Input Prices and R&D Allocation Analysis for Tablet Development Corporation - Research Paper Example

Input Prices and R&D Allocation Analysis for Tablet Development Corporation Table of Contents 1 Introduction 2 Development of Pricing and R&D Allocation Strategy 3 Analysis of Tablet Development Corp. Performance 4 Conclusion References Annexes 1 Introduction 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 2 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. In order to bring a revolution in the existing business practices of the company, it is important that a new pricing strategy is devised that is based on the strategic objectives of each product individually. Furthermore, the decisions for the allocation of funds for the Research & Development (R&D) of each product should be taken individually and on annual basis to achieve the desired objectives of the product and the company. 1.1 Aim The aim of this report is to discuss the new pricing and R&D allocation strategy for the core products X5, X6 and X7 and to reflect on the subsequent performance of each product in response. 1.2 Objectives To study the new pricing decisions and R&D budget allocations for each core product, namely: X5, X6 and X7 taken in 4 years (i.e. from 2012-2015). To analyse the subsequent performance and life cycles of each product due to the difference in the decisions. To review the financial performance of each product and their impact on the market factor like consumers and market saturation. To conclude with the explicit difference in performance and the rationale behind the total score achieved. 2 Development of Pricing and R&D Allocation Strategy 2.1 Pricing Strategy The pricing strategy is largely used as the competitive force for the companies to achieve maximum market share in a particular marketplace. For instance, Apple Inc. uses the low-pricing strategy along with its innovative product catalogue to attract largest customer share of the global marketplace. In the study conducted in 2010, Blevins, Cunningham, Ivanova, Koke and Sullivan (2010) found that Apple Inc. has adopted an international price distribution strategy to achieve competitive advantage over its competitors; mainly the Microsoft. In this regard, it has a separate price strategy for each region which is consolidated and central in nature. Likewise, Tablet Development Corp.’s largest competitors are Acer, Apple, Samsung and Microsoft that are involved in the production and manufacturing of tablet computers and applications. In order to enter into the established marketplace, Tablet Development Corp. has to undertake the penetration pricing strategy. A penetration pricing strategy is used when the company has to enter into an established marketplace and to attract the market in a substantial manner through low-pricing techniques. After a while, the prices of the product are gradually increased with a strong focus on the product performance that is measured through the customer base and sales volume of each year. In the year 2012, the price of product X5 was set at the lowest possible price of $180 and it was increased by $5 every year. Similarly, the price of X6 was set at $300 only and was increased by $10 each year. The price of X7 was kept at $50 and is increased by $10 each year (See Annex 1). 2.2 R&D Budget Allocation Strategy Wind (1990) postulated that there are four purposes of R&D investment, namely: (1) Support and enhancement of existing products and services, (2) Line extension of existing products and services, (3) Discover new products and markets, and (4) Develop new products and services and market portfolios. The first two R&D activities are integral to keep the existing product catalogue of the company operational and thriving. This is a compulsory investment which varies according to the company’s maintenance and improvement costs. The other two activities depend upon the ability of a company to cover the existing expenditures of the production of the product and also focus on the future market trends to remain way ahead of its competitors (Steldon, 1992). The discovery and development of new products is a substantial investment that may or may not bear fruit. Tablet Development Corporation is involved in the technological product applications which keeps on changing. In case, it is not investing enough resources into the R&D activities, it would have become obsolete and ultimately out of business. In order to survive in the marketplace, Tablet Development Corporation has to investment substantial amount on its R&D activities. However, strategic distribution of the R&D budget over the years is key to the success. Therefore, only first two R&D activities require substantial investments whereas the last two requires little investment to keep it going. We considered the importance of product X7 and focused on investing more on its maintenance and enhancement as compared to other two products. Therefore, the R&D budget allocation was increased for product X5 and X6 in the subsequent years whereas, product X7 was allocated less percentage of the R&D budget (See Annex 1). The less amount shows the R&D allocations for the maintenance of product X7. 