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Introduction: BM533 Evaluating Non-Traditional Decision-Making Approaches and Strategic Analyses at Innocent Drinks
The study will evaluate the benefits and drawbacks that are associated with the use of non-traditional approach of decision making at Innocent Drinks. The study will analyse how the Innocent Drinks set their pricing policy. The study will shed light on analyzing the Innocent Drinks’s decision of selling their business to Coca Cola by making use of the economic behaviour theory. The study will be making use of the Prospect theory as the economic behaviour theory. The PESTEL and the SWOT will be deployed as the business analysis tools for identifying the threats and opportunities for Innocent drinks.
Task 1: Impact of Non-Traditional Decision-Making Approaches at Innocent Drinks on Pricing and Marketing Strategies
One of the major illustrations where Innocent Drinks has been witnessed to use non-traditional measures of making decisions is demonstrated by their initiative of setting product pricing policies. The product pricing at Innocent drinks is marked by its adherence to the premium pricing strategy even at the times of the financial recession during Covid 19. This is evidenced by the fact that the Innocent Drinks sells soy milk by at premium prices which is 65% more than the prices of the cow milk during Covid 19 (Mellentin, 2023). It is in stark contrast to the other beverage manufacturers as they have switched from the premium pricing strategy whereas the Innocent drinks have struck to the premium pricing policy. This has been possible due to their non-traditional way of decision making as the company has focused on setting the premium pricing policy by aligning non-traditional approach of developing forecasting models that are trained with neural algorithm to predict the dynamic supply and demand trends more accurately instead of relying on the traditional prediction models. This non-traditional way of decision making has been beneficial for the financial performance of Innocents Drinks set their product pricing policy. It is because the non-traditional approach indicated that the company would incur on higher returns if they persisted with their premium pricing policy even during the pandemic and it turned out to be a reality as the company has gained on higher sales revenue during the pandemic. This is evidenced by the fact that the Innocent Drinks has improved their sales revenue by 15% during the pandemic (Devlin, 2023). Similar evidence can be observed in the findings of Angel et al. (2022) as the researcher suggest that the use of AI prediction models has been effective for setting prices and has a positive association with rise in financial performance, which is one of the major benefits. On the contrary, Cao (2022) has argued that the implications of AI forecasting model are challenging for financial decisions. The previous statement is restricted in terms of viability since the research has not conducted data triangulation which undermines the credibility of findings significantly. Therefore, it is analysed that the non-traditional approach of setting pricing policy with AI forecasting model has benefited Innovative drinks to reap the benefits of increased annual revenue.
This decision-making capacity is in coherence with the dual systems theory. It is because the dual systems theory of decision making focuses on a set of decision making where the individuals give more priority to the data than experience while taking decision and similar ideology is reciprocated on the decision-making capacity of Innocent Drinks as the use of AI forecasting models emphasizes their importance on data such as supply, demand trends while taking decisions on the pricing policy. In the findings of Grayot (2020), it is supported that the second element of dual systems theory in decision making process signifies the importance of more deliberate thinking capacity by taking in “greater range of data than just our own experience”. Hence, it is analysed that the decision making at Innocent Drinks is derived from the dual systems theory.
However, the AI forecasting model has also stated that the pricing policies for their smoothies should be differentiated by the provision of different carton size boxes at different premium prices and Innocent Drinks decided to deploy the suggestion. This is evidenced by the fact that the company launched two different sized smoothie cartons a 750ml carton and 1250 ml carton at increased recommended selling price by £2.79 (O’Reilly, 2014). However, this decision has proved to be disadvantageous. It is because it has resulted in harming the brand image of the company as the customers found it unethical way of raising the prices and dropping the affordable 1000ml carton. This is evidenced by the fact that more than 12 customers took to the Innocent Blog for raising their dissatisfaction for dropping the affordable 1000ml carton and stating this decision to be a “price hike in disguise” (O’Reilly, 2014). Hence, it is analysed that the reduction of the brand image has been one of the major drawbacks of the non-traditional approach of setting pricing policy with AI forecasting model that has adversely affected Innocent Drinks.
