Constructing and Analysing - Math Problem Example

Detailed Case Study Statement of the situation George Mann thee divisional director of the Domestic Products Division (DPD), Groningen, the Netherlands, DPD's main product is an electronic shaver. The division lost nearly €500,000 in the previous year and George Mann has been having discussions with four executives Tom Salman, the sales manager, Michael Advent, the advertising manager, David Marcus the marketing Services manager and Sarah Proctor, the product manager. Torn Salman recommends a price cut of 10% from list which, he contends, would result in the company selling the whole capacity of 160,000 and probably requiring either second-sourcing or double-shift working. Michael Advent believes that DPD must expand overseas and adopt much more aggressive marketing. Advertising is to be increased to €375,000 a year. Further the price should be increased by 10% and the schedule restructured so that the product is priced at €165 but carries a 25% discount. As a further stimulus to international sales, he recommends that sales commission is raised from 5% to 10% and says that he is confident that, focusing on UK stockists with increased publicity, increased commission the division would sell a minimum of 125,000 units. David Marcus tends towards Advent's opinion. However, he is adamant that the price of €150 should not be altered but considers that DPD should strengthen its strategy for the product, go for greater overseas turnover and aim to sell 80% capacity of factory output. Sarah Proctor is negotiating with a well-known retail chain in the UK. She explains that they wish to place an initial order for 50,000 units ex-factory, that is, no distribution costs would be involved, but they are asking for €37,500 towards the cost of promotion, and €30 per 100 packaging cost. As it is an international sale, no commission would be paid. It is clear from her discussions with the prospect that the existing home market of 90,000 units at the current price would not be affected. Introduction The problem with this case study involves more than one discipline of management and more than one aspect of marketing and research. It involves financial, marketing and management problems including logistics and overseas trade concerns. All the aspects are interlinked and it is not possible to study and one aspect in isolation. Bearing that in mind we approach the problem with the following views: We identify the keys of the problem and restate the problem to make it meaningful, and proceed to find the financial implications and the marketing strategies touted. We will also analyze the production problem in detail. The Costing Situation The situation is seen through the eyes of the decision maker George Mann divisional director of the Domestic Products Division (DPD) of the company. We also consider that the company is at Groningen, The Netherlands, and the domestic market is the whole nation. Analysis of the problem. 1. Price factor - considerations This has a direct bearing on the analysis. We have to first see if the pricing and the sale at the domestic market is so shaped as to yield a profit, regardless of the number of units sold at any time. The current price of the product, the electronic shaver at the local market is €150 per unit. There is a discount offered at 25% and the effective sale price is €150 - € 37.50 = € 112.50. It is the actual selling price. Commission given on the sale to the dealer is 5%. Net returns on a single piece sold will thus become (€ 112.50 – € 5.62) = €106.88. The cost price of a single unit, excluding fixed costs incurred, The aim being to maximize profit or break even by covering variable costs – is: Cost list Total cost per unit Materials €45 per unit. Direct labour €15 per unit. Variable prod. Over head €9 per unit. Thus variable costs per unit will be € 69 We have to remember that we have not accounted for the fixed costs, and some variable costs. The net returns of the variable cost from each sale will be : €106.88- 69 = €37.68 We have to remember that the returns we calculated is the bare requisite for remaining in business without folding up. Let us call it the Survival returns. Looking up at the data of sales of the previous year, we know that the company sold 90,000 units. Assuming that production was equal to the sale and fixed costs can be distributed among all units sold, (for including the other variable and fixed costs) we now proceed to actually calculate the distribution of the fixed costs. The fixed and other costs are given as: Sales salaries €891,000, Advertising €120,000, Distribution of the €151,875, Fixed administration cost €900000, Variable administration €50,625, Fixed production overheads €1,770,000. The total cost adding the above is € 3,883,500. The unit distributed cost is € 43.15 (TC/90,000). Adding this to the cost we got for the variable cost, the actual cost of a sale is € 80.83. We have calculated the return on a single piece sold as = €106.88. The net obtained on a sale = €26.05. Thus for the sale of the 90000 units an average profit of 0.20% was achieved. In other words, the profit earned was below the 5% return level necessary for expansion and growth. Or we may also see that the venture made a loss (1- 0.20) of 0.8%. Thus one hypothesis to counter the current situation will be to curtail the variable costs in the sale front and manufacturing front to get the returns raised to a 05.00% level. 