Forgang & Einolf, 2007).
Based on the above discussion, the company can make the product qualify as a necessity for consumers. When it achieves the objective, people will have to buy the products, even when the prices increase. Typically, the firm will have to reduce the threat of substitute goods by making its product unique in their value proposition.
Customers should be able to get a significantly higher utility from the company products than they can obtain from the closest substitute.
Consequently, the biggest focus of the firm should be on product differentiation and market research to ensure that its products meet consumer demand better than substitute products and consumers understand the value difference when making purchase choices. Marketing campaigns using product samples would be a favorable strategy for the firm in this endeavor.
Major Effects of Government Policy
The free market economy is often sufficient for rewarding risk takers with favorable business returns and in the process, ensuring that the demand for goods and services is fulfilled by the available supply. However, there can be loopholes in the system that give suppliers or consumers an unfair advantage, such that they are able to get more than a socially fair return for their investments or the price they pay for goods and services.
Government intervention through policy often comes as a way to correct the inability of the market to allocate resources where they are most needed. The government regulates trade. In doing so, it limits the extent to which producers and sellers can manipulate prices. It also regulates trade to limit the distribution of certain goods or services and it can also ban their trade.
In regard to low-calories frozen, microwavable food, such a policy can be about increasing taxes on high calorific foods to limit their consumption and ensure that the populace remains healthy (Deng, Falvey, & Blake, 2010).
The second major effect of government policy is the equitable distribution of public goods that the market is unable to do. Entrepreneurs may not find it profitable to invest in low-calorific foods when there is a limited demand. Therefore, the government would intervene in the market to reduce the cost of production for producers such that the microwaveable foods are affordable to produce.
Since the producers also want to increase sales, they will likely lower prices to match demand. On the other hand, consumers would have higher purchasing power for the low-calorie, frozen microwave foods because of the low prices.
In this regard, the effect of the government policy to lower costs of production would be an increase in the demand for the products, which would allow the company to increase its production capacity and distribution channels to match the new demand.
A similar increase in demand could be achieved by government sensitization of the benefits of the product. In the end, the company will employ more people and contribute to the reduction of unemployment in the economy.
Government Involvement
Reasons for Involvement
The reason for government involvement in a market economy is to correct possibilities of market failures. On the other hand, markets could qualify as failures when there is evidence suggesting that they do not supply goods, which in this case are low-calorie, frozen microwaveable food desired by consumers (Auerbach, Gale, & Harris, 2010).
Secondly, interventions could also occur because consumers do not have enough information to make informed food choices. Lastly, interventions by government would rise to correct social consequences of individual food-consumption choices. While market failure situations outlined above justify government involvement, they do not guarantee the cost-effectiveness of the policy.
The intervention by the government often mitigates the market imbalances for a short while and may not be very responsive to changing factors that influence supply and demand of low-calories, frozen microwaveable food (Suranovic, 2010).
Two Examples of Government Involvement in Similar Market Economy
In the first example, the government can choose to own enterprises so that it is able to influence their business choices because of its powers as a major shareholder. In this case, the government would be able to direct investments and strategies toward the education of consumers and the reduction of manufacturing costs through the use of state resources.
The second example is where the government establishes anti-competition laws to prevent mergers and acquisitions that would allow firms to become dominant in the market and be able to manipulate prices.
Expansion via Capital Projects
Major Complexities That Would Arise
After undertaking a capital expansion project, the business opens up itself to a set of new problems that are not necessarily the same problems experienced by the smaller business on a larger scale. Instead, these problems are brought about by a restructured nature of the business and its operation in different markets and trading environment.
The business could have grown too fast to meet demand when management realizes that its present contractual agreements with suppliers curtail its growth. For example, the company could sign leases for warehouses and exclusive transport services for five years, but three years into the business it realizes that the provided capacity is not enough for additional growth.
Indeed, the biggest problem with capital project is the underestimation or overestimation of the actual behavior of the market and the actual demand of the capital project from the business in the future.
When undertaking a major infrastructural project, the business has to update its systems of monitoring cash flow and tracking inventories and deliveries because some of its operations would be unique to its normal business operations. At the same time, when the capital project is complete, the business realizes that its payment obligations increase significantly that they may cause a problem for management.
In addition, the project may stall midway as the business exhausts its available capital for expansion and misses out on opportunities to get more capital to finish the project. The consequence of such a scenario is a diminished ability of the business to meet the present demand due to the sunken capital costs and is yet to provide any returns to the business.
On the other hand, capital projects create a business demand for new hiring in various positions and the business has to have the adequate hiring capacity. Otherwise, it could make mistakes in the evaluation and fulfillment of personnel needs such that it is unable to effectively operate competitively after commissioning the new project.
Lastly, the business leadership faces the challenge of adapting to the changing roles brought by capital projects. The business leaders often fail to let experts in accounting, legal, and human resource matters assist, which makes the leader less capable of managing the expanded organization.
Key Actions to Prevent Complexities
It would be advisable for the company to seek the services of consultants to help it increase its capital projects. The consulting services may be costly, but they allow the company to avoid making bad decisions that could jeopardize its ability to respond to demand in the future. A second viable action is the engagement of third-party firms in manufacturing and research to reduce the initial capital outlay for expansion.
