Developing a New Knife Product of Kitchenware Products Company - Essay Example

Number Kitchenware Products Executive Summary This report is based on Kitchenware Products Company. The company wished to develop a new knife product, but due to several uncertainties in both the technical and marketing processes, a study had to be conducted in order to figure out the feasibility of developing the new product. In this case, a financial analysis that leads to a financial model is important. The company aspires to sell over 40,000 units of the new product within the first year of its development. The study was conducted with 50 potential customers as the respondents. A quantitative research was initiated using questionnaires as the data collection method. The study results shows that the new product has great chances of recording high sells and profits within the target market. Nevertheless, this success is possible only if the company considers what is needed most by the customers. It was found that most customers would be looking at the overall superiority of the new product. 1.0 Introduction Leo Wahl established the Kitchenware Products Company in the year 1919. Since inception, the company has been a leader in the production of quality kitchen utensils mainly from stainless steel. In addition, the company has been a major producer of simple electrical appliances for kitchen use. Currently, the Kitchenware Products Company operates within an organizational tradition of superior customer service, innovation, and superior quality. Wahl keeps on changing to a new and a better ways of effectively meeting the needs of their customers. With such efforts and frequent changes, the company ensured that products are continuously developed to meet the needs of the current modern households as it is required in product development processes (Bhote, 1996). Wahl is a brand with a global presence and trust. This brand is based on the company’s founder, Leo Wahl. As at now, the company operates in an estimated 165 countries throughout the world. The company is currently considering the manufacturing and marketing of a new product; a new type of curving knife. The company has done a general approximation, and the results indicate that 40,000 units of the new product will be sold during the first year. This sales quantity is projected to increase by an average of 10% in the preceding years. The variable costs for every production unit have been approximated in three ways. The variable cost of; a raw material per unit is 3.00, packaging is 0.90 per unit, distribution is 1.00 per unit, and direct labor is 2.00 per unit. The value of currency is in pounds. The company has also done adequate forecasts on the inflation rates (Husig & Kohn, 2003). The rates for the next three consecutive years are projected as 3%, 5%, then 6%. Inflation has an effect on the product variable costs; however, fixed costs most probably remain at the same value (at 10,000) for the next four years. Tax rates also most probably remain the same for the next four years at 23%. The Kitchenware Products Company intents to sell the new knife product at 8 pound in year one, and then in the preceding years the value will be increased by 0.3 pounds. Kitchenware Products has decided to introduce a new product, as part of its investments, referred to as ProtoC or Electric Knife product of Wahl James. The ProtoC is a superior product because it is easy and comfortable to use. The product is also safe to use because it has a safety lock which hinders the knife from being accidentally opened. There is also the safety which ensures blades are removed safely. The ProtoC has several blades to enhance effectiveness. Uncertainty is always realized during the process of developing the new product, or in the marketing of the new product (Ulrich & Eppinger, 2004). The most common uncertainty issues for companies are; the proper production quantity, potential sales volume and value, the potential selling price per unit of the new product, and related manufacturing costs for the new product (Armstrong, 2013). The uncertainty factors are usually analyzed effectively through probability distributions. The profitability of introducing new products in the market is analyzed through simulation methods. Representing the risk factors is usually regarded as risk analysis. Therefore, Kitchenware products must be engaged in effective risk analysis process; during the development and the marketing of the new knife product referred to as ProtoC. From this investment, it is important to establish a good risk analysis for the process of developing and marketing the new product (Bhote, 1996). 1.1 Research Questions Kitchenware Products Company made a decision to introduce a new product mainly to meet a new line of consumers’ needs and expectations. The new product to be developed is the ProtoC, which is an electric knife product. To develop the product, a number of questions need to be put across in order to guide in the establishment of the target objectives (Burns, 2000). The following are the key questions that the report tends to answer: i. What is the need of developing the new product? ii. What aspects of the product make it better than the existing products? iii. What are the key uncertainties of developing the new product? iv. How are these uncertainties avoided? v. What are the chances of surviving the market? 