Larson_Business_Recommendations

Business Recommendations for Larson, Inc. Larson, Inc. is a manufacturer of batteries for anything from laptops to toys. Larson is currently facing an uncertainty in the future economic environment. To complicate matters, because the company has operations in the United States and Germany there is a chance that the economic conditions in each country will be different (University of Phoenix, 2010). This will mean that Larson will have to make decisions independently for each of its operations based on the economy in each country. Alternative Economic Futures In the milestone one paper written by team D it was determined that the most likely economic future was a recovery in both countries. This determination was based on the examination of economic indicators in both countries including the unemployment rates, inflation, GDP, the federal funds rate, and the discount rate. The team has now been asked to make recommendations for three alternative economic futures. The three alternative economic futures that were chosen are the economies in each country move in different directions, there is a double dip recession in either or both countries, and because of over stimulus there is an economic recovery followed by high inflation. These three alternatives were chosen based on the belief that they are the most likely scenarios. The following discussion will address each scenario assuming that each of Larson’s operations will make decisions based on the economic environment in the country that it operates. We will therefore discuss how each of the operations should respond to economic recovery, a double dip recession, and high inflation. Economic Recovery Looking at the current unemployment rates, the GDP figures, and the inflation rates for both Germany and the Unites States, it appears that both countries are currently in the expansion stage of the business cycle (McConnell, Brue, & Flynn, 2009). In both the United States and Germany, the unemployment rates have been falling. In May 2010, the unemployment rate in the United States dropped slightly to 9.7% (United States Department of Labor, n.d.). In Germany the current unemployment rate is 7.7% (Trading Economics, 2009). The International Monetary Fund predicts that Germany will only see modest gains in GDP in the next few years with the peak in 2013 at 1.8% (Property-Investing.org, 2007-2010). In the first quarter of 2010, GDP in the United States rose at a 3% annual rate (Bureau of Economic Analysis, 2010). In the United States the average inflation rate between 1914 and 2009 was 3.37% and as of April 2010, it was 2.2% (CoinNews, 2009). The International Monetary Fund forecasts that Germany’s rate of inflation will fall significantly over the coming years and then rise to 0.5% in 2013 (Property-Investing.org, 2007-2010). In the recovery stage, Larson can expect to see a shift of the industry demand curve to the right as more money is available to households and firms. During this stage, it is expected that both households and firms will increase spending on laptops and toys, which will increase the quantity demanded for the batteries that Larson produces for these items (McConnell, Brue, & Flynn, 2009). Double Dip Recession The current fiscal position of several European countries including Germany has led to some speculation that there could be a double dip recession in both Europe and the United States. Although the International Monetary Fund and other European institutions have taken steps to lessen the threat of a European sovereign debt default, there is still a possibility that it will happen (thestar online, 1995-2010). In the United States, new home sales in May are “expected to fall off a cliff” according to a survey conducted by Market Watch. One major fear is that if sales for homes drop in the second half of the year, consumers may feel that their wealth evaporating again causing a decrease in overall spending. Durable good orders are also predicted to fall 1.4% in May from a 2.8% increase in April. According to John Silvia, a chief economist at Wells Fargo Securities, “industrial production now appears to be running ahead of demand.” This could cause a pullback in production further weakening the economy (The Wall Street Journal, 2010). According to FOX  (2010), economists estimate the chances of a double dip recession at 15%. In the event of a double dip recession, the demand curve will shift to the left causing a decrease in the overall quantity of goods produced. Given that prices tend to be “sticky” they should remain at the current levels (McConnell, Brue, & Flynn, 2009). Recovery with Inflation The two most likely causes of inflation given the current economy would be over stimulus by the government, which causes demand-pull inflation or an abrupt rise in raw material prices, which causes cost-push inflation (McConnell, Brue, & Flynn, 2009). Over stimulus by either the German Government, the United States or both is a possibility given the problems associated with fiscal policy. Fiscal policy is not an exact science and is further complicated by many problems that can undermine its effectiveness. These problems include the timing issue in which there is a lag between the