SLP

Introduction

The SLP 3 scenario saw relatively poor performance, using a strategy that did not waver much from the original scenario. There were a few interesting findings from the cost volume profit analysis that can be applied to the strategy utilized in SLP 4. Each product will be covered in detail.

X5

The X5 in 2012 has already been on the market and is probably at the top of the product life cycle. It sells good volume and is profitable, but past simulations have shown that the X5 becomes less profitable over time. The X5 has the highest fixed costs of any product, at $75M, and is expected to drop below the margin of safety by the final year, 2015. By this year, the contribution is expected to be below fixed costs. Therefore, the X5 should be discontinued for the 2015 year.

There is also the matter of pricing the X5. The original price is currently making the X5 profitable. The only real decision with respect to pricing the X5 is how to price it in such a way that extracts the absolute maximum number of sales prior to the 2015 year, at which point it will be discontinued. Basically, any potential sales still on the table after 2014 will be sales that could have happened, but did not. However, the trade off is that lowering the price of the X5 to win those sales will also reduce the per unit contribution. There is a risk that lowering the price to increase sales will lower the total contribution lower the price too much and those additional new sales will simply not be worth it.

The other element is the R&D funding. The company has a set amount of R&D funding each year. This cannot be changed; it is an organization-wide fixed cost. However, the R&D funding can be divided among the products. More R&D invested into a product will impact on the desirability of the product. The written reports that come at the end of each year discuss this issue in terms of "customers feel that this product is priced too high for the features" and verbiage like that. There is also a lag of one year in between when the company invests in R&D and when the fruits of that investment are reflected in sales. In other words, R&D in 2012 doesn't show on the bottom line until 2013. Where the X5 is concerned, money invested in 2012 shows in 2013, at a point when the X5 is peaking. Furthermore, if price is going to be massaged in order to squeeze all the potential unit sales out of the X5 by 2014, there is no value in investing any R&D money into this product. Literally, R&D money invested into the X5 will not have any meaningful impact on the bottom line. Therefore, it is recommended that the R&D money from the X5 is shifted to the other two products.

The strategy employed in the SLP 4 will therefore see R&D for the X5 cut to zero immediately, and the price lowered slightly to $270 in order to ensure that there are as few remaining potential customers as possible at the end of 2014.

X6

The X6 is closer to the beginning of the product life cycle in 2012. This is the company's premium product,...…lower contribution per unit. In SLP2, the X7 was a money-loser. The pricing strategy was not originally supposed to change, but it was then realized that increasing the R&D budget of the X7 wouldn't change the production cost; it would change the features of the device. It is interesting that decreasing the price did not have more of an impact on market saturation, which only got as high as 11%. This is an important figure, because the other two products sold out to 100%. That means that any improvements in the future have to come from the X7. It is possible to make more money from the X5 and X6, but how much more can be made? The reality is that not much more money can be made. To really make an impact on the organization's bottom line, attention needs to be focused on the X7.

First, the drop in price increased demand, but not as much as was expected. That is interesting, but at least it provides some context as to the relationship between price and demand for this product. That will allow the company to set a better price point going forward, in order to capture the rest of the demand. However, there was no change in R&D allocation for this product. Apparently, increasing the R&D budget actually does matter if the product is too bare bones, it will lag even in the low-end market, and that is probably why the price drop did not result in the expected sales spike. It is clear from this analysis that finding the right balance between price and R&D on the X7 is really the only significant…