BUS599 SLP 2 Pricing Strategy

This discussion continues with the analysis of how Module Price adjustments impact the total profits and market share of SunPower vis-à-vis industry-wide performance. Further, the discussion highlights how improvements in processes yield unit costs reduction. Like was the case with the previous exercise (SLP1), four major decision points will be taken into consideration in the current exercise, i.e. SLP2. A more conservative pricing approach will, however, be adopted in SLP2.

Decision 1: Beginning of Year 1: 2007 (See Appendix 1)
SLP1 Module Price: $0.15
SLP2 Module Price: $0.13

It is important to note, from the onset, that in SLP2, SunPower starts off with a more significant share of the market at a lower price level than that adopted in SLP1. In SLP2, the market share is 4.85%, which is essentially 2.45 percentage points better than the market share in SLP1. The annual revenue is also markedly high at the current price level than the annual revenue registered in SLP1. Currently, the company has annual revenues of $626.82m – which is more than double the revenue registered in SLP1. The process development expenditure is also higher in SLP2 than was the case in SLP1. It is clear at this point that price related decisions have had an impact on the performance of SunPower. This assertion is in line with Stiving’s (2011) viewpoint to the effect that when implemented well and with the long-term view in mind, lower prices could augur well for the company in terms of market share.

It should, however, be noted that the return on sales ratio of SunPower is still not impressive in relation to that of other entities in the same industry. Albrecht, Stice, Stice, and Swain (2007) deem this ratio as a key gauge in the measurement of “the amount of profit earned per dollar of sales…” (p. 672). The company’s operational efficiency, just as was the case in SLP1, is not at par with the operational efficiency of firms in the same industry. This effectively means that the company is operating at a suboptimal level. To remedy the situation, the management of SunPower would be required to boost the operational efficiency of the company via the adoption of various strategies in both the short and medium term. Suggestions include, but they are not limited to, the enhancement of business processes, outsourcing of noncore activities, etc.

Decision 2: For Years 2013 – 2017 (See Appendix 2)
SLP1 Module Price - $0.13
SLP2 Modular Price – 0.11

It is important to note that the percentage of price decrease is in this case similar to that in SLP1. However, the price level is lower. The market share in this case jumps from 4.85% to 8.46% with the lower pricing adopted. The percentage increase is in this case more significant than was the case in SLP1. Thanks to the increase in market share, the annual revenue also increased from $626.82 million to $1.71 billion. This represents a 63.34% increase which is nonetheless lower than that registered in SLP1 (183%). The process development expenditure in this case registers an increase of 168%. SLP1’s process development expenditure increased by a similar proportion. The cost of goods sold is manifestly high and the return on sales ratio of SunPower is still not impressive in relation to that of other entities in the same industry. In essence, this further highlights the need for SunPower to take deliberate measures to enhance its operational efficiency.

The company’s consumer net price in relation to that of competitors is largely impressive. The $0.02 reduction in the same is a good move as it means that the end consumers’ net price for each installed solar cell has gone down. It would be interesting to see how this translates in terms of market share in the coming period. The company’s gross margin remains the same at a time when the same ratio (industry-wide) increases from 46% to 51%. This is one ratio to keep an eye on in the next period in an attempt to gauge how competitive the products offered for sale by SunPower are in the market vis-à-vis those offered for sale by other companies operating in the same space.

Decision 3: For Years 2018 – 2022 (See Appendix 3)
SLP1 Module Price - $0.11
SLP2 Module Price: 0.09

Like has been the case in prior periods, the percentage of price decrease is in this case is similar to that in SLP1. The price level however remains lower. The increase in market share is impressive. Also, it is clear at this price level that the company is the dominant player in this particular market – effectively controlling 32.88% of the market share. It is important to note that there are many factors that may have contributed to the enhanced market share. These include, but they are not limited to, the sustained drop in consumer net price which effectively benefits customers in such a way that they are able to access solar cells at a lower end consumer’s net price.

There is also a marked improvement in the amount of profit SunPower earns for each dollar raked in from sales. This is an indication of improved operational efficiency. Although there are parallels that could be drawn in SLP1 and SLP 2 on several fronts, i.e. with regard to an increase in market share and annual revenues, it should be noted that the magnitude of the said differs. This could be a direct consequence of the lower price levels implemented and the fact that there is a significant decline in the end consumer’s net price for each installed solar cell. Although the impact of the process improvements will be highlighted in greater detail elsewhere in this text, it is important to note that the significant outlay of development expenditure could have led to process improvements, reduced costs, and overall, greater operational efficiency. Essentially, development expenditure is a key component of the “strategic capacity of the company” (Holt and Pressman, 2007, p. 145).

Decision 4: For Years 2023 – 2025 (See Appendix 4)
SLP1 Module Price - $0.09
SLP2 Module Price – $0.08

At the current price level, SunPower occupies and controls more than half of the market share. The annual revenue increment is also significant, and so is the gross margin – effectively meaning that the company’s operational efficiency is no longer in question. The significant increase in process development expenditure could be an indication of the introduction of a new product or the adaptation of better and more efficient production processes. This is more so the case given that at its level, we would expect the company to have reached maturity, in which case a company at such a level no longer needs to routinely spend huge amounts in the creation as well as improvement of products and processes.

Figure 1.0
Figure 1.1
It is clear from the above figures that from year 2018 moving forward, an increase in process development expenditure led to a decrease in unit direct costs. This could be a direct consequence of a move by the company to adopt new technologies, modify products to suit the needs of the market, as well as apply new findings in research. In aggregate, activities of this nature lead to the improvement of processes and, hence, the reduction of associated costs.

In becoming a cost leader, the company will effectively be offering its products at prices that the competition cannot beat. There are various benefits of adopting a cost leadership strategy. One of these has got to do with the sustenance of a long-term competitive edge (White, 2004). Being able to operate at a lower price level than peers in the industry and being able to maintain end consumers’ net price for each installed solar cell at the current level will protect the company’s market share and insulate it from the threat of new entrants. According to Godfrey (2015), threats of new entrants could be brought down “by using price as a barrier to entry to force new competitors out” (p. 83).

With the significant market share, the company will be able to develop economies of scale and thereby optimize its profitability by engaging in R&D efforts to enhance efficiency, while at the same time scaling up operations. It is important to note that the management of SunPower ought to continue spending on R&D efforts so as to further enhance the quality and performance of its products and services. In this case, other entities will find it difficult to compete or operate at the company’s efficiency level – effectively meaning that SunPower could be able to sustain its dominance in the market. I am also of the opinion that the company ought to consider diversifying to other related areas. There are plenty of opportunities, for instance, that abound in areas of value addition. Towards this end, the company ought to consider rolling out solar-powered tools and items. Examples include, but they are not limited to, solar powered lawn mowers, solar powered drones, etc.