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ECONOMICS

INTERNAL ASSESSMENT

An Investigation OnThe Impact Of The Role Of Grace Kennedy In Jamaica


Name: Mark Phillips Teacher: School: Kingston College

TABLE OF CONTENTS
Page Introduction Aims and Objectives Methodology Employed MODULE 1 (A) (B) (C) Scarcity Demand Analysis Income 6 (D) (E) MODULE 2 (A) (B) (C) MODULE 3 (A) (B) (C) (D) Appendices Conclusions Reference Theory of Income Distribution Demand for Factors Supply of Factors Evaluation and Recommendations 13 14 15-16 17 18-20 21 22 Market Structure Price Plus Costing Evaluation and Recommendations 10 11 12 Supply Evaluation and Recommendations 7-8 9 4 5 1 2 3

INTRODUCTION
Grace Kennedy is one of the Caribbean's largest and most dynamic corporate entities. The company started in Jamaica in 1922 as a small trading establishment and wharf founders. It has expanded and diversified over the years, changing from a privatelyowned enterprise to a public company listed on the stock exchanges of Jamaica, Trinidad, Barbados and the Eastern Caribbean. Today, the Grace Kennedy Group comprises a varied network of some 60 subsidiaries and associated companies located across the Caribbean and in North and Central America and the United Kingdom. Its operations span the food distribution, financial, insurance, remittance, hardware retailing and foodprocessing industries. In 1995, Grace Kennedy developed its 2020 Vision, its objective being to transform the business from a Jamaican trading company to a global consumer group with the business roots in Jamaica. After thirteen years on this journey, the company is substantially larger and stronger, measured by the business growth in revenues, productivity, profits and market value. Its mission continues to be, ' To satisfy the unmet needs of Caribbean people wherever we live in the world . Although Grace Kennedy is a conglomerate and is involved in Food Processing, Financial Services, Information Services and Retail and Trading. This study focuses on the Food Processing operation.

AIMS
The major aim of this IA is to investigate the role of Grace Kennedy in Jamaica. This project will also help me to fulfil the requirements of the CAPE ECONOMICS exam and give me a better understanding of the topics highlighted in the project.

OBJECTIVES
Module one: Define Demand Identify the factors that affect demand and the elasticity of demand Define Supply Identify the factors that affect supply and the elasticity of supply

Module Two: State the type of market Structure which the firm operates Explain the factors that influence the pricing and output decisions of the firm

Module Three Theory of Income Distribution Define the term Demand for Labour Define the term Supply for Labour

METHOD OF DATA COLLECTION


An interview and a questionnaire were used to access information from Grace Kennedy, during the year 2010 -2011. The Purchasing Manager and the marketing manager of the company did the Interviews. Questionnaires where answered by the Chief Executive Officer, Douglas Orane.

SCARCITY
Grace Kennedy like any other firm uses various types of factors of production such as land, labour, capital and entrepreneurship. These resources are all economic resources since they are scarce. The company faces difficulty in this area because some of there product subsidies like guava have to be imported, so this put a constraint on d company because they are supporting international market than local. When the various resources are used to produce goods supplied by Grace, there is an opportunity cost, that is the alternative goods that such resources could have been used to produce.

DEMAND ANALYSIS
Grace products are demanded both by local consumers as well as international. Grace Kennedy produces a wide range of goods such as Tomato Ketchup... There is a wide demand for these products. Demand for these products are affected by the products own price, income, price of related goods and other factors. A change in the price results in the law of demand this means that the lower the price the greater the quality demanded.

Elasticity of Demand
The concept of elasticity of demand measures how responsive is the quantity of a product to a change in its price. It is the percentage change in the quantity demanded divided by the percentage change in price. Demand for Grace products is likely to be inelastic from the point of view that these products are food items which are considered as necessity. Never the less these products have very close substitutes and demand would tend to be elastic. Again Grace products would tend to account for a relatively small percentage of consumers income and are likely to be relatively inelastic.

