The Needs of Gadgets2u.coms Target Market - Essay Example

Case Study in Business at College Level Section A (Answer all questions a) Market research captures the needs of Gadgets2u.com's target market (lines 55-60), a dynamic group with fast-changing tastes looking for well-designed innovative products. Gadgets2u.com can do surveys (a properly designed web-based survey is quick and reliable), events-based test marketing (distribute samples in social events and get instant feedback), data-mining (analyse customer data and spending behavior), scientific sampling (interview a target market sample), and demographic studies (find out what products future 25-35 year olds want and what products the present market will want in the future). 1.b) Price skimming is the strategy of setting a high price to attract customers willing to pay a premium. This creates a high product quality image in markets where rivals are slow to enter, where buyers value the product highly, and where market demand is inelastic (fixed and variable costs benefit little from economies of scale). Penetration or predatory pricing is the opposite and means setting a low price in anticipation of future cost declines in order to grab a bigger share of a growing market (Bagozzi 54-55). Price skimming works for the products Gadgets2u.com sells (line 58). Predatory pricing works best once the level of sales starts to decline, with the effect of discouraging any potential competitors. 2.a) Gadgets2u.com's problem (lines 44-46) is not in the structure but in the lines of communication between project teams and staff (lines 39-43). This is common in fast-growing e-businesses and the solution is "not to automatically transform the flat structure into a formal hierarchy, but to make the hyperarchical system efficient by making it easier for project team leaders to communicate with each other, collect and evaluate the relevant information, and make decisions" (Amor 48). Gadgets2u.com's matrix structure is hyperarchical1 and characterized by flexibility, fast information flow, and quick decision-making. Improving communication efficiency will make the structure scalable or adaptable to growth. 2.b) Homeworking (or telecommuting) is done by five employees (line 138), but if their productivity is low and having them in the office will improve it, or if they have new assignments where their office presence is needed, then bringing them to the office is acceptable. Otherwise, this will backfire. The employee(s) may resign or be demotivated, leading to lower productivity and worse problems. Homeworking is a good way to keep and motivate good employees, especially creative types or those with health problems or multiple roles2 (family or community). Good employees are satisfied if they know they are more productive working from home and their contributions to the company's success are recognized. It is assumed that workers are given full management support and resources (communication lines, clear assignments, etc.). The appraisal system (line 137) will give Tom and the management more information on this matter (if homeworking is productive, motivating, or not). 3.a) Holding too much stock is a problem because stock costs money and space (which costs something and is therefore also money). Declining future sales may affect profits. Holding too little stock is also a problem because if the goods sell very well, the market will be frustrated with the company. Market satisfaction seems to be a problem lately (lines 119-120), although distribution is the main reason for that. 3.b) Just-in-time (JIT) stock control, currently under study by the management (lines 98-99) is one of the ultimate goals of any e-business (Amor 49). JIT is a system where inflow and outflow of stocks are balanced, or where the company has almost exactly the amount of goods that the market wants to buy (Germane 192). JIT requires near-perfect coordination between Gadgets2u.com and the suppliers, and demands accurate knowledge of market behavior which, because it is very dynamic, is difficult to predict. This ideal of near-perfect coordination leads to problems: suppliers need to assure on-time delivery of goods which should be in perfect quality condition (otherwise, rejects due to poor quality will result in lower stock levels, with disastrous effects on market satisfaction). Warehouses or distribution points should be so located that accessibility is not a problem and fast delivery to a large market is assured. 4) Expansion to retail operations by increasing brand exposure will demand adjustments from Gadgets2u.com's management, people, and processes. Internally, it needs to scale up (improve and increase the capacity of) its logistics (purchasing, stock control and distribution), its marketing (research and new product development), financial and cost control (setting up retail stores needs capital, so they may have to go public, invest profits, or borrow long-term), and even human resources management (retail employees are different from e-business employees, who stay behind a computer 24/7). Externally, Gadgets2u.com competitors want to grab a share of a growing and profitable market and will do anything to do so (expand aggressively, engage in price wars, or resort to dirty tricks). At the same time, if Gadgets2u.com wants to grow in global market share, they need better market research (lines 86-87). Both options (selling more new products to a growing market or increasing product demand by retailing) require investments in people, facilities, and processes. Management can evaluate these two business options using basic financial tools and decide to do what is more profitable. Another choice is to do both if the company (especially Tom) is ready for the challenge, and everyone is willing to learn by doing (and willing to learn from their mistakes). Section B (Answer one question from this section.). 