2: Operations Decision
Assignment 2: Operations Decision
Introduction
Food industry in the United States has over the recent past undergone significant changes
(Cachon & Terwiesch, 2012). The changes in the food industry have involved the emergence of
low-calorie foods that are frozen and microwavable since they have gained wide acceptance
among consumers across the country. According to Andreyeva, Long and Brownell (2010), this
trend of increasing acceptance of low caloric foods that are frozen and microwavable has been
motivated by heightened awareness among consumers towards healthy foods as well as healthy
eating habits. The two leading competitors within the United States in the food industry
involving the production of low-calorie as well as microwavable foods are: Healthy Choice
which is a subsidiary of ConAgra and Lean Cuisine which is a subsidiary of Nestle Foods. In the
United States, these two companies in the food industry control a significant market share and
both have a considerable grip in the food industry market. These two features of the identified
companies have enabled them to grow tremendously over the last decade with regards to
revenues as well as range of their food products. In order to satisfactorily answer all the
OPERATIONS DECISION 2
questions asked in Assignment 2, reference is made to the regression calculations presented in
Assignment 1 and answers to varied operation decisions are as follows:
- Market structure analysis is an important marketing plan tool that provides insights into
the required strategies (Russell & Taylor, 2005). Saito (2011) noted that the food industry
market needs are considered to significantly influence sales volumes and revenue of such
companies subsequently impacting of their profitability. This means that it is imperative
to carry out an analysis of growth trend of the target market since it shows the
companies’ ability to predict or forecast future market trends, which is important in
facilitating long-term decisions to be made. The market structure in the food are rapidly
changeable and quite dynamic in the United States even though they can vary from one
state to another or from one region to another within the same state (Noreen, Brewer &
Garrison, 2013). Therefore, the companies should ensure that the appropriate market
structure is embraced since the imperfectly structured market characterized by oligopoly
require effective managerial and operational strategies in order to achieve competitive
edge in the market (Luke, Froed & McCann (2015). - According to Best (2010) and Daly (2012), there is a vast range of factors that can be
attributed to market structure changes, and two of the most important factors considered
include consumers’ income levels and consumers’ tastes and preferences. These two
factors are majorly the cause of shifts in the demand of products in the market. For
instance, an increase or decrease in the income levels of consumers can either result to
increased or decrease consumers’ purchasing power subsequently leading to diminishing
demand for products (Cachon & Terwiesch, 2012). Also consumer tastes and preferences
is the other fundamental factor that playa a vital role in determining market structure and
OPERATIONS DECISION 3
its monitoring should be carried out regularly (Baye & Prince, 2013; Mankiw, 2014).
According to Whelan (2011), consumers’ tastes and preferences determines whether they
are interested in a particular product; whereby high interest translates to more sales, while
low interest results to low sales. Thus, the company should consistently monitor these
two factors and ensure they remain favorable by implementing the necessary corrective
actions whenever signs of unfavorability are observed (Forstater, 2007; Mankiw, 2014).
- Analysis of the market structure is a vital process in determining the position of a
company in the market. Thus, on basis of the assignment 1 calculation results, the cost
functions of Lean Cuisine both long-run and short-run can be determined by calculating
performance indicators of the company in the market including AVC, VC, TC, ATC as
well as MC as shown below:
OPERATIONS DECISION 4
Equations for the calculations as provided
TC = 160,000,000 + 100Q + 0.0063212Q2
VC = 100Q + 0.0063212Q2
MC = 100 + 0.0126424Q
Quantity Demanded (Qd) = Quantity Supplied (Qs)
26770−42P=−7909.89+79.0989P
Pe = -34679.89 (As derived from Assignment 1)
121.0989
Pe = 286.37 cents (As derived from Assignment 1)
Q = -7909.89 + 79.0989(286.37)
= 14741.66 (As derived from Assignment 1)
OPERATIONS DECISION 5
VC = 100Q + 0.0063212Q2
= 100 * 14741.66 + 0.0063212 * 14741.662
= 148790301.3
MC = 100 + 0.0126424Q
= 100 + 0.0126424 * 14741.66
= 286.3640
TC = 160,000,000 + 100Q + 0.0063212Q2
= 160,000,000 + 100 * 14741.66 + 0.0063212 * 14741.662
= 308790301.3
ATC = 308790301.3/14741.66 = 20946.779
AVC = 1487903.3/14741.66 = 10093.185
Surplus = 0.5 x 286.37 x 14741.66
= 2110784.587
OPERATIONS DECISION 6
Short-run Equilibrium
Long-run Equilibrium
In both calculations, that is, in the determination of the short-run and long-run
equilibrium prices are observed to remain equal to quantity subsequently leading to
OPERATIONS DECISION 7
equilibrium in the cost functions of the company. According to Baye and Prince (2013),
market dynamic variations are attributed to upward and downward shifting of the
equilibrium quantities. As a result, the obtained information can be used to realize
optimal product demand through appropriate shifting of the prices in a direction that is
favorable to consumers ( Andreyeva, Long & Brownell, 2010). According to Daly (2012),
the obtained information is also vital in identifying price changes that are unfavorable in
a timely manner in order to allow corrective or mitigation interventions to be
appropriately and swiftly taken (Best, 2010).
- The expectations of any company when beginning or expanding its operations is that they
will be prosperous, but sometimes circumstances become unfavorable forcing
discontinuation of the operations. Baye & Prince (2013) note that a company has the
ability to decide on discontinuation of its operations either in entirety or in some divisions
based on the operational or market conditions, especially when they become unfavorable.