Cross Elasticity
Since Grace products has a number of close substitutes a rise in the price of Grace products could affect the demand of other brands and vice versa. Economists refer to this relationship as cross elasticity of demand.

INCOME
As income increases both at home and abroad, larger quantities of these products are generally consumed especially these consumers who view the companies product as a normal good. However, some people may view tin mackerel, sausages, sardines and corned beef as inferior goods. The demand for these goods would decrease as income increases. The extent to which these goods will be perceived as normal or inferior goods will depend on the level of income.

Price of Related Goods


The goods produced by Grace Kennedy have a wide range of close substitutes since there are other firms selling similar products. A rise in the price of other products would result in a significant increase in the demand for Grace products and vice versa. This means that the company will watch carefully the pricing policies of its competitors. Even though there are other firms selling similar products persons might be willing to pay higher price for Grace products due to the greater utility associated with the consumption of these products as oppose to other brands.

SUPPLY
Supply refers to the amount of goods that Grace Kennedy is willing to produce and offer for sale. Like demand, supply is affected by a number of factors such as the products own price, the cost of production, technology, price of related products and so forth. The companys operation is largely dependent on obtaining reasonably priced products on a sustainable basis. To this end the company has bypassed local farmers and other local producers and outsource goods from overseas. E.g. coconut water is obtained from Thailand, mango concentrate is obtained from Columbia, guava from Brazil and bottles from Trinidad. The reason given is the difficulty encountered in obtaining reasonably priced goods on the local market on a sustainable basis. The company is manufacturing fewer items and is outsourcing them from more efficient producers who can supply these items at a lower price than it would cost Grace to produce. The companys objective is to move closer to the final consumer, develop better customer service, extend its international business and achieve operation efficiency.

Elasticity of Supply
This is defined as a measurement of the responsiveness of the quantity supplied to a change in price. Grace Kennedy products can be produced in a relatively short period of time and would be quite responsive to an increase in price. Since most of the products have a relatively long shelf life, finished goods can be stored as inventory. When price rises due to an increase in demand the company can sell goods by reducing its inventory. Inventory would tend to make supply more elastic. However, holding inventory increases

a firms production cost, it also involves financial resources tied up until the goods are sold. Like all other Jamaican firms the company is affected by higher cost of utilities such as electricity, water, telephone service as well as security cost. The company operates in the heart of downtown Kingston where crime is a major concern and this necessitates the need for a large fleet of security personnel.

EVALUATION AND RECOMMENDATIONS


Grace Kennedy responds quite favourably in satisfying the ever increasing demand for food items within the country. The company uses various methods to increase supply not only by means of its own production but through outsourcing. It imports a large amount of fruit concentrates and pastes from other countries, many of which can be obtained locally. It asserts that Jamaican suppliers are unreliable and the prices are sometimes too high. The company ought to mobilize local farmers to produce the fruits and other raw materials for its processing plants. To the extent that it generates income for local farmers they will be able to earn the income to purchase the companys products. With the present arrangement a significant part of Grace earnings is used to pay for imports.

MARKET STRUCTURE
Grace Kennedy operates in an oligopolistic market structure. This structure states that where a few usually large firms characterise the market, each possessing a substantial market share. Its major competitors are Eve, Nupak and Lasco. Since there are other firms selling similar products firms are reluctant to engage in price competition. If Grace lowers price, other firms are likely to cut their prices which may precipitate into a price war. If Grace raises prices it is likely to lose sales to other firms. In reality there is a cluster of prices, that is, the price of other brands are very close to that of Grace, sometimes differing only by a few cents. This explains the typical price rigidity of the oligopolistic model. Grace of course uses none price competition in terms of advertising an introduction of new products Grace is arguably the market leader and there could be some elements of price leadership or tasic collusion where Grace as the dominant firm sets its price and the other firms follow. In the absence of price competition oligopolists resort to research and development to develop new products or add new features to existing products. This will serve to extend the products life in the market. Over the past two to three years Grace has developed a wide range of new products such as Grace Porridge, Grace Juices, Grace Soup This is in keeping with the health conscious consumers who prefer non-sugar natural juices as oppose to artificially flavoured drinks. Today Grace is a popular brand name and there is tremendous brand loyalty. Brand loyalty will make demand more inelastic and will give the firm some discretion in raising price within certain limits. This will somewhat overcome the difficulties that oligopolists face in changing prices.

