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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...
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.
The strategy for the SLP2 simulation, therefore, will include the following tactics. For the X5, a cut in R&D expense. The product doesn't need it. The price will be held steady. The X5 will be cut from the lineup after 2008. The X6 will not see any changes. This product performs very well, with stable profitability and final year saturation. The X7 will see a price reduction to spur the product into the growth phase from 2007-2009. The R&D money from X5 will be repositioned to the X7 to increase the value proposition of this product. These changes have been compiled in the following chart:
Year by Year Decisions: Pricing & R&D Allocations
2006
2007
2008
2009
X5
Price $250
Price $250
Price $250
Price n/a
R&D % 0
R&D % 0
R&D % 0
R&D % 0
Discontinue? N
Discontinue? N
Discontinue? N
Discontinue? Y
X6
Price $450
Price $450
Price $450
Price $450
R&D % 33
R&D % 33
R&D % 33
R&D % 0
Discontinue? N
Discontinue? N
Discontinue? N
Discontinue? N
X7
Price $150
Price $150
Price $150
Price $150
R&D % 67
R&D % 67
R&D % 67
R&D % 100
Discontinue? N
Discontinue? N
Discontinue? N
Discontinue? N
To run this simulation again, it is clear that the R&D for the X6 must be maintained. In terms of fundamental business theory, this makes sense. The X6 is a premium product, and the demand for this product is more likely to be derived from features than from price. This was learned early when it was determined that price elasticity of demand was low. Elasticity of demand from features was
At a lower price point, this may not have happened. However, R&D seems to be a significant driver for the X6 model, since it has a premium position in the market. If it is to command premium prices -- which will be the case no matter if the price is $400 or $450 -- it needs to have premium features. Thus, it should retain its R&D through 2008, since
5 cents, so you lose $7,500 in contribution for every $1 you increase the price but you gain. This hints that price elasticity of demand is relatively low for this product, perhaps lower than previously believed. Increases in price will result in reduced sales figures but can be expected to bring in more profit as well. It is not expected, however, that elasticity is perfectly linear. It is worth testing
While the contribution margins of the X6 and X7 appear to be maximized, that only holds for the levels of R&D investment. A shift in the R&D investments levels, therefore, is critical to maximizing profit over the four years. This requires a greater understanding of how R&D affects demand for the two products. The X6 clearly benefits from a high level of R&D, but this impact may wane as
What assumptions did you make when you planed your strategy? Did these assumptions prove to be right, or was there something else you didn't think about that influenced your results? How will taking those factors into account affect your strategy in this upcoming run? Again, you need to crunch some numbers to determine how successful you were, where the greatest sources of profit are, and what changes make sense. Make
Pervasive Video Games as Art The form and function of art has evolved and changed quite a bit over the years, decades and millennia. Paintings and sculpture have been artistic mainstays for much to most of the world of the civilized human race. However, with the technological revolution that has roared up over the last fifty years or so, new forms of art have bubbled to the proverbial surface. Digital technology