Running head: LONG-TERM INVESTMENT DECISIONS

1
Long-Term Investment Deisions
Stra!er "niversit!
#er!$ %& Gas'ue
(ro)essor: Muhammad
ECO **+ Manageria$ Eonomis and G$o,a$i-ation
.une /0 1+12
LONG-TERM INVESTMENT DECISIONS 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.
3 $o4 a$orie or hea$th! o5tion )ood is a )resh one5t 4hih has gained a $ot o) interest
in toda!6s times& Restaurants0 shoo$s0 and even 5risons are )eeding hea$thier& More 5eo5$e 4ant
to ,e hea$th! and $ive hea$thier $i)est!$es& This 5a5er 4i$$ out$ine a 5$an )or managers antii5ating
rising 5ries0 e7amine the ma8or e))ets the government have on 5rodution and em5$o!ment0
determine 4hether government regu$ations ensure )airness0 e7amine the ma8or om5$e7ities
under e75ansion via a5ita$ 5ro8ets0 and $ast$! suggest ho4 a om5an! ou$d reate onvergene
,et4een the interests o) sto9 ho$ders and managers&
The Com5an! aims to 9ee5 the 5ries o) its 5roduts as ine$asti as 5ossi,$e& This means
that the 5riing strateg! shou$d have no im5at on the 4a! the onsumers 5ereive and ,u! suh
5roduts :De)inition o) Ine$asti0 :n&d&;;& Genera$$! 4e see suh demand on$! in situations in
4hih the good or servies are indis5ensa,$e and the onsumers annot do 4ithout the 5rodut&
This is not the ase )or miro4ava,$e )ood 5roduts&
The demand )untion )or $o4 a$orie miro4ava,$e )oods $arge$! de5ends on the 5rie o) the
merhandise0 its re$ative :su,stitute; 5rodut0 advertisement overheads and $ast ,ut not the $east
on the inome o) the onsumer&
<rom the demand )untion and the e$astiit! onsidered0 it is esta,$ished that the mar9et
)or the $o4 a$orie miro4ava,$e )oods )it into a mar9et o) mono5o$istia$$! om5etitive t!5e& 3
mono5o$isti om5etitive is distinguished ,! a reasona,$e num,er o) ,u!ers and se$$ers& 3s a
resu$t 5eo5$e an hange to another ,rand i) a s5ei)i ,rand harges a soaring 5rie& =o4ever0
mono5o$isti om5etitive su55$iers arr! out 5rodut di))erentiation and onse'uent$! ,ringing
LONG-TERM INVESTMENT DECISIONS >
in the onsumers&
No40
(ro)it :N(; ? Tota$ Revenue :TR; Tota$ Cost :TC;
? (@ TC
3ording to the <OC o) 5ro)it ma7imi-ation0 4e get
?- A=ere ( is not )i7edB
? MR MC ? +
so MR ? MC
<rom the e$astiit! as onsidered in the s5ei)ied assignments0 4e an o,serve that the
demand )or the $o4 a$orie miro4ava,$e manu)atured goods is not ver! e$asti in nature&
No40 4ith the 5ur5ose to maintain their 5roduts as ine$asti as )easi,$e0 the )irm 4i$$ attem5t to
di))erentiate its merhandise )rom other 5roduts o) other )irms& I) their 5rodut is dissimi$ar
)rom others then the ustomers 4i$$ not $oate a su,stitute )or that merhandise straight)or4ard$!&
That 4i$$ )ormu$ate the demand )or the e'uiva$ent 5rodut ine$asti in harater&
%e a$$ are )ami$iar 4ith the )at that the $arger the amount o) 5rodut di))erentiation the
$arger the mar9et 5o4er ,eomes& Conse'uent$!0 it is sensi,$e )or the organi-ation to arr! out
vigorous 5rodut di))erentiation to ma9e the most o) its 5ro)its&
Examine the maor effects that government policies have on production and employment.
Predict the potential effects that government policies could have on your company.
