Assignment 3 LONG TERM INVESTMENT DECISION
The grocery food 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 makes long term
decision.
One of the most important long term decisions for any business relates to investment.
Investment is the purchase or creation of assets with the objective of making gains in the
future. Typically investment involves using financial resources to purchase a
machine/building or other asset, which will then yield returns to an organization over a period
of time. Planning investments involves thinking about a range of issues that have a bearing on
where you ultimately decide to put your money. These issues will vary according to your
particular age, circumstances and attitude to risk, and thinking about them carefully before
you start making commitments will help you avoid some potentially costly mistakes.
1. Outline a plan that managers in the low-calorie, frozen microwaveable food company
could follow in anticipation of raising prices when selecting pricing strategies for
making their products response to a change in price less elastic. Provide a rationale for
your response.
Pricing the product to reach out the current and potential customers is crucial for the
managers. It is their understanding and decisions that are going to determine the success of
any business. A major strategy that ensures that customers are retained with the product is to
make the product inelastic employing pricing and other strategies. However, before the
strategies are discussed to make low-calorie microwavable food inelastic, we must know the
meaning of elasticity.
Elasticity or price elasticity is a measure of quantity demanded responds when price is
changed, that is, it a measure of responsiveness of the consumer due to change in price. It is
measured as the ratio of the percentage change in the quantity demanded and percentage
change in price. If the elasticity of demand is greater than one, we say that demand is elastic,
if it is less than one, we say that demand is inelastic, if equal to one, we say demand is unit
elastic.
The company aims to keep the prices of its products as inelastic as possible. This means that
the pricing strategy should have no impact on the way the consumers perceive and buy such
products (Definition of Inelastic, (n.d.)). Generally we see such demand only in situations in
which the good or services are indispensable and the consumers cannot do without those
goods and services. But this is not the case for microwavable food products. There is
competition in the market to keep the prices under check. Hence the company needs to do
two things to make its prices inelastic- First of all the company needs to spend money on the
R&D efforts to differentiate its products from the rest of the players. This differentiation
could be on the basis of the core product, advisory service which comes along with the
product, packing, availability, support services or virtually anything else. As the second
measure it needs to send down two important messages to its potential as well as current
customers through its marketing communication efforts- First that the low calorie food should
not be choice but be used as essential and second that the company serves this essential
requirement like no one else does. Once the customers are aware and agreed with these two
messages, price will play very minimum role in their buying decision (Price Elasticity of
Demand, (n.d.)).
Low Calorie Microwavable Food Company should consider the following pricing strategies
to reduce price elasticity to achieve maximum profits.
1. Branding: This strategy involves creating a unique product identity, which
customers can easily relate with and attach high quality. Branding is the process of
creating an image or idea of a product or service in the market arena, which
increases the demand for such product. It may include changing the packaging,
creating brand names and improving the quality of a product. Once a brand is
build, affirm succeeds in creating a major difference in the minds of a customer’s
between their product and those of the competitors. Once a product attains a
positive outlook in the mindset of consumers, the organization attains brand
equity, which brings competitive advantage for the firm as customers view the
products as unique or superior, which effectively reduces the price elasticity as
substitute products become less close to their product.
2. Product Differentiation: In this pricing strategy, the firm should seek to identify
and highlight the difference between its product and those of competitor products..
Differentiation looks to make a product more attractive by contrasting its unique
qualities with other competing products.
3. Persuasive advertising – The primary goal is for a company to build selective