The circumstances that can lead to discontinuation of operations include when the
demand for the manufactured products dwindles as well as when the products become
obsolete (Saito, 2011). These two circumstances can be caused by new entrants in the
markets or changes in consumer demography as well as technological advancements that
make machinery and systems outdated (Cachon & Terwiesch, 2012). According to Saito
(2011), necessary modifications of the old machines can be done to avoid discontinuation
of operations and also the company should allocate a higher budget to research in order to
ensure new, appealing and high quality products are produced. However, if the
modifications do not succeed, the company should look for alternative products that can
be produced by the same machines and systems failure to which they should be sold prior
OPERATIONS DECISION 8
to more depreciation subsequent to discontinuing operations (Best, 2010; Cachon &
Terwiesch, 2012; Luke, Froed & McCann, 2015). Andreyeva, Long and Brownell (2010)
emphasize that it is imperative for the company to gradually discontinue its operations
through a step-wise disposal of associated facilities.
- The pricing policy can be used to ensure profit maximization is achieved by leveraging
on elasticities. For instance, in the food industry where the company operations are based
is very competitive and rapidly changing market dynamics making it necessary to make
frequent evaluation of its products’ price elasticity against competitor products as well as
prevailing market conditions in order to determine the appropriate strategy for
competitive edge to be achieved (Daly, 2012). Therefore, the company should embrace
price reductions mostly through discounting in order to increase demand for its products
and subsequently make its food products more appealing and affordable to consumers so
that it can achieve increased sales and revenues as well as improved profitability (Daly,
2012). - It is undoubtedly evident from previous discussion that, optimal profitability of the
company is only achievable through implementation of pricing strategies that have been
effectively developed (Daly, 2012; Mankiw, 2014). This is attainable by ensuring that
customer income levels and demographics are appropriately articulated with regards to
the prevailing economic situations. According to Luke eta al. (2015), the company can
leverage on these factors to evaluate its financial performance mostly through its long-run
as well as short-run profits, revenues, sales volume and ultimately market share growth.
This approach is undeniably very vital because it encompasses periods of economic
hardships as well as periods of favorable economic conditions; whereby in the former
OPERATIONS DECISION 9
economic situation pricing strategy adopted is fundamental is determining financial
performance, while in the latter economic situation quality and convenience factors gain
significance in determining demand (Luke, Froed & McCann, 2015).
- With regards to the supply and demand calculations carried out for the determination of
the company’s equilibrium both in the long-run and short-run operations, it is imperative
to implement effective interventions in order to improve the company profits as well as
ensuring that the stakeholders are delivered with more value. The appropriate strategies
ought to follow a properly laid down plan including brainstorming, implementation and
monitoring. Embracing this approach or plan is highly imperative to ensure the company
competitive edge in the market is maintained ultimately leading to increased revenues
and profitability. As a result, the two actions that are recommended to ensure This is
attributable to the fact that, this approach is important in order to ensure that there is
improvement in the company’s profitability as well as ensuring that the stakeholders are
delivered with more value include:
a. There will be need to increase capital investment particularly in the area of
research and new product development. Through continuous research and
adoption of cutting edge technologies in food manufacturing, the company will be
able to consistently produce high quality and novel food products (Mankiw,
2014). According to Whelan (2011), this is an essential strategy in enabling
production of food products that are more appealing to consumers at low
production and operational costs, which will in turn improve the company
profitability.
OPERATIONS DECISION 10
b. The other recommended action will be to devise and implement a marketing plan
that is effective through appropriate advertising and promotional strategy to
improve visibility of the company’s food products in the market and dispel the
stiff competition (Cachon & Terwiesch, 2012; Daly, 2012). The company will be
required to advertise its food products through a variety of promotional channels
both mainstream and upcoming ones, methods and/or techniques as well as media
outlets (Baye & Prince, 2013).
OPERATIONS DECISION 11
References
Andreyeva, T., Long, M. W., & Brownell, K. D. (2010). The Impact of Food Prices on
Consumption: A Systematic Review of Research on the Price Elasticity of Demand for
Food. American Journal of Public Health, 100(2), 216-222.
Baye, M. & Prince, J. (2013). Managerial Economics & Business Strategy, (8 th ed.). New York,
NY: McGraw-Hill Education.
Best, R. (2010). Market-based Management, (3 rd ed.). Upper Saddle River, NJ: Prentice Hall.
Cachon, G. & Terwiesch, C. (2012). Matching Supply and Demand: An Introduction to
Operations Management, (3 rd ed.). New York, NY: McGraw-Hill Education.
Daly, J. (2012). Pricing for Profitability, (4 th ed.). Hoboken, NJ: John Wiley & Sons, Inc.
Forstater, M. (2007). Economics. Chicago: Chicago Review Press.
Luke, M., Froed, B., & McCann, B. (2015). Managerial Economics. Boston, MA: South-
Western College Publishers.
Mankiw, G. (2014). Principles of Microeconomics, (7 th ed.). Boston, MA: South-Western
College Publishers.
Noreen, E., Brewer, P., & Garrison, R. (2013). Managerial Accounting for Managers, (3 rd ed.).
New York, NY: McGraw-Hill Education.
Russell, R. S. & Taylor III, B. W. (2005). Operations Management: Quality and Competitiveness
in a Global Environment, (5 th ed.). Hoboken, NJ: John Wiley & Sons, Inc.
Saito, Y. (2011). Managerial Decisions to Discontinue Operations and Future Firm
Performance.
