Ina Food Industry is located in Ina, Nagano Prefecture which is surrounded by the Japanese Alps. The company’s chairman, Hiroshi Tsukakoshi, aged 75 years has managed Ina Food Industry for 55 years. They have experienced continued growth in profits and regular income. Ina Food Industry is widely recognized for manufacturing powdered agar obtained from seaweed. Tsukakoshi wants to make sure that Ina Food would counter competition from global companies. Ina Food industry is successful and there are no urgent challenges. Tsukakoshi feels that he should not be reluctant because he has contributed to the success of the company. He is almost retiring but is concerned with the long-term growth of Ina Food Company. Tsukakoshi thinks that new marketing strategies will improve the performance of the company and the deflationary conditions in Japan. Tsukakoshi was interested in increasing the sales and profits by increasing the price of the products but the other companies reduced their prices due to deflation. In deflationary conditions, the prices of goods increase relatively as a result of keeping them constant. Hiroshi argued that there are different approaches to increase profits and the prices of goods caused by a company’s confidence in their quality of products.
Deflation is the reduction of normal prices in the economy. It occurs when the rates of inflation go below zero. Deflation increases the value of the currency after some time. Individuals purchase more goods with the similar amount they used when the prices were normal (Davidson, 2011). Companies are at high risk when they decrease the prices of their products in deflationary conditions. The Ina Food Industry succeeded in increasing the prices of their goods in spite of the economic conditions in the country. The company was successful as a result of proper marketing strategies, production of high-quality goods along with the effective allocation of resources.
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The changes in the food prices in Japan were not effective in reducing the inflation prices. Japan should implement monetary and fiscal policies that will control deflation. Many firm s in Japan are unable to increase their prices due to a rise in marginal costs. Some firms have reduced the quantity of their products without reducing the prices to counter deflation. The pricing strategy of Ina Food Industry worked out but others have been ineffective (Imai and Watanabe, 2014) .
Reasons for Global Economies Facing an Age of Deflation
Global economies are encountering an age of deflation. Many countries believe that inflation rates will rise after some years. Countries have implemented monetary along with fiscal policies in the economies to maintain their growth rates. The expectation that the prices of goods will increase is true. Many countries have encountered inflation but not deflation. The previous period when deflation was encountered was in the 1930s. American was mostly affected by deflation. Inflation occurs in times of war including the Cold War along with the fight against poverty. During inflation, the government spent more on the activities around the nation and the private sectors increased their investments. The government has tried to fight inflation through formulating policies that hinder the growth of the private industries during economic downturns. The increase of wholesale prices during inflation amounted to 5.7 % from 1749 to 1844 but reduced to 1.2 % during deflation. Deflation will increase in the United States as a result of maintaining peace with Iraq and Afghanistan. The government of America will reduce their spending on the wars (Gary, 2013).
Deflationary Forces in Global Economies
Consumer Price Index. The deflation rates have decreased over the past ten years but the rates of inflation have increased. The CPI of United States decreased at the beginning of 2013 which resulted in increasing the prices by 0.7 %. The CPI is affected by regulating the private industries along with financial organizations which increases deflation. The world economy is deflated as a result of the policies that regulate the private sector. The government restrictions have been affecting the policy programs since 2007. The United Kingdom is facing recession despite the strict government regulations. The gross domestic product of China is stagnant but that of America increased by 0.1 % in 2012 (Gary, 2013).
Low liquidity created by central banks. The central bank creates a lower liquidity as compared to the losses incurred due to the state regulations on the private organizations. The banks have reduced securitizations through terminating or writing off the assets which have resulted in low liquidity. Economies are increasing capital necessities despite the banks eliminating assets to increase capital rates. The household savings of Americans dropped to 1 % in 2005 from 12 % in the late 1990s. The decrease of household savings of about 1.5 % annually is as a result of increased consumer spending. This indicates that the gross domestic product was lower than the consumer spending by 0.5 % per year which is equivalent to the growth of the economy inclusive of the multiplier effect. The American imports resulted in the growth of Asian and export-driven countries. American citizens must increase their savings to reduce deflation (Gary, 2013).