time that an economic condition starts, is recognized, and action is taken. In addition, there are other problems that may arise that have a negative effect on fiscal policy including political considerations, expectations of future policy reversal, offsetting of state and local finances, the crowding out effect, and public debt. Over stimulus will cause the demand curve to shift to the right increasing prices (McConnell, Brue, & Flynn, 2009). Cost-pull inflation or an abrupt rise in raw material prices is a significant threat in the lithium ion battery industry. According to Argonne National Laboratories (n.d.),  due to an increase in uses, like car batteries in hybrid and electric cars, for Lithium batteries the demand for lithium is expected to increase at an increasing rate over the next 40 years. This combined with the possible increase in overall economic demand for all products could drive process of raw materials up considerably causing cost pull inflation. If this were to happen, the market supply curve would shift to the left causing prices to rise and quantities to fall (McConnell, Brue, & Flynn, 2009). Different Economic Environments in Each Country We recognize that it is a possibility that the economic environment of one country behave differently from that of another country and that the decisions made by the United States branch may differ from the decisions made by the German branch. However, in our recommendations below, we believe that the alternative economic scenarios adequately supply recommended courses for both the German operation and the United States operation if they were to experience differing economic scenarios simultaneously. For example, in the same year, the German branch could experience economic scenario one, (economic growth and unemployment decline) whereas the United States branch experiences economic scenario two. In this situation, the German branch would use the recommendations for economic scenario one but the United States branch would use the recommendations for economic scenario two. Pricing Strategy Pricing Strategy: Original Recommendation Our original recommendations for pricing strategies included holding prices steady and identifying ways to reduce production costs to increase profit margin. The following are recommendations to incorporate the three economic scenarios described above. Pricing Strategy: Economic Scenario One (ES1) Economic growth, unemployment decline, increased demand for batteries. 1. Keep prices similar to competitors to avoid a price war. 2. Use product differentiation to increase sales and thereby increase profits. 3. Identify ways to reduce production costs to increase the profit margin. 4. Budget dollars for research and development of a premium product that can be sold at a higher price point. Pricing Strategy: Economic Scenario Two (ES2) Economic decline, decreased demand for batteries, double dip recession. 1. Keep prices similar to competitors to avoid price wars. 2. Reduce production to minimize losses. 3. Identify ways to reduce production costs to increase the profit margin. 4. Focus advertising on the purchase of replacement batteries. Pricing Strategy: Economic Scenario Three (ES3) Economic growth, increased inflation. 1. Increase prices to accommodate for increased cost of raw materials and variable costs. 2. Identify ways to reduce production costs to increase profit margin. Non-Price Barriers to Entry Non-Price Barriers to Entry: Original Recommendation Our original recommendations included researching and developing electric car batteries, negotiate deals with electronics manufacturers to include Larson, Inc. batteries, and the development of smaller, lighter, and more environmentally friendly batteries. Non-Price Barriers to Entry: ES1 Economic growth, unemployment decline, increased demand for batteries. 1. Research cutting edge technologies and patent developments to lock out competitors from using this technology for several years. 2. Increase marketing dollars to increase costs for new entrants to the industry. 3. Include prepaid envelopes for returning depleted batteries for recycling of battery material. Use recycled materials in production as a means of lowering costs and increasing Larson’s supply of rarer battery materials. Non-Price Barriers to Entry: ES2 Economic decline, decreased demand for batteries, double dip recession. 1. Consider merging with a similar technological company to gain market share and collaborate research and development dollars. 2. Include prepaid envelopes for returning depleted batteries for recycling of battery material. Use recycled materials in production as a means of lowering costs and increasing Larson’s supply of rarer battery materials. Non-Price Barriers to Entry: ES3 Economic growth, increased inflation. 1. Owning or controlling essential raw materials for battery production. 2. Include prepaid envelopes for returning depleted batteries for recycling of battery material. Use recycled materials in production as a means of lowering costs and increasing Larson’s supply of rarer battery materials. Product Differentiation Product Differentiation: Original Recommendation The original recommendations for product differentiation included ramping up a campaign to brand Larson, Inc. batteries, easy recycling of spent batteries, and researching current advertising content and placement. Product Differentiation: ES1 Economic growth, unemployment decline, increased demand for batteries. 