A Simulation Exercise SunPower

SunPower: Simulation Exercise

Background

SunPower, a young innovative company, with new proprietary technology. I will be seeking to maximize the cumulative profit of SunPower over an eighteen year period. The strategies selected will be founded on not only periodic reports such as key industry data and income statement, but also on the industry structure and informed prediction of customer/competitor reactions. At the beginning of Year 1, the market share is at 2.4%. I will be seeking to expand this market share over the 18 year period. In essence, this will call for the formulation of pricing decisions that are largely favorable, while at the same time bringing down unit costs and further enhancing the product’s utility.

Discussion

Decision 1: Beginning of Year 1: 2007 (See Appendix 1)

Module Price: $0.15

With a module price of $0.15 and a market share of 2.40%, SunPower is all set to consolidate its place in the market as the most efficient solar cells producer in the world. It is important to note that with projected explosion of solar power, and an impressive product, the company is likely to do well going forward. This is more so the case if the right decisions are made with regard to not only the short-term, but also the medium-term and long-term strategies to be embraced. The company’s management ought to make the right pricing and related decisions so as to leverage SunPower’s strengths (while minimizing its weaknesses) in a way that could allow the company to fully exploit the opportunities available in the market. The company’s return on sales ration, against that of the rest of the companies in the industry, is not impressive. This ratio, in the words of Albrecht, Stice, Stice, and Swain (2007), seeks to measure “the amount of profit earned per dollar of sales…” (p. 672). Return on sales ratio is a key indicator when it comes to the measurement of an entity’s operational efficiency (Bragg, 2010). The fact that SunPower has a significantly lower return on sales figure than its peers in the market effectively means that the proportion of profits the company is deriving from sales is quite low. This is, therefore, a ratio that could be used to gauge how effective the company’s management is as far as profit generation is, at a specified level of sales. Therefore, this is yet another figure to watch going forward so as to track the operating efficiency. Also, going forward, it would be interesting to keep an eye on product development expenditure with an aim of determining how it impacts unit costs. It is important to note that it is the percentage revenue allocated towards the improvement of processes that determines product improvements.

Decision 2: For Years 2013 – 2017 (See Appendix 2)

Module Price - $0.13

The company experiences a 2.85% increase in market share. This increase in market share is also accompanied by growth in annual revenues from $220.9M to $626.82M, representing a 183% increase. The growth in the annual net income is also very impressive. However, the return on sales figure remains low – especially when compared to those of peers in the industry. This, therefore, means the company is yet to improve its operating efficiency. The company’s management ought to do more to ensure that the firm is at par with its peers when it comes to operating efficiency. The decline in consumer net price indicates that the end consumer’s net price for each installed solar cell has gone down. This could earn the company a greater share of the market. The company also seems to have significantly increased its process development expenditure. This is a figure that I will be keeping an eye on so as to determine the impact its change over time is likely to have on the company’s unit direct cost of producing solar cells. It is important to note that this cost is inclusive of both the unit variable costs and unit fixed costs. The decline in gross margin from 28% to 36% is, however, a cause for concern. This is more so the case given that the gross margin of other firms in the industry (in general) rose during the period under consideration. The gross margin ratio, in the words of Heisinger (2009), “indicates the gross margin generated for each dollar in net sales” (p. 634). The drop in this case could therefore be an indicator of the company losing the competitiveness of its products. Going forward, this is a ratio that should be investigated.

Decision 3: For Years 2018 – 2022 (See Appendix 3)

Module Price - $0.11

The further increase in market share could be attributed to various factors. One of these is the decrease in the company’s price of solar cells which could have come about as a consequence of a fall in SunPower’s unit direct costs of producing solar cells from 0.10 to 0.08. It should, however, be noted that the company ought to ensure that it further slashes its unit direct costs so as to match or mimic industry averages. The increase in market share has also occasioned a 59.65% growth in revenue. At the same time, the company’s peers were able to grow their revenue by 73.15%. In that regard, therefore, it should also be noted that the enhanced market share and revenue growth in the case of both SunPower and its peers could also be attributed to an explosive growth in solar power. How fast this particular industry is likely to grow is not known but forecasts project continued growth (Handerson, Conkling, and Roberts, 2007). It would be interesting to see how the industry expansion pans out going forward by reading the revenue growth figures of players in this very industry, while at the same time taking into consideration the aggregate expansion of market share. The continued drop in consumer net price indicates that the end consumer’s net price for each installed solar cell has gone down – possibly earning the company a greater share of the market. The company’s return on sales ratio still paints a picture of inefficiency, more so in comparison to that of the company’s peers. There is need for the management of the company to ensure that the net income the company earns per every sales dollar is enhanced. A company’s sales ratio could be enhanced by adopting better cost cutting measures, while at the same time growing revenues (Jennings, 2001).

Decision 4: For Years 2023 – 2025 (See Appendix 4)

Module Price - $0.09

With a 288.65% growth in market share, it would be fair to conclude that SunPower is a dominant player in the industry. The company’s revenues also experienced massive growth as a consequence – from $1.71B to 21.53B. The unit direct costs of producing solar cells also fell, effectively putting the company in an excellent position to offer its products to consumers at better prices. This can be gleaned from the further reduced end consumer’s net price, which also happens to be lower than that of SunPower’s peers. It should also be noted that the company’s return on sales ratio improved markedly, despite it still being lower than that of peers. This demonstrates that SunPower is becoming more efficient – i.e. experiencing an improvement in its operational efficiency. It is also clear from the figures mentioned above that there are efforts to increase revenue and cut costs.

Conclusion

With the growth in market share, so has annual revenues gone up (see figure 1.3 and 1.4). It is also clear that process improvements have reduced unit costs over the period of time under consideration (see figure 1.1 and 1.2). Process improvement is cited by Hansen, Mowen, and Guan (2007) as a cost reduction measure. The growth in revenues is indicative a growth in demand, as projected by various forecasts. With demand expected to grow, SunPower should brace for increased competition in this space. This is more so the case as new entrants join the fray, perhaps attracted by the profit potential of this particular industry. I am of the opinion that the company should further cut its production costs so as to enable it to offer the product for sale at a friendlier price. As Miltenburg (2005) points out, “successful cost leaders can be low cost product developers, low cost manufacturers, low cost distributors, low cost marketers, or low cost service providers” (p. 15). By being a cost leader, the company will be able to effectively lock out competition, particularly new entrants, who cannot compete at its price level. This is one of the key benefits of a low-cost.