Lastly, the firm can use a long-term strategy that is responsive to market changes such that management retains the leeway to modify strategy parameters and go slow on expansion when the firm needs to reallocate capital. This way, the firm could hire more personnel when operational challenges arise.
Finally, the important thing for the company would be to limit its contractual agreements such that it does not find itself in positions where its long-term obligations are too costly to terminate and do not add to its profitability and business opportunities.
Corporate Social Responsibility and Stakeholder Governance
It is usually hard to have CSR and good governance being executed concurrently in a smooth way. Even when a company chooses not to have its managers free of social responsibilities, problems still arise as the company tries to institutionalize the concept.
On the other hand, expanding the responsibilities of managers to answer various stakeholder groups may worsen the problems of the firm such that managers have a hard time of having effective discipline.
According to Ferrell, Fraedrich, and Ferrell (2014), it is not greedy shareholders who are the enemies of other stakeholder of the firm. Instead, it is the lazy and greedy managers who operate in an unsupervised and unethical way who are the enemy of other stakeholders.
The managers who lack a moral obligation can take the firm to profitability as desired by shareholders, but may also open up the firm to social inconsistencies and legal problems that expose it to the wrath of other stakeholder groups.
The practical way of converging stakeholders and managers is by sacrificing profits and shareholder wealth so that that firm can meet its extra-legal and moral obligations. It is not always practical to sacrifice shareholder interest for overall stakeholder interest as the case is with corporate social responsibility.
Such interventions fail because shareholders still have a right to compel management to increase profits, which could mean abandonment of the corporate social responsibility strategy. Nevertheless, most firms still practice CSR, albeit on a small scale. Deliberately foregoing profitability of the firm causes the firm to lose its appeal to investors and may jeopardize its intentions to raise additional funds.
It is not enough to have a system of stakeholder governance where managers are free to carry out profit-consuming CSR activities and strategies. Such an intervention is open to abuse by management, who would be shielded from shareholders. In addition, it is not possible to have all managers being motivated to act in stakeholder interests other than their self-interest.
In light of the above discussion on the possible shortcomings of CSR or lack of it, the best way to balance the issues of stakeholders and managers is by making CSR as part of the firm, but only incorporates CSR activities that enhance the profitability of the firm. The activities should be measurable and visible to both managers and stakeholder groups.
However, their contribution to profitability does not necessarily have to match the contribution of other core business activities. The aim here is to prevent managers from abusing their privileges to allocate funds for CSR related activities and for stakeholders to gain from the activities of the firm without curtailing its ability to exist in a competitive environment.
Impact to Profitability
When the convergence of stakeholders and managers takes place as proposed above, the firm will likely incur increased costs and have a slight drop in its profit, at least for the initial period of implementing the strategy.
Nevertheless, when the CSR activities start to pay off by increasing the firm’s brand reputation and its market penetration, then profits will again grow to match the potential of the firm’s main business activities in relation to available market opportunities. Therefore, long-term profitability of the company would be sustained by the convergence (Ferrell, Fraedrich, & Ferrell, 2014).
Two Examples of Instances
According to Karnani (2010), companies working on fuel-efficient vehicles were not common in the past as they are today because they had little demand for fuel efficiency. The demand arose with the sensitization of consumers by various stakeholder groups. Its acceptance by managers only arose when they saw a clear pathway to profitability.
They could use the projected performance of their firms to convince shareholders to allow the firm to make investments on corporate social responsibility with the aim of reducing emissions. This would both allow the company to emerge as a pioneer in the new market and grow its reputation as a champion for fuel efficiency.
Another example is managers being unable to go against shareholder interest of increasing profits such that they can only invest in social programs to meet stakeholder interest when they have a connection to future profit. According to Reinhardt, Stavins, and Vietor (2008), in Delaware, a court ruled that the business judgment law protects a corporate manager’s decisions as long as they are rational.
However, the law does not recognize non-financial incentives as conflicts of interest. In this regard, it allowed managers of Occidental Petroleum to pay for an art museum named after the company CEO, even when the cost was almost half of the company’s profits (Reinhardt, Stavins, & Vietor, 2008).
In the first example, managers succeed because they focus on a profitable social intervention. In the second example, managers sacrifice profits for a cause that appeals to some stakeholders.
References
Auerbach, A. J., Gale, W. G., & Harris, B. H. (2010). Activist fiscal policy. Journal of Economic Perspectives, 24(4), 141-164. DOI: 10.1257/jep.24.4.141
Deng, Z., Falvey, R., & Blake, A. (2010). Swapping market access for technology spillovers? Tax incentives and foreign direct investment in China. International Conference on Applied Economics-ICOAE, pp. 147-159. Web.
Ferrell, O. C., Fraedrich, J., & Ferrell, T. (2014). Business ethics: Ethical decision making and cases (10th ed.). Stamford, CT: Cengage Learning.
Forgang, W. G., & Einolf, K. W. (2007). Management economics: An accelerated approach. New York, NY: M. E. Sharpe, Inc.
Karnani, A. (2010, August 23). The case against corporate social responsibility. Wall Street Journal. Web.
Reinhardt, F. L., Stavins, R. N., & Vietor, R. K. (2008). Corporate social responsibility through an economic lens. Cambridge, MA: National Bureau of Economic Research. Web.
Suranovic, S. (2010). A moderate compromise Economic policy choice in an era of globalization. Basingstoke: Palgrave Macmillan.
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