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Afk1502 Assignment 2 Operations


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Unformatted text preview: E Q q u = a t i 7 o 9 n 0 s 9 . a 8 Running Head OPERATIONS DECISION 1 Tamika Denis August 10, 2015 ECO 550 Operations Decisions Dr. Mohammad Sumadi OPERATIONS DECISION 2 Market Structure When marketing a product like healthy microwaveable frozen dinners, it is best for the firm to understand its audience. For example, when frozen dinners such as Lean Cuisine and Healthy Choice were developed by ConAgra and Nestle, both firms marketed towards the Food as Medicine shoppers (Gilbert, 2000). Food as Medicine shoppers are considered as well educated and well informed adults. Food as Medicine shoppers strive for healthy living, and Lean Cuisine and Healthy Choice frozen dinners provide a healthier lifestyle (Gilbert, 2000). Lean cuisine was developed in 1981 by Nestle as a healthy alternative to Stouffer's frozen dinners. At the time, there was an increase in the desire for weight management products. So, since its development, the Lean Cuisine brand has become the trusted partner of consumers who prefer healthy balanced meals (Nestle, 2015). Healthy Choice was developed in 1985 when former CEO Mike Harper suffered a heart attack, which forced him to change his diet (Healthy Choice, 2015). While seeking healthier alternatives, this led him to develop a brand of frozen healthy foods that would make it easier for people to develop a healthier lifestyle (Healthy Choice, 2015). “And after teaming with the FDA to create a set of standards that all foods must meet in order to be called healthy, Healthy Choice was born” (Healthy Choice, 2015). Currently, there has been a sales decline in healthy frozen foods (Hood, 2015). In order to market products such as Lean Cuisine and Healthy Choice, firms need to stick to the demographic that is into health and fitness to maximize their profit. There are other ways to target consumers besides focusing on demographics. According to Rick Suttle (2015), “Other ways to [target] consumers is by different psychographic or behavioralistic characteristics, such as their interest and usage rate”. Lastly, “[Marketers of the brands should include] product information and health claims about their product, and [it ] should be presented in a number of iterations on product labels, in the media, OPERATIONS DECISION 3 and at doctors' offices” (Gilbert, 200). Also, the baby booming generation is a great target market for healthy foods in general, so the firm should help baby boomers that are transitioning to their senior years by showcasing frozen foods' healthy advantages. Changes in Marketing Structure There are four basic types of market structure. They are, perfect competition, which occurs when there are many buyers and sellers, but none are able to influence price. There is also oligopoly, which occurs when there are several large sellers who have control over the prices (Business Dictionary, 2015). The third market structure is a monopoly, and that occurs when there is one single seller, and the seller has considerable control over supply and prices (Business Dictionary, 2015). Lastly, there is monopsony, and a monopsony occurs when there is one single buyer with considerable control over demand and prices (Business Dictionary, 2015). Both competition and oligopoly can effect change in a market structure. If there is a new competitor, for example, firms may have to change their market structure. The firm may have to change its image in order to retain their old consumers and gain new ones. Firms may have to reevaluate its methods of operations as well (Joseph, 2015). If the market becomes monopolistic, it can then transform to oligopolistic. “In oligopolistic markets, independent suppliers can effectively control the supply, and the price, thereby creating a seller's market” (Business Dictionary, 2015). “An [Oligopoly] offers largely similar products, differentiated mainly by heavy advertising and promotional expenditure, and can anticipate the effect of one another's marketing strategies” (Business Dictionary, 2015). According to Reed Fisher (2011), “Oligopolists tend to respond to aggressive marketing