SunPower Simulation

Background To remain relevant in a competitive business environment, business entities ought to, amongst other things, embrace optimal pricing structures (Morden, 2016). In this case, I concern myself with the most viable pricing strategy for SunPower so as to not only earn the highest cumulative profit, but also expand market share. This will be done in the light of competitor pricing policies, in which case the said competitors are likely to charge prices that are lower than those of SunPower.

Discussion From the analyses in Appendix 1 (Run 1) and Appendix 2 (Run 2), two themes emerge. As SunPower’s module price decreases, the market share as well as profitability increases. On the other hand, as SunPower’s module price increases, the market share drops, while profitability increases sluggishly up to a certain point then tanks. These two themes will be comprehensively analyzed below. Gradual Increase in Module Price At a price level of $0.16, SunPower has a market share of 2.87% and an annual net income of $45.08M.

The other market participants in existence at the time have a set module price of $0.15 which is lower than that of SunPower. When SunPower increases the module price to $0.17, and other existing players in the market maintain their price level at $0.15, its market share falls to 2.54% and its net income increases by 61%. The said price increase despite the slashed market share could be explained by increased profit for every unit sold.

In this case, SunPower is earning more than its competitors for each unit it sells to consumers, despite its market share having reduced. When new firms enter the market, SunPower’s market share is sliced further. Its profitability also takes a hit. It is important to note that in this case, existing firms in the market maintain the module price at $0.15 while SunPower increases module price to $0.18. However, the new firms entering the market at this point in time offer a module price of $0.10.

This move ends up further eating into SunPower’s market share and impacting negatively upon its profitability. The new firms start out with a market share of 6.20%, which gradually increases over time as SunPower continues to increase its module price. The profitability of the new firms entering this particular market also grows over time – from $13.26M to $3.33B in net profits over a fifteen year period. Also, within the 15-year period, new firms increase their share of the market from 6.20% to 30.27%.

The decline in both SunPower’s profitability and market share in this case could, therefore, be used as a classic example of poor pricing decisions. Gradual Decrease in Module Price Over the 18-year period, SunPower increased its market share from 3.41% to 40.36%. Similarly, the company’s annual net income increased from $39.08M to $43.84B. The progress is in this case very appealing.

Having started off with a module price of $0.15, SunPower gradually reduced its price of PV panels in $ per kilowatt-hour over time in a move that saw it not only protect its market share, but also enhance its profitability. It is important to note that looking at Appendix 1, during the first five decision points, the company was unable to drastically grow its share of the market. This was largely because of the move by new entrants to undercut the company’s prices.

During this time, however, SunPower was able to keep the module price lower than that of firms already existing in the market. Had the said firms managed to outcompete SunPower in pricing, the company could have found it difficult to grow its market share even by modest means.

However, it was only after the SunPower was able to match the prices offered by the competition that it experienced significant growth in both market share and profitability – with its market share increasing from 5.64% to 11.07% and its net profit leaping from $61.66 million to $171.02 million at the matched price level of $0.10. When module prices were dropped to below $0.08, i.e. $0.07, new entrants held their module price at $0.08.

This is because at a price level below $0.08, companies entering the market could not be profitable as they were yet to gain a market share big enough to justify slashing the module price past the said price level. Adopting a low cost strategy could be an excellent entry barrier. In essence, barriers to entry “reduce the rate of entry of new firms, thus maintaining a level of profits for those already in the industry” (Doyle, 2011, p. 175).

From my analysis, therefore, at a price level below $0.07, SunPower can be said to have gained a competitive advantage in the sense that its module price would significantly reduce the rate of entry of new firms, while at the same time denying those at a higher price level a share of the market. From Appendix 1, SunPower would have a significant share of the market (at 40.36%) as well as impressive net income (at 43.84B) at a price level below $0.08, i.e. at a module price of $0.07.

Analysis From this discussion, it is clear that an increase in the module price at a time when the competition is charging lower for the same unit would be a bad business decision. It is important to note that the loss in profitability as well as market share of SunPower in Run 2 could largely be blamed on the decision by SunPower to increases its prices gradually without regard to competitor pricing strategies or behaviors.

In this case, the company effectively charges prices higher than those charged by the firms already existing in the market as well as those making new entry. All along, SunPower’s unit direct cost ($/kWh) remains higher than that of both existing forms and new market entrants. The decision to gradually lower prices is, however, prudent. In addition to further expanding SunPower’s market share, it effectively makes the company the cost leader over the 18 year period.

During the last two decision points, SunPower manages to match the competition’s unit direct costs. This is impressive as it means that if the company is able to lower the said costs even lower, it can embrace an even lower price level – which is what happens during the last decision point. It is at this decision point that SunPower manages to take its unit direct costs of producing a PV panel in $ per kilowatt-hour to $0.03 while that of the competition remains at $0.05.

It is also impressive that over time, the company has managed to lower its unit direct cost while maintaining good control of its level of expenditures on process development. For this point onwards, and with all things held constant, SunPower could be seen as the effective cost leader in this particular market. As the cost leader, there are quite a number of benefits that SunPower could reap. These, according to Wit and Meyer (2010) include, but they are not limited to, above average performance in the industry.

In the words of the authors, “at equivalent or lower prices than its rivals, a cost leader’s low-cost position translates into higher returns” (Wit and Meyer, 2010, p. 269). Recommendations to the Newly-Hired CFO Effort should be made to keep SunPower’s unit direct costs of producing a PV panel in $ per kilowatt-hour as low as possible – preferably lower than that of both existing firms and new entrants.

Only then can the firm be said to have acquired a true cost leader position in this particular market. According to Griffin (2011), “an organization implementing an overall cost leadership strategy attempts to gain a competitive advantage by reducing its costs below the costs of competing firms” (p. 72).

If SunPower were to keep its costs below those of both new entrants and existing firms, then it could manage to charge the same module price as that charged by competitors and still be able to rake in more profits per unit sold. However, even in seeking to be a cost leader, the company should not compromise on the quality of the PV panels it manufactures for sale.

Deliberate effort should therefore be made in ensuring that the quality of the said panels is either better or comparable to products made available to the market by competitors.

In the words of Duhaime, Stimpert, and Chesley (2012), “a successful ‘cost leader’ develops a competitive advantage not by selling products and services that are perceived as ‘cheap’ or inferior or of poor quality, but by offering products and services of adequate quality or levels of quality that are comparable to industry standards, at lower prices…” (p. 149).

In the final analysis, therefore, the success of an entity like SunPower in a highly competitive market is determined by its own pricing and related strategies in relation to the behavior of competitors. While the aggressive pricing strategies used by competitors in Run 2 leads to the imminent demise of SunPower whose market share has been reduced to below 1%, the said aggressive pricing strategies do not adversely affect SunPower’s competitive ability in Run 1. This is more so the case thanks to not only the awareness about the.