1. Differentiate Larson’s service from competitor’s service by including features with battery purchases such as a recycling program. 2. Research and develop new technologies that will differentiate Larson battery quality from other battery manufacturers, such as lighter, longer lasting batteries. 3. Revamp safety features until Larson laptop batteries surpass competitors in third-party safety tests, focus advertising on safety and quality of batteries, in light of HP’s recall of some of its batteries (Mandle, 2010). Product Differentiation: ES2 Economic decline, decreased demand for batteries, double dip recession. 1. Differentiate Larson’s service from competitor’s service by including features with battery purchases such as a recycling program. 2. Research and develop new technologies that will differentiate Larson battery quality from other battery manufacturers, such as lighter, longer lasting batteries. 3. Revamp safety features until Larson laptop batteries surpass competitors in third-party safety tests, focus advertising on safety and quality of batteries, in light of HP’s recall of some of its batteries (Mandle, 2010). Product Differentiation: ES3 Economic growth, increased inflation. 1. Differentiate Larson’s service from competitor’s service by including features with battery purchases such as a recycling program. 2. Research and develop new technologies that will differentiate Larson batteries from other battery manufacturers, such as lighter, longer lasting batteries. 3. Revamp safety features until Larson laptop batteries surpass competitors in third-party safety tests, focus advertising on safety and quality of batteries, in light of HP’s recall of some of its batteries (Mandle, 2010). Business Decisions, Evidence, and Modifications Pricing Decisions, Evidence, and Modifications In our above recommendations for pricing strategies for ES1, we recommend avoiding a price increase to avoid starting a price war with competitors. According to Garvin (2010, para. 2), “Unless your business model is being the superior low-cost producer or provider of a good such as Wal-Mart or Southwest airlines, competing on a price alone will never lead to a successful outcome.” Rather than competing on price, we recommend that Larson work to minimize its production costs and increase sales by differentiating its products from its competitors. Both of these recommendations will be discussed in further detail later in the paper. In ES1, Larson can also capitalize the consumer’s increased purchasing power, due to higher levels of employment (United States Department of Labor, 2009). The expansion stage is a practical time to bring higher price point products to the marketplace. In ES2, although the economy is declining due to the double dip recession, we do not recommend that Larson adjust its prices downward. According to Reuss (2009), “prices are not perfectly flexible (they exhibit ‘stickiness’).” In this case, Larson should consider reducing production to match decreased demand while minimizing losses. Larson can also hone its advertising focus to customers who would normally consider upgrading laptops or toys, but due to the recession, are more likely to opt for the less expensive option of purchasing replacement batteries. The average life of a lithium-ion battery for most electronics is two to three years (Buchmann, 2003-2005). This provides a significant number of customers over the next five years to market replacement batteries to as a means of increasing laptop and electronic equipment performance at a lower cost that upgrading to new equipment. In ES3, we recommend raising prices, not to initiate a price war, but to accommodate increases in the cost of raw materials due to inflation in this scenario. Raw materials make up approximately 75% of the total cost of production (Petersen, 2009, para. 8). In this scenario, it is likely that all battery manufacturers will increase prices because raw materials costs will also increase so it is unlikely that a price increase initiated by Larson would cost the company significant market share. In all three scenarios, we recommend reducing costs to increase profit margin. According to Howell (2008), the main costs for lithium-ion batteries are “the high cost of raw materials and materials processing as well as the costs of the cell, packaging, and manufacturing.” Although Larson does not have control over the costs of raw materials, packaging costs and manufacturing costs are areas that Larson could spend time reducing waste and increasing efficiencies. Most laptop and cell phone batteries are not seen by consumers as they are already inside of the products by the time they reach the consumer. The main function of the packaging should be to protect the batteries at the lowest cost possible. To reduce manufacturing costs, Larson should consider increasing automation at its factories in both the United States and Germany. According to saveyourfactory.com (2005), “Industrial robots provide a number of direct