of the costs that may be in our product’s development is legal costs. What kind of legal activities would be incurred?
6 Why is it important to know the break-even point?
7 What are methods to anticipate customer demand and pricing?
8 Projects should always exist to support the corporation’s strategy. Why?
9 Once products have reached the decline stage in the product lifecycle, they become a commodity. Is this true? What is a commodity?
10 All costs in a product’s development should be recovered in the first year of a product’s sale in the marketplace. Is this a good strategy? Why or why not?
Answers to Case 2.1 Discussion Questions – Kodak
1 As a large, successful US company, Kodak was once a “dogs of the Dow” firm listed on this stock exchange. It could be argued that Kodak’s management was unwilling to change or consider new ideas to displace or augment its line of film products. What does this tell us about the role of innovation in a company?This case should reinforce the need for companies to continuously develop new products. This could also be an effort to update existing products.
2 With the advantage of twenty-twenty hindsight, it is easy to criticize Kodak’s lack of foresight or imagination. However, it is likely that past success blinded Kodak to the future of film. This might be categorized as a resistance to change, which is found in most large corporations; it becomes part of the corporate culture.If you are in a senior level position – at any company – how would you work to change the corporate culture? Changing the corporate culture is extremely difficult from middle or even senior management levels within a company. Corporate culture describes “Who we are” as a company. Generally, when the Board of Directors recognize a company is stagnating, they usually bring in a new CEO to turn things around or go in a different direction. Even with new leadership, it will still be difficult to move change through the company’s ranks. This is why new CEOs will many times clean house at the senior levels and bring in people they can trust to implement change.It is unlikely anyone below the CEO can implement change; and most executives with any powers of observation will see deterioration of a company’s position, and several will probably leave long before a new CEO takes over.
3 What role should the marketing department have played in this long-term decline?The role of marketing is to be aware of industry trends, provide input to the corporations strategic planning, and generate new ideas and products to keep the company in front of its competitors.
4 From a managerial standpoint, what are the challenges when a company is in decline?Once a company is on a downward spiral, it presents serious managerial issues:There is a rush to maintain revenues, which means more pressure on salespeople.R&D is pressured to devise new products for the market – and quickly. This leads to mistakes or the wrong products at the wrong time.Once the decline is noticed by employees, the best people – those who have the skills to land a new job fast – are the first ones out the door. The firm is then left with the “B Team” to perform a company turnaround.A publicly held company, such as Kodak, will face mounting pressure from analysts and shareholders to “do something.”Publications like the Wall Street Journal and others will start to cover the firm’s issues, putting more pressure on management.If the senior leadership of the team cannot think more creatively, the Board of Directors may replace the CEO (and other executives) with new leadership.From a marketing perspective, customer needs and wants should be determined quickly and action taken. It should have been noticed by the marketing team much earlier that film was going to become obsolete with digital cameras. Would senior management have listened?
Answers to Discussion Case 2.2 – Portable Battery Unit
| Sale Price | ||||
|---|---|---|---|---|
| 10% of 16.9 million | Price Sensitivity | TTL Revenue | Margin | Margin % |
| 1,960,000 | $ 50.00 | $ 98,000,000.00 | $ 24,500,000.00 | 25% |
| 1,960,000 | $ 45.00 | $ 88,200,000.00 | $ 19,404,000.00 | 22% |
| 1,960,000 | $ 40.00 | $ 78,400,000.00 | $ 15,680,000.00 | 20% |
| 1,960,000 | $ 35.00 | $ 68,600,000.00 | $ 11,662,000.00 | 17% |
1 What are the advantages and disadvantages of this kind of modeling?It is acceptable to build models that can look at different scenarios. While the model above is somewhat simplistic, most companies use very sophisticated models to predict sales, margins, etc. The advantages include evaluating different market acceptance scenarios and its impact on revenues and margins.Disadvantages include the possibility that market acceptance may be way off target, impacting costs and revenues. Further, the true costs of the product should be as accurate as possible to obtain realistic outcomes.
2 Why do you think margins per unit decline as the price drops?There could be several reasons for this.Efficiencies of production ($/unit) tend to be beneficial at higher levels of product manufacturing. These efficiencies typically drop as the units produced decrease.Most likely, suppliers of raw materials provide volume discounts, so less raw material ordered will result in higher material costs.The fixed costs of production (salaries, overheads, etc.) are being absorbed by fewer units of production.
3 Looking at the sale prices compared to margins (%), is $50 the best price? How do you know students will pay this amount for your product?In this case, we do not know that $50 is the best price. It will provide the most profitability if we can sell almost two million units, but there is no guarantee for that level of market demand. Also, consider their target market, students, whom are very price sensitive. The best way to determine the selling price is to conduct focus groups with the target market.
4 If 10% of students purchase your product the best-case scenario shows $98 million in revenue and profits of $24.5 million. Worst case is profit margin of $11.662 million. In your opinion, are these numbers realistic?If those sales goals are obtained, the numbers are a good approximation. However, this cannot be considered absolute. What if we find some areas of the country will pay $50, but other areas only $30? This model will most likely need to be very dynamic with frequent updates on sales, costs, and revenues. And perhaps parsed to address different market acceptance across geographic areas or income levels.
5 Do you think you will have competitors prior to reaching the maturity stage?If the product “takes off” it will only be a matter of time before competitors appear. This may happen prior to the maturity stage but is hard to predict. It will depend, to some degree, on how technically difficult the product is to copy.
6 Is this type of analysis realistic?Model building to approximate sales and revenue is very common. However, the flaw in this model is the assumption that 10% of the total student population will buy the new product. Some considerations:If only 1% of the student population accepts the product, it could be a money loserIf 20% accept, we would perceive this as a good thing. However, at 20% acceptance, this means manufacturing would need to produce twice as many units to meet demand: 4 million units instead of 2 million. Can manufacturing meet this? Can we get the raw materials at the price and time needed? Can we distribute