How would you determine the market demand for your firm's it services?

Milestone Two Tips

Part II: Critical Element “Impact”

Part II: Critical Element “Firm’s Actions”

To receive an exemplary score on the Supply and Demand section of your paper, you’ll need to do the following:

-Effectively evaluate trends in demand over time

-Explain the impact the demand trends have on the industry and the firm in detail

-Analyze information and data related to the demand and supply for the firm’s product(s)

-Use the information and data on supply and demand to support a recommendation (or recommendations) for the firm’s actions (noted in bold text in example below)

-Include a graphical representation of data and information (using the last 5 years of company sales data is a great choice, as shown in example below)

-Use concrete examples in your analysis (in the example below you’ll notice a discussion of demand in China and of the supply of cocoa)

Here is an example that meets the above requirements:

Supply and Demand

With the demand for chocolate rising and its growing popularity in the international markets, it’s important that we analyze and understand the supply and demand trends to determine how Hershey can best align its firm’s product to sustain future growth in the confectionery market. In addition, we need to evaluate pricing along with revenue growth to understand the impact it will have on consumer responsiveness by utilizing the price of elasticity of demand as our guide. As noted in my initial introduction, the demand for chocolate in the global market is expected to have an annual rate increase of about 3 percent with “Asia being the major source in growth sales, and is expected to rise to a 20 percent share in the global market by 2016” (Bradford, n.d.).

As illustrated in the graph below, Hershey has shown tremendous growth in sales over the last 5-years and contributes much of its growth from “a nearly 10% price increase that was phased in over the last couple of years” (Wismer, 2013).

Figure 1. Hershey’s Revenue and Cost of Goods Sold (COGS incl. D&A) data for the past 5-years. Adapted from HSY Annual Income Statement - Hershey Co. Annual Financials. (n.d.). Retrieved from http://www.marketwatch.com/investing/stock/hsy/financials

The company also had a strong, aggressive business strategy that included special promotions, brand extensions, new products, and acquisitions of candy makers that offered diversity in product textures and unique flavors. With a solid rank in the U.S. market, the company is now positioned to expand its operation into key international markets to improve global sales (Wismer, 2013).

In 2013, the company expanded into China and acquired 80% of renowned candy maker, Shanghai Golden Monkey. The established company is recognized in its home market with supported net sales growth in the double-digits making it the ideal partnership for Hershey to expand its footprint and gain access to an emerging demographic market (Merced, 2013). The acquisition resulted in a good deal with Hershey growing its sales to $7.4 billion in 2014, and China being responsible for 4.5 percent of those earnings. According to Reuters (2015), “the chocolate consumption growth in the emerging markets closely tracks GDP growth, suggesting China’s increasing urban population would drive chocolate consumption”. Based on these facts, the rising demand for chocolate by the urban population in China is expected to grow to $4.3 billion by 2019. That would be almost a sixty percent increase from the $2.7 billion sales in 2014 (Reuters, 2015). Given the surging demand for chocolate in China, I recommend that Hershey continue to invest resources into expanding their operations to grow their sales in China.

As the popularity for the taste of chocolate grows so does the increased demand for cocoa, which is the main ingredient needed to make chocolate. There are many factors that influence the price of cocoa with the most serious being lack of resources and monetary earnings by the “small-scale family farmers who grow 90% of the worlds cocoa” (Goodyear, n.d.). This has resulted in low production with many farmers leaving the industry due to low wages and poverty in their community. The “demand for cocoa is predicted to rise by 30% by 2020 but without investing in small-scale farmers, the industry will struggle to provide sufficient supply” (Goodyear, n.d.). My recommendation would be for Hershey to support and invest in Fairtrade certified cocoa organizations, which encourage long-term business relationships with cocoa farmers by ensuring higher wages and proper resources to produce long-term quality products. By aligning and buying their supplies from Fairtrade certified farmers, the company would be strengthening their business relationship and investing in the most crucial ingredient for the company’s products, cocoa. Without this ingredient, the company would no longer have a functioning chocolate confectionery business.

Tips on how to start writing about supply and demand for Part II:

One of the critical elements is to evaluate the trends in demand over time and explain their impact on the industry and on the firm. But how do you evaluate the trends in demand over time and explain their impact on the industry and the firm? Here are some ideas of concepts that could be applied to your firm to help you evaluate the trends in demand. Your company’s press releases (available on their website) and various financial websites (Yahoo Finance, etc.) are a great place to find out some demand and supply issues that your firm faces. You don’t need to discuss everything below; this is just to provide some ideas to help you get started on your research!