!overnment involvement in the market economy
Most 5eo5$e ,e$ieve that regime must regu$ate the mar9et& The on$! a$ternative to a
regu$ated mar9et is an unregu$ated mar9et& Either a mar9et is regu$ated or it is not& To some
e7tent0 there shou$d ,e regime regu$ationC intervention& Government regu$ation is needed& Too
o)ten0 there is an urge to denoune government as 5oint$ess or a 4aste0 4ithout onsidering that
LONG-TERM INVESTMENT DECISIONS 2
there are some things that government an do ,etter than 5rivate industr!& =and$ing e7terna$ities0
5roviding 5u,$i goods :)rom nationa$ de)ense to 5u,$i roads;0 en)oring ontrats0 and
su55$!ing a medium o) e7hange :that is0 mone!;D a$$ o) these are things that government an do
,etter than 5rivate industr!0 sim5$! ,! virtue o) ,eing a government :#$einshmidt0 1++/;&
There an and shou$d ,e $ots o) disussion a,out 4here to dra4 the $imits o) government
and 4hat s5ei)i ativities shou$d )a$$ 4ithin those $imitsE To argue that0 4ou$d one ,e ,etter o))
4ith no government 4hat so ever or is that 8ust as re9$ess and shortsighted as arguing that the
government shou$d ,e in harge o) ever! eonomi ativit!& Neither one 4i$$ resu$t in an idea$
eonomi $imate& T4o main reasons )or government invo$vement in a mar9et eonom! is
esta,$ishing ru$es )or e7hange in mar9ets and using that same 5o4er to en)ore& 3dditiona$$!0
reduing eonomi unertaint! )or 5eo5$e 4ho are $ess )ortunate due to 5oor hea$th0 ,ad $u90 8o,
$osses0 or other irumstanes :OFSu$$ivan G She))rin0 1++H;& Overa$$0 a mar9et eonom!
5rovides 5$ent! o) o55ortunities to 5eo5$e0 ,ut there are ris9s&
"etermine whether or not government regulation to ensure fairness in the low-calorie,
frozen microwavable food industry is needed. #ite the maor reasons for government
involvement in a market economy. Provide two $%& examples of government involvement in
a similar market economy to support your response.
The ,asi 5ur5ose o) the government6s intervention to the mar9et is the use o) 5rivate and 5u,$i
goods0 im5er)et in)ormation0 and 4here,! individua$s are not the ,est 8udges o) their o4n interest
and are not a,$e to )igure out 4hat 4i$$ ,ene)it the& The "&S& government must )und things that
are in soiet!6s ,est interest overa$$& The governmenta$ intervention is re'uired in the mar9et
eonom! ,eause 4ithout it0 the mar9et 4ou$d ,e $ose to ,eing ine))iient :Manageria$-
eonomis strategies;& Mergers and mono5o$! through the mar9et eonom! are high$! 5ossi,$e
reating o55ortunities )or onsumer e75$oitation through su,standard goods and high 5ries& The
government6s ro$e in this ase is to oversee the mergers and ontro$ the mar9et to o,sure
LONG-TERM INVESTMENT DECISIONS *
mono5o$! reations& The essene o) mar9et eonom! is to ahieve o5tima$ a5ait! in
5rodution an as5et that is $i9e$! to miss out 4here a mono5o$! e7ists& %ithout government
regu$ation0 5rie sta,i$it! is not ahieva,$e sine0 the inreasing om5etition 4i$$ $ead to
onsistent $o4 5ries and thus 5rie insta,i$it! :#$einshmidt0 1++/;& In a ase 4here regu$ations
in the mar9et are $a9ing0 $o4er 'ua$it! goods 4i$$ ,e introdued to re)$et the $o4 5ries the
mar9et o))ers&
The )irst e7am5$e o) government invo$vemet in m! o5inion 4ou$d ,e suh as 4hen the
Government intervenes 4hen )irms are 5roduing too man! negative e7terna$ities suh as a
manu)aturing 5$ant 5roduing smog that is ausing some harm& I) this e7terna$it! is ausing no
harm to the 5roduer then the om5an! 4i$$ ontinue this ation ,eause there is no ris9 o)
onse'uene& 3ording to Lin :1++2; China has smog that is so thi9 that the iti-ens are
onstant$! 4earing mas9 and )ores to minimi-e an! outdoor ativities )or goods& The vast
ma8orit! o) these goods are headed to the "S 4here environmenta$ $a4s and government
en)orement is muh striter&
The seond e7am5$e o) government invo$vement is the need to regu$ate ,an9ing0 and
natura$ mono5o$ies& Our government has $a4s en)oring a,i$it! to 5rotet the rights o) average
3merians )rom un)air ,usiness 5raties $i9e arte$s& These same rights are 4hat a$$o4ed to
government to 5roseute Dennis #o-$os9i a)ter he $ooted T!o o) IH++ mi$$ion do$$ars :Thottam0
1++2;&
Examine the maor complexities that would arise under expansion via capital proects.
