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Ina Food Industry 2 Marketing Strategies In A Deflationary Environment

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2141 1481 Words (8 Pages) Mitsuru Misawa University of Hong Kong : HK1011
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Global economies have witnessed a long lasting period of deflation over the last few decades. Long-lasting and recurring periods of deflation may indicate impending recession and arduous economic times (Ashford, 2020). Decrease in aggregate demand due to decrease in public confidence, a general fall in money supply in several economies across the globe, and an increase in aggregate supply, due to lower production cost as a result of advancement in technology are the key deflationary forces in the global economies (United Nations, 2020).

Following questions are answered in this case study solution:

  1. It is widely said that global economies are now facing an age of deflation. What are the common deflationary forces in global economies? Has the U.S. experienced deflation in recent times?

  2. Ina Food has been successful for 55 years of continuous revenue and profit growth. Nevertheless, the Japanese economy has been stagnant due to inflation. If Japan can overcome deflation, Ina could do much better. How can Japan overcome deflation? 

  3. Put your quant hat on! In the main text, it is claimed, “If the gross margin of a product was 30%, it could be increased as much as 17% through simply raising the price 5% if the cost is not changed.” Explain this mathematically. 

  4. Tsukakoshi believes that as long as a company is confident in its competitiveness, there are always methods to raise prices and increase profits smoothly. Is this a viable general business model in a deflationary environment?

  5. The case authors consider Ina Food’s successful price increase in a period of deflation to be a “contrarian” strategy. What is a “contrarian” strategy? What is the case that supports Ina Food’s contrarian strategy? 

  6. Tsukakoshi decided to raise prices during a period of deflation. What if he had lowered them as so many companies were doing in this environment? What would have happened? 

  7. Consider this: The old Price is 10. The new Price is 12. Demand under the old Price was 200. Demand under the new Price is 150. Calculate the percent change in the quantity demanded and percent change in Price. Now calculate the price elasticity of demand PED): % change in quantity demanded/% change in Price. If the PED is greater than 1, then demand is sensitive to price changes. If the PED is less than 1, demand is inelastic (not sensitive to price increases). How would you use PED to test a proposed price change strategy in a deflationary environment, in the same and other industries, in Ina, or any firm using its historical data?

Case Study Questions Answers

The U.S. economy has witnessed several deflationary periods, including the deflationary periods of 1817-1860, the 1865-1900 deflationary period, the worst deflationary period of 1930-33 that occurred during the Great Depression, then the 1950-2000 deflationary period, and again the period ranging from 2007-2008. These recurring deflationary periods have had severely adverse effects on the economy (Greenstein, 2005).  

2. Ina Food has been successful for 55 years of continuous revenue and profit growth. Nevertheless, the Japanese economy has been stagnant due to inflation. If Japan can overcome deflation, Ina could do much better. How can Japan overcome deflation? 

Japan’s economy has suffered through a long battle against deflation. The country’s deflation started in the early 1990s and persisted for almost two decades, which led the Japanese economy in to recession (Takayama, 2016). As a result, many companies operating in the jurisdiction were forced to decrease their prices, to remain in business and combat their decreasing market share given the economic situation (Kuroda, 2019).

Ina Foods could have done much better if Japan could have overcome deflation. However, Ina Foods has been doing relatively better as compared to its competition despite the deflation in Japan due to its strategy of the price increase and stabilizing its production costs and creative marketing, when the other companies were furiously striving for decreasing prices.

3. Put your quant hat on! In the main text, it is claimed, “If the gross margin of a product was 30%, it could be increased as much as 17% through simply raising the price 5% if the cost is not changed.” Explain this mathematically. 

Old Price

1

 

 

Cost

x

 

 

Old Gross Margin

0.3

 

 

 

 

 

 

Let’s calculate the cost

 

 

 

 

Cost = Price - Gross Margin

 

 

 

 

Cost =

0.7

 

 

 

 

 

 

Then, let’s calculate the Gross Margin for new data

 

 

 

 

 

New Price

1.05

 

 

Cost

0.7

 

 

New Gross Margin

x

 

 

 

 

 

 

 

 

 

 

New Gross Margin = New Price – Cost

 

 

 

 

New Gross Margin =

0.35

 

 

 

 

 

 

Finally, let’s calculate the % change in Gross Margin

 

 

 

 

 

% change in Gross Margin =

(New Gross Margin - Old Gross Margin) * 100 / Old Gross Margin

 

 

 

 

% change in Gross Margin =

16.6666667

= 17

 

 

 

 

 

4. Tsukakoshi believes that as long as a company is confident in its competitiveness, there are always methods to raise prices and increase profits smoothly. Is this a viable general business model in a deflationary environment?

Generally, during recession or in a deflatory environment, consumers tend to slow down their spending in the hopes of further price decreases. However, there are ways to combat price decreases in a deflationary environment. One strategy that had worked for ages for different brands is the establishment of brand value in the minds of the customers. Brands who have established themselves as premium brands based on perceived quality tend to follow the superior pricing strategy, which allows them to continue with their on-going prices, and often times allowing them price increase resulting in increased profits, even when competitors are decreasing their prices (Eppele, 2016). 

However, successful implementation of this strategy greatly depends on the company’s competitiveness and the perception of its brand value. For making such a business model and pricing strategy viable for a business operating in a deflationary environment, especially when the deflation is persistent and long-term, certain strategic measures need to be taken. Firstly, the company should ensure that it maintains the quality of its product. Secondly, the company has to ensure that its marketing and communication strategy is strong to cultivate the superior brand-quality perception intact in the minds of the customers (Allsopp, 2005).

5. The case authors consider Ina Food’s successful price increase in a period of deflation to be a “contrarian” strategy. What is a “contrarian” strategy? What is the case that supports Ina Food’s contrarian strategy? 

A contrarian strategy is a strategy generally used in by investors that suggests going against the general market behavior in the hopes of future benefit. Usually, during difficult economic times such as deflation, or recession, firms generally try to survive simply by adjusting their supply to the decreasing market demand, and often times lowering their prices. Ina Food’s case, the company acted contrarian when Tsukakoshi chose to increase the prices rather than following the market trend of decreasing prices to meet customer’s expectations due to the deflationary market conditions (Chan, 1988).

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