Market demand is the demand by all the consumers of a given good or service. Find out who your customers are and provide detail on them. Use annual sales data to find out how much of the product is purchased. Building on that idea, how has the annual sales data changed over time? There are several variables that can shift market demand: income, prices of related goods, tastes, population and demographics, expected future prices. Discuss those in variables in detail that relate to demand changes for your firm. Here is some further detail on each of these factors that can help you as you write your paper.

Income

The available income of a consumer impacts their willingness and ability to buy your product(s). Discuss whether your product is a normal good or an inferior good. A product is a normal good if demand increases and income rises and decreases as income falls. A product is an inferior good if the demand increases as income falls and decreases as income rises. In your paper you could discuss any changes in disposable income for your customers as a whole and how that impacts demand. Explain which way the demand curve shifts and how that impacts the equilibrium price and quantity.

Prices of related goods

The prices of other goods can be a big factor impacting the demand for a product. Substitutes are goods and services that can be used for the same purpose as your product. If your firm was impacted by the price change of a good that many consider to be a substitute for your product, you can discuss the impact in this section. If the price of a substitute good falls, then the demand for your product would fall (demand curve shifts to the left). If the price of a substitute good increases, then the demand for your product would increase (demand curve shifts to the right). Explain how the shift in demand impacts equilibrium price and quantity. You could also discuss any goods that are complements to your product in this section. Complements are goods and services that are used together. If the price of a complement good falls, then the demand for your product would increase (demand curve shifts to the right). If the price of a complement good increases, then the demand for your product would decrease (demand curve shifts to the left) because it is more expensive to buy a good that is used together with your product.

Tastes

What could impact consumer tastes (preferences) for your product? One idea might be advertising, which could help increase the demand. Negative advertising by competing firms, or perhaps by reviewers of the product, could decrease the demand. Other trends, such as environmental consciousness, could impact your product as people move to change their purchasing behavior.

Population and Demographics

Population can impact demand because as the population increases, the number of consumers also increases which should lead to an increase in demand of most goods. Changes in demographics (characteristics of a population such as age, race, and gender) could also impact the demand of your product because different groups of people have different preferences for the goods they purchase.

Expected Future Prices

Consumers of your product might delay making a purchase for a while if they expect that prices of your product will fall. That would decrease the demand for your product right now. Alternatively, if consumers are expecting the price of your product to rise, the demand for your product will increase as consumers try to purchase before the expected price hike.

One of the critical elements is to analyze information and data related to the demand and supply for your firm’s product(s) to support your recommendation for the firm’s actions. You will include a graphical representation of the data and information used in your analysis.

Here’s how you can get started with your discussion on supply. You don’t need to discuss everything I cover below; this is just to provide some ideas to help you get started on your research! The supply curve represents the relationship between the price of a product and the quantity of the product supplied. You’ll want to use information and data to discuss some of the variables that shift market supply, explain the direction the supply curve will shift and the resulting impact on equilibrium price and quantity, and use that analysis to recommend specific actions to your firm. Here is a quick explanation of variables that can shift market supply.

Price of Inputs

This is the factor which is most likely to cause a shift in the supply curve and the price of inputs should definitely be discussed in your paper. An input is anything used in the production of a good or service. If the price of an input for your product rises, the supply will decline (supply curve shifts to the left). This shows that your firm will supply a lower quantity at each price point than it previously could. On the other hand, if the price of an input declines, the supply will increase (supply curve shifts to the right).

Technological Change

This is a factor that describes a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs. A positive technological change means that the productivity of the firm’s workers or machines has increased; the firm is able to produce more output using the same amount of inputs. When a firm can produce more output with the same amount of inputs, its costs will be lower and the good will be more profitable to produce at any given point, which shifts the supply curve to the right. A negative technological change is rare, but it could result from a natural disaster or a war that reduces the ability of the firms to supply as much output with a given amount of inputs. In this case, the costs the firm experiences increases, the firm will earn lower profits from producing the good, and the supply curve will shift to the left.

Prices of Substitutes in Production

Alternative products that a firm could produce are called substitutes in production, which generally use similar components and can be assembled in the same factory. When the price of one product goes up relative to another, the firm can shift more production to the product that has become more profitable.

