According to Grant (1991), a corporation’s capacity to gross profits in excess of the sum of debt and equity is dependent upon two aspects: having competitive advantage over competitors and the rate of growth in a particular industry. Profits are earned by selling large amounts of products or services at cheaper prices to attract consumers, or selling at a high price when you are the sole company offering a particular product or service. For at least the next three years there is a monopoly market and Quasar owns the patent on the Neutron. This is an exceptional product so there will be challenges in the industry.
The intention is to maximize profits while there is little threat of substitutes or threat of entry from other companies (Newman, 2013). Pricing Strategy Selling 8. 2 million Neutrons at $1850. 00 yields a profit of 0. 29 billion. Jane’s advice (Vice President of Finance) to cut advertising costs by 200 million would add 200 million to the bottom line. Jane is most likely relying on income statements and balance sheets, which has backward looking data (Newman, 2013) but shows that the company would profit by spending less on advertising while the product is still new to the industry.
The cost to produce one single unit at this price is a little less than 10 million. The product’s demand is inelastic; it would sell the same number of units without regard to price. Robert’s (Vice President of Marketing) advisement is to spend more on advertising (500 million) because it would increase profits by volume and building the brand will contribute to future sales. This is a better solution. The corporation could reach out to new customers in all locations to compete for shares while growth is slow (Anand, 2013).
It is important to allocate funds towards marketing and advertising when a new product is vying to make a mark in a new industry. Production Costs and Processes The optical notebooks have done well in the past two years and have increased revenues significantly. To maintain profitability, the firm must look to streamlining manufacturing facilities. David, Vice President of Technology states the firm is experiencing waste in the production process, which is increasing the cost of production. The new price for Neutron was set at $1900. 00.
This created a downward sloping curve that means an increase in costs to cover production improvements should not be passed onto customers because fewer people would buy the product at higher prices. Threat of Rivalry Orion Technologies has entered the market and captured a 50% market share. In order to protect Quasar’s market share, the corporation must attract competitor’s customers. The products are similar; a new pricing strategy is needed. The price is set at $1750. 00 expecting Orion to sell for $1800. 00. Our prediction would garner 61 million profit and 56 % of the market share.
When prices were changed, Orion lowered their prices to $1750. 00, which resulted in a 50/50 market share, 1230 million in revenue for each company with Orion losing 162 million in profits. Quasar used a game theory to predict Orion’s strategic behaviors by assuming their next move. In an oligopoly, the degree of o pricing power depends on the differences in products. These two products were virtually the same. Because there are only a few competitors, both companies would benefit by coordinating strategic actions so that they both prosper (Newman, 2013).
One way to coordinate is to agree to offer certain features on the notebooks exclusively rather than battle through price wars. Monopolistic Competition Quasar has found a new market for notebooks, namely targeting customers to buy the notebooks for personal use rather than sell exclusively to corporate accounts. Optical technology has become readily available and there are new competitors in the market. To have a leg up in the industry, we must add new features to differentiate our product from competitors. Robert, a marketing consultant suggests that Quasar launches a ariant of the notebook similar to Kindle called the Ceres. The firm could set aside 200 million for branding development. This idea would work because it could sell at a premium price. Ceres production would also use 12 million units of unused optimum production capacity, which would lower production costs for the Ceres and the Neutron. This move allows Quasar to target new market segments. Another avenue is to sell cheaper complementary products as Apple has done with iTunes (Anand, 2006). Perfect Competition
In a perfectly competitive industry, consumers buy items because of cheaper prices when companies are selling similar items. It is difficult to achieve even a temporary competitive advantage because consumers will switch to cheaper products or services. Low entry barriers create numerous competitors (Newman, 2013). Perfect competition is a rare industry structure and is usually approached by commodity markets like natural gas for example. Currently, Quasar’s optical notebooks have matured. Market share and profit margins for the Neutron has stabilized.
We have acquired a controlling stake in Opticom, one of our suppliers of optical screen displays. Opticom is a profitable venture because it is sold mainly online at process quoted by suppliers. Robert (VP of marketing) thinks we will not continue to make profits because many firms are doing the same thing we are. David, (VP of technology) believes that we should take the initiative for continuous process improvement as we did with Quasar. I decide to allocate 40 million dollars for David’s initiatives over the next six months. In February, we saved $0. /unit because of reduced inventory and $0. 05/unit due to an increase in material usage efficiency. The market price remains the same as January ($50). In March, we continued to see profits from reduction in rejection rates and material usage, however, our competitors have forced us to decrease our market price by $0. 10/unit and they have been able to replicate our savings from material usage, which pushes the market price another $0. 05/unit. Market prices continue to drop in April because our competitors have also reduced rejection rates and replicate saving form material usage by $0. 5/unit and $0. 05, respectively. In May, we did not see any saving but market prices continue to plummet ($0. 02/unit due to rejection rates and reduced downtime $0. 15/unit for competitors). The following is our semi-annual report: Year 2013 Total Investments in Production40mn Total Savings accrued over period108mn Savings accrued over the period0. 5mn Current Profit0. 2mn Conclusion Although we have seen marginal profits by investing in continuous process improvement, I do not see this scenario as a way to increase profits over time.
I think it was anomaly, it does not prove that we will get the same result if we continue this process. Our competitors can also invest in branding improvements and may find other ways to gain market share in this industry. Rivalry in any market is intense because it is hard to build up a brand. According to Porter (2012), managers must pay attention to all forces and not confuse evidence with cause. The competitive forces can be altered. Lastly, focus on players, not products. References Anand, B. N. Harvard FSS: Crafting Business Strategy and Environmental Scanning. (2006). Accession Number: 8282c. Lecturers: Anand, Bharat N.. Document Type: Video; Transcript. Publication Type: Video). Harvard Business School Faculty Seminar Series. Grant, R. M. (1991). The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation. California Management Review, 33(3), 114-135. Newman, Charles. (2013). Managing strategy in the global marketplace. The Graduate School University of Maryland University College. Porter’s Competitive Strategies (2012). Retrieved from: http://vectorstudy. com/management- theories/porters-competitive-strategies