Marketing: Text and Cases essay
It is possible to develop organizational strategy basing on the results of the financial year. However, developing a long-term strategy is more effective, and often the results of certain decisions (like R&D investments) can be seen only in 2-3 years after the decision was implemented. There exist numerous techniques for determining the strategy and its possible consequences. One of powerful techniques for operational decision-making is cost-volume-profit (CVP) analysis. The purpose of this paper is to apply CVP analysis to the activities of by Clipboard Tablet Company during the 2012-2015 timespan, analyze previous strategies from the perspective of CVP analysis, and develop a new strategy with fixed decisions for pricing and R&D allocation which would lead to optimal short-term and long-term results for Clipboard Tablet Company.
- Strategic background
Clipboard Tablet Company manufactures and sells three types of tablets: X5, X6 and X7. From the position of the VP of marketing, it is possible to change the following internal variables: prices for each of the products, the percentage of R&D budget allocated for each product, and decision on whether to continue or to discontinue a product. The strategy of Joe Schmoe, former VP of marketing at Clipboard Tablet Company, was to set the same prices for the whole period ($285, $430 and $190) and same shares of R&D allocation (33%, 34% and 33% accordingly). As a result, the company accumulated total profit of $1,513,237,527 during the 4-year period (Tablet Development Sim, 2012).
The second strategy, suggested by the new VP of marketing of Clipboard Tablet Company, was aimed at maximizing short-term profit of the company, and was based on discontinuing X7, and allocating R&D as 25% and 75% to X5 and X6 accordingly. The pricing for X5 for set to $285 during the whole period, and the pricing for X6 was $550 in 2012-2013, and was decreased to $545 in 2014 and $540 in 2013. This strategy resulted in cumulative profit of $2,174,502,513. Although this strategy is effective for increasing short-term profits, it leads to quick market saturation and might cause the decline of Clipboard Tablet Company in the long-term period due to the lack of new competitive products. Therefore, it is reasonable to develop a more balanced strategy which would be beneficial both in short-term and in long-term perspective.
- CVP approach
CVP analysis is based on break-even analysis, and is frequently used for operational decision-making. This tool is a form of cost-accounting, which is used for determining how the changes in volume and costs might affect the company’s revenue and profit (Hansen & Mowen, 2006). In this model, total costs are defined as fixed costs + variable costs, and total revenue is determined as the sales price multiplied by the number of units. Profit (or loss) in this model is calculated as unit contribution (unit profit – unit variable costs) multiplied by the number of units less total fixed costs (Hansen & Mowen, 2006). CVP analysis can be used for determining target income sales and associated volume and pricing.
It should be noted that CVP has the following assumptions: sales price per unit are constant, as well as variable costs per unit; total fixed costs are also constant, all items which are produced will be sold, if there are multiple products, the products are sold in the same mix, and the behavior of cost and volume is described by linear relationship (Hansen & Mowen, 2006).
- CVP analysis for the Clipboard Tablet Company
In this report, CVP analysis is used as the basis for decision-making at Clipboard Tablet Company for the 4-year period. Using CVP calculator, it is possible to determine the minimal sales volume required for reaching the break-even level for the product at the specified price level. At the same time, CVP analysis does not take into account the changes of demand associated with the changes of price and performance. Therefore, it is necessary to evaluate the price elasticity of demand for X5, X6 and X7, and also evaluate the performance elasticity of demand (changes of demand associated with R&D investments).
Price elasticity of demand is determined as the relative change in quantity demanded divided by the relative change in price; similarly, the performance elasticity of demand can be determined as the percentage of change in demand divided by the percentage of change in R&D. Using the data from the previous strategies, it is possible to develop an approximation of both types of elasticity. Table 1 shows the results of this evaluation.
The solution allows increasing short-term profits, and also includes gradual investments into X7. Overall, the main emphasis is placed on the X6 model, and the sales of X5 are supported until maturity. The new solution shows the importance of cautious investments into X7 when it is still in the introduction phase (R&D in X7 are supposed to increase in 2015, when it will firmly enter the growth phase).
Conclusion
The development of revised strategy based on CVP analysis shows that current prices are close to optimal, and that most beneficial strategy is reasonable adjustment of R&D investments. It was determined that discontinuing X7 will not benefit the company in the long-term perspective, so during 2 years negative profits associated with X7 emerged. One notable difference of this strategy is very cautious investment into X7 performance when the tablet is only in the introduction stage. The new strategy is developed based on the assumptions of linear relationships between price, performance and demand. For further adjustment and improvement of the strategy non-linear analysis of these relationships is recommended. In addition to this, operational decision-making can be improved by NPV and IRR analysis of X5, X6 and X7 projects – using project details, it will be easier to forecast product returns and make strategic choices.