Number of Firms in the Market

Changes in the number of firms in the market will shift the supply curve. If a new firm has entered the market the supply curve will shift to the right, which lowers the equilibrium price and increases the quantity supplied. If an existing firm leaves the market the supply curve will shift to the left, which increases the equilibrium price and decreases the quantity supplied.

Expected Future Prices

If your firm expects that the price of its product will increase in the future, the best interest of your firm is to decrease supply now and increase it in the future when the price rises. If your firm expects that the price of its product will fall in the future, it should increase production now to take advantage of the higher price.

I hope this was helpful. There is a chart you may find useful on page 81 of your text summarizing the most important variables that cause market supply curves to shift. These are the shifts that you will be most likely to see for your firm.

Part III: Price Elasticity of Demand

Critical Element “Analyze”

Critical Element “Consumer Responsiveness”

Critical Element “Pricing Decisions”

In order to receive an exemplary score on the 3 different elements of the elasticity of demand section, you’ll need to meet the following criteria:

-Analyze available data and information to justify how the price elasticity of demand for the firm’s product was determined and use research to illustrate these claims (see underlined text in the sample paper for an example of how to meet these criteria). In other words, be sure to state whether you have concluded the demand for your good is elastic or inelastic and use specific evidence to explain why. While you may be able to find enough information to calculate the price elasticity of demand, this is not required. You can use research on the factors of consumer responsiveness or evidence based on pricing and revenue growth to support your claim.

-Explain all 5 factors that affect consumer responsiveness to price changes for the product using the concept of price elasticity of demand as a guide (see bold text in the sample paper). The factors affecting consumer responsiveness are: the availability of substitutes, the passage of time, luxuries vs. necessities, the definition of the market, and the share of a good in a consumers budget. More details on these factors are explained on pages 178-179 of your text.

-Accurately assess how the price elasticity of demand impacts the firm’s pricing decisions and revenue growth, using research to illustrate claims (see italic text in the sample paper). See section below for further detail on how to write this section.

I really recommend narrowing your focus to one product or type of products when discussing elasticity of demand, particularly if you selected a firm that creates a diverse product line. For example, if you have chosen Apple as your firm, I would recommend discussing the elasticity of one product line such as the iPhone or the iPad.

Below is a sample paper on the price elasticity of demand for chocolate. Note that the formatting of this example is only to show you how the critical elements are met. Please do not bold, underline, or italicize the different elements on your paper.

Price Elasticity of Demand

A shortage in the supply of cocoa would have a significant impact on the confectionery market and its input costs leading to a major shift in retail pricing for chocolate. As a result – without a reasonable substitute for chocolate, consumers craving the taste for chocolate will not be able to replace the desirable treat for another confectionery product making the demand for chocolate inelastic. However, there are many different types of chocolate products available for purchase that can be substitutes. When we narrow the market, we know that if a particular brand of chocolate goes up in price then the consumer could substitute their choice by switching to another brand making the demand for the brand of chocolate elastic. The “biggest fear surrounding the chocolate industry right now it that the supply situation leads to further retail price increases which creates conditions where chocolate is seen as a luxury” (Maduri, 2014). When a product is viewed as a necessity such as; gas, milk, or bread - the quantity demanded would not change in response to price fluctuations. But when a product is seen as a luxury, the price change would influence the quantity demanded as consumers with less disposable income would do away with the purchase all together. The possible thought behind this fear is that chocolate once viewed as an affordable treat could now be considered too expensive by the average consumer, which cause the demand for chocolate to become more elastic (Maduri, 2014).

As an example, in 2012 - Hershey “increased its prices on products by 6% on average, which resulted in a 2% increase in sales volume, a 140 basis point increase in gross margins, and a 14% year-over-year increase in EPS” (Asad, 2014). For Hershey in 2012, the price increased by 6% and the change in quantity demanded did not decrease by more than 6% (it actually increased 2%), which indicates that consumers are less sensitive to price changes and that the demand for Hershey’s chocolate is inelastic. This is supported by the idea that consumers consider chocolate to be a necessity and that it currently makes up a small enough part of the average consumer’s budget to make price increases less noticeable.