PRICE PLUS COSTING


The company is likely to use the price plus costing method where the firm determines its unit or average cost and adds a percentage mark up or profit margin. Such profit margins are based on the rate of return that a similar sized firm of equal risk would obtain. Since average cost tends to increase with prices, this unit cost must be calculated based on some level or percentage of capacity utilization. Grace is arguably a conglomerate since it produces a wide range of differentiated products. The company benefits not only from economies of scale but economies of scope. Economies of scope is defined as a reduction in average cost arising from the firms diversified business. Such benefits assist the firm to occupy a good position in the market and to be better able to enjoy cost and price advantage over other firms. The company also outsources certain products whenever it finds other firms that can produce that product or part of a product at a lower price. Equipped with such strengths Grace is able to ward off the onslaughts of competitors and reduce the level of the uncertainty characteristic of the oligopolistic market.

EVALUATION AND RECOMMENDATIONS


Grace operates in an oligopolistic market where there is a great degree of interdependence. Since there are other firms selling similar brands the company face limited options in raising prices, it is therefore forced to use non-price competition such as product improvement, development of new products and better customer service. The company continues to increase efficiency by outsourcing products when it can be produced cheaper by other firms. The company should always try to identify local sources of products where possible. The company can expand its range of products and benefit from economies of scope as well as risk bearing economies of scale.

THEORY OF INCOME DISTRIBUTION


Like all firms, Grace Kennedy uses various types of factors of production such as land, labour, capital and entrepreneurship. Land is used to site the various companies plants. Labour refers to the various categories of employees and capital refers to the buildings, machinery and equipment used by the company. Finally entrepreneurs refer to the shareholders. Since these are economic resources, they have to be paid at least what they could have earned in their next best alternative use. Such opportunity cost of a factor of production is known as the transfer earnings. This is the minimum income required to attract or retain a factor in its current use. Any income earned that is above the transfer earnings is known as economic rent.

DEMAND FOR FACTORS


Demand for any factor of production refers to the amount of units of that factor that a firm is willing to employ at different prices for that factor over a period of time. Demand for any factor is a derived demand, since it depends on the demand of the goods that such factors are needed to produce. In other words Grace demands labour and other factors of production because theres a high demand for the wide range of food products that the company produce. Like any demand curve the demand curve for these factors would be downward sloping to the right, indicating that there is an inverse relationship between factor prices and the amount of factors employed. In the short run the demand curve for factors like labour is downward sloping due to diminishing marginal product. In the long run the downward sloping nature is due to the substitution of one factor for the other when there is a change in factor price. The demand for factor curve or any other factor is the marginal revenue product curve. This is the marginal product of labour times the marginal revenue of the product sold.

SUPPLY OF FACTORS
The supply of labour or any other factor is the amount of that factor that households are willing to sell or hire at various factor prices over a period of time. Like any supply curve the supply of labour slopes upwards to the right indicating that the higher the price of the factor, the more of that factor will be made available to firms. Grace Kennedy sells its products in an oligopolistic market but obtains factors of production in a competitive market since it has to compete with other firms for additional workers. This means that to employ an additional unit of labour the company will have to pay higher wages to attract workers from their previous job. This means the marginal cost or the marginal resource cost of labour is upward sloping. However, this would refer to only professional, skilled or technical workers who are in short supply. The company could obtain lower categories of workers at a reasonable wage rate since the supply of these categories of employees would be much more elastic. Grace will continue to employ additional units of labour and other factors until the marginal revenue product of labour is equal to the marginal resource cost. If the marginal revenue product exceeds the marginal resource cost it will be more profitable to employ an additional unit of labour. If marginal revenue product exceeds marginal resource cost, employing an additional worker would add more to the firms total revenue than to its total cost. If the marginal resource cost exceeds the marginal revenue the firm should employ at least one less unit of labour since employing an additional worker is adding more to the firms cost than its adding to its revenue. The company is a major player in the labour market and could have some degree of market power in determining wages nevertheless workers are unionized and trade

