Economics and Management of Competitive Strategy - Assignment Example

 Essay and Discussion Questions: a) After reading chapter 7, complete a written response to the following question at the end of the chapter for discussion in class: Chapter 7: Discussion Question 1. (i) The customer’s willingness to pay for a movie rental is equal to the value that the customer perceives to realize or benefit for the cost paid for renting a movie. The customer’s willingness to pay is the benefit that would be derived from watching the movie. Likewise, in terms of the cost per movie of the movie studios who are the movie rental supplies, the total cost is the cost of producing the movie. However, to determine the supplier value, it is equal to “the difference between the payment the firm makes to the supplier and the supplier’s cost” [Spu09]. Their cost could be estimated by determining the cost of using their assets; or by calculating their operating profit. Likewise, the costs per movie of the movie rental chain is therefore the total costs or expenses that the movie rental chain is willing to pay to deliver the total value to the consumers. Thus, the value created per movie of the movie rental chain is the “total value created net of customer value and supplier value” [Spu09]. (ii) The retail price per movie is the price paid by the customer per unit of renting a movie; while the wholesale price is the price in volume, of say, renting movies in batches of 10 or more. The factors that affect retail and wholesale prices include transaction cost per unit, direct labor, and overhead costs. Consumers’ surplus is determined by the net benefits from purchasing the goods; while producers’ surplus, also known as operating profit is the supplier value, defined as “the difference between the payment the firm makes to the supplier and the supplier’s cost” (Spulber, 2009, p. 206). Thus, the total value of the firm is defined as the “created total value net of customer value and supplier value” [Spu09]. (iii) The movie rental chain can increase the value that it creates through: “(1) operating more efficiently by providing customer benefits at a lower cost or by lowering supplier cost; (2) providing greater benefits to customers by improving products and services; and (3) developing innovative transactions that offer new value to the market” [Spu09]. Likewise, the movie rental chain can increase the value that it captures either through increase of prices to customers; reducing payments to suppliers; or making more effective use of its assets. (iv) In a rent or sell of DVDs alternative, the movie rental chain should take into consideration the following factors: (1) the costs of paying suppliers (supplier value) for the DVDs to be sold or rented out; (2) direct costs (labor and overhead); and (3) the perceived customer value from either renting or buying DVDs. The cost of capital would definitely play a major part in the decision since purchasing DVDs for subsequent selling is more capital intensive than the rental option. Likewise, competition also plays an important part in terms of determining the current strategies applied by competitors and projecting the image of competitive advantage, or the ability of the movie rental chain to provide greater services that increases the total value of the firm, as compared to its competitors. Chapter 7: Discussion Question 3. If the major steel producer exhibits operating costs that is $150 greater than the world price of steel, it means that they are sourcing materials and incurring costs that are significantly higher than those that are being incurred by competitors within the industry on a global scale. Therefore, the strategy that must be implemented is to determine the root cause for higher operating costs and address them appropriately. The firm could also opt to seek cost minimization by finding markets where raw materials and labor costs are substantially lower by venturing or relocating the facilities in other countries. Thus, the considerations that enter into the strategic decision of managers include: the current world prices of steel, the direct costs (raw materials, labor and overhead), as well as the prices of competitors in the local and international markets. In addition, other factors that should be considered include volume of potential clientele in current and prospective markets; as well as resources, competencies, and abilities if venturing to international markets would be opted. Chapter 7: Discussion Question 5. An individual pharmaceutical company could make the decision of participating or not in a research program depending on the mission and vision of the organization. If one of the missions of the company is to undertake regular research for drugs that would ultimately be beneficial to the greater number of people for the greater good, any costs that would be incurred would be seen and categorized as investments for to increase the value of the firm through transaction advantage. Thus, uncertainties should be incorporated in their computations for potential returns through application of the Net Present Value (NPV) analysis [Spu09]. Likewise, there could be situations where managers could opt to stop their research projects before they are completed, especially when the resources of the company could not support or sustain any potential returns in the future. As emphasized, when the computed NPV results to negative outcome, then, at all means, the manager should put a stop to the project so as not to jeopardize the long term financial standing and condition of the company. 