Savings rate. The household savings should be increased to reduce the consumer spending and gross domestic product including the multiplier effect. The economic growth will decrease which will result in deflation. Fertility is also considered as a deflationary force. The fertility rates in developed economies cannot reach the required standard of 2.1. The population of older people in the world is higher than that of the youths. The ratio between the working-class and the total population will be lower resulting in slower economic growth and low productivity particularly in America (Gary, 2013).
Ways in which Japan can Overcome Inflation
Over the past two decades, the Japanese economy has been stagnant, deflated and have incurred low-interest rates. The nominal gross domestic product for Japan has been stagnant for 25 years. Their economy has been caught in the liquidity trap. Low inflation and deflation cause liquidity trap. It is likely that the policies implemented in Japan are characterized by low-interest rates and high liquidity from the reserve bank. The monetary policies adopted by Japan have not been effective in controlling deflation (Akram, 2016). According to Keynes (2007), low-interest rates along with high liquidity cause a liquidity trap in an economy.
Possible Solutions to Japan’s Economy
The major cause of a liquidity trap is an increase in the real interest rates. The real interest rates do not change despite a decrease in nominal interest rates, inflation, and deflation. This decrease investments and business growth. Japan must adopt monetary policies that will increase inflation along with the anticipated inflation. The accommodative monetary policy is the best instrument for countering a liquidity trap in an economy (Akram, 2016). Keynes (2007), suggested that the monetary policies must be characterized by no interest rate regulations and quantifiable easing.
Extraordinary Monetary Accommodation to Overcome Liquidity Trap. Japan should increase the money supply and the reserve bank’s liquidity. The reserve bank of Japan should increase the citizens’ anticipation on inflation in perpetuity by increasing the money supply and its liquidity. The assumption that will be made is that monetary reconciliation will result in high anticipation of inflation and increase risk returns. This will be brought by an increase in money supply on cumulative demand. The nominal interest rate should be reduced to increase finances along with public spending. In case the nominal interest rates are not reduced below the standards levels, the central bank should buy long-term assets leading to a reduction in normal interest rates. This will encourage investors to make investments and look for the best ones that have high risks. In case Japan implements this policy, Ina Food Industry will increase their investments which are riskier but with high returns. The industry will expand because of the economic opportunities for new markets. Investors from abroad will be encouraged to make investments in Japan and this will be an opportunity for the company to get foreign investors (Akram, 2016).
Multifaceted plan to reduce inflation. Firstly, the central bank should increase the money supply to the public. Secondly, the central bank should carry out open market operations in the public. The central bank must reduce the normal interest rates and the spread of risks (Akram, 2016). According to Keynes (2007), the central bank must be ready for the particular terms set in the debts after maturity and the spread of risks. He argues that low-interest rates will increase the investments particularly in areas that have high risks. The policy decreases the anticipation of future demand. Keynes (2007), claims that the banks should not disclose the expectations of the future interest rates because it can hinder the investors from making investments. An investor will hold cash in case the interest rates are expected to increase in the future. Investors will make investments in INA Food Industry after decreasing the interest rates. The company will have an opportunity to expand because the central banks will control the risks. INA Food Industry can get finances in lending institutions and return them at low-interest rates.
Alternative Solutions
Japan requires a reasonable, effective fiscal policy that will increase efficiency, real growth rate, increase the competitiveness of their products and demand. An increase in the household income will be important for strong economic growth for Japan. The central bank of Japan has adopted an ineffective policy that could force them to conduct open market operations. This solution will expand the Ina Food Industry as a result of increased real growth and demand.
Relationship between Gross Margin, Prices and Costs
The gross margin of a product can be increased from 30 % to 17 % by increasing its price by 5 % while maintaining the same costs. The gross margin is directly proportional the price of the product. This can be expressed as:
M=(c) P
Where;
M is the gross margin, c is the cost which is constant and P is the price.
