Operations Decision on Demand Estimation

Introduction

            This assignment is based on the operations decision on ‘Demand Estimation,’ in which case the primary focus is to establish the market structures in which the firm operates. In this case, the primary business line of the company is frozen low-calorie food products. In this case, the analysis will focus on the industry competition that the company will face, judging from the analysis of its market structure, as well as the operations strategies that the company will develop to stay afloat the market, including pricing strategies, profitability analyses, as well as strategic business relationships not only in its domestic markets but also across the international scale.

Operations Decision Question One

Initially, the company was operating within a perfectly competitive market structure whereby the sellers and the buyers have absolute knowledge of the market. Furthermore, the sellers have no control of the market, especially regarding price setting. However, recent market changes have brought about a significant transformation in the market structure to the extent that the firm now exercises significant control in the market, considering its new power over setting the price of its products, going by the price margins that are optimal. This could be considered as an oligopoly market structure whereby the firm exercises significant control in price setting, in addition to other critical aspects of the market including market entry as well as exit. The reason for this assertion is because the company’s price-setting power can only be long-term in the event the threat of new entrants to the market is very low (Heizer, 2016). However, in case new firms can easily penetrate and establish themselves in the market, the new firms will water down the supernormal profit margins that the existing firms enjoy, subsequently leading to normal profits, if not losses. Furthermore, through price-setting powers, the company also gains significant market control by gaining a competitive edge over other industry players

Conversely, the best approach to employ in evaluating how effective the market structure of the company is in terms of its operations is by conducting an econometric market analysis assessing the players in the market, the customers, as well as their respective bargaining powers, not to mention a critical analysis of the available substitutes of the low-calorie frozen food products, which is the primary product that the company deals with (Bromiley & Rau, 2016). This analysis will also reveal how the right strategies that the company must employ in order to maintain its price setting powers in the market, subsequently maintaining a competitive edge in the market, in addition to making supernormal profits from the sale of its products.

Operations Decision Question Two

The transformation in market structures results from changes in market forces as well as market positioning of the industry players. Essentially, the perfectly competitive market structure entailed a group of buyers and sellers who were all fully aware of the market operations, such as the type of products as well as the prices charged for each product. Furthermore, these markets are characterized by high product homogeneity among the traders in addition to the high presence of product substitutes, hence a low-profit profile (Hitt, Carnes & Xu, 2016). As such, the change in market structure is largely attributable to the extermination of these market characteristics, which subsequently gives the market players, including the company, significant market control, and power, significantly price-setting powers.

In this regard, it is worth asserting that the company strategies were effective in transforming its market structures, such as Business Process Reengineering (BPR) as well as Product Differentiation. In this regard, the company managed to set itself aside from the other market players, elevating itself to a higher level than the other businesses within the perfectly competitive market structure (Krajewski, Malhotra & Ritzman, 2015). As a result, the company advanced into a higher market structure, subsequently gaining the market power as well as the control that come with the new market structure settings. In this case, it is possible that the company gained the price-setting power because it produced a higher quality product compared to its competitors, in addition to the absence of substitutes of its line of products.

Figure 2: BPR Framework

Conversely, it is worth noting that BPR and Business Differentiation played an instrumental role in facilitating the transformation in the market structure of the company from perfectly competitive to imperfectly competitive. Nonetheless, this transformation in market structures will also have a significant impact on the business operations of the company given the different business environment in the new market structure (Smith, Maull & CL Ng, 2014). For one, the company will invest heavily in Research and Development (R&D) to maintain a highly differentiated high-quality product to maintain its competitive edge. Moreover, the company will also be required to invest heavily in marketing and advertising to create a reputable as well as strong brand image and identity that will enable it to maintain its market control and power.

Operations Decision Question Three

The tables above show the specific cost functions that determine the company’s operations in both short-run as well as the long-run. The TC cost function provides that the company can significantly reduce its costs of operations through increasing its sales volumes while taking into consideration the quantity function (Q) as well as the Q² function. The VC cost function provides that the company will incur high costs if it disregards the Q² function. The MC cost functions provide that the company will incur costs by its quantity of sales, as provided for under the Q function (Heizer, 2016). Therefore, in applying the above cost functions, the company is in a position to determine its optimal production levels in such a way that it will have an average cost function, subsequently maximizing its profit margins. In essence, the MC cost enables the company to establish the optimal quantity of products to deal with to ensure profitable operations. It is one thing to have the price setting power, but it is another thing to waste this power through overproduction of products in such a way that the company ends up incurring more expenses in the production of the products compared to the profit margins obtained from the sales.