1.2 Objective There is a need for Kitchenware Products Company to keep on improving in its production and marketing processes. This could only happen with certain knowledge about customer needs and the nature of the market for an effective pricing strategy (Smith & Reinertsen, 1991). The main objective in this report is to specify the most promising strategies in the course of developing the new product. The idea here is to establish a way of identifying the proper production quantity, potential sales volume, and value, the potential selling price per unit of the new product, and related manufacturing costs for the new product (Husig & Kohn, 2003). The potential selling price per unit of the new product is based on the applied pricing process, which is a major concern in this report (Wong & Tong, 2012). 2.0 Methodology This section of the report concerns the methods used to collect data, the type of data used, as well as the techniques used to analyze the data (Nachmais & Nachmais, 2008). This sections aims to answer all the research questions in order to achieve the main objectives. In any research, the kind of data to be used and the technique used to analyze such data are very critical (Burns, 2000). In many cases, researchers may decide to use only quantitative data or purely qualitative data. Sometimes a combination of the two becomes essential due to various reasons. A research combines the two methods in order to achieve the intended goals (Higgs, 1997). For this research, quantitative data is used since the research is quantitative in nature. In that case, quantitative techniques are used to analyze the data about Kitchenware products. 2.1 Data Collection Process The data collected was mainly quantitative in aspect. The quantitative data was obtained through both secondary and primary methods (Cant, 1997). This implies that both secondary data and primary data were found to be essential in this research. Secondary data refers to the data obtained from existing sources. It is the data from previous studies as well as maintained records about the event being studied. Previous study reports could be found in online articles, research paper, blogs, and magazines. In that case, previous studies about the development of new products were obtained from online sources such as journal articles, websites, and blogs (Creswell, 2003). The major aim is to figure out the feasibility of developing the new product given the prevailing market conditions as well future market expectations. The feasibility is attributed to the need of developing the new product. Data on such aspects and its analysis would give way to the perfect strategies enhancing the new product quality (Cooper & Edgett, 2008). Again, achieving success in the product development is based on the major uncertainties to be faced in the course of developing the new product. From the data analysis, ways of avoiding the possible uncertainties are structured including the establishment of the chances of surviving the existing market competition (Babin, et al., 2012). Primary data is also critical in cases where secondary data cannot fit in the research. Secondary data only reflects the past, but primary data is critical for the prevailing conditions. Primary data in this case was to determine the value of the new product to customers within the target market. It was important to establish customer preferences for the newly developed product with respect to the alternative products, which the customers could purchase. In total, 50 potential customers were conducted regarding the preferred features on the new product. Again, the same number of customers was questioned about the amount they would be willing to pay for the new product (Bilbrough, 2013). 2.2 Results and Analysis A risk analysis on the marketing of the new product is important in this case. The company made a capital investment of £120,000. The initial estimates based on a study conducted about the company reveal that the company is able to sell 40,000 units and experience sales increase by 10% p.a. The resulting sell volume in the following year would be: (110/100)*40,000 = 44,000 The variable cost for each unit would be calculated as: Variable cost per unit = £3.00 +£0.90 + £2.00 +1.00 =£6.90 First year For the 44,000 units, the variable cost for the first year is: 40,000 * £6.90 *1.03 = £276,000*1.03 = 284280 Total cost for the first year would be VC + FC = £284,280 + £10,000 = £294,280 The profit would be: Net Profit = (selling price – production cost) – tax Selling price = £8 *40,000 = 320,000 =£320,000 -£294,280 - tax =£25720-£5915.6 = £19804.40 Scenario 1 If inflation is predicted to be 5% during the second year and 9% thereafter, the profitability of the new carving knife in these circumstances would be as follows: Second year For the 44,000 units, the variable cost for the second year is: 44,000 * 6.90 *1.05 = £318780 Total cost for the first year would be VC + FC = £328780 The profit would be: Net Profit = (selling price – production cost) – tax Selling price = £8.3 *44,000 = 365200 =£70920 - 16311.6 =£54608.4 Third Year The third year would yield into 1105 of 44,000 units, which would become 484,000 units. The variable cost for the second year is: 48,400 *6.90 *1.09 = £364016.4 Total cost for the first year would be VC + FC = £374016.4 The profit would be: Net Profit = (selling price – production cost) – tax Selling price = £8.6 *48,400 = 416240 =£416240- tax =416240-374016.4 =£42223.6 – tax (23%) = £32512.172 Scenario 2 If the Company decides to sell 4% more units per year as well as increasing the current selling price by 10% per year, the effect on the ‘net profit after tax’ for each year would be as follows: First year The fix and variable costs will not be affected. Thus, for the 40,000 units, the variable cost for the first year is: 40,000 * 6.90 *1.03 = £276,000*1.03 = 284280 Total cost for the first year would be VC + FC = £284,280 + £10,000 = £294,280 The profit would be: Net Profit = (selling price – production cost) – tax Selling price = £8 *40,000 = 320,000 =£320,000 -£294,280 - tax =£25720-£5915.6 = £19804.40 NB: The first year is the base. Second year For the 44,000 units, the variable cost for the second year is: 41600 * 6.90 *1.05 = £301392 Total cost for the first year would be VC + FC = £311392 The profit would be: Net Profit = (selling price – production cost) – tax Selling price = £8.3*1.1*41600 = 379808 = 379808- 311392 =£68416- tax (23%) =£52680.32 For the second year, the products net profits would decrease from £54608.4 to £52680.32. This implies that the net effect is a decrease in the net profit by 3.5%. Third Year Similarly, the variable cost is not affected and remains as 43264*6.90 *1.09 = £325388.54 Total cost for the first year would be VC + FC = £335388.54 The profit would be: Net Profit = (selling price – production cost) – tax Selling price = £8.6*1.1 *43264= 409277.44 =409277.44-335388.54 =£73888.9- tax(23%) =£56894.453 In this case, the net profit would increase from £32512.172 to £56894.453, which is represented by a 75% increase. Scenario 3: If Kitchenware Products decides to vary the projected sales volume over a range from -5% to 10% of the initial assumption. The company wants to see how the ‘Net profit after tax’ would change as the projected sales volume changes. This is done as follows: First year Net Profit at -5% For the 40,000 units, the new volume would be 38000. The variable cost for the first year is: 38000 * £6.90 *1.03 = £270066 Total cost for the first year would be VC + FC = £270066 The profit would be: Net Profit = (selling price – production cost) – tax Selling price = £8 *38000 = 304000 =£304000 –270066 = £33934- tax (23%) =26129.18 10% increase Variable Cost would be 44000- * 6.90 *1.03 = £312708 Total cost for the first year would be VC + FC = £322708 The profit would be: Net Profit = (selling price – production cost) – tax Selling price = £8 *44000 = 352000 =£352000–312708 = £39292- tax (23%) =30254.84 Thus the net profit would change from £26129.18 to £30254.84 as the sales volume changes from -5% to 10%. The new product is typically associated with various factors, which have their respective probabilities tabulated in table 3.0 below. Table 3.0: The factors associated with the new product and their respective probabilities Selling Price Probability Variable Cost Probability Sales volume Probability 22 24 27 0.3 0.4 0.3 18 20 22 0.4 0.4 0.2 40,000 45,000 50,000 0.25 0.50 0.25   From the table, the mean profit can be obtained through the determination of the expected value of each case regarding the selling price and the variable cost. The expected values are calculated as follows: Selling price (40000*22*0.3 + 45000*24*0.4 + 50000*27*0.3) = 24432840 Variable cost (40000*18*0.4 + 45000*20*0.4 + 50000*22*0.2) = 11941600 Mean profit =4163746.66 The key feature that customers were looking for are quality/superiority, ease of use, comfort of use, safety, and effectiveness (Bernstein & Macias, 2002). Based on such aspects, customers prioritized on different features. The results of their preferences were tabulated in the table below. Table 3.2.1: Feature Preferences by Customers on the new Product # New Product’s Feature No. of Customers giving priority Rank of Product Features 1 Product Superiority 18 1 2 Comfort 8 3 3 Ease of use 6 5 4 Safety 11 2 5 Effectiveness 7 4 Total Customers Conducted 50 For easy interpretation, the tabulated results were presented in a pie chart as depicted below: Figure 3.2.1: Feature Preferences by Customers on the new Product From the pie-chart, it is clear that most of the respondents (36%) focused on the product superiority over other products. Again, 22 per cent of the participants focused on product safety as their preferred feature. 