Managerial Economics: Al Ain Dairy Case Study (Research Paper Sample)

Managerial Economics: Al Ain Dairy Case Study
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Al Ain Dairy Case Study
Al Ain Dairy is a leader in the cow and milk category sectors in the U.A.E, as well as the pioneer company in the business, having spanned over 30 years in business (Balakrishnan, 2011). The company’s demand has exceeded growth over the past few years, an indicator that its growth prospects are positive. For this reason, Kingston Fernandez, the company’s head of sales, has to make tough decisions regarding investment in his approach in projecting sales volumes. However, he has to factor in various details including residential complexes and development of additional community areas. Additionally, he has to take into account the demand and supply factors influencing the company, as well as the manner in which they could influence Al Ain in the future. This paper analyzes Al Ain’s demand and supply factors, their potential effect on the company, economies of scale available to the company and the market structure.
Demand and Supply Factors
Demand factors. Undoubtedly, the factors of demand represent the driving forces behind market economies in the U.A.E. and the rest of the globe (Baye, 2010). Supply and demand represents an instrument that managers can utilize to envisage the "big picture." Towards this end, many companies often fail since their managers become bogged down with their day-to-day decisions regarding the business devoid of a clear picture of the market trends and the corresponding changes on the horizon. The first demand factor, in view of the U.A.E, is the climate. Given the country’s positioning in the Northern desert belt, its tropical desert climate implies that it is constantly very hot and dry (Chandrappa, Gupta, & Kulshrestha, 2011). In turn, this implies that the local population is in constant demand for cold, refreshing products such as fresh milk and juices. For this reason also, the company ought to ensure that its company’s products are always fresh as this appeals to most of the consumers. In this regard, the company has to invest in its technological capability in order to stabilize the expiry dates on its product labels.
The second demand factor that AL AIn ought to consider is the rising population. Along with the economic progression that the country has experienced over the past few decades, there has been a corresponding growth of the fertility rate as more people get access to quality healthcare. For instance, the population grew by 3.1 percent in 2012 and its urban population alone is poised to grow to approximately 7.9 million y the year 2020 (Everington, 2013). By extension, this implies that the consumer market size (demand) is on the increase. As per the case study, there are only two companies in the country that deal in camel milk, the Emirates Industry for Camel Milk and Al Ain. This indicates that the company can take advantage of the increasing population to increase its market share in the camel milk industry. The season of Ramadan also affects demand. During this period, individuals fast and abstain. They do not eat anything all day. In such seasons, the demand increases in the first week and sharply declines in the subsequent periods.
Another demand factor is the rise in preference for camel milk by the U.A.E and the overall global population. This is a factor that has seen the company investing in high-tech camel milking parlor as a way of facilitating increased production to satisfy the national demand (Balakrishnan, 2011). Additionally, this has made Al Ain an ardent supporter of the camel milk sector, and the company has been exploiting this by publicizing the numerous health benefits that camel milk is believed to possess. In tandem with this, the GCC market has been in demand for the expertise that Al Ain possesses with regard to camel milk production. Such an exposure means that the company’s brand image and reputation will be significantly elevated, which in turn contributes to a larger market demand for its products and expertise. Its achievement of the ISO 22000:2005 for safety standards is also a factor that influences demand. Given that the company operates in a foods-related industry, consumers are usually sensitive to the environment in which the products are manufactured (Hansen, 2013). The recognition is a driver for demand as more hygiene-inclined consumers will want to purchase Al Ain’s products.
The final and most significant demand factor is the retail price associated with Al Ain’s products. While the U.A.E is among the nations with the highest milk production costs in the world, the government does not offer any subsidies (Balakrishnan, 2011). Additionally, the U.A.E Ministry sets a fixed selling price, which presents a challenge for the sales and marketing department. As outlined by Baye (2010), price is a critical aspect of the supply-demand curve for any product in the market; a high retail price negatively affects the demand. This means that the company has to be very creative and aggressive in its marketing in order to achieve its desired demand. Towards this end, the company has diverse product categories for different age groups, which are really representative of the income groups of the country’s population.
Supply factors.
Starting off from the preceding section, price is a critical driver of supply. This price, in turn, is affected by the cost of production (Baye, 2010). In the U.A.E, milk production costs are high, implying that the retail prices will have to be set at a premium. However, this is not usually possible because of a fixed price set by the Ministry. Additionally, the government offers zero subsidies. This negatively affects demand. Another supply factor is the climatic conditions of the area. Given that the U.A.E is very hot and dry, it is extremely difficult to accurately predict the expiry dates of the products, especially in light that they are perishable food products. This has an impact on the supply since the company is cautious to prevent over-supply (which results in losses) and simultaneously ensure steady supply (to retain their customer base). This presents a dilemma for the management.
Additionally, seasonal changes often affect the company’s supply. According to Hansen (2013), products ought to be adapted to the prevalent market conditions, fashion, climate and preferences. For the U.A.E., the production of fresh juices and milk is constant as demand is constant all year round. However, in the month of Ramadan, production of different products fluctuates as per the Holy month’s calendar. Another factor is the technological capacity of the company. In order to satisfy its sales projections, the company is in the plans of introducing more innovative products using its state-of-the-art production facilities. It is the availability of such technologies that influence the quality and level of production, and in turn, supply to the market. Its "ultra-fresh" requirement also necessitates such technology. Finally, the rising population is also a critical supply factor. With the increase in the number of people in the U.A.E and the corresponding increase in demand for camel milk, the company’s supply has the inevitable phenomenon of increasing to satisfy the market.
Concepts of Economies of Scale
As outlined by Baye (2010), economies of scale tend to exist in the event that long-run average costs decrease as output increases. A company that has the potential of producing greater output levels at lower average costs tends to obtain competitive advantage over their competitors. From the perspective of the case study, an element of economies of scale that is evident is specialization. The production of complex products such as yoghurt and cardamom involve many intricate phases (Hansen, 2013). This implies that the production process has to be segmented into different, specialized phases. Such specialization contributes to an efficient production process and a relatively lower need to train more workers (less cost). In the same breadth, such a production process contributes to high levels of output. Al Ain has invested in high-tech production facilities for its products, an aspect that demonstrates that it has specialized its functions.
Additionally, the case study indicates that Al Ain exerts emphasis on maintaining its high volume production. In view of this, the company has invested in technologies and husbandry techniques, as well as importing various high quality raw materials (fodder) from Europe and the Americas (Balakrishnan, 2011). As outlined by Sivagnanam (2010), companies can achieve economies of scale through the ability to purchase raw materials in bulk, which in turn lower the average costs. Al Ain maintains large heads of cattle, implying that its production factors are acquired through bulk purchases. Additionally, risk bearing can contribute to achievement of economies of scale. By investing in ground-breaking technology and introducing new products into the market, the company is taking a risk. However, in the event that the technologies and the new products become successful, Al Ain will become successful; achieve low average costs and greater output levels.
On its part, economies of scope describe the reality that the ATC- average total cost of production diminishes as the result of increasing the number of diverse products offered (Baye, 2010). For AL Ain, the company deals in three different categorie...