Profit Margin and High End Segment

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Cost Leadership
After contemplating many different strategy options and evaluating our markets, the Ferris group decided that we would utilize and follow a strategy discussed in chapter 6 of Wheelen and Hunger’s text[1]: cost leadership. This strategy focuses on “a lower-cost competitive strategy that aims at the broad mass market and requires efficient scale facilities, cost reductions, and cost and overhead control. This strategy avoids marginal customers, and aims for cost minimization in R&D, service, sales force, and advertising.” If used effectively, this strategy should reduce and control your labor and overhead costs. This would in turn decrease variable expenses and simultaneously increase your contribution margins, and ultimately your net profits. To follow this strategy, we decided to take the following actions: 1.We refrained from introducing any new products in order to prevent paying large start-up costs without efficient funding. It would have been wise to introduce a new product if we had more rounds during the simulation. This would have allowed us to specialize in the markets we were efficient in and dropped those that were costing us money. If we were to introduce a product however, to see any benefits of this initiative during the simulation, the product would have had to been launched within the first few rounds. But, spending a lot of borrowed money early on in the simulation did not make sense for our cost leadership strategy. We would have had to wait until we could fund it with our retained earnings in order to be in alignment with our strategy. However, this would not have been an option until the 3rd or 4th year, and by then much too late to see positive benefits by year 6. 2.We remained quite frugal with our allocated expenses to marketing (promotion and sales budgets) to keep our costs low and contribution margins high. 3.We decided to increase our automation for products that did not have rapidly changing market buying criteria specifications (i.e. if expectations regarding size and performance stayed fairly similar throughout the six rounds because their drift rates were small, then we increased automation for that particular line within the first year). 4.We attempted to use a Just In Time (JIT) strategy which meant that we tried to calculate the exact quantity each market would purchase of our products and we then produced only enough to have no more or no less on hand at the end of each forecasted year. •To calculate this precise forecast, in each segment we took the actual sales from the previous year and multiplied it by the market growth rate for the corresponding market segment. We then multiplied that number by a conservative (i.e. 90%) and optimistic (i.e. 110%) rate to get the respective marketing and production forecasts. •The only time we produced a little higher than the conservative forecast calculated using the above formula was if we stocked out of an item in the previous year and could then expect even higher sales the following year; essentially preventing ourselves from short-changing our forecast for the next year. If this was the case for a previous year, we would be a little more aggressive with our forecast fro the following year and used conservative and optimistic rates of around 90% and 120% respectively. 5.We decided to decrease the Mean Time Before Failure (MTBF) of those products (The Traditional and Low End segments) in which MTBF as a buying criteria was not very important to the customer to the minimum specification within the acceptable range to the customer (i.e. If the desired range for MTBF was 22,000 – 27,000 for a product that did not base much of their purchasing decision on MTBF, we would set the MTBF for that product at the minimum of 22,000). This was done to keep costs low by decreasing the reliability (which saves money in production costs) of those products in which customers did not care about the MTBF.

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