2. The colleagues of George Mann have come up with suggestions over the product pricing and sales, including expanding it overseas. The suggestions may be stated in a nutshell: The unit made a loss of €500,000 last financial year. Price cuts of 10% will result in sale of 160000 units. Must step up advertising budget to Pound 375,000 a year. Price must be increased by 10%. Product to be priced at €165 but carries a 25% discount Selling to UK stockists will sell 125,000 units. Will also allow for sale of 80% of output. The price prevailing must not be lowered or changed. UK chain stores agree to take 50,000 units with €37,500 for promotion and €30 per 100 packaging cost. The home market with 90,000 unit sale may not be affected by overseas venture, but the pricing policy will. The Merits and Demerits of these suggested Policies. The various personnel have suggested the policies which we have condensed above. Let us now examine how these policies have their inherent strength and weakness and what is the strategy to be evolved to solve the ‘Shaver Problem’ 1. Financial Problem analysis The unit made a loss in the last financial year, in spite of sales of 900000 units. Raising the sale by increasing the advertising will further increase the variable cost and make the extra sale valueless. The financial question will be to see what expenses in production, distribution and sale, including commission, advertisement layouts, and discounts can be cut or reduced so that with the existing tempo of sale it is possible to break even. In that case which of these suggestions regarding price and production will be more beneficial and proper? 1. Price cuts of 10% will result in sale of 160000 units. 2. Must step up advertising budget to Pound 375,000 a year. 3. Price must be increased by 10%. Product to be priced at €165 but carries a 25% discount 4. The price prevailing must not be lowered or changed. We can note that (1) and (3) are contradictory. Only one of these can be followed. Similarly, if the company was to find new markets in the UK, what will be the total production cost considering that shifts and overtime, consequently labour cost, machinery cost and other fixed and variable cost like shipping and taxes increasing? Will there be a differential price for the domestic and UK market? What is the best strategy for export and venture overseas from the perspective of Finance? What will be the total outlay and capital finance needed to improve production, marketing and overseas ventures? These form the financial angle of the problem. 2. Production Problems The production problem is two fold. We already know that the domestic market sale at the prevalent price will have to come down. However as it is the system is not producing the desired profit. Price hike is out of the question. Production costs will have to be cut down drastically to reduce the production cost. We have two strategies open. One is to find a more suitable system of production which will bring the ‘economies of scale’ into the current operation thereby reduce cost. The alternative is to seek shorter methods like replacing a part of the labour with automations. This also involves initial outlay. Increasing work hours in shifts will raise the labour cost and all variable costs. In case of an overseas venture, the pertinent questions are: Can the production be geared to meet the extra demand, say at least the 500000 pieces demanded by the UK store? If that was to be achieved what outlay and what system can produce the articles at the desired time and cost using the existing infrastructure and machinery? How to allot the production sequence for both the domestic and overseas markets? We cannot foresee all the problems that may crop up, but these questions have to be answered first before any venture can be planned. 3. Marketing Problems Marketing departments problems are again two fold. For the domestic market the marketing strategy has to be overhauled. Who are the domestic competitors? Who are the foreign competitors operating in the local market? What is the consumer preference? For example the marketing and advertising has to woo the prospects from the blade-and lather shave market to the electronic shaver market. It is not enough to compete with other products of the same category. Those prospects are lost already. 4. Overseas Problems What are the policies in UK regarding imports and restrictions? What economy is it? What culture and habit prevail? How many competitors exist? Will the chain store be reliable? What will happen if a competitor launches similar product and the chain store switches loyalty? What kind of restrictions exists in transfer of gains to Netherlands? Different modes of entry may be more appropriate under different circumstances, and the mode of entry is an important factor in the success of the project.. The appropriate adjustments for national differences always should be made. Should a joint venture, take over or independent direct marketing planned ought to be studied in depth. The marketing strategy to win over the foreign clients may require different approach to those envisaged for the domestic market. 5. Strategy planning problems Added to all the above, logistics – what is the cost of shipping products to UK? Is it cheaper to manufacture at UK rather than use selling agents and export the product? What will be the return ratio for each option? Which is more viable? What are the requirements in terms of costs, market analysis, marketing, personnel, training, overheads and investment required to generate enough to meet a 5% profit domestically and a similar rate at the new targeted country? What is the best alternate market form? What strategies are to be carried out initially and how will cash flow, system sequences be planned? What will be the appropriate growth rate and what period of time is safe? In the short run how can the company make enough to sustain added operational burdens without folding down? Appropriate Analysis Methods George Mann and his colleagues have to find answers to these questions and find a suitable solution for the short run and long run operations. The analysis as we have shown should centre on stabilizing production and creating demand for the shaver at the home market by targeting the sector of the market that can be wooed from the blade shaving market by highlighting the product difference and creating a new niche. This involves through positioning the product for the uniqueness, cost, and market leadership. A SWOT, PEST, Cost Leadership Strategy will have to be done with market research for the domestic and UK Market. Along with that for the UK market a separate study will have to be designed and done to determine