Milestone_1__Business_Recommendations_Based_on_Economic_Projections

Milestone 1: Business Recommendations Based on Economic Projections ECO/561 Business Recommendations Based on Economic Projections Larson is a monopolistic firm competing in the global market for electronic equipment batteries. With operations in America and Germany, Larson produces and sells batteries for anything from laptops to toys. Prior to the economic downturn, Larson, held a stable position in the marketplace; however, the business is now facing financial issues involving a steady decrease in market share. Profits are at a record low (University of Phoenix, 2004). The financial records for 2009 are so dismal that the Larson CEO put together a team to study the current economic conditions and recommend the actions to change the business model resulting in increasing market shares and profits. Key economic conditions include the following: |Economic Conditions |America |Germany | |Unemployment Rate |9.9% |10.8% | |Inflation |2.3% |1.7% | |GDP |$14.6 Trillion |$2.8 Trillion | |GDP Per Capita (2008) |$32,560 |$34,200 | |Federal Funds Rate |.25 | | |Discount Rate |.50 | | |Population |305 Million |82.3 Million | Table 1 Key Economic Indicators Export figures include: |Export Goods |Percentage Exported | |Production Machinery and Equipment |32.4% | |Industrial Supplies |26.5% | |Non Auto Consumer Goods |11.7% | |Motor Vehicles and Parts |11.5% | |Aircraft and parts |7.6% | |Food and Beverage |7.3% | |Other |4.0% | Table 2. Export Figures (University of Phoenix, 2004). The average battery cost is $80 in raw materials and production costs, and at current sales volume or anticipated initial sales volume, fixed costs come to $30 per unit. The total cost is $110 per unit. Present markup is 35% (University of Phoenix, 2004). There are a large number of small firms competing in this market structure, and there is very little market control over price or quantity. With relatively few government rules and regulations, an increasing number of competing firms are steadily entering the market. Larson must find ways to stand out and be perceived as being different because it’s product line is so similar to the competition. The teams’ key objectives are to focus on pricing strategy, non-price barriers to competition, and product differentiation (University of Phoenix, 2004). Pricing Strategy Recommendation Larson produces and sells batteries in America and Germany. Larson needs to focus on making their products distinguishable. By using product differentiation Larson removes price as a major factor in sales and the demand curves should shift right. Larson needs to be a price setter by gaining control over product pricing. In America to do that they must distinguish based on customer service, quality, and product differentiation. By becoming a price setter Larson will face a downward sloping demand curve and price elasticity (McConnell, Brue, & Flynn, 2009). Profit maximization is critical to monopolistically competitive firms. To maximize profits, direct costs need to be reduced wherever possible. The direct costs include labor and materials. Direct costs are those that are directly attributable to production of batteries. Indirect costs that are general and administrative expenses also need to be reviewed and reduced. Introducing business process improvement measures will help Larson to minimize costs and maximize profits (McConnell et al., 2009). Larson also needs to analyze production quantities of batteries. An analysis will include at which quantity the most profit can be made. The quantity will need to be set where marginal revenue will equal marginal cost. Calculating a demand curve will help identify the optimal quantity (McConnell, et al., 2009). A successful way to reduce cost would be to cut a percent of production and advertisement. In reducing business costs, Larson should look to methods that allow it to produce its services at the same level with lesser costs (Entrepreneur, 2010). Often times this means reducing wastage to help reduce costs, to include: wasted materials, wasted effort, and wasted time (Entrepreneur, 2010). Effective ways to reduce costs include: training the workers, obtaining quality goods from suppliers, and using some form of total quality management (Entrepreneur, 2010). Cost reduction can be achieved through reduction, elimination, modification, substitution, or innovation. Larson should take all cost drivers into account and with thorough analysis the best and least cost path is adopted for each activity. Non-Price Barriers Recommendations It is important for organizations to determine product features and the use of advertising, if using price to compete is not an option. Competition is critical to marketing. To be better than competitors businesses must provide a product or service through perception better than similar ones offered by competitors. To make a product or service distinctive from others, several strategies are available including: lowering prices, better quality, faster service, or raising prices. It is important to note that promoting the product requires marketing and advertising. Traditional competitive analysis does not normally take into account the qualitative differences in products, this would be product differentiation. To be competitive businesses must create qualitative differences in products and the way it markets the products. Monopolistic competition means that the products are alike with only small variances from business to business. Differentiation mean the products or services are made to appear somewhat different and superior to those produced by others. Product