Posted: June 21st, 2021

Profit Margin and High End Segment

Cost Leadership After contemplating many different strategy options and evaluating our markets, the Ferris group decided that we would utilize and follow a strategy discussed in chapter 6 of Wheelen and Hunger’s text[1]: cost leadership. This strategy focuses on “a lower-cost competitive strategy that aims at the broad mass market and requires efficient scale facilities, cost reductions, and cost and overhead control. This strategy avoids marginal customers, and aims for cost minimization in R&D, service, sales force, and advertising. If used effectively, this strategy should reduce and control your labor and overhead costs. This would in turn decrease variable expenses and simultaneously increase your contribution margins, and ultimately your net profits. To follow this strategy, we decided to take the following actions: 1. We refrained from introducing any new products in order to prevent paying large start-up costs without efficient funding. It would have been wise to introduce a new product if we had more rounds during the simulation.
This would have allowed us to specialize in the markets we were efficient in and dropped those that were costing us money. If we were to introduce a product however, to see any benefits of this initiative during the simulation, the product would have had to been launched within the first few rounds. But, spending a lot of borrowed money early on in the simulation did not make sense for our cost leadership strategy. We would have had to wait until we could fund it with our retained earnings in order to be in alignment with our strategy.
However, this would not have been an option until the 3rd or 4th year, and by then much too late to see positive benefits by year 6. 2. We remained quite frugal with our allocated expenses to marketing (promotion and sales budgets) to keep our costs low and contribution margins high. 3. We decided to increase our automation for products that did not have rapidly changing market buying criteria specifications (i. e. if expectations regarding size and performance stayed fairly similar throughout the six rounds because their drift rates were small, then we increased automation for that particular line within the first year). . We attempted to use a Just In Time (JIT) strategy which meant that we tried to calculate the exact quantity each market would purchase of our products and we then produced only enough to have no more or no less on hand at the end of each forecasted year. •To calculate this precise forecast, in each segment we took the actual sales from the previous year and multiplied it by the market growth rate for the corresponding market segment. We then multiplied that number by a conservative (i. e. 90%) and optimistic (i. e. 10%) rate to get the respective marketing and production forecasts. •The only time we produced a little higher than the conservative forecast calculated using the above formula was if we stocked out of an item in the previous year and could then expect even higher sales the following year; essentially preventing ourselves from short-changing our forecast for the next year. If this was the case for a previous year, we would be a little more aggressive with our forecast fro the following year and used conservative and optimistic rates of around 90% and 120% respectively. . We decided to decrease the Mean Time Before Failure (MTBF) of those products (The Traditional and Low End segments) in which MTBF as a buying criteria was not very important to the customer to the minimum specification within the acceptable range to the customer (i. e. If the desired range for MTBF was 22,000 – 27,000 for a product that did not base much of their purchasing decision on MTBF, we would set the MTBF for that product at the minimum of 22,000).

This was done to keep costs low by decreasing the reliability (which saves money in production costs) of those products in which customers did not care about the MTBF. Overall Company Performance Mistakes During the simulation, we made quite a few costly mistakes that put us in a really bad spot in comparison to the other teams. These mistakes are as follows: 1. We missed the opportunity to launch a new product because right out of the gate we were focused on the products we already had and making them all profitable.
We were not willing to create a new product until we could finance the investment with our retained earnings instead of taking on debt to finance such a project. The problem was that it took us about 4 rounds to build up a cushion of cash that allowed us to feel comfortable making such an investment. Unfortunately, since it takes 2 rounds to launch a new product, we did not feel that the timing was right after round 4 because we would not have generated profits for the new product by the end f the simulation; we were unable to justify the investment for a long term project with only 2 years left in the simulation. Therefore, we did not move quickly enough within the first few rounds in assessing our markets as a whole and making long term investment decisions. 2. My group was also quite concerned with not increasing debt and rather building our retained earnings and collecting cash as a cushion. However, this tactic was not such a great one because it cost us points for wealth creation. We should have been using that saved cash to invest in our company, rather than hanging on to the money. . We never created any long term plans during the simulation. This was probably what hurt us the most because all we were focused on was the previous year’s results and how to make them increase. We never actually set specific goals which would have then forced us to create a detailed plan of action to help us achieve those goals; rather we were blindly just trying to be or stay profitable. 4. We continually implemented the same strategies that were not producing stellar results; especially with regards to individual segments.