5.a) Running the warehouse as a cost center allows the company to know precisely its unit costs for each of the products sold, because one major problem managers face is how to allocate common costs (like warehousing) to different products (Seiler 14). This will avoid the problem of unit costs going up because of excess capacity (line 120) and improve profitability through cost control, one of Gadgets2u.com's strengths (line 142) and a very important success factor for an on-line business (Amor 13-14). One way to do this is for the company to compute for the optimum inventory level for each product line so that unit costs do not go beyond a certain level and the warehouse capacity is fully used. This move also gives Gadgets2u.com's finance people the flexibility to decide how to write-off the investment cost of the warehouse: long-term (leading to lower unit warehousing costs for goods sold over the life of the warehouse) or short-term (high costs and lower profits now, but near-zero costs and higher future profits) by allocating the cost to all the goods to be stored and sold in the future. 5.b) See Excel file in the Appendix for the formulas. The summary answers are in Tables A and B. i. the value of closing stock (in Euros) at the end of each month (Table A) ii. the gross profit for the period May to August (Table B) 5.c As shown in 5.b) i. Table A, FIFO gives a higher stock valuation after four months because there are more high-priced goods on stock, unlike LIFO where high-priced goods are sold first and low-priced goods are left in stock. This results from May to July price increases (though prices went down in August). FIFO gives a higher gross profit [see 5.b) ii. Table B], which stockholders like. This happened because prices of goods went up during the period and sales went down in August. 6.a If interest rates go up, Gadgets2u.com's loan interest payments will also go up. It can also affect the spending habits of the market, especially since they use credit cards (line 63). Increasing interest rates also strengthens the exchange rate as currency traders buy more Euros to avail of high interest rates. See 6.b for the effects. Increasing interest rates is good if the increase in loan payments is less than the increase in profits (goods are cheaper). 6.b As people buy more Euros (see 6.a), the Euro strengthens (i.e., U.S. dollar goes from 1.26 to 1.30 per euro, and yen goes from 153 to 160 per euro, see Appendix 1), and the goods bought by Gadgets2u.com from these countries will be cheaper. Profits will go up. 6.c.i See Excel file in Appendix for the formulas (Yellow cells are filled blanks) Total payments 263,682 400,180 407,996 498,726 Net cash flow 17,318 (30,180) (132,996) (156,726) Opening balance 88,020 105,338 75,158 (57,838) Closing balance 105,338 75,158 (57,838) (214,564) Table C. Cash flow statement Jan-Apr 2006. 6.c.ii The main principle to improve (have a positive) cash flow position is to increase sales and decrease payments. Gadgets2u.com's cash flow (Appendix 5) shows sales are increasing, so aside from selling excess inventories (using predatory pricing for old products), nothing much can be done for sales. The company can decrease payments by: (a) managing purchases (pay suppliers after 60 to 90 days, or after the peak seasons (lines 61-62) when revenues are generated), (b) cutting down payment time from credit card companies from one month (line 65) to one or two weeks, (c) restructuring higher-cost short-term borrowing (line 143) to lower-cost long-term borrowing (long-term loans may be cheaper than short-term loans), (d) increasing the efficiency of purchasing and stock control (to avoid excess stocks, see lines 97-99), (e) improving warehouse usage to achieve economies of scale (as an example, see Section B, Question 5: if they bought 18,000 units in May at 3.00, Gadgets2u.com would have saved3,800 out of a54,000 purchase, for savings of 7%), and (f) finding ways to reduce exchange risk (line 151) (paying for goods when the Euro is strong will decrease the dollar and yen payments due to exchange rate fluctuations; see lines 147-148). Works Cited: Amor, Daniel. The E-business (R)evolution: Living and Working in an Interconnected World. New Jersey: Prentice Hall, 2000. Bagozzi, Richard P. "Marketing Management: Strategies, Tactics, New Horizons." Ed. Gayton E. Germane. The Executive Course. Reading: Addison-Wesley, 1986. Seiler, Robert E. "Managerial Control Accounting." Eds. Lester R. Bittel and Jackson E. Ramsey. Handbook for Professional Managers. New York: McGraw-Hill, 1985. Appendix 1 Table A. Stock value at end-month (in Euros). FIFO Value at end-mo. May 7,800 June 6,336 July 4,828 August 7,184 LIFO Value at end-mo. May 7,800 June 5,940 July 4,260 August 6,900 Table B. Gross profit for the period May to August (in Euros). FIFO GP at end-month May 30,600 June 49,976 July 65,412 August 14,506 160,494 LIFO GP at end-month May 30,600 June 49,580 July 65,240 August 14,790 160,210 Appendix 2 (*&) Worksheet (Click to see Excel File) Instructions: As soon as Worksheet appears, copy data to a separate Excel file that you can print out as Appendix 2. Please format the worksheet for printing as needed. Then, clean up this page [delete the area between (*&) and (&*)] before submitting the paper. Good luck! (&*) Endnotes: Read More