Another major instance where the Innocent Drinks has adopted non-traditional measures of making decisions is marketing. Most of the beverage firms align with the traditional mode of promotion such as advertising and sales promotion through discounts, however, the Innocent drinks have taken the non-traditional decision of holding music festivals to drive their marketing promotion campaigns. This is evidenced by the fact that the company has organised the Fruitstock event where the local farmers were asked to set up stalls in the musical festivals and their fruits were used by them to prepare smoothies in the music festival, which resulted in attracting more than 35000 customers (Crush, 2023). This has benefited the Innocent Drinks significantly. It is because these innovative marketing approach has increased customer satisfaction drastically as the customer’s expects higher stakeholder engagement with the firm and its other consumers and such need is met by this non-traditional marketing technique. This is evidenced by the fact that the customer satisfaction score has increased from 8.2 to 9. Furthermore, Grundey (2018) has supported that the non-traditional approaches in marketing (experiential marketing) such as organizing live event for stakeholder engagement has a positive association in the growth of customer satisfaction and one of its major benefits. On the contrary, Wood (2019) has argued that the use of events as an experiential marketing decision draw on the allocated budget extensively and is one of the major drawbacks. This is evidenced by the fact that the operational cost at Innocent Drinks has grown by 15%. Therefore, it is analysed that the non-traditional approaches of organizing music event is vested with the benefit and drawbacks of increased customer satisfaction and elevated operation cost respectively.
Task 2: Evaluating Innocent Drinks’ Share Sale to Coca Cola through the Lens of Prospect Theory
The Innocent drinks initially chose to sell only 10% of the share to Coca Cola. However, they decided to sell 90% of the share to Coca Cola. They incurred on such decision because the selling a portion of their shares to Coca Cola increased their potential of making increased sales and improved brand recognition by tapping into their international customers as well as using their exclusive rights to major sporting events for promoting Innocent drinks. This is evidenced by the fact that the Innocent drinks have recorded sales revenue of £209m after tapping into the customer base of Coca Cola as well as being the official smoothie providers for the London Olympics (Lucas, 2023). Furthermore, the Innocent drinks was looking at an operational loss of 25% if they had not sold more of the share to the Coca Cola and this also drove them to sell to Coca Cola. This business decision of selling the share to Coca Cola is in alignment with the prospect theory since the prospect theory indicates that the investor should align with the economic decisions that have more weight in terms of perceived gains as compared to the perceived losses in an attempt. Similar evidence can be observed in the works of Altman (2015) as the author suggest that the prospect theory has been successful for business that has been asserting their decisions based on potential gains than on potential losses and has been a sharing a positive association with the financial performance. On the contrary, Barberis (2013) has argued that the implications of the prospect theory has been not as effective as predicted. The previous statement is restricted in terms of reliability as the finding has been drawn on the basis of restricted sample size which undermines the credibility of the statement significantly. Therefore, it is observed that the Innocent drinks’ decision of selling their share to Coca Cola is justified in accordance to the prospect theory as this decision has a positive effect on their sales revenue and target audience reach.
The Innocent drinks has considered the decision of selling their shares to Coca Cola by keeping in mind that their overall sales and the brand value will increase due to the acquisition of Coca Cola. This is reflected by the fact that the brand valuation of the Coca Cola has increased by £209m, which is an increase of more than 15%, after the selling of their ownership rights to Coca Cola. However, Innocent drinks did not predict or estimate that their marketing investment would be reduced significantly after the agreement with Coca Cola and emerge as a significant benefit. This is supported by the fact that the marketing investment at the Innocent drinks has reduced to just 5% of the entire allocated budget (Crush, 2013). This outcome of the decision bear a striking resemblance to the prospect theory as the prospect theory indicates that the investors often ignore or underestimate outcomes with low probability and such feature is also reflected by the Innocent drink owner’s as they neglected the outcome of reduced marketing investment due to its low chances of probable occurrence. Analogous observations are accounted in the works of Seth and Chowdary (2017) as the authors suggest that “Prospect theory signifies tendency of people to underestimate outcomes with a low probability”. Furthermore, Kahneman and Tversky (2017) have supported that the “Prospect theory tend to overestimate the probability of likely events, resulting in a bias that neglects improbable outcomes”. In opposition to the above findings, Barberis (2013) has argued that the Prospect theory has been highlighted by difficulties. The above statement is restricted in the context of feasibility as the researcher suggest have failed to perform data triangulation which subjugates the quality of findings significantly. Hence, it is observed that Innocent drinks’s decision to sell to Coca Cola is deemed to be right decision in the context of prospect theory as this reduces their marketing investment.