unions would act as a monopoly on labour and neutralize the market power of Grace, forcing it to act in a more competitive manner. The company employs various categories of workers such as engineers, technicians, mechanics and professional categories, many with qualifications in chartered accounting and masters in business administration. It has other categories of workers such as clerks, factory workers and so forth, workers are paid higher wages based on qualifications, experience and so forth. Within the company therefore there are substantial wage differentials. The company not only compensates its employees but also its shareholders who are the entrepreneurs. The company educates its work force through training programs, both externally and on-the-job. Measures are also taken to improve working conditions and to improve the level of safety and the reduction of accidents.

EVALUATION AND RECOMMENDATIONS


Grace is a profitable company and can afford to pay the wages that will attract labour and other resources. The companys employees seem to be comfortable since there has been no evidence of industrial action. However, to remain competitive the company may have to mechanise more of its operations in order to increase efficiency. This could lead to the laying off of workers. The company should introduce employees share ownership programs. This method will make all employees share holders of the company. This step could harmonize the objectives of the employees with those of the company and reduce conflicts. The company should continue training its staff to measure productivity. Care has to be taken to ensure that such training is specific or peculiar to the company and reduce the chance of trained workers leaving and working for other companies.

Fig 1 Diagram showing a graph of a typical demand curve

This typical demand curve shows that as the higher the price of the commodity, the smaller the quantity demanded. When the price was at $15 the quantity demanded was at Q1. However, when the price increased to $20 the quantity demanded went to Q0. it also shows an inverse relation between price and quantity demanded because as one goes up the other goes down.

Fig 2 Diagram showing a graph of a typical supply curve

This graph shows a positive relationship where as price goes up there is an increase in quantity supplied. This can be further explained as it is shown on the graph where price was at $25 and the quantity supplied was at 100. Whist as the price increase to $30 the quantity supplied went to 200.

Fig 4 Graph showing Economic Rent (B) & Transfer Earnings (A)

This graph illustrates transfer earnings and economic rent. Transfer earnings are indicated by area under the labour supply curve. The economic rent is shown above the transfer earnings. The wage rate is at equilibrium with the supply and the demand curve. Although the equilibrium wage is W, at wage rate below this are these are transfer earnings and above the wage rate those are economic rent. So persons that are willing to work below the wage rate are transfer earnings and person who works for wages above the wage rate are economic rent.

Fig 5 Graph Showing the Demand of Labour

This graph simply illustrates that as the wage rate of Wo the firm will demand L0 workers. As the wage rate falls the firm is in disequilibrium where the wage rate is less than the MRP of the last unit of labour. However as the wage rate falls at W1, the firm will employ more workers which means that the firm is able to pay the wage rate of the labour demanded.

Quantity supplied

Fig6 Graph Showing the Supply of Labour This graph illustrates that as the wage increases the quantity supplied of labour also increases. This clearly means that as when wages is at W the quantity supplied of labour is LQ0. However when wages moves to W1 the quantity supplied of labour increases to LQ1.