differentiation may be genuine or apparent. Real differentiation is some physical differences in products. These could be quality or physical appearance difference. Non-physical differences are what the buyer perceives as a difference or what they have been told. Using differentiation helps business gain market share. The demand curve of a business that gains market share will change to the businesses advantage. The curve becomes more flexible and shift upwards, “if successful, the firm’s demand curve will shift to the right and will become less elastic” (McConnell, et al., 2009, p. 224). Selling cost and product differentiation enables the business to influence the shape of the demand curve. When a business differentiates a product or service the business must sell the difference involving advertising and marketing to tell potential buyers why the differentiation is superior. Even if there is no real physical difference sellers can be made to believe there is an apparent difference by using advertising and marketing. Competition is critical to marketing. To be better than competitors businesses must provide a product or service through perception better than similar ones offered by competitors. To make a product or service distinctive from others, several strategies are available including: lowering prices, better quality, faster service, or raising prices. It is important to note that promoting the product requires marketing and advertising. Traditional competitive analysis does not normally take into account the qualitative differences in products or product differentiation. To be competitive businesses must create qualitative differences in products and the way it markets the products. Monopolistic competition means that the products are alike with only small variances from business to business. Differentiation mean the products or services are made to appear somewhat different and superior to those produced by others. Product differentiation may be genuine or apparent. Real differentiation is some physical differences in products. These could be quality or physical appearance difference. Non-physical differences are what the buyer perceives as a difference or what they have been told. Using differentiation helps business gain market share. The demand curve of a business that gains market share will change to the businesses advantage. The curve becomes more flexible and shift upwards, “if successful, the firm’s demand curve will shift to the right and will become less elastic” (McConnell et al., 2009, p. 224). Selling cost and product differentiation enables the business to influence the shape of the demand curve. When a business differentiates a product or service the business must sell the difference involving advertising and marketing to tell potential buyers why the differentiation is superior. Even if there is no real physical difference sellers can be made to believe there is an apparent difference by using advertising and marketing. Rather than maintaining the lowest competitive price, the battery industry is investing in research and development to introduce new features that consumers will value. Scientists are developing many different types of batteries to include environmentally friendly, lighter, longer lasting and less expensive. Developing unique qualities are product attributes that will make Larson stand out among competition. One would recommend that Larson increases R&D efforts and team with Altergy Inc., a manufacturer of Hydrogen batteries. Opening up operations in America has proven valuable but the current economy will stifle profit maximization in the next five years. Over the next five years Larson needs to expand its presence in Germany and invest in opening up markets in Asia and Africa. The ability and willingness to collaborate with partners is vital to ongoing cost and opens new markets for Larson. The company is negotiating with Mattel Corporation to bundle and supply the electronic toys with batteries. The pros of an advertising campaign are reflected in the high impact spread to the company’s customer base. The company would be able to target specific markets and (between television and prime magazine ads) they could gain a large exposure that might have been missing previously. The cons result from the high cost of advertising campaigns and a high probability that competitors would counter strategize with the fast-second strategy. The fast-second strategy allows a firm to make product-improvements, increase marketing prowess, or use the economies of scale to prevail in the end (McConnell, et al., 2009). Larson’s current packaging is lackluster and the company uses little advertising. Spending more money on the businesses advertising is a critical way to differentiate Larson, such as with better and more eye or ear catching packaging and catch phrases. Partnering with established well reputed and known firms is another option for Larson (University of Phoenix, 2004). References Ghosh, D. (2008). Corporate values, workplace decisions and ethical standards of employees. Entrepreneur, 3. Retrieved on April 3, 2010 from entrepreneur.com Website: http://www.entrepreneur.com/tradejournals/article/177552212_1.html. McConnell, Brue, & Flynn. (2009). Economic: Principles, Problems, and Policies, 8th ed. McGraw-Hill Irwin. Entrepreneur. (2010). Effective ways in reducing cost. Entrepreneur, 3. Retrieved on April 2, 2010 from entrepreneur.com: http://www.entrepreneur.com/tradejournals/article/177552212_1.html. University of Phoenix. (2004). Larson Inc Scenario. Retrieved March 25, 2010, from University of Phoenix, Week Three, rEsource. ECO/561—Economics Course Web site.