The costs are the independent variables in this case. The gross margins are dependent on the prices of the products. Increasing the prices and gross margin of the product will not have an effect on the costs. The gross margin and the prices of the product are indirectly proportional to the costs. Conversely, a decrease in the gross margins and prices will not affect the costs. The cost of the product is the function of price.
In our case, if the gross margin of agar is increased to 17 % as a result of 5 % increase the cost will remain constant. The equation can be expressed as:
M a = (c a ) P a
Where;
M a is the gross margin of agar, c a is the cost of agar and P a is the price of agar.
Relevance of the Business Model
A company can use different approaches to increase the prices of their product in case they are confident in the quality of their items. Ina Food Industry increased the prices of their product they believed they met the requirements of their customers. The main aim of Ina Food Industry was to increase the prices of their products that could be acceptable to their customers. The customers did not notice the price changes immediately but discovered after a year. The consumers could not stop buying the product after noticing the price changes (Misawa, 2013, p. 5).
The business model that Ina Food Industry adopted during the deflationary period was appropriate in increasing the value of the company. Tsukakoshi claimed that increasing the prices of goods resulted in building customer loyalty along with increasing the company’s value. The company aimed at meeting the needs of the consumers because they wanted to retain them despite the high prices. Ina Food Industry became cautious after increasing the prices which resulted in inefficient operations and high performance (Misawa, 2013, p. 5).
The business model assisted the company to focus on progress rather than trends. Ina Food Industry increased the prices of their products despite the market trends. The company focused on increasing profits, expanding their opportunities to other areas and increasing their customer loyalty. In order for a company to attain sustainability and long-term growth, it must focus on the progress (Misawa, 2013, p.5). A company should give more attention to progress for them to make improvements on their weaknesses.
The business model assisted Ina Food Industry to stabilize the costs of their materials. The company constructed other four storage facilities using the profits that were generated after increasing the prices. Moreover, the company expanded the factory along with production services to increase their volume of the stock. The profits were also used to pay for visits of top managers who went to seek suppliers of materials. Ina Food Company increased their stock as a result of increasing their prices (Misawa, 2013, p. 5).
The business model helped the company to upgrade their refining process. Ina Food Industry utilized their profits in upgrading their refinement process of producing agar. The quality of agar improved as a result of applying advanced approaches in manufacturing it. The company increased their customer loyalty and trust due to producing high-quality products. Their sales increased along with the profits (Misawa, 2013, p. 6).
Contrarian Strategy
A contrarian investment strategy refers to carrying out business activities in contrast to the current market trends. Contrarians believe that markets trends are influenced by the attitudes of investors and consumers towards certain products. For instance, when customers perceive a negative attitude on a product they will not buy it because they will share the information with other consumers. The product will have low sales. Investors will not make investments in businesses that are believed to make low returns.
In our case, Tsukakoshi discovered that consumers rated the quality of a product with respect to the price. The information on prices was established as a result of past skills and knowledge along with making comparisons with similar products. There is a positive relationship between the price and customer’s perception of the quality of the product. The high-priced item needed financial forfeiture of the consumer but it increased self-esteem. Companies influenced the purchase behavior of consumers through pricing their products (Misawa, 2013, p. 3). According to (Genchev and Yarkova, 2010). , an increase in the prices of inelastic products may cause customers to substitute for expensive products that they perceive are of high-quality. Ina Food Industry increased their prices which built a brand of their company because consumers rated the quality of the product on the basis of its price. The sales of the company increased despite the low performance of the country’s economy. The other companies did not increase their sales because the customers perceived that their products were of low-quality.
The country was facing deflation which is a reduction in the normal prices which is brought by a decreased supply of money or loans. The deflation in the country persisted for some time which resulted in decreasing the margins, reducing the income along with employment and increasing loan delinquency (Misawa, 2013, p. 3). Ina Food Industry increased the prices of their products for their sustainability and growth. The other companies faced financial constraints as result of deflation and low prices.
