The market

The predicted and out-turn index of GNP increased over the past five years. The industry is trading semi-durable products and it is at its growth stage. From the figure below, actual GNP increased by about 1-3% per year and there is strong sign of increasing GNP for the following years. The total potential of the markets is estimated to be 30 million units and the trend of sales volume is also expected to increase drastically. The sales units increased from 120000 units to 4937500 units from year 1 to 5 and each of the active and background company account for 5% of market share, with 40% in total. Furthermore, the replacement rate is 75% per annum and it is a significant source of potential sales. Therefore, we can tell that the market is far from saturation and the growth potential is huge. The sales units for all companies by year 9 are still far from the true potential of the market, which are 30 million units. The market is fast growing enough that none of the companies can achieve significant market share.

Our company sells identical products to those of our competitors and there is no single company has control over market price. Product differentiation comes in the form of how prestigious of the product is and the location of product. This market structure is called monopolistic competition. Since demand curve is downward sloping, advertising is crucial. It can create a less elastic demand curve, thus extracting an additional price for the products.  

	year 1	year 2	year 3	year 4	year 5
Industry wide sales revenue	15,000,000	41,000,000	100,000,000	207,000,000	395,000,000
highest price	150	105	90	85	85
lowest price	100	80	80	75	75
average price	125	93	85	80	80
no of estimated units sold	120,000	443,243	1,176,471	2,587,500	4,937,500

The market is far from saturation and there is no dominant player. The number of estimated units sold is increasing and the industry wide sales revenues increased with increased marketing expenditure. They are all positive signals of growing market and positive economy. However, the optimistic growth forecast was limited by increased price competition in maturity stage and possible aggressive takeover by other firms.

SWOT analysis:

Strengths: l   Low debt/equity ratio	Weakness: l   Low ROE l   Low ROCE l   Low profitability after takeover l   Low asset turnover
Opportunities l   Growing market l   Positive economic outlook l   No dominant player l   Tax incentives	Threats: l   Increased price competition in maturity stage l   Competitive mergers

Product Life Cycle

The lifespan of products go through 4 stages: 1) Introduction 2) Growth 3) Maturity 4) Decline. The industry is expected to achieve a 65% penetration of the market by year 9 and higher penetration will not be likely to achieve in the following years. Hence, we expect the products would enter its decline stage eventually after year 9. Different marketing and pricing strategies should be implemented in different stages, for instance, a relative large amount of money should be spent on marketing to maintain sales growth because demand is inelastic during growth stage.

Sales and marketing strategies

We did not maintain stable net profit over the 7 periods. We failed to understand marketing expenses and selling prices are key drivers for growth until period 7.

Based on product life cycle, year 1-5 is introduction stage; year 6-8 (period 1-3) is growth period, year 9-12(period 4-6) is maturity period. We expect we would enter decline period afterwards. Our marketing expenses during growth period were too low to increase product awareness; whereas our price was too high at period 4 when the market became mature. In period 7, we adopted a better strategy by lowering our sales price during mature stage.

Revised strategies:

Price elasticity tends to decrease over the product life cycle. Skim pricing strategies would be adopted when launching the products by charging a higher price then gradually lowering the price. A more inelastic demand curve would give greater revenue from a skimming price as quantity sold would not be so different between two prices (marketing). During the introduction stage, when demand is inelastic, we would set price higher than average to establish demand. The growth stage is a period of rapid revenue growth. Sales increases as more customers get familiar with the products. Therefore, increasing marketing expenses is more effective than reducing sales prices. Sales continue to increase at a slower pace at maturity stage. Competition may result in decreased market share. Since replacement sales become more dominant in maturity period, price reduction strategy is more effective in this stage.

Distribution strategies:

We originally planned to develop area 4 since it is less developed, in turn less competitive. However, we then focused on both 4 areas in order to avoid unnecessary loss. Compared with our major competitors, companies 181 and 185, put most resources on 1 or 3 areas rather than all 4 areas. Shipping cost can be saved with such strategy. Our shipping costs accounted for 4%-10% of total sales revenues, which is quite high. We chose area 4 to build our factory because it is relatively less competitive (only one team developed it) and we have started developing it since period 1.

Revised Strategies:

We would first focus on home sales (area 2) and 3 areas during growth stage to reduce shipping cost. Afterwards, when production increases in maturity stages, economics of scale can be achieved when shipping 100,000 units or more. We would then focus on 3 areas or all 4 areas after period 5. We believe building factory in area 4 is a right decision given it has generated the highest revenue in period 7 when we also adopt the right price reduction strategies.

Dealers:

Our number of dealers matches exactly with production and sales. We did not sell in excess of dealer capacity of 2500 and they are also fully utilized, except period 4, in which we mistakenly set very high price and result in poor sales. Overall, we believe the dealers’ strategy is a right one.

Dealer’s utilization:

Period 1				Period 2							Period 3					Period 4
A1	A2	A3	A4	A1		A2		A3		A4	A1	A2	A3		A4	A1	A2	A3	A4
2230	2500	2500	1130	2157		2140		2240		2285	2200	2192	2083		2091	1488	1123	1253	2142
Period 5				Period 6							Period 7
A1	A2	A3	A4	A1	A2		A3		A4		A1	A2	A3	A4
2500	2491	2500	2500	2177	2460		2250		2493		2345	2500	2500	2464

Production and marketing strategies

Our production increased by 0%-25% each period, based on our estimate increase in demand. We had relatively high closing stocks in each period, except period 2, 3 and 7. It indicated that our production and marketing strategies are not optimized. Period 2 and 3 was growth period and we did not have enough stocks to meet with demand. We reduced our selling price in period 7 which resulted in relatively high sales revenue.

Revised Strategies:

With the incorporation of market strategy in production planning can increase our profit. We would build the factory in earlier period to meet with increased demand in growth period. We would also increase our production and marketing expenses at peak periods, whereas reducing our sales price and increase our production to meet with the increased demand at maturity stage.

Future Strategies: (conclusion section?)

Since we have built two factories in area 2 and 4, in order to maximize our profit, we will mainly focus on these two areas in latter periods. We would also start eliminating not so profitable channels of distribution during decline stage. We would put the proportional increase in dealers to cope with sales increase in these two areas. As we are already in mature stage, our main goal is to sustain the market share and extend the product life cycle. Therefore, we will reduce our price similar to the market average in response to competition while avoiding a price war. In the decline stage, when sales begin to decrease and demand is highly elastic, we will consider minimizing prices, lower than average, in order to increase demand or maintain sales. Marketing expenses would be minimized because customers have already been familiar with the products and future sales are mainly driven by replacement demand.

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