and indirect economic benefits… One robot can perform the work of three to five people, reducing the cost of labor.” Automation can also positively affect quality, efficiency, increased control, and viability. Non-Price Barriers to Entry Decisions, Evidence, and Modifications In our above recommendations for non-price barriers to entry for ES1, we recommended that in a time of economic growth, Larson should focus on being at the forefront of emerging technology in the battery industry through increased funding for research and development. One such technology is the lithium-air technology, which is similar to current lithium-ion battery technology, except more attractive to consumers because the battery is much lighter than a normal lithium-ion battery (Laptop Battery blog, 2010). As new technologies are developed, Larson can patent these technologies to lock out the competition from producing similar products, for up to 20 years (West Virginia University, 2008). Another barrier to entry that Larson could use in a time of growth and profit is to increase marketing dollars to increase costs for new entrants to the industry. This will increase expenses for new entrants as they will have to spend additional funds to match the name recognition that Larson will have (McConnell, Brue, & Flynn, 2009). In ES2, we recommend that Larson consider options for merging with complimentary electronics companies with similar research and development goals. Panasonic, the world’s number one plasma TV maker recently merged with former rival, Sanyo, one of the world’s largest rechargeable battery makers. Panasonic is quoted stating that “existing strategies must not only be accelerated, but also that drastic action is now required for further strengthening initiatives to achieve potential revenue and profit growth in the global economic recession stemming from the financial crisis as well as in the midst of intensified global competition” (Caggeso, 2008, para. 4). By merging with a competitor, Larson would expand not only its market share, but its research and development budget, making it a major player in the battery oligopoly. In ES3, inflation’s effects on raw materials prices are a significant concern for Larson. According to Argonne National Laboratories (n.d.), the increased use of Lithium batteries for other applications like electric and hybrid cars will cause a dramatic increase in the demand for the raw materials that are used to make these batteries in the coming years. This combined with the risk of inflation could cause the cost of the raw materials used to rise significantly. To manage this concern and create non-price barriers to entry, we recommend that Larson consider purchasing or merging with a supplier of essential raw materials for battery production (Bresnock, 2008). This merger could provide Larson with reduced rates for raw materials or simply more control of the raw materials needed for battery production during an economic period where these costs are increased. In all three economic scenarios, we recommend that Larson develop a “Depleted Battery Materials Recycling Program” by include prepaid envelopes with original battery purchase for returning depleted batteries for recycling of battery material. According to Argonne National Laboratories (n.d.), the raw materials to produce lithium-ion batteries are scarce and Larson’s use of recycled materials in production will lower its costs. New entrants to the battery market will not have recycled materials upon initial entry to the industry so this will create an additional barrier to entry. Product Differentiation Decisions, Evidence, and Modifications Product differentiation will be important for Larson regardless of the economic climate. Because it is not in Larson’s best interest to compete on price given that rival firms will likely retaliate, differentiation gives Larson an opportunity to compete without the risk that it will cause a price war with rivals (McConnell, Brue, & Flynn, 2009). The following recommendations for product differentiation apply to all three economic scenarios. One way Larson can differentiate itself from rivals is by starting a recycle program in both countries for used batteries. Larson could include a prepaid envelope in the packaging of replacement batteries so that customers can send their old batteries to Larson. This strategy has been used by ink cartridge manufacturers like HP for several years and has multiple benefits including giving the public the perception that the company is “green” and reducing the costs of manufacturing by reusing components of the used products (Hewlett-Packard Development Company, L.P., 2010). This option would also allow Larson to reduce its costs for raw materials which are projected to increase significantly due to the projected increase in demand for these materials. According to Argonne National Laboratories (n.d.), the increase in demand for raw materials such as lithium will increase drastically in the coming years. The supply of these materials will not keep up with the demand and recycling will become a necessary strategy in order to insure that there are enough raw materials to meet the demand for the battery market (Argonne National