EVALUATION AND RECOMMENDATIONS


Grace Kennedy responds quite favourably in satisfying the ever increasing demand for food items within the country. The company uses various methods to increase supply not only by means of its own production but through outsourcing. It imports a large amount of fruit concentrates and pastes from other countries, many of which can be obtained locally. It asserts that Jamaican suppliers are unreliable and the prices are sometimes too high. However the supply of these products during the hurricane season will decrease since the amount of fertilisers will also decrease which would be beyond the farmers control. On the other hand, it can be recommended that these farmers produced as much fertilisers to supply the company so that a hurricane would not much of drastic effects. The company ought to mobilize local farmers to produce the fruits and other raw materials for its processing plants. To the extent that it generates income for local farmers they will be able to earn the income to purchase the companys products. With the present arrangement a significant part of Grace earnings is used to pay for imports

Grace operates in an oligopolistic market where there is a great degree of interdependence. Since there are other firms selling similar brands the company face limited options in raising prices, it is therefore forced to use non-price competition such a better customer service. The company continues to increase efficiency by outsourcing products when it can be produced cheaper by other firms. The company should always try to identify local sources of products where possible. The company can expand its

range of products and benefit from economies of scope as well as risk bearing economies of scale. Grace is a profitable company and can afford to pay the wages that will attract labour and other resources. The companys employees seem to be comfortable since there has been no evidence of industrial action. However, to remain competitive the company may have to mechanise more of its operations in order to increase efficiency. This could lead to the laying off of workers. The company should introduce employees share ownership programs. This method will make all employees share holders of the company. This step could harmonize the objectives of the employees with those of the company and reduce conflicts. The company should continue training its staff to measure productivity. Care has to be taken to ensure that such training is specific or peculiar to the company and reduce the chance of trained workers leaving and working for other companies. Additionally, since Grace Kennedy is an oligopolistic market they face competitions from other companys such as Lasco, Nupack, and Eve, they can dominate these firms with advertisements and promotions. Grace Kennedy can advertise their products extensively to persuade consumers in purchasing it so that they can have a substantial share of the market. They can also use promotions by involving the consumers to make them have a sense of loyalty towards the company. This will enable the company to be more involved with the consumers and once these consumers realises the benefits they provide it will be at an advantage to Grace to dominate more of the market share. Grace Kennedy faces problems with the goods they produced which are slightly differentiated from those of their competitors. With this problem faced they can introduce a product innovation. This means that they can do their outmost best in trying to

differentiate their products from their competitors. This can be done by changing the sizes or shapes for some of their produced products. For example both Grace and Lasco produce tinned mackerels. These products are slightly differentiated however; Grace Kennedy could use the advantage by producing their tinned mackerels by putting on a can opener so it would be easier for the consumers to open it instead of using a knife or something sharp which could cause damages. Moreover, Grace Kennedy also faces problems in terms of brand proliferation. This means that the company is not producing enough brands to saturate the market. It can be recommended that the company produces a lot of brands that will saturate the market so that no gaps will be left for their rivals. Market segmentation could also be a problem faced by Grace Kennedy as an oligopolistic market. This is so because they may not decide that there are sub markets where consumers have different characteristics and needs. This problem could be solved by getting different views from their consumers in acquiring information as to what goods are more effective to them and those that are not. Many house holds in Jamaica cannot afford goods produced by Grace Kennedy because of the prices at which they range. The company can use this as a means of implementing a process innovation. This simply means that they can find a way of reducing their average cost, by cutting back on their prices to take these consumers in consideration without sacrificing their profits made.

REFERENCE
Internet
www.GraceKennedy.com www.Wikipedia.com

Book
Comprehensive Economics for Caribbean Students- Edward Bahaw Economics for Cape Colin Bamford and Narissa Mohammed

CONCLUSIONS
Grace Kennedy imports a lot of raw materials which could be produced in Jamaica. For Example, in the production of tropical rhythms, the guava is imported from Brazil; the mango imported from Columbia and the bottles from Trinidad. There is little value added. The company should mobilize farmers to grow crops. Since more revenue will go to Jamaicans to purchase their products. There is stiff competition for other products, which tend to reduce their market share. Grace Kennedy should develop new products which will take competing firms a while to catch up with them. The company has a system where employees and managers work together to achieve desired objectives. For example, if a trailer is to be unloaded quickly, all members of the company from the workers as well as managers participate in manual work. The company should encourage employees to become shareholders. This is likely to reduce industrial unrest in the organization.