Task 3: In-Depth PESTLE and SWOT Analysis of Innocent Drinks
PESTLE
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Political
The ascendancy of the Labour party as the ruling political party has proved to be an opportunity for Innocent drinks as the firm could make use of the support schemes that has been launched by the political party after forming the government. This is evidenced by the fact that the UK government has launched Restart Grant fund which provides firm with £18,000 per premises to SME’S for supporting their expansion (Wait, 2024).
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Economic
The inflation rate in UK has increased by 4% (Romei, 2023). This rise inflation rate poses as a threat to the future operations of Innocent drinks because the rise in inflation might be associated with reduction in the purchase power of premium products and since Innocent drinks, mainly deals with sales of premium smoothies, they can find it difficult to generate revenue. This is supported by the reduction of annual sales by 4% (Wood, 2023).
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Social
The literacy rate in UK has increased to 95% (Ward, 2023). This serves as an opportunity for the Innocent drinks as the company emphasizes in the development of non-conventional marketing techniques which require creative candidates and such requirement is met by the increased literacy rate as it shares a positive association with the growth of professional prospect with high creativity. This is evidenced by the fact that the employment at Innocent drinks has grown by 10%.
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Technological
The growth rate of ecommerce technology has increased in UK by 12% (Trade, 2023). However, this has posed as a credible threat to the Innocent drinks as most of its competitors have been able to develop successful ecommerce websites whereas Innocent drinks has failed to build a proper ecommerce website. This is a threat to the operations since ecommerce technology have been a significant revenue stream for smoothies manufacturers and Innocent drinks have failed to tap into such revenue stream.
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Legal
The Corporate Tax Act 2010 has mandated that the corporate tax rate will be reduced to 19% (Miliken, 2023). This will serve as an opportunity for Innocent drinks as the lowered tax rate will provide them with the scope of reducing operational investment.
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Environmental
The Climate Act 2006 has mandated that the carbon neutrality and decrease of carbon footprint should be attained by the nation by 2050. This will serve as the opportunity for Innocent drinks as they have been working with 50% recycled plastic for packaging their smoothies in an attempt to reduce carbon footprint (Wright, 2023).
SWOT Analysis
Strength
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Threat
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Weakness
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Opportunities
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One of the major strengths of Innocent drinks has been their financial strength. It is because the company introduces innovative marketing campaigns which requires proper investment and such investment is supported by their high existing financial capital. Another major strength is the innovative promotional campaigns. One of the weaknesses of the Innocent drinks has been their reduced brand image. It is because the reduction in brand image might adversely affect the customer loyalty and influence the customers to prevent their purchase from Innocent drinks. Another major weakness is the distribution system. The development of ecommerce website serves as a significant opportunity for Innocent drinks. It is because this would provide them with a new channel for generating revenue. Whereas the rise of inflation serves as a critical threat to Innocent drinks as it might adversely affect their sales volume.
It is recommended that Innocent drinks should adopt demand-based pricing strategy. It is because the threat of higher inflation rate would influence the customers to purchase affordable smoothie options would require the price to be reduced from premium pricing and such flexibility of changing prices in accordance to marketing conditions can be set by the use of demand-based pricing strategy as it vested with the features of accurate optimization of pricing models by considering purchase intention. It is also recommended that the Innocent drinks should set up their ecommerce website. This is because it will provide them with the option of gaining competitive edge in the market by increasing revenue stream.