the entry mode, type of holding and distribution, economic consideration, product differentiation, competition and cost analysis will have to be done before embarking on any change. Alternate Course of Action and Strategy Plan Analysis We have studied the problem in detail and without getting carried away by such rhetoric like “there are a lot of rough chins out there”, have decided to approach the problem logically first asking the question – Are the rough chins out there ready for the shaver? You will now have come to the conclusion that the problem cannot be studied in isolation. That is to say that we cannot see it as a marketing problem or production problem and so on. It requires a whole new approach or the solutions ought to be generated from all together a new way of looking at the problem. We are aware that it involves more than one discipline of management and more than one aspect of marketing and research. It involves financial, marketing and management problems including logistics and overseas trade concerns. All the aspects are interlinked and it is not possible to study and one aspect in isolation. Bearing that in mind we approach the problem with what ought to be the best way of finding a solution to the aspirations of George Mann in UK market, and how to cope with the local trend which is not satisfactory? We have seen that the price factor per unit and policies of discount have to be restructured. We also arrived at the conclusion that to effectively work on price, we have to consider curtailing the variable costs in the sale front and manufacturing front to get the returns raised to a 05.00% level. Similarly, if the company was to find new markets in the UK, what will be the best pricing policy for the UK market? What is the best strategy for export and venture overseas from the perspective of Finance? What will be the total outlay and capital finance needed to improve production, marketing and overseas ventures? Have to be answered. We have to integrate the possible problems and challenges in Production. The production, we already know that the domestic market sale at the prevalent price will have to come down. Production costs will have to be cut down drastically to reduce the production cost. We have review the production process in terms of generating an ‘economies of scale’ into the current operation thereby reduce cost. Some alternative also has to be found for stepping up production for the UK Market. Should the overseas venture be taken up at all? What will be the effects and prospects? The appropriate adjustments for national differences always should be made. Should a joint venture, take over or independent direct marketing planned ought to be studied in depth. The marketing strategy to win over the foreign clients may require different approach to those envisaged for the domestic market. The analysis as we have shown should centre on stabilizing production and creating demand for the shaver at the home market by targeting the sector of the market that can be wooed from the blade shaving market by highlighting the product difference and creating a new niche. This involves through positioning the product for the uniqueness, cost, and market leadership. The most important thing we have to consider is the approach to the problem. How can we approach the problem? With whose mind shall we think? George Mann and Tom Salman are new comers. The clue to our approach is also in that fact. We can note that (1) and (3) are contradictory. Only one of these can be followed. Similarly, if the company was to find new markets in the UK, what will be the total production cost considering that shifts and overtime, consequently labour cost, machinery cost and other fixed and variable cost like shipping and taxes increasing? Will there be a differential price for the domestic and UK market? We already know that the domestic market sale at the prevalent price will have to come down. Price hike is out of the question. Production costs will have to be cut down drastically to reduce the production cost. We have two strategies open. One is to find a more suitable system of production which will bring the ‘economies of scale’ into the current operation thereby reduce cost. The alternative is to seek shorter methods like replacing a part of the labour with automations. This also involves initial outlay. How to allot the production sequence for both the domestic and overseas markets? We cannot foresee all the problems that may crop up, but these questions have to be answered first before any venture can be planned. The marketing strategy is to see that existing prospects are loyal, and the new ones wooed from the wet shave market. At the domestic front Gillette and Wilkinson have shared many cheeks between them with their disposable razors and wet shave products. However the product of the company can be projected as vastly superior and comfortable. The marketing campaign will have to be truly phenomenal. It will naturally involve costs and marketing efforts. Demand has to be created by appropriate strategies. A survey of the potential market and the impact of attacking the prospect field of the wet shave market have to be done through a professional agency and all these are going to be initially very costly. “A better shaver” strategy will not be working any more, since the preference of the consumer in the market is set. The marketing strategy is to see that existing prospects are loyal, and the new ones wooed from the wet shave market. At the domestic front Gillette and Wilkinson have shared many cheeks between them with their disposable razors and wet shave products. However the product of the company can be projected as vastly superior and comfortable. The marketing campaign will have to be truly phenomenal. It will naturally involve costs and marketing efforts. Demand has to be created by appropriate strategies. A survey of the potential market and the impact of attacking the prospect field of the wet shave market have to be done through a professional agency and all these are going to be initially very