Laboratories, n.d.). Larson can cater to its customer’s needs by focusing its research and develop on new technologies that will differentiate Larson battery quality from other battery manufacturers. Consumers are interested in batteries that are lighter weight, yet maintain long-lasting energy storage capacity. Lithium-air batteries are in early stages of development and should be lighter, longer lasting batteries than Lithium-ion batteries (Saveyourfactory.com, 2005). To distinguish itself from its competitors in regards to safety, Larson should revamp its production processes and safety features on its laptop batteries until they are able to test above competitors in third-party safety tests. Larson can then use these statistics to differentiate its products as safer, higher quality products than its competitor’s products. Consumer safety with lithium-ion batteries is issue that has recently been brought to light because of recalls of numbers HP laptop batteries (Mandle, 2010). According to Howell, “Actual lithium-ion battery technology is not intrinsically safe. Short circuit, overcharge, over-discharge, crush, and high temperature can lead to thermal runaway, fire, and explosion” (Howell, 2008, para. 8). Larson should take these safety issues very seriously. Conclusion The above recommendations should provide Larson with practical business options for each potential economic scenario. Although it is nearly impossible to predict what the future will bring, by planning ahead for several options, Larson will have a relevant plan of action for pricing strategy, non-price barriers to entry, and product differentiation regardless of how the future economic climate progresses. References Argonne National Laboratories. (n.d.). Lithium Battery Recycling Issues. Retrieved from http://www1.eere.energy.gov/vehiclesandfuels/pdfs/merit_review_2009/propulsion_materials/pmp_05_gaines.pdf Bresnock. (2008). Lecture 11. Retrieved from Bresnock, ECO201 website. Buchmann, Isidor. (2003-2005). The high-power lithium-ion (BU5A). BatteryUniversity.com. Retrieved from http://www.batteryuniversity.com/partone-5A.htm Bureau of Economic Analysis. (2010). National Economic Accounts. Retrieved from http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm Caggeso, M. (2008, December 19). Panasonic offers $9 billion for controlling stake in Sanyo. Retrieved from http://www.contrarianprofits.com/articles/panasonic-offers-9-billion-for- controlling-stake-in-sanyo/10401  FOX . (2010). FOX Business. Retrieved from http://www.foxbusiness.com/story/markets/industries/government/poll-fed-rate-hikes-slowed-moderate-recovery/ Garvin, J. (2001-2010). How to avoid price wars. Retrieved from http://www.gaebler.com/How-to-Avoid-Price-Wars.htm  Hewlett-Packard Development Company, L.P.. (2010). hp. Retrieved from https://h30248.www3.hp.com/recycle/supplies/index.asp'__cc=us Howell, D. (2008). Energy Storage Research and Development, Annual Progress Report 2007. Washington, D.C.: Office of Vehicle Technologies, U.S. Department of Energy. Retrieved from http://www.tms.org/pubs/journals/jom/0809/daniel-0809.html Mandle, N. (2010, May 21). HP adds to list of recalled laptop batteries. Retrieved from http://blogs.consumerreports.org/electronics/2010/05/hp-laptop-battery-recall-notebook- overheat-burn-fire-hazard.html McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics. Principles, Problems, and Policies (19th ed.). New York, New York: McGraw-Hill Company Petersen, J. (2009, March 3). Li-ion Battery Manufacturers: The Bleeding Edge of Energy Storage Technology. Retrieved from http://seekingalpha.com/article/127163-li-ion- battery-manufacturers-the-bleeding-edge-of-energy-storage-technology Property-Investing.org. (2007-2010). Germany Economy Forecast October 2009. Retrieved from http://www.property-investing.org/germany-economy-forecast.html Reuss, A. (2009). Part III: Keynes, wage and price “stickiness,” and deflation. Retrieved from http://www.dollarsandsense.org/archives/2009/0809reusskeynespartIII.html Laptop Battery blog. (2010). The research of lighter and more capacity battery: lithium-air battery. Retrieved from http://www.laptops-battery.co.uk/blog/the-research-of-lighter- and-more-capacity-battery-lithium-air-battery/ Saveyourfactory.com. (2005, December 12). Manufacturing competitiveness through robotics and automation. Retrieved from www.saveyourfactory.com/whitepapers/WP.pdf thestar online. (1995-2010). Business. Retrieved from http://biz.thestar.com.my/news/story.asp'file=/2010/6/19/business/6500386&sec=businessal Trading Economics. (2009). Global Economic Research. Retrieved from http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx'Symbol=DEM United States Department of Labor. (n.d.). Bureau of Labor Statistics. Retrieved from http://ftp://ftp.bls.gov/pub/special.requests/ForeignLabor/lfcompendium_bycountry.xls#Germany!A1 United States Department of Labor. (2009). How the government measures unemployment. Retrieved from http://www.bls.gov/cps/cps_htgm.htm University of Phoenix. (2010). Scenario. Retrieved from University of Phoenix, ECO/561 website.  The Wall Street Journal. (2010). MarketWatch. Retrieved from http://www.marketwatch.com/story/economy-weak-data-look-even-weaker-2010-06-20'pagenumber=