Assignment 2: Operations and
Long –Term Investment Decision
Joanne T. Johnson
Eco 550
March 20, 2014
Professor Jae – Kwang Hwang

Operations and Long –Term Investment Decision
Introduction

The grocery market is filled with various options for microwavable food depending on the preferences of the consumers. Instead of the traditional use of the oven many families now use the microwave because of their busy lifestyles. The variety of healthy low calorie -microwave food has made shopping much easier for today’s busy consumer. Low calorie labels are regulated by the Food and Drug Administration (FDA) and require food “labels claiming low-calories must not have more than 40 calories for a given reference amount (except sugar substitutes)”. (The Calorie Control Council, 2014) Healthy low-calorie microwave foods have come a long way since the first Swanson pre-packaged TV dinner in the 1950’s. The meal tray was heated in the oven and consisted of a small portion of meat, two vegetables and dessert. The top two competing manufacturers of microwavable low-calorie foods are Lean Cuisine owned by Nestle and Healthy Choice owned by ConAgra. Both leaders in the frozen food market began in the 80’s. Healthy Choice works rigorously with the FDA to assure foods qualify under government health standards for healthy low calorie foods. Like all businesses these two businesses need a financial business plan that allows them to assess the company’s results and set targets for future growth. Marketing is a vital part of the business plan. Healthy low calorie microwave food as a health option is a concept which has gained enormous interest. The previous assignment discussed the background and the introduction of the company which caters to this segment. The purpose of this paper is to discuss the long term capital budgeting decisions that a company needs to make to determine the market structure operates in and to provide a framework to represent how market segmentation can determine the right target customers. Market Segmentation is important to be able to understand the needs of their customers. The different market segmentation type variables are important when identifying the right products and services to the targeted customers. Market Segmentation The variables in market segmentation are demographic, geographical, psychographic, and behavioral. The most common variable is the demographic segmentation that divides customers into segments based on consumer’s age, income, and gender. The geographic segmentation divides target customers into segments based on their geographical areas such as their state, city, counties, etc. Psychographic segmentation targets consumers based on their likes and dislikes, lifestyles or values. Usually their purchase choices are based on their social and economic standing. The last variable is behavioral segmentation which divides targeted customers based on their knowledge of certain products and their responses. This can be determined by consumer buying patterns such as the frequency of purchase and the quantity purchased. With the use of market segmentation companies are able to build sales, target key customers, retain customers, and compete with larger companies. See Table 1: Table 5.1. Common Ways of Segmenting Buyers By Behavior | By Demographics | By Geography | By Psychographics | * Benefits sought from the product * How often the product is used (usage rate) * Usage situation (daily use, holiday use, etc.) * Buyer’s status and loyalty to product (nonuser, potential user, first-time users, regular user) | * Age/generation * Income * Gender * Family life cycle * Ethnicity * Family size * Occupation * Education * Nationality * Religion * Social class | * Region (continent, country, state, neighborhood) * Size of city or town * Population density * Climate | * Activities * Interests * Opinions * Values * Attitudes * Lifestyles | (Tanner & Raymond, 2010) Various tools and programs are used in market segmentation to gather the information needed. A popular geo-coding online software program produced by a company named Claritas is called PRIZM NE. which combines both your demographics and geographic data together referred to as geodemographics. By entering your zip code into the program you are able to view demographic information that classifies the American population into segments. In the 80’s a California company called SRI International developed a survey called “Values, Attitudes, and Lifestyles” (VALS) (U.S. Framework and VALS Type) in which thousands of consumers were asked questions in which they agreed or disagreed. Based on the answers given they were categorized into different categories based on their buying behaviors. This study tool can be found online at http://www.sric-bi.com/vals/surveynew.shtml to find out which category you’re in. 1. Innovators – Their possessions reflect a cultivated taste for the finer things in life. 2. Thinkers - are practical consumers; looking for durability, functionality, and value. 3. Achievers –favor established, prestige products that demonstrate success to peers 4. Experiencers – purchase reflect emphasis placed on looking good and has “cool” stuff. 5. Believers- favor American products and are generally loyal customers. 6. Strivers – impulsive as their financial circumstance will allow. 7. Makers- prefer value to luxury, they buy basic products. 