System Feedback Loop From This Capstone Project

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The second and third runs, therefore, were largely based on making adjustments to the first run strategy. In each instance, the adjustments made increased the total profit over the four years and it is believed that continuing along that same path of making slight adjustments would consistently increase the profits earned. It is for this reason that the strategy changed little -- there was no insight that was believed to lead to a better strategy and in lieu of such major insight there was no reason to pursue a radically different strategy.

The most useful concepts in this exercise were contribution margin (CVP analysis) and elasticity of demand. Understanding the cost structure of each product allowed for more intelligent pricing decisions. For example, the price cut in the X7 was significant at 25% from the base price in the base case run to 31.5% of that price in the later runs. It was understood from the outset, however, that such drastic price cuts were possible. The same theory was used to determine that an increase in the price of the X6 would increase its total profit.

I also learned about the value of understanding strategy and sticking to a sound strategy. This lesson was learned not through my policy of making slight adjustments to an initial strategy, but from the wrong turn that I believe I took with respect to the R&D expense at the X6. The X6 was positioned as a premium product, with demand driven by features. A premium price was charged for a product that ultimately was not sufficiently differentiated to justify that price. This runs counter to what we learn from Porter's generic strategies (Quick MBA/Porter, 2007). The tactics undertaken -- in particular the holding of R&D levels low on the X6 and then cutting them altogether in 2008 -- are not congruent with the differentiated strategy and therefore were not at their optimal effectiveness.

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Even in the third simulation, this error in interpretation was not corrected to a sufficient degree. By contrast the X7 product was focused on a cost leadership strategy. Therefore, the high levels of R&D money pumped into this product were probably not justified as they are not congruent with a cost leadership strategy. By aligning the tactical actions with respect to these products with the generic strategy, it is expected that the outcomes would have been better.

Risk aversion is another factor that revealed itself in the course of this simulation exercise. When my tactics are analyzed, it is realized that after some initial success I became risk averse. I did not want to risk the high profit level I had achieved in the first simulation run by seeking another tactic. This is perhaps why companies become stale -- they are hesitant to make bold changes to a successful strategy, even when the evidence suggests that perhaps bolder moves are required. The minimal improvements in the third simulation indicate that perhaps bolder action should have been undertaken but risk aversion prevented anything more than minor changes to two products. Going along with risk aversion is the notion that products were mainly optimized. Once success has been determined to have occurred, further optimization does not seem to be attractive. For example, nothing was done with the X5 beyond the first simulation. This belief that strategy was optimized for the X5 contributed to strategic myopia that limited options to the aforementioned minor adjustments. More creative thinking might have revealed a better strategy but the doors were closed to that option based on the idea that the X5 was optimized.

Overall, much was learned about tactics, strategy and the alignment between the two. The simulation can be considered a success, but at the same time it revealed weaknesses that in another situation could have been disastrous.

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