ECO404 Managerial Economics GDB 2 Solution Fall 2012

The Case:

Nestlé S.A. is a company of Swiss origin headquartered in Vevey, Switzerland. Nestlé’s products mainly include baby food, bottled water, breakfast cereals, coffee, dairy products, ice cream, pet foods and snacks. Werner Bauer, Chief technology officer of Nestle, has presented company’s vision that they are committed to delight their consumers with healthy food and beverages of the highest quality and they can’t achieve this goal without education and skill enhancement of the workers of Nestle.

That’s why they have invested on R&D for development and improvement of analytical standards through an analytical methods network. Each day, it strives to make its products tastier and healthier that help consumer’s care for themselves and their families. This would not be possible without its unmatched R&D capability, nutrition science and passion for quality in everything it do. For example, Nestlé Professional has taken a lead in reducing the salt and fat content of its sauces. Nestle has engaged more than 100 professional chefs to incorporate the Nestlé philosophy on Nutrition, Health & Wellness into their products and recipes.

Suppose, due to vast experience, efficiency and investment in R&D, Nestlé’s sales volume had reached from $19 billion in 2010 to $94 billion in 2011 with profit of 6% in 2010 and 7.5% in 2011. Furthermore, the company has reduced its average cost by 3.5% from 4.1% during 2010-11. This huge jump of its sales is a reward of learning by doing which has enhanced the efficiency of professionals, decreased the cost and eventually promoted the sales of quality products.


A.   If Nestle has a target to achieve 11.6% profit for the year 2014, how they can get insight from Managerial Economics in order to fulfill its target?


Managerial Economics provides students with fundamental knowledge in the areas of business economics, e-commerce, information and technology management and supply chain and logistics management. Special emphasis is placed on training students in the analytical skills needed to address the various planning, operational and control issues involved in systems management and business decision-making. Students will develop insights into the application of modern principles and methods of economics and management sciences to strategy formulation.

B.   Keeping in view above scenario, discuss with logical reasoning which concept of Managerial Economics tend to increase the quality production of Nestle by promoting such a bumper increase in sales and profit.


SCOPE OF MANAGERIAL ECONOMICS Well scope is something which tells us how far a particular subject will go. As faras Managerial Economic is concerned it is very wide in scope. It takes intoaccount almost all the problems and areas of manager and the firm.ME deals with Demand analysis, Forecasting, Production function, Cost analysis,Inventory Management, Advertising, Pricing System, Resource allocation etc.Following aspects are to be taken into account while knowing the scope of ME: Operational issues or internal issues 1. Resource Allocation 2. Demand Analysis and Forecasting 3. Cost and Production Analysis 4. Pricing Decisions, Policies and Practices 5. Profit Management 6. Capital Management 7. Strategic Planning

PROFIT MAXIMIZATION AND THE FIRM. Under the simplest version of the theory of the firm it is assumed that profit maximization is its primary goal. In this version of the theory, the firm’s owner is the manager of the firm, and thus, the firm’s owner-manager is assumed to maximize the firm’s short-term profits (current profits and profits in the near future). Today, even when the profit maximizing assumption is maintained, the notion of profits has been broadened to take into account uncertainty faced by the firm (in realizing profits) and the time value of money (where the value of a dollar further and further in the future is increasingly smaller than a dollar today). It should be noted that expected profit in any one period can itself be considered as the difference between the total revenue and the total cost in that period. Thus, one can, alternatively, find the present value of expected future profits by subtracting the present value of expected future costs from the present value of expected future revenues.

THE CONSTRAINED PROFIT MAXIMIZATION. Profit maximization is subject to various constraints faced by the firm. These constraints relate to resource scarcity, technology, contractual obligations, and laws and government regulations. In their attempt to maximize the present value of profits, business managers must consider not only the short-term and long-term implications of decisions made within the firm, but also various external constraints that may limit the firm’s ability to achieve its organizational goals. The first external constraint of resource scarcity refers to the limited availability of essential inputs (including skilled labor), key raw materials, energy, specialized machinery and equipment, warehouse space, and other resources. Moreover, managers often face constraints on plant capacity that are exacerbated by limited investment funds available for expansion or modernization. Contractual obligations also constrain managerial decisions. Labor contracts, for example, may constrain managers’ flexibility in worker scheduling and work assignment. Labor contracts may also determine the number of workers employed at any time, thereby establishing a floor for minimum labor costs. Finally, laws and regulations have to be observed. The legal restrictions can constrain decisions regarding both production and marketing activities. Examples of laws and regulations that limit managerial flexibility are: the minimum wage, health and safety standards, fuel efficiency requirements, antipollution regulations, and fair pricing and marketing practices.