Open Systems Theory Handheld Corporation

Open Systems Theory

Handheld Corporation is challenged by the costs of maintaining its three product lines, with difficult decisions specifically in the areas of defining product pricing strategies, allocation of R&D budgets, and the decision of whether to discontinue a product line or not. From an analysis of the financial performance and marketing data for each of the three PDA models that Handheld Corporation manufacturers, recommendations are presented within this paper as potential strategic options the company can take given the challenges they are facing today. This is an analysis that will not center on a given aspect of strategy yet will seek to find an integrative strategy based on the concepts of open systems theory (Negandhi, 1973) for Handheld to pursue that will seek to optimize their investment in new products and continually grow existing products performing well both from a financial and marketing standpoint.

Concerns over the X7 New Product Strategy

After analyzing the financial, market and product data from the Models X5, X6 and X7, the role of the latest product to be introduced, the X7 has been launched as a low-end product entry for the company. From an analysis of the financial and marketing data on the Model X7, it is clear that Handheld believed they could gain disproportionately higher sales with a low-end version of their PDAs. In effect, Handheld was attempting to capitalize on the elasticity curve of the market (Haley, Goldberg, 2008) and price a product on or below that curve, to achieve disproportionately higher sales. As is evidenced by an analysis of their financial and marketing data, the elasticity curve for PDAs in the price class of the X7 is flat and doesn't seem to show any signs of elasticity within the $200 range.

The X7 product launch highlights a far more serious flaw in the approach to decision making within Handheld however. Leadership on price is a costly strategy and cannot scale, and to have invested so heavily in this new product shows that there is a lack of appreciation for how to compete on differentiated features, and unique value propositions (Markey, Ott, Toit, 2007).

As bad of a decision it was to launch a low-end product designed to compete primarily on price, Handheld had little choice. Saturation rates are increasing on the X5 at 31% and the X6 at 18%. While not explicitly mentioned in the case, from financial analysis it can be seen that both the X5 and X6 are facing continual pricing pressure in the stages of their lifecycles each is in.

Differentiation Must Be Based on More than Price

In addition to the strategic error of launching a low-end product to compete primarily based on price, Handheld is not differentiating their products based on distribution of price points throughout their product line defined by features-driven solution segmentation (Hall, 2005) as well. The Model X5 is priced at $250 the X6 at $400 and the X7 at $200. In industries that have rapidly changing product lifecycles, it is essential to have at least a 30% difference in price to achieve differentiation (Olsen, Sharma, 2008). At only $50 below the X5, Handheld must either drop the price to at least $175 for the X7 to alleviate cannibalization from occurring by the X5. The paradox however is that to lower the price of the X7 is to prolong the payback period for this specific model, which is the most unprofitable of the entire company. Ideally the X7 needs to have a higher price point associated with it, and in retrospect the better product strategy would have been to expand into higher-priced models where Handheld would have had ample room in terms of price points to differentiate. The new product needed to be approximately 30% or more than the X6, with significantly greater features including support for WiFi, social networking apps including Facebook, MySpace, Twitter, Friendfeed and other features that could be turned into value-added services that could be upsold to customers. A new product at the higher end of the product line would also give Handheld the opportunity to move into the lucrative services sector as well, offering WiFi-based applications and content syndication through partnerships with providers. As X6 saturation is progressing at the most rapid rate of all three products, this higher-end product strategy makes more sense than launching a $200 unit that has little strategic direction apart from being a loss-leader. The X6 customer loyalty is exceptional, further supporting the decision to enter a higher-end segment than attempt to compete only on price. Despite this being the best direction, Handheld has $12.8M invested in the X7 and must significantly re-position the product to make it profitable.