1 Why have price levels deterriorated so badly in this industry? Due to the fact that …
– Market is developed. Capacity of market has actually been constantly over the demand because 1970 – Client doesn’t see this product as advanced one. 85% is price-oriented. 15% put focus on delivery – Federated Industry does not have actually separated skills in the item – Rivals, generally Brice, started to produce the item cheper and lower quality – Item itself is tough to distinguish and very simple to produce – Raw product is simple to get
2 Could price disintegration have been avoided? Can the situation be scheduled?
Cost disintegration need to be prevented if there were barrier to new entry .
.. – diferentiating aspects such as quality, guarantee and other additional benefits – Fixed cost long term agreement, regular delivery, or high switching expense (sell 3 items as package) etc (Consumer) – Unique agreement with provider that allows Federated purchase basic material lower rate – Regulation (Rate, patent, etc).
3 What has Federated efficiency been throughout the period covered in the event?
– Overall, bad. It has been losing market share and sales and finally go into the red.
4 What is your examination of Federated prices policies?
Ad hoc( 1977-1980): Bad. There was no strict rate policy although there was book price. This period may trigger the rate war since sales can reduce price freely. Strict book price( 1980-1981): This is worst strategy of five techniques. It lost share and sales because of loss of bid. Controlled oppotunistic( 1982 ): Great as experiment.
Selective prices( 1982-1983): Great but too late. Knowing from regulated oppotunistic, the business variate cost strategy depending upon the type of offer. Nevertheless, cost war is currently there and resulting in average cost dropping. No book rate( 1983-): Need rate policies depending on type of offer.
5 Should Federated withdraw from the market? If so, why?
If there is any item that can earn more margin than capacitator, Federated needs to withdraw the company. If not, nevertheless, it can continue business as long as rate is more than variable cost.
(In 1983, sales was 8400, VC was 5600 and contribution margin was 2800) If withdrawing the market, group’s overhead reduces by 2000. So, as long as contribution margin is above 2000, it can be continued.
For getting back profitability, there is no innovation and recover of profitability. The market has been fully matured; price continues decreasing and, as a result, industry revenues also continues decreasing even though volume of shipments increases.
It is very difficult, generally, to increase price once it decreased. If there were innovation and Federated could appeal other additional value to customer, it could win both share and profitability again. However it cannot be expected. firstly because this product is too simple to innovate, and secondly the company doesn’t have competency in R&D.
6 If Federated stays, what action should it take on the SVA bid due August 6?
If it stayed and wanted to win the bid, put 2.50 because Federated need to push price down if going low bid price. (1.98 is also reasonable select. Since there is no brand image or loyal customer, it’s not big problem to price very low as long as defend VC. Profit is only $4000, but as long as the business continues it’s better than nothing.)
7 What should its long-run objectives be for this market?
If continuing to be in this market, Federated should aim at… 1. keeping either profitability or share. I think profitability is more reasonable objective because it’s difficult to win share in price war against Midland, which is giant and price competancy. 2. differentiating the product by additional benefit and keep loyal customer. For example, there are cudtomers of Small Public that occupy 15% of market demand ($18.15M * 15% = 2.72M). This segment cares delivery primarily, so it can focus on delivery. 3. digging out the segment which put emphasis on quality. Appeal its high quality to them and offer high price. However it requires sales force and customer education
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