costly. The question here is: Will the cost and effort help capture a larger market for the shaver, and will it help increasing the market share substantially? What benchmark and goals are to be set for such efforts and how will the success be measured? How will the competitiveness be maintained once it succeeds? What to do if it fails? In the overseas market, who are the defenders of the turf and what amount of ‘chins’ are available for conversion? What are the policies to be framed for the UK exports? Many modes of entry may be more appropriate under different circumstances, and the mode of entry is an important factor in the success of the project.. The appropriate adjustments for national differences always should be made. Should a joint venture, take over or independent direct marketing planned ought to be studied in depth. The marketing strategy to win over the foreign clients may require different approach to those envisaged for the domestic market. Keeping all this in view we now formulate the approach to the problem. Proper Perspective and Approach What if a NEW company desires to enter the ‘electronic shaver’ market competing against the domestic market of this company? The one solution is to approach it from the angle of someone who desires to enter the market, given all the data about Groningen Company and its problems. So what will the new comer do? What will the new comer look for? We can agree that he will be looking for a competitive advantage. We use the theory of Michael Porter and find that there is (1) Cost advantage, (2) The differentiation advantage. According to Porter, “Cost and differentiation advantages are known as positional advantages since they describe the firm's position in the industry as a leader in either cost or differentiation. A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation.” So the competitor will try in the first place, to stick to the same price range, but with lesser costs. So the company must also try to lower its costs without increasing the price. At this point we may agree that the existing selling price must not be changed. Perhaps that is why Mann insisted that the price must not be altered. The potential new entrant will also try to differentiate his shaver as something unique and attack the niche of this and other companies. Since he may be a Guerrilla strategist, his efforts will always is to woo in prospects that are easy and who have no grooves in their mind for the product at all. Who are such prospects? Thus assuming that we are entering the crowded field of shavers with new niche marketing as a guerrilla, what strategy will we follow? We have the advantage of an existing market. The aim then will be to keep the price constant and expand into small pockets of the shaving market wooing the customers. Thought Tip Even though the product is from an established company, to market and create a new niche at the domestic market, the company strategist ought to think Like a guerrilla new entrant and re-define shaving and shaving with the machine. He has to make a constant effort to woo away a larger segment of the users of other systems and carefully avoid attacking the competitors in the electronic shaver category. We are not attacking the existing electronic shaver market because it is costly to dislodge a similar competitor rather than find an empty space and fill it. That is why Mann should think of promoting ‘electric shavers’ to those who do not use it, including the bearded ones. Cost Leadership and takeovers The cost leadership strategy relates to improving production and distribution efficiency. This involves “making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. There must be an access to the capital required to make a significant investment in production assets and technology to replace costly processes with viable ones. This requires re engineering of the manufacturing process. We are in this case given the premise that necessary funds can be obtained for this purpose. Achieving Economies of sale Economies of scale can be achieved by selling more of the same product, for example, by geographic expansion. That is what Mann is trying to do by entering the UK market. Assuming that by working out the strategies for domestic marketing in terms of the approach of a new entrant, treating the ‘shaver ‘unit as a distinct new entity in a niche market. Concluding the analysis of the Domestic Market Thus we find that there is no one exact solution to the marketing problem at the domestic front but a number of ways which ought to be integrated. A ‘separate division’ approach, coupled with guerrilla marketing strategies for the single product at the domestic market after gathering all requisite statistics and information will help the company in the long run to retain its domestic market without drastic cuts in price. It can also step up production. Conclusions & Tips - Domestic Market The important thing is to achieve cost advantage. (Why?) The differentiation advantage must be researched out. (What are the benefits?) The strategy to create a new niche at the domestic market (What & Why?) The overseas venture The company management must first seek to find out the nature of the UK market and the dynamics of competition there. A well-designed global strategy can bring about a shaver machine advantage. For one thing, the company can get the crossover customers between markets. Competitive Advantage in the UK To determine if the company can enter UK, we have to analyse the entry cost, the differences in country costs, and the possible economies of scale. Will the production costs drop with each doubling of volume? Can we say that of a shaver? If we double the quantity produced, will the costs drop? We can say yes and no. It depends on the product market and what is now available in UK and if the model proposed to be exported is unique and is considered desirable. That brings us to the identity and choice of the product. Identity of choice We have to see if the consumer needs, which largely depends on the culture and personal preference in the UK. Different