When a competitor develops and introduces a superior product, that is less costly to manufacture and even many times usable and durable, Hans Thorborg, the general manager of the German plant of Precision Worldwide, Inc.(PWI), and his team have to decide to math the competitor’s product. When to do so, how to price or what sustainable competitive advantage they need to adopt during the next strategic period, given that they hold a large inventory, which is now inferior product. PWI is confronted not only with a substitute product that is both cheap and durable; Compared to PWI’s steel rings, the plastic rings being produced by Henri Poulenc is both cheaper and lasts longer. PWI is also facing the risk of earning the ire of its customers if it manufactures but selectively introduces the cheaper plastic rings in areas where it faced with the ‘plastic’ competition. Hans Thorborg may open many alternatives decisions as the following: Stay out of plastic rings. However, continue to sell steel rings and do not manufacture/sell plastic rings do not seem like a feasible decision because for its survival PWI will have to plan strategically and keep with competition. It is just an issue of time, when to sell plastic ring.
Stop selling steel ring. It may be a necessary action need to take, but when is the earliest stop date is a concern. Otherwise, sell steel ring until plastic ring available and dispose of remaining steel ring and steel inventory, or stay out of plastic ring until all steel ring inventory is sold.
Manufacture more steel rings with excess labor in the Summer.
Do or do not sell plastic rings only in France and continue to sell steel rings in other markets.
In order to make good pricing decisions, Hans needs to identify what are the relevant costs in both steel and plastic ring and compare their contributing margin (CM). As the note in Table A, “OH was allocated on the basic of direct labor cost, and...