CTC Time Warp Case Study

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Business Management

CTC Time Warp

Time warp 2 provided for increased knowledge regarding the market and the way in which CVP could be used to improve decision regarding prices. Time has reset and the CVP along with the results may be used to develop a more effective strategy. Adjustments to the strategy will be made learning from time warp 2.

Underlying Theory

The assessment from the past time warp indicated that the X5 has only a limited life, it is well into the product lifecycle, and it may be argued that the reluctance to discontinue this item until 2015 may not have been an optimal result; while the X5 was available there was less likelihood that the customers buying the firms tablets would move to the more profitable models of the X6 or the X7. The X5 may be producing some revenue, but with most sales being replacement due to the high level of penetration in the later years, it may be argued that the continues of the X5 up until 2015 is also presenting the firm with an opportunity cost in the later years. However, it is also apparent that in 2012 there was a good profit realized from the X5, and during this year the X7 had not yet been fully established in the marketplace, so there is still value to be gained, and as such strategies to maximize the short-term sales of the x5 should be pursued.

The overall strategy will be to use prices to maximize the potential sales, increasing market share while optimizing the profit by ensuring that there is a good contribution margin achieved. At the same time the firm also needs to look to the future, investing in the products that have the potential to benefit from improvements, which means paying close attention to the product lifecycle stages and avoid unnecessary costs. The strategy will therefore vary compared to time warp 2 where prices were set for the entire period and did now change, and only small changes were made to the R&D budget.

The Strategy for 2012

The strategy will be considered on a year to year basis, as managing product lifecycles will require some changes across the years. In 2012 there will be a change in strategy; in time warp 2 the price of the X5 was reduced to $270, with the aim of increasing sales, and R&D budget was reduced to zero due to the lifecycle stage. In this time warp a similar strategy will be pursued; reducing the price and keeping the R&D budget at zero. To increase sales and potential benefit from sales during the remaining life the price may be reduced further than seen in time warp 2, and it was found in the past time warp that customers for the X5 were highly price sensitive, which leads to a level of elasticity that indicates decreasing the price may create a disproportionate increase in sales.

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In time warp 3 the price will be reduced to $220, leaving a low profit per unit, but making it more attractive to a price sensitive market. R&D will be reduced to zero.

The X6 is an important model, as there is a potential market of 6,000,000 remaining. The X6 is likely to be attractive to the market as it has a higher level of performance than the X5, and it stands up well to the competition. As this is a premium product the pricing should reflect is position, and as it is stated that the market for this product care more about performance than price, it may be argued there is the potential for a price increase, this was the strategy used in the past. However, in the past time warps the price increase in the X6 has not resulted in sufficient levels of long-term growth, so this time the price will be left at the 2011 level of $430. While the market information indicates that the market is not price sensitive, it does not mean they completely disregard price, so the product has to remain competitive, this price level may help to gain more market share and market momentum. A further change will be made to the R&D budget compared to time warp 2. The X6 has been on the market for 2 years, and as such a significant increase in the R&D budget may be misplaced; it may present a high opportunity cost. The marketing budget will stay at 34% will allowing development for an established product to be undertaken, without overspending.

The X7 is a new product, which has only been on the market for a year. In the past scenario the CVP was used to assess an optimum level of production to maximize revenues. However, there is also the need to recoup the sunk costs, and the product is new, which means that although the CVP analysis is useful, the new product may benefit from a more strategy use of pricing strategy. In this market the consumers care about both cost and performance. Price can be seen as a part of a positioning strategy, so for 2012 there will be the continuation with the higher price, this is still below the X5 price level. However, the R&D budget will not be increased above the 2011 level. Just because an R&D budget is available does not mean it should be used; this is a product that has already been developed and is on the market, the existing budget will allow for the continued development for a product that is already on the market. This gives the following

Table 1; Strategy for 2012

Selling Price

Proportional R&D Budget

X5

0%

X6

34%

X7

33%

The Strategy for 2013 & 2014

The first major change from time warp 2 is the discontinuing of the X5….....

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