Profit Margin and High End Segment
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
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