Conclusion
The findings of the report suggest that the Innocent drinks’ decision of selling the business to Coca Cola is justified when the prospect theory is being considered. The outcomes of the report suggest that the use of AI forecasting models for deciding pricing strategy as non-traditional approaches of making decision has benefitted the Innocent drinks in terms of increasing sales revenue. The results of the report also indicate that the rising inflation rate and lack of ecommerce technology have emerged as the threats to the Innocent drinks.
Reference List
- Altman, M., 2015. Prospect theory and behavioral finance. Behavioral Finance: Investors, Corporations, and Markets, pp.191-209.
- Angel, M., Rodriguez, E., Alemán, S., Batan, A., Rentería, A. and Smith, A., 2022. Artificial Intelligence for Pricing: A Survey on Current Applications. Artificial Intelligence, 13(11), pp.311-323.
- Barberis, N.C., 2013. Thirty years of prospect theory in economics: A review and assessment. Journal of economic perspectives, 27(1), pp.173-196.
- Cao, L., 2022. Ai in finance: challenges, techniques, and opportunities. ACM Computing Surveys (CSUR), 55(3), pp.1-38.
- Crush, P. 2013. Innocent: the unconventional smoothie brand, Campaign UK. CampaignUK. Available at: https://www.campaignlive.co.uk/article/innocent-unconventional-smoothie-brand/224892 (Accessed: 19 January 2024).
- Devlin, E. 2023. Innocent turns pandemic sales decline around, The Grocer. The Grocer. Available at: https://www.thegrocer.co.uk/results/innocent-turns-pandemic-sales-decline-around/660122.article (Accessed: 19 January 2024).
- Grayot, J.D., 2020. Dual process theories in behavioral economics and neuroeconomics: A critical review. Review of Philosophy and Psychology, 11(1), pp.105-136.
- Grundey, D., 2018. Experiential marketing vs. traditional marketing: Creating rational and emotional liaisons with consumers. The Romanian Economic Journal, 29(3), pp.133-151.
- Kahneman, D. and Tversky, A., 2017. Prospect theory: An analysis of decision under risk. In Handbook of the fundamentals of financial decision making: Part I (pp. 99-127).
- Lucas, L. 2023. Coca-Cola swallows most of Innocent. Available at: https://www.ft.com/content/0b01403a-7d0e-11e2-adb6-00144feabdc0 (Accessed: 19 January 2024).
- Mellentin, J. 2023. Innocent Drinks Turns to Coca-Cola in Recession. Nutraceuticals World. Available at: https://www.nutraceuticalsworld.com/contents/view_breaking-news/2010-04-12/innocent-drinks-turns-to-coca-cola-in-recession/ (Accessed: 19 January 2024).
- Miliken, D., 2023. Low UK corporation tax has failed to boost investment – report. Available at: https://www.reuters.com/world/uk/low-uk-corporation-tax-has-failed-boost-investment-report-2022-09-19/ (Accessed: 19 January 2024).
- O’Reilly, L. 2014. Innocent faces consumer backlash after carton resize, Marketing Week. Marketing Week. Available at: https://www.marketingweek.com/innocent-faces-consumer-backlash-after-carton-resize/ (Accessed: 19 January 2024).
- Romei, V. 2023. UK inflation unexpectedly increased to 4% in December. Available at: https://www.ft.com/content/42c4bece-abd9-4e02-a403-66f1a29647b4 (Accessed: 19 January 2024).
- Seth, R. and Chowdary, B.A., 2017. Behavioural Finance: A Re-Examination of Prospect Theory.
- Trade. 2023. United Kingdom - eCommerce, International Trade Administration | Trade.gov. Available at: https://www.trade.gov/country-commercial-guides/united-kingdom-ecommerce (Accessed: 19 January 2024).
- Wait, R. 2024. Startup & small business grants UK - nothing to be repaid
7 Years | MSc in Economics
