Larson Outputs the First Potential

Larson Outputs

The first potential economic future for Larson is that of a stable market and a state of monopolistic competition. Economic stability is likely in the Eurozone, where the temporary crisis in Greek debt is likely to stunt the economic recovery. Recovery in the U.S. is also expected to be stunted as the monetary policy climate is focused on an imaginary inflation threat (not backed up by empirical evidence in the 10-year Treasury yield curve) and thus will not include further monetary expansion. With stunted growth, firms in the industry are likely to continue to compete on the basis of price. Under this scenario, Larson would be able to adopt a penetration pricing strategy by cutting into its 35% gross margins in order undercut smaller competitors and build market share among OEM manufacturers of computers and cell phones. Under this scenario, the company would increase market share and revenue, but would see profits flatline. However, as competitors fall by the wayside, Larson's market share would grow larger and the industry could potentially enter into an oligopolistic state. If that occurs, Larson would be positioned to exert pricing pressure on the other firms in the industry and would also have significant non-price barriers to entry.

The second potential economic future for Larson is that the oligopolistic scenario will emerge quickly and is viewed as a certainty rather than a potentiality as in Milestone 1. Under this scenario, Larson would not be a strong position of pricing power but because of its current size and growth trajectory would be forced to become more of a niche player. Under this scenario, it is recommended that Larson focus on research and development. Demand for battery products is not expected to fall, but demand for improved levels of battery performance is expected to increase as consumers become increasingly dependent on mobile technology. Cost controls are also recommended because even high-performing batteries will be subject to intense cost pressures from larger competitors. Larson does not have competitive advantage in innovation, so even if it does develop differentiated products will be subject to strong and immediate competition both in terms of product quality and in terms of price on those quality products. Thus, even with an increased emphasis on R&D, Larson will need to focus simultaneously on cost control. The result will be that the company will lose some profitability as it fights to carve out a niche market, and this niche market development will likely come at the expense of fighting to maintain its existing market share.

The third potential economic future for Larson is that the credit market tightens. This is possible Larson's home nation of Germany in light of the Euro crisis, which threatens economic growth in the region. While the firm may consider offshoring production in pursuit of cost leadership, a credit crunch would make such a plan difficult as new factories overseas are not free. However, if the recent declines in the value of the Euro hold over the medium-term -- and they may if further crises emerge within the Eurozone (i.e. In Spain or Italy) Larson's products will be cheaper on global markets. Under this scenario, Larson would be forced to finance its operations entirely from ongoing cash flow. It would also see a slump in the strength of the battery industry. If the industry slumps, this may bring about the oligopoly scenario from Milestone 2. At present, however, a credit crunch would simply limit the amount of R&D that Larson could conduct, and would prohibit the offshoring of production in order to cut costs. Larson would still be able to follow the core cost leadership strategy, which was always the most reasonable option on the table given the industry characteristics.

Larson is faced with an uncertain future in that each of these three different scenarios delivers slightly different characteristics with regards to the nature of competition and the opportunities that exist in the marketplace. Some of the options presented under the different scenarios are mutually exclusive -- Larson cannot build a new plant in China during a credit crunch, nor can it focus on R&D while pursuing a cost leadership strategy. What Larson needs to do is evaluate its strategy based on the most likely scenarios of the global economy and the industry conditions. In this instance, the most likely scenario is a relatively slow growth economic scenario. While markets in Asia are strong, Europe may suffer from the effects of the Greek debt crisis, which threatens to stifle recovery from the 2009 economic slowdown. Conditions in the United State are different, but the current monetary policy climate is oriented towards imaginary threats rather than threats that actually exist, such as lingering high unemployment. This increases the threat of a double-dip in the U.S. As such, it is unlikely that growth in the world economy will be robust over the next five years. Larson should focus on gearing up for a price war with the existing firms in the industry, in particular as growth slows and some firms drop out.