8. Survivors - loyal to favorite brands, especially if they can purchase them at discount. Market Structures In economics, market structure is the number of firms producing identical products which are homogeneous. The different types of Market Structure are: 1.Pure (perfect) Competition 2.Monopoly 3.Monopolistic Competition 4.Oligopoly The last type Oligopoly is “a type of market structure when a certain market is run by a small number of firms that together control the majority of the market share”. (McGuigan, Moyer, & Harris, 2014, pg. 411) Lean Cuisine and Healthy Choices are examples of an Oligopoly market structure. Each company must consider its rivals’ reactions in response to its decisions about prices, output, and advertising. Decisions on the market structure are made by focusing on the audience that is targeted for their products and determining factors based on if the business is local, national or global. Effectiveness of our market structure is dependent upon the increase in demand and the revenue in sales that are generated through them. Demand for microwavable low-calorie food is inelastic in nature. This suggests that that increases in food prices will lead to the fall in quantity demanded by less than proportionate amount. The income elasticity of the product is flexible and can be said to be a luxury or superior good. Advertising plays a very important role in the marketing process. It increases the consumption of a particular product or service. It reinforces the image of the brands and also brings in awareness about new product categories and new brands. (Young, 2205) Pricing Strategy
The company aims to keep the products prices as inelastic as possible. This means that the company’s pricing strategy should not have any impact on the way the consumers perceive and buy their products. (Investopedia US, 2014) Generally demands are seen only in situations in which the good or services are indispensable and the consumers cannot do without those. But this is not the case for microwavable food products. There is competition in the market to keep the prices under check. Therefore the company needs to do two things to make its prices inelastic- First, is product differentiation in which the company focuses on a target market in which competitors already offer related products or services. The use of product differentiation creates the perception among certain target customers that their version of the product is some how different and has added value not available from their competitors. This differentiation can be the product itself or some type of advisory service which comes with the product, its packaging, availability, support services or etc… Secondly, the company should send two vital messages to its current and potential customers through its marketing communication efforts- First, that their low calorie food is essential and second that their company serves this essential requirement better or much differently than any other company can. Awareness of these two messages accepted by the customers will greatly diminish a role that prices pay in their buying decision.
Determine Changing Factors in Market Structure
Changes in lower prices for microwaves would increase the number of frozen foods that would be demanded by the consumers. So, the cost of relative products is an important role in market structure of goods. Substitute goods are goods which, as a result of changed conditions, may replace each other in use (or consumption). (Nicholson, 1998) A substitute good, in contrast to a complementary good, is a good with a positive cross elasticity of demand. This means a good's demand is increased when the price of another good is increased. Conversely, the demand for a good is decreased when the price of another good is decreased.
One good is a perfect substitute for another only if it can be used in exactly the same way. In that case the utility of a combination is an increasing function of the sum of the two amounts, and theoretically, in the case of a price difference, there would be no demand for the more expensive good. In microeconomics, two types of substitutes are being distinguished, gross substitutes and net substitutes. Good is said to be gross substitute of good if

Goods X and Y are said to be net substitutes if

Where is a utility function for the two goods? (Browning, 1999)
Examples of substitute goods are jelly or jam, butter or margarine whereas complimentary goods examples would be bread and butter, and peanut butter and jelly. So when one prices rises on a product and other conditions remain constant it has an impact on demand for substitute goods. Similarly, if prices for fresh vegetables increased, consumers would substitute them for frozen food due to its cost effectiveness and ease of use.

Government Policies Just like any other business, for setting up low calorie microwavable food business the government policies will play a very important role. The company needs to follow the guidelines prescribed by the local as well as the federal food and drug administration to ensure that their production methods, formulas and any other part of the business does not violate the local laws. Government policies may also be critical in deciding the necessary taxes and other duties that the company may have to pay to operate its business in a certain province. The federal as well as state governments in various states have been working on anti-obesity programs and have been proactive in encouraging the low calorie food. This could be a welcome move and the right time to start the business. If the company can get into any type of partnership with the government under which its products are served to the sections like school students or other economically weaker sections under government welfare schemes, it may be a very good source

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