We continually tried executing the same tactics (i. e. low cost, JIT, etc…) without changing any details (i. e. more product development, repositioning, etc…) and kept hoping that things would get better. Our performance did get a little better within our underperforming segments after about 3 rounds, but not enough to push us ahead of our competition as a whole company. 5. We did not invest in automation for a few lines (Performance and Size) like we should have in the beginning.
For whatever reason, a few team members believed that increasing the automation for a line that has a product with specifications that change rapidly from year to year (the High, Performance, and Size segments) was a bad idea. They were convinced that increasing the automation for these segments would be useless and that it would in fact return to where it originally started at each year end. Looking back, we should have dramatically increased the automation for these segments to keep our variable costs low and in alignment with our strategy. . One of our biggest problems was that we kept making mistakes that cost us immensely. Some of those mistakes include: •Wrong Growth Rate. We used an excel spreadsheet to determine the forecasts for each segment throughout the entire simulation. However, we did not realize until we were making decisions for round 4 that the formulas were actually entered wrong into the spreadsheet and every segment was being forecasted at the Traditional segment’s growth rate rather than the actual growth rate that corresponded to each segment. Inversion of Specifications. We accidentally inverted the size and performance specifications for the High End segment during round 3. This dramatically reduced our net profit margin for this particular segment (Please see Exhibit 1). Sadly, this was originally one of our best markets and because of this mistake we missed a huge opportunity to increase our profits and perform well as a company. •Long Revision Dates. We did not notice until the round 4 processed that the revision date for the High End segment for round 4 was not until 2 years later.
Therefore, we were unable to keep the product for this segment competitive for the remainder of the simulation; especially after our setback in round 3. In fact, this mistake dramatically decreased our contribution margin for this segment and even brought our net profit margin for the segment to a deep negative (Please see Exhibits 2 & 1 respectively). Again, we dramatically messed up one of our best selling products and were continually trying to play catch-up from our mistakes with this line; therefore, we missed a huge opportunity to increase our profits.
Performance Measures To determine whether or not our company was doing well, we assessed a few areas of the Capstone Courier: 1. Contribution Margin Percentage (Please see Exhibit 3). We looked at this percentage after each round was processed to determine whether or not it was increasing. If it was not increasing, we knew that our strategy of lowering our costs was not effective for the round in question; alerting us to lower our costs. 2. Contribution Margins (Please see Exhibit 2). We looked at the contribution margins for each segment to concentrate on each individually.
Looking at whether or not the segment in question was increasing or decreasing was effective because it showed us which products were costing us the most in variable costs (i. e. materials, labor, etc…); showing us which segments we needed to cut costs for. 3. Net Profit (Please see Exhibit 4). This was our first indicator on the courier as to whether or not we did well in the previous round. We started off doing pretty badly but by round 3, we brought our net profits up by about $5,200 from round 1. However, the mistakes mentioned above led to dramatic decrease the following year 4 that put us in an even worse spot than we were after round 1. Luckily, we made strides to overcome those obstacles (discussed below in the Product Line Performance section) which increased our profits the following year by almost $9,500. 4. Net Profit Margins (Please see Exhibit 1). This measure was quite useful in determining how our net profits could be assessed for each segment. This told us the story of which products were profitable, which were most profitable, and which were actually costing us money to sell.
Our goal for each round was to have each of the segments positive and turning a profit; which we accomplished in rounds 5 and 6, finally. Product Line Performance Errors We had many issues and made many errors with my particular line (High End – Fist) as mentioned above. During round 3, we inverted the performance and size specifications. In addition, during round 4 we did not realize that our revision date was 2 years away; this meant that my product was unable to be competitive within its segment for 3 rounds and the remaining year was spent catching up to the competition.
Once the mistakes were made, there was nothing we could do to correct our mistake. However, we did try to redirect our focus from staying competitive 100% within the High End segment with Fist, to using this product to be more competitive within the Traditional segment during round 4 while our revision date neared. To do this, we dropped the sell price from $39. 00/unit to $28. 00/unit. We did this for a couple of reasons: 1. Fist lay most closely to the Traditional product on the perceptual map.
