PDA SIM I The First

PDA SIM I

The first simulation was run using the default values. During this simulation, after the first year the X5 had market saturation of 31%. This means that the X5 is in the growth phase of the market. This has lasted for one year and may last 1-2 more years. The X6 has a market saturation of 18%, heralding the beginning of the growth phase. The X7 has a market saturation of 3%, so the product is still in the introductory phase.

In subsequent years, the X5 remains in the growth phase for 2006 and 2007, but enters the mature phase in 2008 and 2009. The X6 lags the X5 by a year, growing through 2008 and entering maturity in 2009. The X7 never enters the growth phase during the length of the simulation. This hints at two key issues to address during this simulation. The first is going to be determining when to cut the X5 from the lineup. Under the default condition, the X5 makes money through 2008 but loses money in 2009. The second major issue is going to be to spur the X7 into the growth phase. Under the default scenario, the X 7 finishes the simulation with 2 million customers out of a total possible of 15 million. The other products reach saturation, so the best opportunity for growth beyond the default scenario lies with the X7.

The final score for the default simulation was a profit of $1.165 billion. The total profit declined every year, such that 2006 saw the highest profit at $505 million (43% of the final total). The following graph shows the profits for the different products for the four years:

This graph illustrates the strategic issues that are being faced. The X5 holds a slender profit in 2008 but loses money in 2009. Clearly, it will need to be cut by that year. Part of the problem for the X5 is that it has high fixed costs - $70 million per year -- which means that it will be profitable for less time than the other two products. The X7 begins to show strong profitability by 2009 even though it has not even entered the growth phase. In that year, it accounts for 75.8% of total profits. The implication for this is that the primary profit driver for the last year -- maybe the last two years -- is going to be the X7. The strategy undertaken should ensure that this product is well into the growth phase during these two years. It is also worth taking into consideration that while under normal circumstances a nice mellow growth trajectory for the X7 would be acceptable, in this scenario any unutilized potential X7 market is wasted -- you don't get to count 2010 results. It may be best, then, not to leave any sales on the table for this product.

That reality makes the X7 the most interesting case. This product has the highest margins, so has the most flexibility in terms of pricing. For the SLP2, the objective with regards to the X7 is going to be to lower the price in order to spur sales. If we consider what the X7 is, it is clear that this is a low-end piece of equipment. Porter would prescribe a cost leadership strategy. Customers of this product may respond to enhanced features, but they definitely want a fair price. The fact that this product never hits the growth phase is indicative that the market does not see this as offering a compelling value proposition.

Whereas price is a decision that does not involve other products, R&D spending does. The growth phase lasts 3 years, if the X5 and X6 are anything to go by. To maximize profit, the growth phase for the X7 should last through 2007-2009 in this simulation. The one-year R&D time lag effect means that to deliver a strong value proposition in 2007, R&D investment will need to begin immediately. Thus, some R&D monies will need to be diverted from the other products. Money spent on R&D in 2006 for the X5 will not have an impact of product quality until 2007, when the market saturation has hit 78% and the product has entered the maturity and decline phase. At that point, the R&D expenditure is unlikely to spur future growth. Therefore, the decision will be made to divert R&D spending from the X5 to the X7 beginning immediately.

What has not been considered thus far is the X6 product. This handheld spends virtually the entire simulation (2006-2008) in the growth phase. Profitability remains high and stable until the final year when the product enters the maturity phase. Profitability for this product exceeds that of the X5 at comparable stages of the product life cycle, but it lags that of the X7. The latter, of course, is priced too high and does not sell enough volume, so it is worth considering that at higher volumes the contribution margin is likely to be closer to the range where the X6 currently lies. Ultimately, the X6 is the cash cow for those three years. It still makes money in the final year and would even with a higher R&D expense. There is little reason to change the figures for the X6. One possibility for that product, however, is to test the upper bound on the price. The X6 is a premium product. Therefore, as long as it delivers a premium experience it can be expected to have a lower price elasticity of demand than the other two products.

Pricing for the X7 should also consider elasticity of demand. Lowering the price can be expected to increase demand, but it will also decrease the margin. There is plenty of margin to give. However, the objective of saturating sales should not come at the expense of total profit. Therefore, it is worth testing the elasticity function in order to determine the ideal equilibrium point that maximizes profit. Incremental sales should increase the incremental product. It is predicted that if the price is cut too much, the product will saturate; the equilibrium point, however, will be somewhere in between the current price and the deep discount price.