Tablet SIM Joe Schmoe\'s Performance Was Not

Tablet SIM

Joe Schmoe's performance was not optimal, and there are a few different changes that can be made. In order to understand the flaws in Joe's performance, it is necessary to understand some key business concepts.

The first of these is profitability, in particular the concept of contribution. This is important to the analysis for a couple of reasons. The first is that the X5 product lost money in its final year. One of the characteristics of this product is that it has high fixed costs of $75 million, double that of the other two products. The contribution to fixed costs is the revenue minus the variable costs. With this information, the breakeven point can be calculated for the X5. In a year when the sales are expected to fall below the breakeven point, the product should be discontinued. Contribution margin is also useful for the X7, because that product is not selling well. It is a low-cost product, so when the final analysis is completed, it is likely that reducing the price of this product is going to be the best approach to generating new sales. The contribution margin analysis will tell us the breakeven price, so that we do not lower the price too much.

Another key concept is the product life cycle. These three products are all at different stages of the product life cycle. The X5 is in either the growth or maturity stage of the cycle. Market saturation has increased from 15% to 27%, but it should be noted that it is going to move out of the growth stage of the cycle in a year or two. During this stage, the company is going to try to maximize sales, but the further along in the life cycle the product is, the less value R&D investments will be. If performance is similar to that Joe experienced, the X5 will be cut from the product lineup in 2016, so R&D investment allocations should take that into consideration.

The X6 has market saturation at the end of 2012 of 16%, so it is still in the growth stage of the product life cycle. Thus, the product should still receive R&D investment, and should be priced accordingly. There are two appropriate pricing strategies for a new product -- skimming and penetration. In this case, the skimming strategy may have been utilized already, so some consideration will need to be given to lowering the price of the X6 slightly in order to make it more competitive. This product appears to be marketed as a technology leader, so investment in R&D will need to be heavy in order to maintain this position in the marketplace.

The X7 is in the introductory stage of the product life cycle. With its low price, it is clearly being marketed as a price leader. Also, there are 15 million potential sales for this product. That tells us that a high volume, low margin strategy is the most appropriate. The current margins on this product are simply too high. As a result, this again points to cost reductions. Whether this product should receive R&D investment is a good question, because cost leaders are usually fairly low end. However, with a better value proposition relative to competitors, the X7 may sell well. Remember that selling as many units by the end of 2016 is the objective here. That means we have to take the X7 through the entire product life cycle in just a few short years.

Recommendations

Based on this analysis, the following recommendations are made. To improve upon Joe Schmoe's performance for the X5, we need to cut the product for the final year. In addition, this implies that we should maximize sales in the other years. This can be done via pricing strategy, with discounts towards the last couple of years of the product's life (maybe to $275 or $265). The R&D allocation for this product should be cut right away. The X5 is going to reach saturation (or close to it) no matter what, so improving the product is not a priority.

The X6 should maintain its price for the time being, or perhaps even increase the price. The reason is that consumers of this product are more concerned with the quality than the price, so the point of profit maximization is probably at a higher price, as long as the R&D expense is increased. The R&D expense should be increased to maintain the vitality of this product, up to 50%. If this product loses its technological competitive advantage, the product's sales will falter.