Since 2012, chocolate retail prices have increased by 60%, prompting Hershey to implement a pricing strategy focused on consumer responsiveness (Maduri, 2014). To diminish the shock of rising retail prices, Hershey gradually increased the costs on its retail products by adding a certain percent over time in order to avoid interruptions with consumer demand. By incorporating this strategy, consumers continued to buy their brands instead of avoiding the purchase altogether leading to increased sales and revenue growth over the last couple of years (Maduri, 2014). In recognizing the impact the supply cost of cocoa would have on their input costs, Hershey was able to sell their products by gradually increasing the costs by a certain percent over time to its retail products making the consumer view the demand for the product still affordable. This pricing increase had a positive impact on revenue due to the inelastic demand for chocolate. If the demand of chocolate were to become elastic as time passes , then Hershey may want to adjust its pricing strategy to avoid experiencing a decline in revenue from raising prices.

Part III: Critical Element “Consumer Responsiveness”

There are five determinants that we can use to determine whether the demand for your product is likely to be elastic or inelastic. You should cover at least two or three of the following characteristics to receive a score of proficient (or all five to receive an exemplary) and apply them to your product to support your determination of elastic or inelastic demand. Here is an example of the application of these determinants to gasoline, as we previously covered in a discussion board assignment.

The availability of close substitutes to the good: Thinking back to module two, we learned that substitutes are goods and services that can be used for the same purpose. If consumers have few options for substitutes, as in the case of gasoline, when the price rises the quantity demanded only falls slightly. If few substitutes are available, the demand for the good tends to be more inelastic. The demand for a good with many substitutes tends to be more elastic.

The passage of time: In general, the more time that passes, the more elastic the demand for a product becomes. If the price of gas goes up one day, most people are still going to drive to work, the store, and to any other planned activities. If the price of gas stays high, eventually people will start making adjustments that could include: carpooling, taking public transportation, purchasing a more fuel efficient vehicle, or finding a job closer to where they live.

Luxuries vs Necessities: Goods that are luxuries usually have more elastic demand than goods that are considered to be necessities. Gasoline is considered to be a necessity for many people, which supports the inelastic demand for gas.

The definition of the market : As a general rule, the more narrowly we define a market, the more elastic the demand will be. If you are stopping to fill up your car and you notice that the gas station across the street is 3 cents cheaper, you’ll probably visit the station across the street, making the demand for gas at one particular gas station elastic. But, at the end of the day the only thing you can put in your tank is gasoline, so your overall demand for gas is inelastic.

Share of a good in a consumer’s budget : In general, the demand for a good will be more elastic the larger the share of the good in the average consumer’s budget. This is where the gasoline example gets tricky, because for many people gas makes up a sizeable portion of their budget. This is why we need to look at multiple determinants when we are trying to determine the elasticity of demand for a product, especially if you don’t have the data to calculate it. In the case of your final project (and Milestone Two), you might not have enough information to calculate the elasticity of demand for your product, so you’ll have to use several of these determinants to decide whether your firm faces an elastic or inelastic demand curve.

Part III: Critical Element “Pricing Decisions

In this portion of your paper you will need to accurately assess how the price elasticity of demand impacts the firm’s pricing decisions and revenue growths. A good place to look to help you answer this question is in section 6.3 of your text: The Relationship between Price Elasticity of Demand and Total Revenue (pg. 181-184). When you write this section you should already have used several of the 5 determinants of elasticity of demand to determine whether or not your firm’s product faces an elastic or inelastic demand curve.

Before we get into the relationship between elasticity of demand and total revenue, we should first understand what total revenue is and how it is calculated. Total revenue is the total amount of funds a seller receives from selling a good or service, which is calculated by multiplying the price per unit by the number of units sold.

If the demand for your product is inelastic, then the price and total revenue move in the same direction. This means that an increase in price would increase the total revenue for that product, and a decrease in the price would decrease. Why? Let’s think back to the definition of inelastic demand: the percentage change in quantity demanded is less than the percentage change in price. So, if the quantity demanded isn’t changing much, then the revenue is going to be influenced by the change in price. If you the demand for your product is inelastic you should increase the price in order to increase revenue.

If the demand for your product is elastic, then the price and revenue move in opposite directions. In other words, if you increase the price of an elastic good the total revenue will fall, but if you decrease the price then the total revenue will rise. Thinking back to the definition of elastic demand: when the percentage change in quantity demanded is greater than the percentage change in price. This means that even though you are decreasing the price the additional quantity you will be able to sell will increase the total revenue; remembering that total revenue = price x quantity sold. So if you are facing elastic demand for your product you should decrease the price in order to increase revenue.

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