Cost Leadership Strategy, Using Discounts as a Pricing Strategy to Increase Sales - Assignment Example

Entrepreneurship Topic 3: The business is using a cost leadership strategy. Explain the components of this strategy Vizio is using a cost leadership strategy. This is a strategy that involves a firm working to keep its operating costs low so that the products or services that it produces can be sold at low prices. By keeping their operating costs low, firms that are engaged in the cost leadership strategy are able to make profit even when selling their products at lower prices than what their competitors offer. The components of the cost leadership strategy are as follows. To start with, the firm needs to improve its cost structure by reducing direct and indirect costs. For Vizio, this has been achieved in number of ways. For instance, the company has outsourced most of the services that it requires, including research and development, warehousing, tech support and shipping. The company also has considerably fewer employees and managerial layers compared to the industry average. In addition, Vizio has low overhead costs in that the company’s overhead costs are less than 1% of its sales. This is far below the average ratio among the company’s competitors, where overhead cost as a percentage of sales is about 10 percent. Vizio has also ensured that other functions that are critical to success and which would lead to high costs such as development of concepts, marketing, and customer service are kept in-house. The company also seeks to improve its cost structure by having a low-cost distribution network that includes discount chains like Costco and Sam’s Club and others, with the aim of reaching mass market buyers who have a tendency to be price sensitive. Another component of the cost leadership strategy is to improve asset utilisation. Vizio maximises the use of its assets by having many functions that would need to be located in different places managed in-house. For instance, instead of having a separate location for offering technical support to customers, the company has maintained all technical support services within its service centre in South Dakota. Also, instead of having separate dedicated premises for selling its computers, the company uses the same distribution channel that it uses to sell televisions by selling its computers through retailers such as Costco, Amazon, Target, Sam’s Club and Walmart. Vizio also sells its computers through portable mini-stores that are designed from old shipping containers, which the company places in college grounds, music festivals and other functions. This means that the company is not only able to avoid high rental costs through the use of containers, but it can also use one container in more than one location where its target market is located because of the containers’ portability. Topic 4: What are the dangers of using discounts as a pricing strategy to increase sales? Explain each danger identified. Selling goods or services at a lower price than the regular price can be costly. To start with, by offering discounts, it means that customers may never pay more, implying that the buyers may never pay the full price that the business would have expected. This may eat up the business’s existing revenue. In other words, discounts may result in a reduction in a business’s profit. Offering discounts can lead to devaluation of a brand. This is because there is a thin line between promotion of a brand and diluting the brand. Offering discounts makes a service or product more enticing to try, but this puts the business at risk given that customers may not see the real value in paying the full price of the service or product if they know that they can get a discount. Since most people value brands based on price, selling a product or service at a discount may lead to a perception among customers that what is being sold at a lower price has a lower value. Using discounts as a pricing strategy may not be a sustainable practice. This is because customers may only buy the items that are discounted and not others. Also, new customers who are attracted by the discount offer may not turn into repeat customers. This implies that the high sales volume that is achieved as a result of discounts being offered may only be short-lived. Offering discounts may spark a price war with competitors. What this means is that when a business sells products or services based on price, it is always at the mercy of the any other competitor that aims to compete based on price. The competitors may lower their prices to an extent that it becomes difficult for some firms to even survive because of very low prices being offered and the reduced profit margins. Offering discounts may set a bad precedent for customers. This is because customers may get used to buying only when discounts are being offered instead of paying the regular price. In addition, some customers who get a discount will also expect to get a discount on their next purchase. Also, some customers may stay a way until they hear about other discount offers. This is bad because the business will be forced to always offer discounts in order to increase sales, which may not be sustainable. Topic 2: As a prospective buyer of one of the businesses, how would you carry out the due diligence necessary to assess the future potential of the business? Due diligence will cover the following issues: Finances: There is need to evaluate the business’s audited financial statements to determine its current and future performance. This should involve looking at the income statements, balance sheets, tax returns and cash flow statements of the business for the past 3 to 5 years. The analysis should determine whether the business collects its accounts receivables in a timely manner; the amount of bad debt that the business writes off each year; whether the business pays its debts in a timely manner; the business’s profit margin; and whether the business has any unpaid liens. Legal issues: Due diligence should involve looking at the business’s permits and licences, insurance policies, consulting agreements, documents pertaining to intellectual property such as trademarks or patents, and any documents relating to lawsuits that the business is involved in. The analysis should determine whether the agreements are enforceable; whether the business has rights to its intellectual property; whether the business is sufficiently insured; whether the business permits and licences are current; and whether the business is involved in any lawsuit, and if so, the potential costs, risks and damages. Employees: There is need to review the business’s organisational chart, employee agreements, employee handbooks, salary and wage information, benefit plans, confidentiality agreements and non-compete agreements. During the review, the following issues need to be addressed: whether there are any employment policies that put the firm at risk of litigation and whether there are any unresolved cases with employees. Business structure: Since companies like Dividend.com and Corbin-Pacific are registered corporations, there is need to assess their corporate charters, bylaws and minutes of all meetings that have been held with shareholders and boards of directors. The reviews should assess whether the business is in compliance and whether the business is properly structured for the buyer’s growth plans or the buyer will need to change the structure. As well, in case the prospective buyer of the business has to buy out shareholders, the cost implication of doing so will have to be assessed. Operations: The prospective buyer of the business should ask for a list of the business’s customers, vendors and suppliers, and the operations manual of the business. This information should be reviewed while considering issues such as: whether the business has adequate inventory systems in place; whether the business’s supply chain has diversified so that the firm does not rely on one supplier; whether the