competitors by stepping up marketing efforts and cutting prices on their products”. Analyze Short – Run and Long- Run Functions OPERATIONS DECISION 4 TC = 160,000,000 + 100Q + 0.0063212Q2 VC = 100Q + 0.0063212Q2 MC= 100 + 0.0126424Q Firstly, let's calculate in order to find the level of output that minimizes the average total cost (ATC) ATC= 160,000,000/Q + 100Q/Q + 0.0063212Q2/Q = 160,000,000/Q + 100 + 0.0063212Q. Next we have to determine the average variable cost (AVC) which is found using the equation: AVC= TVC/Q= 100Q/Q +0.0063212Q^2= 100 + 0.0063212Q. ATC=MC 160,000,000/Q+ 100 + 0.0063212Q = 100 + 0.0126424Q Then you subtract 100 from both sides: 160,000,000/Q +0.0063212Q = 0.0126424Q Next, subtract 0.0063212Q from both sides 160,000,000 = 0.0063212Q^2 = 25,311,649,686.786 = Q^2 = =159,096.353 The above value is the output. The value of 159,096.353 is a representation of the level of the firm's output, which averages the total cost. If the level of production level continues at 159,096.353, the firm would be showcasing that they are producing at their ATC. These results should allow the firm to decide whether they should continue to remain in business whether it is in the short-run and longrun. To complete this determination, the firm has to figure how much it will cost to produce the ATC: ATC = (160,000,000/Q) + 100 + 0.0063212Q OPERATIONS DECISION 5 = (160,000,000/159,096.35) + 100 + 0.0063212(159,096.35) = 1,005.68 + 100 + 1,005.68 = 2,111.36 = $21.11 If the firm's price remains at 21.11, it can remain stable. If the firm decreases the price in the long-run, there is a possibility that the firm may have to discontinue supplying their goods and services (Investopedia, 2015) Discontinue Operations It is not unlikely for firms to discontinue operations. There can be many factors that cause a business to fail. For example: A [firm] may have been around in the marketplace for many years and have been profitable in its initial and growth stages, however, that does not guarantee that it will be so indefinitely. If managers keep continuous track of a product's financial performance, they may discover that its sales and profitability decline over time, sometimes at a very rapid rate. This is the time managers need to start analyzing other factors to see if the product has any positive effect on the business. If it is discovered that the product's only benefit is income, which is no longer coming in, managers may go ahead and discontinue the product (B, 2014). Even if a product line is profitable, it may just drain the [firm's] resources for very little benefit. Ensuring that resources are utilized by all your product lines optimally is very important. Managers should analyze the margin, overhead cost, labor cost, maintenance cost, marketing expenses, etc., that are spent to keep a product line running. If a product line merely absorbs resources in exchange for minimal return, then it may be better to eliminate it and pave the way for other product lines that can utilize input resources more effectively (B. 2014). OPERATIONS DECISION 6 In order to determine the possible circumstances under which the firm should discontinue operations, we need to calculate MR by incorporating the demand function from the first assignment where QD = 38650 - 42P. QD = 38650 – 42P = P = 38650/42 – Qd/42 = TR = P×Q = 38650Q/42 – Qd2/42= MR = 38650/42 – Qd/21= 920.2380952 – 0.048Q Since the firm is monopolistic: MR=MC 920.2380952 - 0.048Q = 100 + 0.0126424Q = Q = 820.2381= .0606 Q = 13535 P =595 If the firm gains a profit, there is no need to discontinue its operations, but if the firm is losing profit in the short-run, they may be able to continue their operation if they conduct layoffs and increase productivity . In the long-run. They may not have a chance to survive because the costs are variable. Policy to Maximize Profits In order to maximize profits: Firms should analyze where money is being spent. Overhead is one of the biggest categories of expenses that business owners face. A long-term lease is often an effective way to ensure you OPERATIONS DECISION 7 are aware of increases in your rent expense. For example, If the advertising campaign is paying off in increased sales, then the higher expense may be