A New Strategy for Tablet Development Corporation Product X5, X6 and X7 - Case Study Example

? Phase 4: Final New Strategy Proposal using CVP Calculator for Tablet Development Corporation Product X5, X6 and X7 during period Name Table of Contents 1 Introduction 2 Analysis of Pricing and R&D Allocation Strategy Used in Phase 3 3 Determining New Strategy for Core Products of Tablet Development Corporation Using CVP Calculator 4 Conclusion References Annexes 1 Introduction Tablet Development is focused on providing high quality and custom designed applications for tablets manufacturers and operating system providers. Its core products are X5, X6 and X7 that have been in the market for the last 2 years. However, there are major drawbacks in the existing price and R&D budget allocation strategies that have undermined the new product development cycle in the organization. In order to bring a revolution in the existing business practices of the company, it is important that a new pricing strategy is devised that is based on the strategic objectives of each product individually. Furthermore, the decisions for the allocation of funds for the Research & Development (R&D) of each product should be taken individually and on annual basis to achieve the desired objectives of the product and the company. However, my strategic decision making for each year has resulted into 60% profitability in case of product X5 and 50% profitability in case of product X6. Furthermore, the increased spending on maintenance, support, enhancement and discovery for product X5 and X6 showed improved product which resulted in higher customer satisfaction. The discontinuation of product X7 through the four years helped in the success of the first two products. Nonetheless, a new strategy needs to be determined using contemporary strategy determining tools like Cost-Volume-Profit (CVP) analysis. The new strategy using CVP analysis has focused on X5 product in terms of its price but less allocation of R&D allocation in order to keep the other two products high on R&D investments. Thus, when X5 will attract less number of sales in one year, the other two products will attract higher number of sales volume. Overall, this strategy will help the Tablet Development Corporation to keep manufacturing all of its core products without discontinuing any of them. At the same time, it will allow Tablet Development Corporation to invest standardized amount of resources to each product and continue to produce a standard volume for sale purposes. As a result, the supply and demand of the product will remain balanced. At the same time, its products will remain in the market for a long time. 1.1 Aim The aim of this report is to develop a new pricing and R&D allocation strategy for the core products X5, X6 and X7 using CVP analysis and calculator. 1.2 Objectives To analyse the subsequent performance and life cycles of each product due to the difference in the decisions. To determine the new pricing decisions and R&D budget allocation strategy for each core product, namely: X5, X6 and X7 taken in 4 years (i.e. from 2012-2015). To provide rationale of the proposed strategy with theoretical support. 2 Analysis of Pricing and R&D Allocation Strategy Used in Phase 3 Due to the use of CVP calculator, in the year 2012, the price of the product X5 was $263 and experienced a growth of 74% in its overall sales and revenue (See Annex 1). The customer base also experienced 60% new customers, 84% repeat sales and 113% profitability. The R&D budget was 15% from the estimated costs of $22,000,000. However, with the changed pricing strategy and R&D allocations, the product X5 experienced a growth of 65% in sales, 20% in new customers, 25% in repeat customers and 35% profitability in the year 2013. In the year 2013, the product X5 experienced a growth of 70% in sales, 26% in new customers, 35% in repeat customers and 65% profitability. Likewise, in the year 2014, the product X5 experienced a growth of 85% in sales, 43% in new customers, 48% in repeat customers and 76% profitability. In 2015, the product X5 experienced a growth of 90% in sales, 32% in new customers, 55% in repeat customers and 81% profitability. Likewise, the product X6 the price was $300 and experienced a growth of 40% in its overall sales and revenue in 2012. The customer base also experienced 24% new customers and 41% profitability. However, only 40% of the R&D budget of $22,000,000 was allocated for it (See Annex 1). With the changed pricing strategy and R&D allocations that is the price was decreased to $290 but the R&D budget is kept at same level., the product X6 experienced a growth of 55% in sales, 26% in new customers, 25% in repeat customers and 30% profitability in the year 2013 (See Annex 1). In the year 2014, the price is further decreased to $240 and it experienced a growth of 60% in sales, 26% in new customers, 30% in repeat customers and 40% profitability. Likewise, in the year 2015, the product X6 experienced a growth of 65% in sales, 42% in new customers, 35% in repeat customers and 49% profitability due to the price is decreased to $200. The price for product X7 in the year 2012 was kept at $210 but only 45% of R&D budget of $22,000,000 was allocated for it (See Annex 1). As a result, and experienced a growth of 26% in its overall sales and revenue. The customer base also experienced 121% new customers and 84% profitability. In the year 2013, the price is increased to $215 but the R&D budget is kept at same level. Thus, it experienced a growth of 30% in its overall sales and revenue. The customer base also experienced 122% new customers and 85% profitability. In the year 2015, the price is increased to $225 along with a decrease in R&D allocation to 40% thus, the and experienced a growth of 50% in its overall sales and revenue. The customer base also experienced 125% new customers and 87% profitability. 