Propose key actions that the company could take in order to prevent or address these
complexities.
Je)ore a om5an! onsiders mergers or e75anding its o5eration0 it 4i$$ have to remem,er
the reason )or ma9ing this a5ita$ ,udgeting deision& The main reason )or a merger deision is
LONG-TERM INVESTMENT DECISIONS H
to ma9e sure the ost0 ris9s0 and ,ene)its o) the investment are 4orth getting into& The 5ossi,$e
ha$$enge )or the need to raise a5ita$ is the soure o) a5ita$& In this ase0 there is $i9e$! to
emerge a 5o4er strugg$e ,et4een the om5an! managers and shareho$ders& The managers6
easiest measure to raising a5ita$ 4ou$d ,e to )ous on the shareho$ders reserves& Raising a5ita$
in a or5oration is not an eas! measure to underta9e :Kie0 1+1+;& There are a num,er o) items
that need to ,e eva$uated& One is the ost o) the a5ita$0 seond$! the ease that the a5ita$ an ,e
o,tained and third$! the e75eted return on a5ita$&
=ere in the 5resent situation0 it has to ,e determined 4hether0 the movie renta$ industr!
shou$d ensure that0 the! shou$d move )or4ard 4ith the merger and $oo9 to have se$)-e75ansion
through a5ita$ 5ro8ets :MGuigan0 Mo!er0 G =arris0 1+11;& I) the organi-ations move )or4ard
4ith the ativit! o) se$)-e75ansion0 then0 it sha$$ not ,e 5ossi,$e )or it to ma9e sure that0 it derives
the ,ene)its 4hih 4ou$d have ,een avai$a,$e to it i)0 the organi-ations might have had moved
)or4ard 4ith the ation o) merger&
%ith the he$5 o) the merger0 the movie renta$ industr! an ma9e sure that0 the! share the
tehno$og! and resoures )or ahieving a higher $eve$ o) 5ro)its& I) the merger 4i$$ not ,e
onduted then0 the organi-ation 4i$$ )ind it di))iu$t in having a higher $eve$ o) 5ro)its0 as it sha$$
ontinue to have the ine))iient use o) tehno$og!0 resoures0 strategies and the )inania$
ommitments and inur $osses :#$einshmidt0 1++/;& In this 4a!0 it an ,e said that0 the movie
renta$ industr! shou$d move )or4ard 4ith merger rather than having se$)-e75ansion through
a5ita$ 5ro8ets&
'uggest the substantive manner in which the company could create a convergence between
the interests of stockholders and managers. (ndicate the most likely impact to profitability
of such a convergence. Provide two $%& examples of instances that support your response
#onflict and convergence of manager)s and stockholder)s interests
LONG-TERM INVESTMENT DECISIONS L
<undamenta$$! there are three )ores that ome together to reate a onvergene ,et4een
the interest o) sto9ho$ders and managers& These in$ude the strategi deision ma9ers-
Diretors0 Managers0 <inania$ Commitment and Organi-ationa$ Integration& Managers are
9no4n to have overa$$ ontro$$ing interests over a om5an!6s a))air& Sto9ho$ders have $imited
ontro$ over the ations o) the managers des5ite the )at that the! are the o4ners :Manageria$-
eonomis strategies;& Con)$it ,et4een the t4o ours 4hen the 5arties see9 to ma7imi-e their
individua$ ,ene)it& %hi$e the sto9ho$ders see9 to ma7imi-e 5ro)its0 managers 4i$$ see9 to higher
inomes0 and higher a$$o4anes& Managers are $i9e$! to ,e against mergers as this om5romise
the! 8o, seurit!& Sto9ho$ders 4i$$ 4ish to minimi-e their ris9 ,! ho$ding interest in as man!
