SunPower

BUS599 Module 3 SLP SunPower
Background
In this particular discussion, a similar pricing model as that adopted in SLP2 will be used. However, unlike was the case in SLP2, SunPower will have to come to terms with the reality of new players joining the industry. The new entrants present new competition. It would be interesting to see the impact new competitors entering the Solar Power industry will have on SunPower’s market share, cost to the consumer, as well as cumulative profitability.
Discussion
Decision 1: Beginning of Year 1: 2007 (See Appendix 3)
SLP3 Module Price: $0.13
SLP2 Module Price: $0.13
SunPower’s market share is typical of a firm at its stage. To enhance its market share, the firm ought to make sound strategic decisions in the light of the prevailing market conditions. The firm could in this case adopt an innovative approach whereby it out-competes rivals in the industry by offering products the competition cannot match in terms of quality and ability to satisfy consumer needs. It is also important to note that the company ought to make well-informed pricing decisions to be able to effectively compete in this space. At this point in time, the company’s end consumer net price for a PV system (installed) is lower than the industry average. However, its unit direct cost is higher than that of other firms in the industry. This is something that the company ought to address from the onset. To be effective as a cost leader, which appears to be SunPower’s preferred strategy, there is need to rein in costs so as to make reasonable profits for each unit of PV system installed. Conclusions made in SLP2 regarding the other variables (i.e. gross margin and return on sales) remain valid at the current price level. However, going forward, even with the price levels remaining identical as those of SLP2 at every decision stage, the said variables are likely to change with the introduction of new competitors.
Decision 2: For Years 2013 – 2017 (See Appendix 4)
SLP3 Module Price - $0.11
SLP2 Module Price – 0.11
At the current price level, the company’s market share increases by 2.4 percentage points. The growth in market share is in this case slower than that of SLP2 whereby the increase in market share was by 3.61 percentage points. The said slow growth on this front could be a consequence of the entry of new competitors whose share of the market is captured as 12.76%. SunPower’s revenue growth is largely impressive in this case, with revenues having jumped from $626.82m to $1.71b within the period under consideration. This represents a 172.8% revenue growth. The said growth is similar to that experienced in SLP2. The entry of new competitors did not, therefore, affect SunPower’s revenue growth. Given that the modular price as well as the consumer net price of the new entrants matches that of SunPower, consumers are not likely to switch from SunPower’s products to those offered by the new rivals. For this reason, the entry of new rivals ‘ate’ into the annual revenues of other solar firms in the market whose modular price as well as consumer net price is higher. It should, however, be noted that at $0.08, the unit direct cost of SunPower is still a concern. This is more so the case given that it is higher than that of not only its existing competitors ($0.07), but also than that of new entrants ($0.06). This problem is revealed by the company’s return on sales ratio. In essence, the return on sales ratio expresses “the profit residual slice from a company’s total sales revenue pie” (Tracy and Tracy, 2014, p. 238). In this case, the company has the lowest return on sales in comparison to that of existing firms in the industry, and that of new competitors. This effectively means that the firm is deriving very little profits (in comparison to other firms) from the current level of sales it makes.
Decision 3: For Years 2018 – 2022 (See Appendix 5)
SLP3 Module Price - $0.09
SLP2 Module Price: 0.09
The market share of SunPower grew significantly while that of new entrants shrunk by 4.8 percentage points. At this point in time, the company controls a larger chunk of the market than it even did at the same decision point in SLP2. This could be attributed to many factors – key among them being the fact that SunPower has the lowest consumer net price ($0.11) as well as modular price ($0.09) across the board. It is also impressive that the company has been able to rein in its costs with its unit direct cost being lower than was the case during the last decision point. The said unit cost is also lower than was the case for SLP2 during the same period of time. It is important to note that the said reduction in unit costs have been reflected in the return on sales ratio. Unlike was the case during the recent decision point where the company had a return on sales ratio of 0.08, the company during the current period has a return on sales ratio of 0.27 – which is even higher than that of the new entrants which stands at $0.25. In essence, this means that the company is at this moment in time generating a greater proportion of profits from sales. The growth in gross margin, both from the recent decision point in the current SLP as well as from SLP2, is also reflective of enhanced operational efficiency at the company. As Heisinger (2009) points out, this particular ratio “indicates the gross margin generated for each dollar in net sales…” (p. 634). The annual revenue figure also experienced huge growth from the last period, beating the percentage increase in the same figure in SLP2.
