Long-term Investment Decisions in Beverage Industry

Long-term Investment Decisions in Beverage Industry
Long-term investment decisions involve the outlay of a large amount of
funds, which are intended to commit the firm into some investment course
of action. To this end, the firm should apply the most accurate tools to
analyze the investment decision to avoid flaws that may expose the firm
into immense financial losses in the future. The two main long-term
investment decisions include the merger and company expansion through
capital projects. The company should consider all the factors that may
affect the success of any of the two long-term investment decisions in
before adopting the most appropriate. The company should consider
factors such as a source of funds to finance the investment,
contribution of the project into the shareholder value, and existing
government regulations. This paper will address the two long-term
investments (merger and expansion through capital projects) decisions in
the case of the Coca-Cola Company.
The government involvement in the beverage industry
The major role of the government in business is to provide an enabling
environment for companies to carry out their operations and ensure the
safety of products offered by the company to consumers. However, the
government involvement does not include the regulation of the level of
competition because the government of the United States upholds the
policy of market liberalization (Vartanian, Schwrtz & Brownell, 2007).
The issue of the safety of the products offered in the market has become
controversial in the beverage industry, thus attracting the need for
government regulation in order to protect consumers. Vartanian, Schwrtz
& Brownell (2007) associated the soft drink consumption in the United
States with the high rate of health conditions such as diabetes,
obesity, and high blood pressure. The increase in the use of sugar
sweeteners and reduced level of fruit juice in beverages has continually
subjected the consumers to health risks. This is common in the United
States, which is the largest consumer (about 12 %) of carbonated soft
drinks in the world. The extent to which beverages expose the consumers
to a range of health risks necessitate the government intervention to
regulate the availability of the drinks. The two most effective
government regulations include the increase in tax on sugary drinks and
prohibition of their sale in schools (Hawkes, 2010).
Additional complexities as a result of expansion through capital
projects
Companies in the beverage industry may seek to expand their operation to
achieve several objects, which include the increase in profit, expand
market share, and product diversification through innovation (Nechako,
2011). However, business expansion in the beverage industry will present
several challenges to the company management. First, expanding the
company in the beverage industry through capital projects will expose to
business risks as a result of market instability and ineffective
management. The market instability in the beverage industry is
contributed by various factors such as the government regulation, which
may reduce the market size for surgery beverages in the future. Research
has shown that the campaigns against the consumption of sugary beverages
especially in schools may significantly reduce their consumption
(Hawkes, 2010). In addition, the policy (such as tax and prohibitions)
that targets at protecting the beverage consumers may reduce the overall
market size. This implies that companies in the beverage industry may
incur losses on the capital projects undertaken to expand the company
operations within the beverage industry.
Secondly, entry of new companies into the beverage industry may present
stiff competition to the established companies. According to Nechako
(2011) the entry barriers that have existed for decades in the beverage
industry are becoming porous as the new companies access the market. The
net impact of the new companies is the reduction in the market share and
the overall profitability. However, the challenges presented by the
company expansion can be solved by prior planning for aggressive
marketing strategies and production of products that comply with the
laid down specification (Vartanian, Schwrtz & Brownell, 2007).
Convergence of the interest of the stockholders and managers
Stockholders invest their money mainly to increase their income, but
they employ managers to pursue these goals on their behalf since they
cannot take part in the active management of the company. However, the
conflict of interest may arise because the company managers have an
interest apart from increasing the shareholder value. There are three
key strategies that can be used to ensure that the company managers
increase the stockholder value in the course of satisfying their
interests. First, the company can award the stock option to the
managers. This has the motivational impact because managers work, not
just as employees, but as owners of the company (Pagano & Volpin, 2005).
This implies that managers work hard to increase the company
profitability and thus the shareholder value.
Secondly, the company can issue stock to established institutions such
as insurance companies and banks. Heath & Wayne (2004) reported that
institutional stockholders are the most effective tools of ensuring a
balanced performance of the company managers. Institutional stockholders
employ analyst, who evaluate the company performance frequently sell
their stockholding if the company performs below their expectations.
This subjects the company to risks of takeovers and dismissal of the
current serving managers. These threats force the managers to work in
the interest of the stockholders by increasing the company
profitability.
Conclusion
The long-term investment decision may determine either the future
progress or fall of the company depending on the prior analysis and
preparedness of the company to counter the potential challenges. The
company managers should consider the government regulations and emerging
challenges to determine the future market trends. Inappropriate
predictions of the future trends may result in finance lose as a result
of reduced consumption of the company products or restricted production
capacity. This is because an accurate forecast of the market trends
helps the managers in identifying the factors such as stiff competition
and shifts in product preference among the company customers. Moreover,
the company performance can be increased by using the management
principles that converge the interests of the stockholders and the
interests of the company managers. This can be achieved by making the
managers feel part of the company through the stock option and the
involvement of professional analysis.
Reference
Hawkes, K. (2011). Worldwide battle against sugary soft drinks in
schools. American Journal of Preventive Medicine, 38 (4), 456-460.
Heath, J. & Wayne, N. (2004). Stakeholder theory, corporate governance
and public management. Journal of Business Ethics, 53, 248-264.
Nechako, S. (2011). Business expansion: Why expand? Vanderhoof:
Community Futures. Retrieved March 16, 2013, from,
http://www.cf-sn.ca/business/business_expansion/expansion_risks.php
Pagano, M. & Volpin, P. (2005). Shareholder protection, stock market
development, and politics. London: London Business School.
Vartanian, R., Schwrtz, B. & Brownell, D. (2007). Effects of soft drink
consumption on nutrition and health: A systematic review and
meta-analysis. Am Journal of Public Health, 97 (4), 667-675. Retrieved
March 16, 2013, from
http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1829363/
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