16 percent of them talked of comfort as their preferred feature on the new product while 14 per cent preferred effectiveness on the product. Regarding the product pricing, the respondents were grouped into three categories. These categories included the customers considering the new product to sell at a higher price than the average competing product, those considering the new product to sell at a price lower than the market equilibrium price, and those expecting it to sell at a price lower than the market equilibrium (Armstrong, 2013). The results were presented as follows: Table 3.2.2: Projected Price Level Customer Category Number of Customers Category Rank Above Market Equilibrium 32 1 At Equilibrium 12 2 Below Equilibrium 6 3 A graphical presentation of the same results was done in a pie chart as shown below: Figure 3.2.2: Projected Price Level 3.0 Discussion Based on the study results, the ProtoC is a superior product as aspired by the majority of the conducted customers. It means that the company needs to focus on the product priority. The second issue to focus on should be the safety of the new product. With regard to the product safety, aspects like safety lock should be incorporated to hinder the knife from opening accidentally and causing unintended injuries to users. Besides, the safety measure would ensure that the knife blades are always removed safely. Slightly over a quarter of the customers wish to have a comfortable product in the sense that it is easy to use and handle (Bhote, 1996). The last feature to consider, which is also critical in the development of the new product is its effectiveness. Having accomplished all these requirements, the uncertainties of the product performance in the target market would reduce significantly. The uncertainties in this case come in the process of developing the product, and within the target market. The process of developing the new product should be based on customers’ expectations as well as the nature of the market (Bacon, et al., 1994). The market for the new product seems to be promising since over 64 per cent of customers would be willing to pay for the new product at a price higher than the market equilibrium. Nevertheless, these expectations are only based on the research results, which represent the targeted population of customers. Chances that the result reflects the actual nature of the target market are very high. The new product can succeed if at least it sells at or above the exiting market equilibrium. Based on the pricing statistics, there is a 76% chance that the new product would succeed in the market. This chance of success can only come true only when effective measures are taken towards the development of the new product (Husig & Kohn, 2003). 4.0 Conclusion To develop the new product, Kitchenware Products Company should utilize all possible steps of developing a new product. The first and major step is to initiate an idea generation in which ideas for the new product are obtained, mainly from basic research (Barnet, 2013). The model used in this case is a SWOT analysis in which the strengths, weaknesses, opportunities, and threats are considered. Many ideas are generated regarding the new product (Bilbrough, 2013). Not all the ideas are implemented. The ideas are created in many forms and based on many forms. Usually, the idea generation as well as the brainstorming of a new product is initiated using idea generation techniques mainly after doing an opportunity analysis as a way of supporting the ideas. This is done in the phase of idea screening. In the idea-screening phase, the aim is to get rid of unsound concepts before devoting resources to such concepts. The idea screeners need to figure out some key requirements. It is significant to establish whether would benefit from the new product. Another aspect considered is the forecasts for the size and growth of the market segment or the target market. Besides, both the current and the expected competitive pressures for the new product’s idea are considered. It is also important to analyze the industry sales as well as the market trends on which the product idea is based and whether is technically feasible to manufacture the product (Bernstein & Macias, 2002). The most important consideration is most whether product would be profitable after being manufacture and if there is any possibility of delivering it to the customers at the target price level. Lesson Learned From the report, the reader would learn about various aspects in the development of a new product with respect to both the design and marketing processes. Essentially, developing a new product is challenging and it is even more serious when it comes to the risk involved especially after making a huge investment. A producer has to initiate a serious research whose results have to closely reflect the reality in terms of the complete product, the market, and pricing strategies. Above all, it is important to note that quality of the new product is the ultimate consideration for the product to be successful, but even with high quality, customer reaction is essential in determining the pricing mechanism and the size of the target and potential market. 5.0 Recommendations Based on the study report, the following recommendations can enhance the company’s process of developing a new product. The recommendations include the following: Concept development as well as testing could be initiated as well in order to develop details on both the market and engineering process. Again, business analysis could be conducted by estimating the selling price with respect to the existing competition as well as customer feedbacks. From, the customer feedback, the sales volume can be determined. 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