Decision 4: For Years 2023 – 2025 (See Appendix 6)
SLP3 Module Price - $0.08
SLP2 Module Price – $0.08
At this point, with a market share of 48.79%, it is clear that SunPower is the dominant player in the Solar Power Industry. Further, SunPower is the clear cost leader. It is important to note that as I have pointed out elsewhere in this text, for a company to effectively be a cost leader in a specified industry, it ought to rein in its costs. This is an assertion supported by Godfrey (2015). SunPower has managed to accomplish this feat. In addition to maintaining the lowest consumer price, the company also beats established firms in the industry on the modular price and matches that of new entrants. The company also has the lowest unit direct costs in the industry – effectively making it a true cost leader. The growth in revenues is also impressive, with the company having registered revenue growth of a whopping 390%. The company’s revenues during the current period are greater than those registered in SLP2. This could be attributed to market expansion and the significantly reduced unit direct costs. By having a higher return on sales figure than both new entrants and existing players in the market, SunPower appears to be the most efficiently run at this point in time. The company also has a higher gross point margin than all the other industry participants.
Recommendations
It should be noted that although new entrants seem to have dented the market share of SunPower, such an assertion may not be entirely accurate. This is more so the case given the company’s growth in revenue over the period under consideration. Thus compared to the revenue growth of SLP2, SLP3 growth has been largely impressive. The issue of the perceived slicing of the SunPower’s market share while revenue grows could be explained by market expansion. This means that while the new competitors could be gaining some traction in the market, the number of consumers could also be growing. Also, the fact that the company has been able to maintain the lowest consumer net price means that the market share ‘eaten’ into by new entrants is that of other existing firms in the industry, and not necessarily that of SunPower.
As can be seen in figure 1.0 and figure 1.1, there is some correlation between the pricing decisions that have been adopted and the growth in market share of the company. Essentially, the decrease in the end consumer’s net price in $ per kilowatt-hour for an installed PV as well as SunPower’s price of PV panels in $ per kilowatt-hour has led to the further enhancement of the company’s market share.
Figure 1.0
Figure 1.1
It is also important to note that there is some correlation between process development expenditure and unit direct costs. In essence, unit direct costs can be brought down via enhanced investments in process improvement. It is for this reason that an increase in process development expenditure has resulted in a decrease in unit direct cost of producing a PV panel.
Figure 1.3
Figure 1.4
Also, as can be seen in figures 1.5 and 1.6 below, there is a positive relationship between the decrease in unit direct cost and the increase in the return on sales ratio. The decrease in unit direct costs has contributed towards the further enhancement of the proportion of profits the company generates from sales.
Figure 1.5
Figure 1.6
As it has been pointed out elsewhere in this text, SunPower is effectively the cost leader in the Solar Power Industry. The company has been able to achieve this amazing feat through the development of an ‘edge’ that permits it to not only gain market share but also protect the said market share from competitors. In the longer term, the company may be able to even protect its market share from new entrants more effectively. A policy of lower prices is very effective in discouraging entry of new players (Moschandreas, 2000). In general, a company that seeks to be a cost leader has the option of either cutting costs so as to further enhance profits while charging the average prices in the industry or adopting a pricing structure that is lower than average industry prices while at the same time cutting costs so as to make reasonable profits for units sold (Morden, 2016). SunPower seems to have adopted the latter approach.
On the basis of the review conducted above, I would have adopted the very same strategy. This is particularly the case given the success the said strategy has had with regard to the further enhancement of the company’s market share, especially amongst price conscious buyers. Companies that have in the past implemented the cost-leadership strategy successfully include, but they are not limited to, “Black & Decker (power tools), Briggs &Stratton (small engines), Dell (computers), Lincoln Electric (welding equipment), Nucor (steel) and Whirlpool (home appliances)” (Miltenburg, 2005, p. 18).

















