1 Why have price levels deterriorated so badly in this industry? Because…
– Market is matured. Capacity of industry has been always over the demand since 1970 – Customer doesn’t see this product as sophisticated one. 85% is price-oriented. 15% put emphasis on delivery – Federated Industry doesn’t have differentiated competence in the product – Competitors, mainly Brice, started to produce the product cheper and lower quality – Product itself is hard to differentiate and very easy to produce – Raw material is easy to get
2 Could price erosion have been avoided? Can the situation be reserved? Price erosion should be avoided if there were barrier to new entry… – diferentiating factors such as quality, warranty and other additional benefits – Fixed price long term contract, regular delivery, or high switching cost (sell three products as package) etc (Customer) – Special contract with supplier that enables Federated purchase raw material lower price – Regulation (Price, patent, etc)
3 What has Federated performance been throughout the period covered in the case? – Overall, not good. It has been losing market share and sales and finally go into the red.
4 What is your evaluation of Federated pricing policies?
Ad hoc(1977-1980) : Not good. There was no strict price policy even though there was book price. This period might trigger the price war because sales can lower price freely. Strict book price(1980-1981) : This is worst strategy of five strategies. It lost share and sales because of loss of bid. Controlled oppotunistic(1982) : Good as experiment
Selective pricing(1982-1983) : Good but too late. Learning from controlled oppotunistic, the company variate price strategy depending on the type of deal. However, price war is already there and resulting in average price dropping. No book price(1983-) : Need price policies dependent on type of deal
5 Should Federated withdraw from the market? If so, why?
If there is any product that can earn more margin than capacitator, Federated should withdraw the business. If not, however, it can continue the business as long as price 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