Operations Decision Question Four

The company should discontinue its operations immediately when its costs of operations become so high to the extent that they cut the profits due to the company. In essence, the purpose of doing business is to make profits. However, because of market changes and operational activities, sometimes it becomes untenable to undertake business activities profitably, with the main constraint being the cost of operations (Bromiley & Rau, 2016). Therefore, when the company realizes that its costs of operations or the cost of doing business are higher than the profit margins it makes; it should discontinue its operations immediately.

Nonetheless, the company can improve on this turn of events by maximizing its sales volumes in such a way that it still ends up making profits, regardless of the minimal profit margins earned from the business venture. However, this approach will only end up taking too much of the company’s resources regarding asset allocation as well as cash flow injections. Therefore, the minimal profit margins earned from the business venture will only be appreciated when they come in a lump sum, and the best way to achieve this is through maximization of the sales volumes of the company (Hitt, Carnes & Xu, 2016). Another approach that the company should use is to try and reduce its operational costs by cutting down on its variable costs, a move that would enable the company to increase its profit margins in the long-run. Another approach would be to increase the price of the products, now that it has the price setting power, even though this will have a negative impact on the company’s market control as a significant number of customers will shy away from consuming the company’s products because of its high prices. Nevertheless, this approach is tenable in the sense that the final price of the company’s products should cover the Average VC incurred by the business in the short-run, as well as the Average TC incurred by the company during its long-run operations.

Operations Decision Question Five

The best way for the company to maximize its profit margins is through matching its marginal revenues with its marginal costs, in such a way that the two equations are equal to one another, as in the profit equation (MR = MC). As such, this sets the optimal price at which the company can sell its products, as well as establish the optimal level of output that the company should maintain to keep the cost constraints in check, now because the company has market control regarding price setting (Krajewski, Malhotra & Ritzman, 2015). Therefore, the most effective pricing policy of the company should be the cost-plus pricing technique, in which the company takes into consideration all the costs incurred in the production of the product, in this case, the low-calorie frozen microwavable food products, plus a slight consideration of the expected profit margin on each product. As such, this approach will be effective in accounting for the cost of operations of the company, in addition to ensuring that the company also makes a substantial profit from the product sales at the end of the day.

Figure 3: Oligopoly market structure profit equation

Operations Decision Question Six

The best way for the company to evaluate its financial performance is analyzing its output margins in the long-run, having taken into consideration all the key drivers involved in determining its performance outputs, and as such, playing a significant role in determining its profitability in the long-run. As such, this approach involves calculating the output levels of the firm for a particular period such as a single fiscal year and compares these values against the costs incurred during the entire period (Smith, Maull & CL Ng, 2014). Therefore, the company will be in a position to easily discover the profits it made during a specific period, such as quarterly, bi-annually, as well as monthly, in addition to the costs incurred during the same period. In this regard, the company will make an informed managerial decision based on the results obtained, such as reducing the cost constraints while promoting the sales constraints to maximize profit margins.

Operations Decision Question Seven

The company can improve its profitability through maximization of its sales volumes. There are many ways of maximizing its sales volumes, key among them reducing the price of its products to attract more customers and subsequently increase the number of sales, or reduce the cost of production, and subsequently increase the profit margin earned in each product (Bromiley & Rau, 2016). One way of reducing the cost of production is through adopting economies of scale, whereby shared costs in product production for each unit significantly reduce the overall cost of production incurred. However, the second approach is most tenable at it keeps both the shareholders as well as the customers fully satisfied and engaged in the company’s operations.

References

Bromiley, P., & Rau, D. (2016). Operations management and the resource based view: Another view. Journal of Operations Management, 41, 95-106.

Heizer, J. (2016). Operations Management, 11/e. Pearson Education India.

Hitt, M. A., Carnes, C. M., & Xu, K. (2016). A current view of resource based theory in operations management: A response to Bromiley and Rau. Journal of Operations Management, 41(10), 107-109.

Krajewski, L. J., Malhotra, M. K., & Ritzman, L. P. (2015). Operations management: processes and supply chains. Pearson.

Smith, L., Maull, R., & CL Ng, I. (2014). Servitization and operations management: a service dominant-logic approach. International Journal of Operations & Production Management, 34(2), 242-269.