A unique and interesting problem arose when one company, a monopoly within the business-to-business (B2B) sensor market, split into six companies with identical products and equal footing within the market. As Director of Finance for Chester Company, one of the newly formed entities, it is important for me to identify a strategy that will enable the company to remain viable and be successful in the future. An in-depth analysis of the industry situation report provided good metrics to project future customer desires and total market potential.
In order to be successful, the strategy that the management team develops must work within the identified parameters while attempting to predict how the other five companies in the B2B sensor market will proceed. There are only two segments of the B2B sensor market: low technology and high technology.
The only product Chester Company offers currently fulfills the needs of both markets but this will change as the newly formed entities revise and develop products to meet customer needs. The high tech segment is appealing but will require continual investment in research and development to maintain the standards that customers expect. It will be easier to meet the needs of the customers within the low tech segment but there will likely be more competition for market share.
1. The strategy that I would like to see the management of Chester Company adopt over the next five years is that of “niche cost leader” (Capsim Management Simulations, 2012) for the low technology segment of the B2B sensor market and to obtain thirty-five percent of that market. This will be achieved by appealing to customers’ sense of thrift. To cut prices below the competition, management should retain the current product and not invest much in research and development. Production costs must also be greatly reduced.
To do this, an early investment in automation is necessary as it will reduce labor expenses in future years which will increase the margin and profitability of the company. This investment will be financed through the issuance of stock and long term bonds. I also plan to provide the marketing department with a very generous budget in the first couple of years to aggressively target the market and increase the awareness and accessibility of the product early on. Short term borrowing will be necessary to finance operations and provide a cash cushion to prevent the need for an emergency loan.
2. There is a great chance for Chester Company to earn good profits within the low tech segment over the next five years. Although the price of the product must be kept to a minimum this will be offset by decreasing costs which increases the contribution margin. Also, there is greater demand for products in the low technology segment of the B2B sensor market which is expected to increase approximately ten percent each year. However, Chester Company shareholders may realize a loss in the first year due to the high marketing budget and cost of labor because the automation rating is low. Unfortunately, some sacrifices will need to be made early on to realize greater profits in the long term.
3. The product that is most important to the success of Chester Company is Cake; the product currently being produced. During the first year of business, this product will have the ability to appeal to customers across both segments of the B2B sensor market and will ultimately become the favored product of the low tech segment. Management will take advantage of the dual appeal of Cake in the first year by taking a portion of both the low tech and high tech markets in an attempt to retain some profitability. Ultimately, the product will be positioned so that it takes a large portion of the low tech market and will likely not take any portion of the high tech market by the fifth year. The plan that I developed focuses primarily on the success of the company for the next five years as there will be a lot of volatility in the market and further projections are impossible to make at this time.
It is difficult to predict how the competitors within the B2B sensor market will be positioned which makes it essential for management to decrease costs as much as possible and increase market share within the low technology segment of the market. My advice to the rest of the management team is to avoid the appeal of developing a new product for either market early on and to avoid the high tech market altogether within the first five years because it will be difficult enough to remain profitable and succeed without squandering business assets on developing a product which will have little chance of being profitable within that timeframe.
Courtney from Study Moose
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