Test of the Optimality of R&D Allocation - Term Paper Example

? Detailed Review of Pricing and R&D Strategy of Products X5, X6 and X7 during the period of Prepared by VP Product Development Tablet Development 12 February 2012 Table of Contents 1 Introduction 2 Products Review Financial Review Market Review Alternative Strategy: Open Systems Theory for Tablet Development References 1 Introduction Contemporary changes in the technological arena has given rise to increasing demand for innovative products to satisfy the customers. Smart organizations understand this dire need for changing their business models and their decision making practices to match the demand. The use of tablets instead of a laptop has given a sharp boost to the global demand for tablets and tab applications. In a recent survey, ChangeWave found that out of 3,043 survey respondents from North America, 14% gave positive response to purchase a mobile tablet in the next 3 months (Epstein, 2011). This rise in the consumer adoption of new technology determines the extent of future changes in the pricing and budget allocation for Research and Development (R&D) of its products. Tablet Development is focused on providing high quality and custom designed applications for tablets manufacturers and operating system providers. Its core products are X5, X6 and X7 that have been in the market for the last 6 years. However, there are major drawbacks in the existing price and R&D budget allocation strategies that have undermined the new product development cycle in the organization. 1.1 Aim: The aim of this report is to highlight the drawbacks of the existing pricing and R&D budget allocation strategy on a period of 6 years for the core products of Tablet Development and to recommend an alternative strategy that should have been adopted to achieve the organizational goals. 1.2 Objectives: To critically review the strategy of pricing and R&D budget allocation for each core product, namely: X5, X6 and X7. To study the nature of the products, their subsequent performance, price and their life cycles. To review the financial performance of each product and their impact on the market factor like consumers and market saturation. To propose an alternative strategy for pricing and R&D budget allocation. 2 Products, Financial and Market Review 2.1 Product X5: In the period 2010-11, the product X5 the price was $265 and experienced a growth of 64% in its overall sales and revenue. The customer base also experienced 61% new customers, 94% repeat sales and 103% profitability. However, the R&D costs deteriorated by -33%. In 2011-12, the product X5 experienced 21% increase in its sales and revenue. The customer base experienced only 15% new customers, 72% repeat sales and 12% profit.ability However, the R&D costs remained stable with 0% change from the previous year. In 2012-13, the product X5 observed a severe decline as its sales dropped with a 23% change from the previous year. The customer base also declined by 36% of new customers. The losses increased to 17%. In 2013-14, the sales declined by another 51%, new customers by 81% and profitability by 88%. In 2014-15, the sales declined by 26%, new customers by 100% and profitability by 500%. In the entire life cycle, the product X5 remained at same price of $265 and R&D cost of USD 7,20,000 with nil change. As a result, the product market saturation declined from 84% in 2010 to 3% in 2015. The repeat sales also declined from 94% in 2010 to only 3% in 2015. 2.2 Product X6: In the period 2010-11, the product X6 the price was $420 and experienced a growth of 126% in its overall sales and revenue. The customer base also experienced 124% new customers and 81% profitability. However, the R&D costs deteriorated by -33%. In 2011-12, the product X6 experienced 60% increase in its sales and revenue and 53% increase in total costs. The customer base experienced only 56% new customers and 14% profitability. However, the R&D costs remained stable with 0% change from the previous year. In 2012-13, the product X6 observed a severe low increase as its sales dropped to 3% increase from the previous year. The customer base also declined by 7% of new customers and 0% profitability was registered. In 2013-14, the sales declined by another 58%, new customers by 82% and profitability by 24%. In 2014-15, the sales declined by 31%, new customers by 100% and profits by 20%. In the entire life cycle, the product X6 remained at same price of $420 and R&D cost of USD 7,48,000 with nil change. As a result, the product market saturation declined from 100% in 2010 to 5% in 2015. The repeat sales also declined from 147% in 2010 to only 4% in 2015. 2.3 Product X7: In the period 2011-12, the product X7 the price was $195 and experienced a growth of 126% in its overall sales and revenue. The customer base also experienced 124% new customers and 81% profitability. However, the R&D costs deteriorated by -33%. In 2011-12, the product X6 experienced 60% increase in its sales and revenue and 53% increase in total costs. The customer base experienced only 56% new customers and 14% profitability. However, the R&D costs remained stable with 0% change from the previous year. In 2012-13, the product X6 observed a severe low increase as its sales dropped to 3% increase from the previous year. The customer base also declined by 7% of new customers and 0% profitability was registered. In 2013-14, the sales declined by another 58%, new customers by 82% and profitability by 24%. In 2014-15, the sales declined by 31%, new customers by 100% and profits by 20%. In the entire life cycle, the product X6 remained at same price of $420 and R&D cost of USD 7,48,000 with nil change. As a result, the product market saturation declined from 100% in 2010 to 5% in 2015. The repeat sales also declined from 147% in 2010 to only 4% in 2015. 3 Alternative Strategy: Open Systems Theory for Tablet Development From the entire review of the products X5, X6 and X7, it is found that all the products poorly performed in the last 6 years. There is constant increase in the total costs of each product against total revenue earned. As a result, the profitability of all the products have declined significantly. The primary reason of this position has been due to the closed system approach to the pricing and R&D budget allocation (Axelos, 2006). Seldon (1992) postulated that the organizations that consider the R&D costs for each product as constant over the years; observe a significant loss of their product. Only, the firms having log linear product demand can achieve profit maximization through the constant prices and R&D budgets. Likewise, Wind (1990) highlighted that the rule of thumb of allocating R&D costs in determining the budget is wrong as it "results either in over-allocating resources or under-allocating resources to R&D" (p.1). The rule is to determine the R&D budget based on the competitors' R&D expenditures. Wind (1990) provided that the appropriate approach to deal with the R&D budget is to first outline the objectives of R&D project and determine appropriate strategies to achieve them. Then to divide each objective into several R&D projects. Each project should be evaluated individually and its costs. Thus, ensuring that all its costs are balanced and justifiable. Therefore, the R&D budget allocations for X5, X6 and X7 should have been determined according to the R&D objectives and strategies of each product. They would have determined whether the product required innovation. Thus, relevant costs should have been taken into consideration to achieve an accurate R&D budget for each product. Also, the Tablet Development should have used the penetration pricing technique to achieve high costs and volumes. There are low changes in BE sales. As a result, the profitability is achieved due to the high change in the sales volume of each product. In this case, the costs are sustainable and the company would have achieved resource advantage. References Axelos, K. (2006). The World: Being Becoming Totality. Environment and Planning D: Society and Space, (24): 643-651. Epstein, Z., (2011). Tablet demand triples ahead of holidays, two out of three buyers want Apple's iPad. Retrieved February 19, 2012 from http://www.bgr.com/2011/11/21/tablet-demand-triples-ahead-of-holidays-two-out-of-three-buyers-want-apples-ipad/ Seldon, B.J., (1992). Test of the optimality of R&D allocation. Journal of Business and Economics, 31. Retrieved February 19, 2012 from http://www.questia.com/googleScholar.qst? docId=5000137220 Wind, Y., (1990). A new approach to the determination and allocation of the R&D budget. Retrieved February 19, 2012 from http://marketing.wharton.upenn.edu/documents/research/9004_A_New_Approach_to_the.pdf Read More