consumer needs and preferences. Will the UK market accept the shaver as it is, or will it require re-engineering and making it altogether different from what it is now? If the answer is yes, then to try and sell the shaver in an incompatible market is a blunder. At the stage the company cannot re-engineer the product either. Check the suitability Industries that have more dependence on equipments than labour tend to achieve optimum efficiency and economies of scale. Larger expenses on rent and labour will negate producing more if the costs are to treble. That is why the industries like handloom and furnishing tend to have poor economies to scale, and automotive, airplane and such industries have higher economies to scale. The company should analyse if by taking on a new market and produce more of its shavers; it can cut down costs at least by 20% for each doubling of volume. It must venture to double or market to a new territory only if this becomes viable. The bulkier the goods, lesser the advantage. For example diamonds are economic to export than things like furniture. In this case the shaver is an ‘export’ favouring item. The transport cost in bulk will be lesser. We may also consider that to market the product overseas, we ought to have a coordinated marketing program at the local market. The company has a record of marketing in the local market. However it is known that the UK agent who desires to be the outlet has imposed conditions and may require close coordination and a special marketing strategy to enter the UK Market. The one question we have to answer is, will the entry in to the UK markets bring economies of scale to the domestic markets and also provide profit with price stability? The existence of competitors at UK indicates that the market is viable. What is to be analysed is if there will be a cost advantage over the local producer. In most cases overseas competitors will have a cost advantage over local competitors. This is because of many factors like government policies, taxing, protection policies and regulations. Joint ventures also have its own advantages. Comparative advantage would be the margin obtained in differences of production process and cost of land labour and capital. The Swedish economists Eli Hecksher and Bertil Ohlin developed the factor-proportions theory, according to which a country enjoys a comparative advantage in those goods that make intensive use of factors that the country has in relative abundance. There are other strategies like multi-domestic strategies where a unit is set up either as a joint venture at the new country. This is followed by most companies like Cocoa Cola which has bottling agents the world over. Since the company has no market share in the UK market, one must analyze the cost structure to determine if the acquisition or merger or some kind of joint venture would offer both a competitive advantage. With the acquisition, will the company be able to cut costs on raw materials, depreciation and maintenance, R&D, and general and administrative costs?. These costs represented 53% of our domestic cost structure. The tasks before the team: So in the context of marketing to UK, what ought the team do? The team has to consider the mode of entry: Is exporting, licensing, Joint venture, or direct investment in UK better? Since the company already has a retail outlet contract at UK it can become an exporter, and having established the market try to create a joint venture with an existing competitor or invest directly depending on the outcomes. You will now understand that other than applying the known cause and effect and management principles to the situation and obtaining viable outcomes, one solution always is impossible in such situations. This is a suggested method of enquiry and is by no means exhaustive. Alternate approaches and different solutions are always possible. Conclusions & Tips - UK Market Study the nature of the UK market Find the dynamics of competition there. Locate the crossover customers between markets. Find the entry cost, the differences in country costs, and the possible economies of scale. Product acceptance Analyse the effect on costs Analyse economies of scale to the domestic markets Find the suitable type of trade, Exporter, Venture or investor at UK. Summing up and conclusions The analysis as we have shown should centre on stabilizing production and creating demand for the shaver at the home market by targeting the sector of the market that can be wooed from the blade shaving market by highlighting the product difference and creating a new niche. This involves through positioning the product for the uniqueness, cost, and market leadership. We also discussed that a separate compartmentalized approach we termed the ‘department’ approach is necessary. We also observed that a guerrilla strategy ought to work out in the domestic market and found it necessary to cut costs by improving the production cycles. On the question of the UK venture we found that more information has to be gathered on the products capability, acceptance as it is, and the most viable medium of operation in that country has to be analysed in depth first before even attempting to negotiate with the potential agent. We may therefore sum up our conclusions that to reach a proper balance in the operation and sale of the shaver, a study and analysis of how to achieve cost advantage, The differentiation advantage, and arrive at a new production and marketing policy. For exports, it is necessary to first study the nature of the UK market and asses the entry cost, the differences in country costs, and the possible economies of scale. Recommended Reading Foley, James F., The Global Entrepreneur: Taking Your Business International John Middleton, The Ultimate Strategy Library : The 50 Most Influential Strategic Ideas of All Time Mark N. Clemente and David S. Greenspan, Winning at Mergers and Acquisitions : The Guide to Market Focused Planning and Integration Suggestion: You can convert this lecture to a PDF file (adobe) and post it with links at your site. Read More