business’s customer base is growing; and whether the firm has the necessary equipment and infrastructure to support continued growth. Topic 5: What is publicity and what steps can business owners take to obtain publicity for their products or services? Publicity refers to any commercial news highlighted by the media which boosts a business’s sales but is not paid for by the business. Publicity can also be defined as the non-personal presentation of ideas, services and goods or a business through a mass media as a news items but which is not paid for by the company or business that is being highlighted. Business owners can take the following steps to obtain publicity for their products or services: Writing an article about the product/ service area that will catch the attention of current customers or potential customers: Writing regular articles in a local newspaper about an area that relates to certain products or services will attract readers. For instance, an article about solar power will attract readers to look for solar power-related devices, which a company may be offering. Sponsor events to raise interest: Local events such as street cleanups, awareness campaigns and so forth can garner press coverage and hence raise interest in a company’s products or services. The concept behind sponsoring events is that a marketer associates its company or product/service with any of various aspects of the event such as the event itself, entertainers, services offered or people involved in the event. Publish newsletters: A business can publish professional-looking newsletters which highlight issues that are of interest to the target customers or potential customers. Contact local radio or TV stations and offer to be interviewed: Many local media stations are looking for people to host on their talk or news shows so that they can address issues that are of interest to the local audiences. Through such shows, a business’s representative can talk about the services or products that the company offers and how they relate to the needs of the audience and other target customers. Engage celebrities in any possible way: For instance, a company can engage a media personality to support its cause through events such as street cleanups, tree planting, or any other event that requires participation by members of the public. The celebrity can help by calling for people to take part in the event. Participate in trade fairs or exhibitions: Such events not only enable the company to be known but to also interact with potential customers face-to-face and get to understand what the existing or potential customers want or expect about a given service or product. Topic 6: Why should a business consider going global? Explain each reason. The growth/expansion imperative: This refers to the need and urgency to expand beyond the current market. As countries develop, their markets become mature, and companies have to look for other markets in which to sell their services and goods. If it can be determined that the demand for a company’s product in other countries is significant, then it will be good for the company to pursue growth by expanding globally. The efficiency imperative: Some companies may realise that the amount of production resulting from the most efficient plant goes beyond the domestic demand for the goods or services that are produced. The efficiency imperative implies the fact that to attain efficiency, firms have to sell in overseas markets so as to justify the quantity of production that is required to support investment in production, research and development and marketing activities among other areas. For example, Boeing cannot afford to sell in the US alone since the demand for Boeing aeroplanes in the US may not be adequate to solely support the company’s production. Selling to other countries expands Boeing’s market, and hence makes the company’s production more efficient. The knowledge imperative: The knowledge imperative advocates that firms locate their manufacturing operations where they can get the skills required for their production. For instance, Apple’s manufacturing function is based in China because the company is able to get the skills and labour required for the assembly of various parts in China and nearby countries like South Korea where many device components are manufactured. The globalisation of customers: The globalisation of customers implies that due to globalisation, customers in different parts of the world tend to be more homogenous with respect to their demand. For instance, people in China and India are becoming more receptive to drinking coffee, people across the world are using computers running on the Windows operating system, and people the world over are making payments electronically using cards. The homogeneity of customer needs across the world means that companies like Starbucks, Microsoft and MasterCard and Visa have to consider operating globally to satisfy the globalised customer needs. The globalisation of competitors: Because of globalisation, many companies are already operating globally. As a result, having a global reach is something that many companies have to consider in order to increase their chances of becoming more successful. For many firms, being successful means being able to effectively control large customer segments across the world. Topic 7: Discuss the layout principles that must be considered by retailers when designing a layout. Identify at least two of these principles from the case. The principles of store layout are as follows: 1. Define the retail store space: Defining the space is all about the brand and image, how it attracts people into the store, and what the people do once they get into the store. The selling area should be separated from the non-selling areas, and the merchandise needs to be arranged in a way that easily shows what is being sold and to whom it has been targeted. 2. Organise the space: The store space should be well-organised and as intuitive and accessible as possible. Customers who enter the store should have a clear way to follow, with various product categories clearly signposted and grouped in such a way that they are easy to find. 3. Offer a chronological experience: The store should intentionally plan the customer experience, both literally and figuratively. There should be something to quickly arouse the customer’s attention to move to the store, and the product arrangement should attract the customer to sample more products at the back of the store. 4. Use visual communication: Visual communication includes branding, signage, and other visual aids that communicate important information to customers. The customer should be able to move from one product category to another seamlessly using the visual cues provided. 5. Invite customer participation: The store arrangement should be such that customers are able to view and even try the products that they are looking for. Where necessary, there should a staff member to offer help to the customer when required. From the case, offering sequential experience and inviting customer participation are some of the principles that are evident. To start with, Ross uses the principle that customers need to be lured into the store with attractive displays of lower-priced gifts. Once in, the customer sees flashy jewellery at the counter, which then leads them towards the back where there are conspicuous shelves of colourful, expensive shoes and handbags. Hence, a series of displays attract the customer to the store to sequentially sample the different products that are available. Turning to inviting customer participation, this principle is seen from the fact that cosmetics retailer Sephora switched from “don’t touch” layouts to “open layouts” that enable customers to have access to different shelves and experiment with different products without the intervention of a salesperson. The idea here is to give customers an opportunity to interact with the products before making a purchase decision. Read More