2. Chapter 6: Imagine a company has a policy of being a cost leader, producing a high volume of output that sells at a relatively low price. The management of the company decides to change to a product differentiation strategy that will involve selling a high-quality product at a relatively high price.  explanation of the different types of incentives The Business Dictionary defines an incentive as an “inducement or supplemental reward that serves as a motivational device for a desired action or behavior” [Web134]. The different types of incentives that could be used to facilitate the company’s new product differentiation could be a combination of traditional incentives which are classified either as monetary or non-monetary: “such as salary, bonuses, promotions, and perks” [Spu09]. In facilitating the new product differentiation strategy, a new incentive scheme for sales personnel could be designed to assist in launching the product with a relatively high price and manifesting high quality. A simple and straightforward incentive system where the connections between performance and the attainment of goals is preferable to a complex incentive program. Likewise, it is pertinent to consider that designing an appropriate incentive system would depend on the perceived value of the reward to the personnel. The motivational drives or needs of the personnel should accurately be determined prior to any appropriate incentive system which caters to the new product could be effectively designed. It could therefore be deduced that a reward could be large or small, monetary or non-monetary; but the success of the newly designed incentive system relative to the new product would always be measured against any previously installed rewards system. If the company designed an incentive system that ties volume sold to performance and an appropriate bonus is set for the previous low priced high volume product, this incentive program would definitely be set as a comparative basis for any new incentive scheme to be implemented. The new scheme should therefore be more attractive to motivate the sales personnel to surpass the indicated quota. Thus, managers could first set standards or quotas that sales people should reach in a particular time frame, say within a month’s time, to tie performance with rewards. For instance, for monetary incentives, if sales personnel could sell 10,000 units of the new product, a bonus of say, 10% of the salary could be provided. Over a longer time frame, the consistently exemplary performance could be rewarded with salary increases or promotions to higher positions, as deemed worthy. Likewise, the company could also provide non-monetary incentives and provide perks, like providing sales personnel with vacation to a certain venue if a pre-defined quota for the new product has been reached. In addition, the company could also provide discounts for their employees who wish to avail of the new products at lower prices.  discussion on the manner by which incentives identified will drive performance effectively Incentives which are tied to performance drive achievement to defined goals more effectively. As noted above, standards should first be set to determine the volume that is aimed by the company to achieve in order to generate targeted sales volume and profits. As such, the incentive schemes must be designed in such a way where these standards are tied to performance through quotas or minimum volume set for sales personnel to market before they could be provided with rewards. As emphasized, “employees are rewarded based on various performance measures rather than on specific actions or effort monitored directly by management. If the performance measures are chosen carefully, employees will “work smarter” rather than simply harder, doing what is most effective to boost performance” [Spu09]. Concurrently, the manager must not only consider relevant factors, such as needs satisfaction, external reinforcements, and expectations of the sales personnel; but more importantly, the fairness of the incentive system must be appropriately taken into account.  explanation on the manner by which the company’s abilities helped determine what incentives were appropriate to use The company’s abilities and resources would help determine what incentives were appropriate to use. For instance, as emphasized, managers must be able to discern the needs and drives which would motivate their sales people to perform better and surpass the standards of performance that are set. Thus, their needs and drives would determine whether employees would be more motivated with monetary or non-monetary incentives. Likewise, the resources of the company should also be taken into consideration in designing the incentives to be used. It was disclosed that “incentive pay is costly to employers, who must boost pay to compensate employees for the additional risks they face, and who must institute performance monitoring to implement the plans” [Spu09]. Thus, it really depends on how much resources or funds could be allocated by the company to form part of the incentive program that would aim to boost sales and performance for the new high price-high quality product. Finally, the expertise and competencies of managers in implementing the incentive program is crucial for its success. Managers must be able to motivate the people they govern toward excellent performance, consistently and effectively. References Spu09: , (Spulber, 2009, p. 206), Spu09: , (Spulber, 2009, p. 210), Spu09: , (Spulber, 2009, p. 212), Web134: , (Web Finance, Inc., 2013, p. 1), Spu09: , (Spulber, 2009, p. 179), Spu09: , (Spulber, 2009, p. 182), Read More