The price elasticity of demand for Ina Food Industry was low. The agar was obtained from seaweed and there were no competitors on healthy products. Consumers claimed that agar was a life-saving product because its components were vegetable fiber. Agar was differentiated from the market resulting in no substitute companies that could manufacture the same product. Ina Food Industry did not sell their goods on the basis of price only but had the desire to meet the needs of the consumers (Misawa, 2013, p. 3). Ina Food Industry had built a brand on producing agar which increased their customer loyalty. The lack of competitors led the company to increase the prices because the customers could only purchase the product from Ina Food limited. The other companies had similar products and did not have unique methods that could assist them to stand.
Effects of decreasing the Prices
The approach of increasing the prices of the products is appropriate than lowering the prices below market level. In case the company could have lowered their prices the sales could decrease. The customers perceived that the prices reflected the quality of the product. Ina Food Industry could not make profits as a result of the low prices. The company needed finances to increase the stock, meet their daily expenses, research, and development. The low profits could have resulted in reducing the number of employees, loan delinquency, and poor performance.
The company could have focused on the trends rather than the progress. Ina Food Industry could not have achieved their company goals due to the low income. They would have taken a long time in meeting their goals. Some of their projects could not be completed because of financial constraints. Ina Food Industry could produce low-quality products leading to poor customer relationships.
The old price=10, the new price=12, demand under old price= 200, demand under new price=150
Then, the percentage change in quantity demanded is;
(200-150)/ 200=0.25
Percentage change in price is;
(12-10)/10=0.2
Price elasticity of demand is=percentage change in quantity demanded/percentage change in price
0.25/0.2=1.25
The price elasticity of demand is greater than 1 which indicated that the demand is sensitive to the prices. An increase in the prices results in the increase in demand. A decrease in the prices results in a decrease in the demand. Customers are sensitive to the price changes of highly elastic products. Products that have low elasticity do not influence the demand of the customers. In our case, the product for Ina Food Industry is elastic because an increase in the prices results in an increase of its demand. The products of the company have low elasticity.
Price elasticity of demand can be used to test a proposed price strategy in deflationary conditions. In case the product is found to be inelastic, the prices should not be increased or decreased because the changes in demand will not affect the purchasing power of the consumers. The price of the product can be increased in case it is found to be elastic. The changes in the prices will affect the demand. Products that are highly elastic should not be increased the prices. The prices of these products can be decreased to avoid a decrease in their demand. A company can increase the prices in periods of deflation on products that have low elasticity.
In conclusion, Ina Food Industry chose the best strategy to counter deflation. Their products have a low elasticity which indicates that an increase in the prices leads to increase in the demand. The increase in the price of products resulted in increased profits which were used to finance activities such as research, development, expansion of the factory and increasing the stock. Japan needs to make improvements in the economy for Ina Food Industry to enhance its performance. They have been using policies characterized by high-interest rates and low liquidity from the central bank. The Japan government should implement monetary policies that will decrease the interest rates and increase liquidity. The central bank is responsible for controlling deflation through increasing their liquidity. A company should establish their price elasticity before implementing pricing strategies in their companies during deflation.
References
Akram, T. (2016). Japan's Liquidity Trap.
Davidson, L. F. (2011). The causes of price inflation & deflation: fundamental economic principles the deflationists have ignored. Libertarian Papers , 3 , 1.
Gary, A. (2013). Why Global Economies Face An Age Of Deflation . Bloomberg view . Retrieved 4 April 2018, from https://www.bloomberg.com/view/.../why-global-economies-face-an-age-of-deflation
Genchev, E., & Yarkova, J. (2010). Analysis of price elasticity of food products (for the period 1999-2009). Trakia Journal of Sciences , 8 (3), 191-194.
Keynes, J.M. (2007). General Theory of Employment, Interest, and Money. New York, NY: Macmillan.
Imai, S., & Watanabe, T. (2014). Product downsizing and hidden price increases: Evidence from Japan's deflationary period. Asian Economic Policy Review , 9 (1), 69-89.
Misawa, M. (2013). INA Food Industry (2): Marketing Strategies in a Deflationary Environment (pp. 1-12).
