STRATEGIC CHOICES (SLP) 1
Once again, upon realizing the date on January 2012 from thetelevision, I observed that I have theresponsibility of advising the organization on the most appropriatestrategies for increasing profitability. This means that I have tocome up with better recommendations to the leadership than the ones Imade before to enhance the position of the organization in themarket. My recommendation at the end of each year comes after ananalysis of the effectiveness of methods of operations in relation tocost, volume, and profitability that determines the level ofcompetitiveness and survival in the future. The tool, as mentioned byPrihadyanti (2011) is useful for forecasting sales and makingdecisions regarding cost collection, pricing as well as productdiscontinuation. As advised by Zeithaml, Bitner and Gremler (2010)the performance and profitability of a business corporationdepend on the ability to meet consumers’needs in the most efficient manner that in turn determines how muchthe company can supplyas well as the prices that buyers will be willing to pay. Thisin turn, influences the level of profitability of the business.Therefore, at the end of every year, we propose changes in priceprices, R & D allocations and any product modifications ordiscontinuations to align with the operational and marketingconditions.
The table below shows the marketing and financial records for 2011for starting the analysis. The information provides guidance forpricing as well as the R&D funding for the three products X5, X6,and X7 produced by the company. The decisions made on the price aresignificant because they affectboth the revenue generated by the company as well as thebuying behavior of the consumers. Similarly, the decisions maderegarding R&D funding are significant in the determination of theprofitability of the company. Because of the fact that there arelimited funds to cater for all projects, it is important to makeappropriate analysis to determine the project that will receivefunding depending on the best results expected.
2011 Financial Summary
In 2011, the cumulative profit score reached 81 571 138, which willimprove coming to the end of 2015 concerning R&D expenses as wellas the rational strategy for pricing. An analysis of the cost andvolume using the simulation, as mentioned by Elson (2012) willprovide assistance in improving the entire situation during eachyear. In this regard, product X5 has attained its maturity level, andit is highly sensitive to price meaning that its strategy concerningpricing as well as R&D expenses has to occur based on both priceas well as product performance. On the other hand, product X6 isenjoying growth hence, it is not sensitive to price, meaning that wedo not have to focus on price when considering performance (Tan,2014). In addition, product X7 is in the first stage of introductionto the market hence, it will generate losses for several yearsbecause of the period required for its establishment in the market.
For year 2012,the strategy concerning X5 product should be the reduction of thecost by $10, meaning that it will enable the new price to become $275but increase the R&D costs by 40%. Both the price as well as theproduct suitability is significant in increasing the overall productperformance in the market (Chen & Popovich, 2003). While for X6product, the strategy is an increase in the costs for R&D toaround 44%, which will move with a price increase to 440 dollars. ForX7 product, the price should reduce to 180 dollars that will matchwith an increase in R&D costs to around 37% to establish theproduct (Tan, 2014). This will influence an increase in volume toaround 352 243 200 with the profitability showing improvement by 10%to reach 26%. In addition, an improvement in per unit margin from $53in 2011 to $89 in 2012. However, an increase in the cost of R$Dcaused an increase in fixed costs by 37 500 000. None of theproducts reached saturation levelbecause of the observed improvement in volume of sales hence, asshown by Elson (2012) they are capable of producing improved sales.Nevertheless, X5 will reach saturation in the near future and,therefore, it will not be capable of generating new sales.
For year 2013, the results in 2012 indicate that there should be anappropriate change for the X5 strategy. We then recommend anintensification of the R&D expenditure to around 42% to enhancethe quality of the product. The quality of the product will also helpin differentiating the product from other similar products in themarket that reduces price sensitivity. The cost of product shouldreduce to allow a change in strategy without increasing the price,which for X6 will be $440 with increase in R&D costs to around44% (Steward, 2004). Customers, as expressed by Chen and Popovich(2003) will not feel the impact of the increase in the price in thefuture because of high focus on quality. However, X7 will require anincrease in the R&D cost without increase in price. The expectedvalue will thus be 860 241 149 showing an additional improvement inthe price by 5% to 31%. Similarly, there is an improvement in perunit margin from $89 to $102.50 with no increase in fixed costs. X7remains in the loss stage but will soon reach its break-even pointbased on further improvement to meet market conditions.