worth it (Kent, 2015). Due to results in the above calculations, it appears as though our price is greater than our Average Variable Cost, so the firm should continue its operations in the short-run, even though it is generating much income. So the firm should seek other avenues to gain more income, in order to maximize profits. Financial Performance In order to showcase the firm's financial performance, “The monopolist finds the profit maximizing output by finding that quantity where marginal revenue equals marginal cost, then projects that quantity on to the market demand curve to determine what market price corresponds to that quantity” (This Matter, N.D.) A monopoly does not have a supply curve because it sets the supply according to the demand. In most markets, the market price is determined by the intersection of the demand curve and supply curve. However, for a monopoly, the market price is not set by the intersection of the demand and supply curves, for the monopolist decides what the supply will be (This Matter, N.D.). Q = 13534 ATC = :160,000,000 + 100(13534)+ 0.006321299(13534)2 162,511,267.002/13534 = 12007.6 Two Actions that the Company Could Take in Order to Improve its Profitability and Deliver More Value to its Stakeholders “The probability of achieving profitable growth is heightened whenever an organization has a OPERATIONS DECISION 8 clear growth strategy and strong execution infrastructure. One without the other impairs the probability of success” (Liabotis, 2007). The firm should have a supportive infrastructure that includes, “Organization capabilities that are valued by customers, a management-performance system and scorecard which focuses on leading indicators and the drivers of growth, and strong leadership practices at every level of the organization” (Liabotis, 2007). Firms should also implement a performance management system and scorecard. Firms need to determine what should be measured, such as performance outcomes, revenue, and profit growth. They should also measure customer loyalty as well as employee engagement. This system can implement growth within the organization (Liabotis, 2007). These strategies have the capability to provide a balanced perspective based on the needs of key stakeholders and heighten profitable growth (Liabotis, 2007). Operations Decisions 9 References (2015, Month. ). In Business Dictionary. Retrieved Aug. 9, 2015, from http://www.businessdictionary.com/definition/oligo (2015, Month. Day ). In Business Dictionary. Retrieved Month. Day, Year, from http://www.businessdictionary.com/definition/marke (2015, Month. Day ). In CFA Level 1. Retrieved Aug. 10, 2015, from http://www.investopedia.com/examguide/cfa-level-1 (2015, Month. Day ). In Nestle. Retrieved Aug. 7, 2015, from http://www.nestle.com/brands/allbrands/leancuisin (2015,). monopolistic competition. Business Dictionary Retrieved Aug. 9, 2015, from http://www.businessdictionary.com/definition/monop. Pure Monopoly: Demand, Revenue And Costs, Price Determination, Profit Maximization And Loss Minimiza. The Matter Retrieved Aug. 10, 2015, from http://thismatter.com/economics/puremonopoly-dema. B, S.. (2014, Sep. 1). When to Discontinue a Product Line. Pan X Pan Retrieved Aug. 10, 2015, from http://knowledge.panxpan.com/articles/when-to-disc. Fisher, R.. (2011, Jan. 15). Oligopoly Behavior. Oligopoly Retrieved Aug. 9, 2015, from http://fisher.jsc.vsc.edu/microecon/cl16_oligopoly. G, Linda. (2000). Marketing Functional Foods: Ho. AgBioForum, 3 (5), H, James. R. (2015, Jun 29 ). Lean Cuisine tries to distance. ConsumerAffairs pp. From-To. Joseph, C.. (2015,). Factors That May Cause Change in an Organization. Small Business Chronicles Retrieved Aug. 9, 2015, from http://smallbusiness.chron.com/factors-may-cause-c. Kent, J.. (Year, Month. Day ). In How to Maximize Your Profits. Retrieved Month. Day, 2015, from http://smallbusiness.chron.com/maximize-profits-16 L, Bill. (2007). Three Strategies for Achieving. Ivy Business Journal, (July/August), Operations Decisions 10 Suttle, R.. (2015,). Define Market Segmentation & Targeting. Small Business Chronicles Retrieved Aug. 8, 2015, from http://smallbusiness.chron.com/define-market-segme. ...
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