3 Determining New Strategy for Core Products of Tablet Development Corporation Using CVP Calculator Hendrix (2010) argued that a downward graph of prices will initiate a snowball effect for the PDAs and tablet computer industry in order to increase their sales, revenue and eventually the overall profitability. Applying this case on the Tablet Development Corporation’s three core products, X5, X6 and X7, the initial price should be higher to stabilize the market image of the product. The early adopters will be encouraged to try the product only after its launch. However, with each subsequent year, the price should be lowered down slightly that will encourage the others to try the product as it has become affordable now. Due to the initial high level impression of the product, more consumers will be attracted to avail the reduced prices and buy the product before the stock ends. As a result, the sales volume will increase as the prices will decline. In terms of the R&D investments for each core product, Shiloy (2011) postulated that new innovations in the field of tablet computers should aim at reducing the manufacturing cost of each unit. As a result, the product will be priced at an affordable price. Keeping in view this perspective, the R&D costs for all products of Tablet Development Corporation should be focused on the reduction of manufacturing costs rather adding more unique features to it. Morse (2003) highlighted that the focus of the manufacturing base should be on the core product that has the highest sales and revenue. The rest of the products can be discontinued if the manufacturing base is over burdened. 3.1 X5 Keeping in perspective the above market analysis for tablet computers, it is found that less price per unit will increase the volume of tablet computers sold each year. Likewise, the price for product X5 in the year 2012 will be kept at $449 but only 45% of the R&D budget of $22,000,000 will be allocated for it. As a result, the R&D costs will come to $9,900,000, fixed costs to $39,000,000 and total fixed costs to $48,900,000 (See Annexure 2). The target profit was $150,000,000, unit cost was set at $300 thus, the volume (unit sale) comes to 428, 859. In the year 2013, the price is decreased to $400 and R&D budget is also reduced to 40%. The variable cost is remains the same at $300 and the expected profit is $17,000,000. Due to the R&D investment on decreasing the fixed costs of the manufacturing of each tablet computer, the fixed costs in 2013 have reduced to $30,000,000. Thus, the volume increased to $558,000. In the year 2014, the price is further decreased to $350 and R&D allocations and all other factors are kept stable. The volume further increases to $1,116,000. In the year 2015, the price is reduced to $333 but the rest is kept stable. As a result, the volume increases to $1,690,909. Thus, the snowball effect took place. 3.2 X6 The price for product X6 in the year 2012 will be kept at $300 but only 25% of R&D budget of $22,000,000 will be allocated for it (See Annex 2). As a result, the R&D costs will come to $5,500,000, fixed costs to $30,000,000 and total fixed costs to $35,500,000. The target profit was $11,000,000, variable unit cost was set at $250 thus, the volume (unit sale) comes to $930,000. In the year 2013, the price is decreased to $290 but the R&D budget is kept at same level. Thus, the volume increases to $1,162,500. In the year 2014, the price is further decreased to $280 whereas, the target profit is kept stable. As a result, the volume further increased to $1,550,000. In the year 2015, the price is decreased to $270 whereas, all other factors are kept stable. The volume further increased to $2,325,000 (See Annex 2). 3.3 X7 The price for product X7 in the year 2012 will be kept at $100 but only 35% of R&D budget of $22,000,000 will be allocated for it (See Annex 1). As a result, the R&D costs will come to $7,700,000, fixed costs to $300,000 and total fixed costs to $8,000,000. The target profit was $26,000,000, variable cost was set at $50 thus, the volume (unit sale) comes to $680,000. In the year 2013, the price is decreased to $95 but the R&D budget is kept at same level. Thus, the volume increases to $755,556. In the year 2014, the price is further decreased to $90 whereas, the target profit is kept stable. As a result, the volume further increased to $850,000. In the year 2015, the price is decreased to $85 thus, the volume further increased to $971,429 (See Annex 2). 4 Conclusion The new strategy has been devised using CVP calculator and market analysis. The snowball effect in pricing has resulted in increased profitability due to higher volume per unit for all three products of Tablet Development Corporation. This strategy has focused on high to low price technique with stable R&D costs and lower fixed costs per year. References Hendrix, P., (2010). If we build it, will they come? Tablet Adoption and Usage Tracking. Retrieved March 15, 2012 from http://www.slideshare.net/pehendrix/dr-phil-hendrix-immr-build-it-and-they-will-come-i-pad-and-tablets-conf-20101006f Morse, Q., (2003). Cost-Volume-Profit Analysis and Planning. Cambridge. Retrieved March 14, 2012 from http://www.cambridgepub.com/managerialaccounting/070-103_Ch%2003_Morse.pdf Shiloy, A., (2011). Tablets need to get into $200-$250 range to become popular - Analyst. Retrieved March 15, 2012 from http://www.xbitlabs.com/news/mobile/display/20110217101912_Tablets_Need_to_Get_into_200_250_Range_to_Get_Popular_Analyst.html Annexes Annex 1 Strategy Decision Matrix using CVP Analysis Product Decision 2012 2013 2014 2015 Price $263 $250 $250 $255 R&D% 15% 15% 15% 20% X5 Discontinue? No No No No Price $300 $290 $240 $200 R&D% 40% 40% 40% 40% X6 Discontinue? No No No No Price $210 $215 $220 $225 R&D% 45% 45% 45% 40% X7 Discontinue? No No No No Annex 2 Strategy Decision Matrix using CVP Calculator and Snowball Pricing Effect Product Decision 2012 2013 2014 2015 Price $449 $300 $350 $333 R&D% 45% 40% 40% 40% X5 Discontinue? No No No No Price $300 $290 $280 $270 R&D% 25% 25% 25% 25% X6 Discontinue? No No No No Price $100 $95 $90 $85 R&D% 30% 35% 35% 35% X7 Discontinue? No No No No Read More