For the year 2014, based on the results obtained in 2013, we decidedthat the price of X5 should further reduce to $267 while the R&Dcosts to increase to 45 percent. We also decided that the strategyfor X6 to improve R&D costs to around 47% with a price increaseof $10 to reach a new price of 450 dollars. In addition, we decidedan increase in R&D costs for X7 product to around 48% while theprice to reduce to $175 (Tan2014). The entire value will, therefore,be 1 281 927 788 and showing no increase in the profitability sincethe new value is 30%. The reduction in sales volume indicate that X5has reached its saturation level hence incapable of generating newsales followed by constant reduction (Steward, 2004). The unit marginwill improve to $102.81 with no variation in the fixed costs whencompared with 2013. X6 and X7 have not reached saturation hencecapable of generating new sales. X7 is in its profitability phase andits sales in the future will increase.
For the 2015, based on the results recorded in 2014, we proposed afurther reduction in price of X5 product to $260 while the R&Dcosts increased to around 48 percent. X6 strategy involved animprovement in R&D costs with no increase in the price, whichwill remain at 450 dollars. X7 requires a reduction in price withimprovement in R&D expenditure to reach 53% that will make thenew price to be $170 (Tan, 2014). The overall value will, therefore,be 1 490 715 195 and a further reduction in the profitability by 6%to 24%. The reduction came from poor performance of X5 and X6 sinceX5 is in the declining stage while X6 has reached saturation. Growthis only with respect to X7 meaning that it is the only productcapable of generating new sales and enhancing profitability.Therefore, discontinuation of X5 and X6 as from 2015 is significantto direct all the revenue to the development of X7, which is capableof ensuring high sales and profitability (Prihadyanti, 2011). Inaddition, the remaining revenue will enhance R&D to create a newproduct that will take over after the saturation of X7 to ensuresurvival in the market.
From the above graphical representation, X5 has been on the declinein regards to sales and thus directing more resources towards itwould be unhealthy for the business. For X6, the product sale is highand for X7, the sales are low and thus more resources are required toraise the returns to profitable levels.
Table 1: Prices of products
Table 2: R&D costs
The ability of the company to acquire competitiveness in the marketdepends on its ability to meet the desires of consumers. Success inthe market depends on the ability to innovate continuously andrapidly to match rapidly changing interests of consumers. Thesimilarity of products available in the market calls for highdifferentiation to help in reducing the price elasticity of theproducts supplied by the company. In this regard, the company mustenhance its R&D that will enable the production of high qualityproducts that will define them uniquely in the market. It will alsohelp to earn consumer loyalty and commitment responsible for ensuringgrowth in sales. In addition, this will enable the invention ofimproved production methods that will lower the cost of production,which in turn will enable the company to lower its prices to increaseits sales. In addition, the company needs to focus on what it canproduce efficiently and target the high-class consumers that makepurchase decisions based on the product quality rather than price toearn higher profitability. The strategies proposed will be difficultfor competitors to imitate, meaning that the company will be in abetter position to increase its productivity and profitability tobecome the most dominant.
Chen, I. J., & Popovich, K. (2003). Understanding customerrelationship management (CRM) People, process and technology.Business process management journal, 9(5), 672-688.
Elson, J. (2012). Tablet Development Simulation. Retrieved from:
Prihadyanti, D. (2011). CVP Analysis Incorporating the Cost ofCapital on R&D. International Journal of Engineering Scienceand Technology, 3(4), 3446-3448.
Steward, R. (2004). Simulation: the Practice of Model Development andUse. Hoboken: John Wiley & Sons.
Tan, H. (2014). Simulation and Modelling Methodologies, Technologiesand Applications. UK: WIT Press.
Zeithaml, V. A., Bitner, M. J., & Gremler, D. D. (2010). Servicesmarketing strategy. Hoboken: John Wiley & Sons.