,usiness ventures as 5ossi,$e :Kie0 1+1+;& Managers earning need to ,e 5egged on their a,i$it! to
raise high 5ro)its& This is 4here the 5a! 5a9age 4i$$ inrease ,! a 5erent o) the 5ro)its raised in
a )inania$ 5eriod& This 4i$$ guarantee that the interests o) the sto9ho$ders are met sine0 higher
5ro)its mean higher dividend 5a! to the shares he$d :OFSu$$ivan G She))rin0 1++H;&
In the 11st entur!0 ,oth 5u,$i and 5rivate ,usiness o4ners6 envisioned eonomi
gro4th0 ,ut gro4th s$o4ed 4hen unethia$ $eaders ,eame 5reou5ied 4ith satis)!ing their
5ersona$ needs instead o) the needs o) their ustomers and their em5$o!ees& <inania$
ommitment re'uires that managers shou$d have 9no4$edge and ontro$ over the interna$
revenue o) the om5an! 5$us the outside )inanes avai$a,$e )rom donors and other )inania$
institution to u5ho$d the interest o) shareho$ders :OFSu$$ivan G She))rin0 1++H;& The sto9ho$ders
4i$$ not ,e in an! 9ind o) 5ro,$em or issue regarding the )at that0 4hether the! shou$d ,e$ieve in
the )inania$ statements o) the organi-ation or not&
The Seurities and E7hange Commission re'uires the organi-ations to 5rovide
ontinuing in)ormation a,out their )inania$ 5ositions& The organi-ation is re'uired to ,e
LONG-TERM INVESTMENT DECISIONS /
5rovided on a 'uarter$!0 ha$) !ear$! and annua$ ,asis in order to ensure that0 the resu$ts )or the
shareho$ders are ,etter0 and the shareho$ders get to 9no4 the true and the orret )inania$
5osition o) the organi-ation in the )uture& There is trans5aren! in the )inania$ statements o) the
organi-ations0 in the )uture0 4ith the he$5 o) )ores tr!ing to ensure onvergene ,et4een the
interests o) the shareho$ders o) the management o) the organi-ation :Kie0 1+1+;&
In on$usion0 it is ver! im5ortant )or a mar9et eonom! to have invo$vement o) the
government to a higher $eve$& There are man! advantages o) government invo$vement in the "S
mar9et eonom!& I) an organi-ation 4i$$ onsider se$)-e75ansion via a5ita$ 5ro8ets then0 it sha$$
not ,e in a 5osition to derive the same ,ene)its as it might have had 4ith the he$5 o) merger
:MGuigan0 Mo!er0 G =arris0 1+11;& There are ertain )ores0 4hih sha$$ ensure onvergene
,et4een the interests o) the shareho$ders and the managers o) the organi-ation&
Re)erenes:
Lin0 .& :1++2;& "S ,u!s Chinese goods and smog& :1+12;& New Scientist0 221:1M*>;0 H&
LONG-TERM INVESTMENT DECISIONS M
#$einshmidt0 .& :1++/0 Deem,er;& The ,ene)its o) entering the g$o,a$ mar9et5$ae& Retrieved
Se5tem,er 10 1+1>0 )rom S5eia$t! <a,ris Revie4:
htt5:CCs5eia$t!)a,risrevie4&omCarti$esC11+/N)1Ng$o,a$&htm$
Manageria$- eonomis strategies& :n&d&;& Retrieved )rom
htt5:CC444&eho4&omCin)oNL//2M1>Nmanageria$-eonomis-
strategies&htm$Oi7--1Kr=o4KtR
MGuigan0 .& R&0 Mo!er0 R&0 G =arris0 <& :1+11;& Manageria$ eonomis: 355$iations0 strateg!
and tatis :11 ed&;& Mason: South- %estern Cengage Learning&
OFSu$$ivan0 3&0 G She))rin0 S& M& :1++H;& Eonomis: (rini5$es G too$s& "55er Sadd$e River:
(earson Eduation In&
Thottam0 .& :1++2;& C3N T=IS M3N S3VE TPCOE& Time0 163:H;0 2/-*+&
Kie0 .& :1+1+;& Joard governane and manageria$ short-term inentives& Management Siene G
Engineering