3 Analysis of Tablet Development Corp. Performance 3.1 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. Furthermore, the R&D costs deteriorated by -33%. However, with the changed pricing strategy and R&D allocations (see Annex 1), the product X5 experienced a growth of 65% in sales, 18% in new customers, 20% in repeat customers and 30% profitability in the year 2012 (See Annex 2). In the year 2013, the product X5 experienced a growth of 69% in sales, 20% in new customers, 25% in repeat customers and 55% profitability. Likewsie, in the year 2014, the product X5 experienced a growth of 75% in sales, 23% in new customers, 34% in repeat customers and 56% profitability. In 2015, the product X5 experienced a growth of 80% in sales, 30% in new customers, 50% in repeat customers and 60% profitability. Whereas, in the case of Joe Schmoe, 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. 3.2 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%. However, with the changed pricing strategy and R&D allocations (see Annex 1), the product X6 experienced a growth of 55% in sales, 28% in new customers, 21% in repeat customers and 31% profitability in the year 2012 (See Annex 2). In the year 2013, the product X6 experienced a growth of 59% in sales, 29% in new customers, 35% in repeat customers and 45% profitability. Likewsie, in the year 2014, the product X6 experienced a growth of 65% in sales, 32% in new customers, 36% in repeat customers and 46% profitability. In 2015, the product X6 experienced a growth of 70% in sales, 35% in new customers, 49% in repeat customers and 50% profitability. Whereas, in the case of Joe Schmoe, the product X6 experienced 60% increase in its sales and revenue and 53% increase in total costs in the year 2011-12. 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. 3.3 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%. This product was discontinued production in order to focus more on the other two products that were in the growth stage. However, in Joe Schmoe’s time, this product declined over the years. In the entire life cycle, the product X7 remained at the 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. 4 Conclusion The total score of applying the penetration pricing and strategic R&D budget allocation was 110 in the year 2015. The closed system strategy of Joe Schmoe resulted into substantial losses to the company. However, my strategic decision making for each year has resulted into 60% profitability in case of product X5 and 50% profitability in case of product X6. Furthermore, the increased spending on maintenance, support, enhancement and discovery for product X5 and X6 showed improved product which resulted in higher customer satisfaction. Furthermore, the discontinuation of product X7 through the four years helped in the success of the first two products. In the case of Joe Schmoe, all the three products were equally treated and none of them was discontinued. As a result, the budgets were poorly allocated and were wasted. The product that required more funds to maintain and enhance itself was not able to get the required amount. As a result, all the three products totally failed. References Blevins, L., Cunningham, D., Ivanova, V., Koke, R., & Sullivan, N., (2010). Apple Inc. and Acer Inc. Foreign Country Market: Taiwan. Retrieved March 3, 2012 from https://www.msu.edu/~kokerobe/bobk/koke/researchpapers_files/tiwan.pdf Seldon, B.J., (1992). Test of the optimality of R&D allocation. Journal of Business and Economics, 31. Retrieved March 1, 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 March 1, 2012 from http://marketing.wharton.upenn.edu/documents/research/9004_A_New_Approach_to_the.pdf Annexes Annex 1 Year by Year Decisions: Pricing and R&D allocations Product Decision 2012 2013 2014 2015 Price $180 $185 $190 $200 R&D% 35% 40% X5 Discontinue? No No No No Price $300 $310 $320 $330 R&D% 35% 40% X6 Discontinue? No No No No Price $50 $60 $70 $80 R&D% 30% 20% 18% 14% X7 Discontinue? Yes Yes Yes Yes Annex 2 Product X5 Financial Performance (2012-2015) 2012 2013 2014 2014 Sales 65% 69% 75% 80% New Customers 18% 20% 23% 30% Repeat Sales 20% 25% 34% 50% Profitability 30% 55% 56% 60% Annex 3 Product X6 Financial Performance (2012-2015) 2012 2013 2014 2014 Sales 55% 59% 65% 70% New Customers 28% 29% 32% 35% Repeat Sales 21% 35% 36% 49% Profitability 31% 45% 46% 50% Read More