References
Godfrey, R. (2015). Strategic Management: A Critical Introduction. New York, NY: Routledge
Heisinger, K. (2009). Essentials of Managerial Accounting. Mason, OH: Cengage Learning.
Miltenburg, J. (2005). Manufacturing Strategy: How to Formulate and Implement a Winning Plan (2nd ed.). New York, NY: Productivity Press.
Morden, T. (2016). Principles of Strategic Management (3rd ed.). New York, NY: Routledge.
Moschandreas, M. (2000). Business Economics (2nd ed.). Mason, OH: Cengage Learning.
Tracy, J.A. & Tracy, T. (2014). The Comprehensive Guide on How to Read a Financial Report. Hoboken, NJ: John Wiley & Sons.




















Appendices
Appendix 1

SLP2 Market Share
SLP3 Market Share

Years 2008 - 2012
4.85%
4.85%

Years 2013 - 2017
8.46%
7.25%

Years 2018 - 2022
32.88%
34.07%

Years 2023 - 2025
54.45%
48.79%



Appendix 2

SLP2 Annual Revenue
SLP3 Annual Revenue

Years 2008 - 2012
$626.82M
$626.82M

Years 2013 - 2017
$1.71B
$1.71B

Years 2018 - 2022
$21.53B
$30.55B

Years 2023 - 2025
$128.49B
$149.96B







Appendix 3

SunPower
Other Solar

Market Share (%)
4.85%
95.15%

Consumer Net Price ($/kWh)
$0.15
$0.17

Unit Direct Cost ($/kWh
$0.10
$0.08

Annual Revenue ($/Year)
$626.82M
$14.60B

Annual Net Income ($/Year)
$35.85M
$3.65B

Process Development Expenditure ($/Yr)
$29.08M
$696.49M

Unit Cost ($/Peak Watt)
$2.47
$2.04

Gross Margin (Fraction of Revenue)
.26
.46

Return on Sales (Fraction of Revenue)
.07
.26

Modular Price
$0.13
$0.15












Appendix 4

SunPower
Other Solar
Other Firms

Market Share (%)
7.25%
80.00%
12.76%

Consumer Net Price ($/kWh)
$0.13
$0.16
$0.13

Unit Direct Cost ($/kWh
$0.08
$0.07
$0.06

Annual Revenue ($/Year)
$1.71B
$24.83B
$2.83B

Annual Net Income ($/Year)
$112.57M
$7.53B
$891.36M

Process Development Expenditure ($/Yr)
$78.03M
$1.18B
$119.45M

Unit Cost ($/Peak Watt)
$2.08
$1.75
$1.69

Gross Margin (Fraction of Revenue)
.26
.49
.45

Return on Sales (Fraction of Revenue)
.08
.30
.31

Modular Price
$0.11
$0.13
$0.11











Appendix 5

SunPower
Other Solar
Other Firms

Market Share (%)
34.07%
57.97%
7.96%

Consumer Net Price ($/kWh)
$0.11
$0.13
$0.12

Unit Direct Cost ($/kWh
$0.05
$0.06
$0.06

Annual Revenue ($/Year)
$30.55B
$76.56B
$9.05B

Annual Net Income ($/Year)
$6.94B
$24.70B
$2.25B

Process Development Expenditure ($/Yr)
$1.27B
$3.46B
$408.19M

Unit Cost ($/Peak Watt)
$1.39
$1.46
$1.49

Gross Margin (Fraction of Revenue)
.40
.49
.41

Return on Sales (Fraction of Revenue)
.27
.33
.25

Modular Price
$0.09
$0.11
$0.10











Appendix 6

SunPower
Other Solar
Other Firms

Market Share (%)
48.79%
39.25%
11.96%

Consumer Net Price ($/kWh)
$0.10
$0.12
$0.11

Unit Direct Cost ($/kWh
$0.03
$0.05
$0.05

Annual Revenue ($/Year)
$149.96B
$160.90B
$38.55B

Annual Net Income ($/Year)
$61.61B
$52.01B
$10.12B

Process Development Expenditure ($/Yr)
$6.37B
$7.33B
$1.70B

Unit Cost ($/Peak Watt)
$0.86
$1.24
$1.23

Gross Margin (Fraction of Revenue)
.58
.49
.42

Return on Sales (Fraction of Revenue)
.45
.32
.27

Modular Price
$0.08
$0.10
$0.08