Therefore, we figured we would make the most of our mistake, which could not be undone, by trying to stay competitive on the edge of both the High and Traditional markets. 2. Luckily, the lowest price within the range for the High End segment was $28. 00/unit and the highest price within the range for the Traditional segment was $28. 00/unit as well. For this reason, we decided to sell Fist during the segments’ crisis at a price that was acceptable for both markets; this was done in hopes of picking up customers from each market since we were well aware that we would not be very competitive during round 4 within the High End segment.
Statistics/Performance Below is a table to show that we were steadily climbing in our progress for Fist during the first 2 rounds and then our mistakes made this segment unprofitable during both rounds 3 and 4 (highlighted in grey) and decreased within every statistic (our customer satisfaction dropped due to the product not being competitive in the High End market, our contribution margin percentage dramatically decreased due to fewer sales/revenue, and our market share almost completely disappeared).
During rounds 5 and 6, we were slowly climbing our way back to a profitable position for this segment; once we were again able to reposition Fist within the High End market we started to improve. High End Segment (Fist) Statistics Round123456 Revenue$21,615$27,099$17,301$22,253$23,470$32,026 Market Share19%20%11%6%12%17% Contribution Margin$7,823$9,624$4,735$4,105$6,698$9,929 Contribution %36%35%27%10%28%31% Net Margin$2,628$3,689($1,403)($1,028)$1,814$4,449 Customer Score242910111815 Functional Area Strategies and Performancelo0
Due to my expertise with regards to my educational focus and previous work experience, my functional area was marketing (alongside Ashley Barnes). Unfortunately, we were not well informed about how to maximize our marketing efforts/investments (promotion and sales expenses) for the simulation until round 4. Promotion and Sales We initially remained quite frugal with our promotion and sales budgets to keep our costs low and contribution margins high in order to follow our cost leadership strategy previously.
However, by investing larger amounts into sales and promotion within the first two rounds, we would have better followed our strategy. This would have been the case because we would have paid less in expenses in the later rounds since we would’ve only had to invest enough to maintain our accessibility and awareness percentages after the initial higher investments; essentially reaping more benefits in the later rounds of our early investments. After we learned of the formulas for producing good customer survey results however, we did quite well in certain segments.
For example, we blindly allocated money to our Size segment during the first 3 rounds and slowly climbed our customer survey score. However, once we learned how to use the formulas given in the Capstone Debrief Rubric, we were able to go from a customer survey score of 16 in round 3, to a 50 in round 4, and even higher to a 57 in round 5. The formula we used came from the Capstone Debrief Rubric and stated that in order to get: •3 Points – The promotional budget had to lie in between $1. 4M and $2M. The Sales budget had to lie in between $2. 2M and $3M. 2 Points – The promotional budget had to lie in between $1M and $1. 4M or in between $2M and $2. 5M. The Sales budget had to lie in between $1. 5M and $2. 2M. •1 Point – The promotional budget had to lie in between $. 7M and $1M or in between $2. 5M and $3M. The Sales budget had to lie in between $. 7M and $1. 5M. •0 Points – The promotional budget had to be lower than $. 7M or higher than $3M. The Sales budget had to be lower than $. 7M or higher than $3M. Once we started to use these formulas, we were able to allocate the right amount of funding to each segment that was appropriate.
For example: if a certain segment was projected to lose money by allocating $1. 4M to the promotional budget to get the full 3 points, we would cut the budget to about $1M and still be able to get 2 points without jeopardizing our contribution margin. This is proven in the Capstone Debrief Rubric; we were allocated 3 points to our higher performing segments (Traditional, Low, and High) for rounds 4, 5, and 6 but were only granted 2 points for our lower performing segments (Performance and Size).
In addition, we always strived to keep our size and performance specifications at exactly the current buying criteria plus the drift rates outlined on page 2 of the Industry Conditions Report. This would keep the product at what the customer expected so that they were receiving what they were asking for. Customer Buying Criteria We made it a priority to keep our prices as high as we could in each segment without disappointing our customers; this was our way of aligning our marketing strategies with our overall company strategy of cost leadership.
We noted what criteria were most important to the customer to determine if we could increase our prices for each product. For example: Price was the least important buying criteria within the Size segment; meaning that these customers were not as sensitive to price changes/increases. Therefore, we were able to charge closer to the high price for the Size segment product (Fume) because this increase would not really affect the market buying decisions for the Size segment; much unlike the Low End segment

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