Microeconomics

In the case study there are three growth options facing Non Stop Yachts in 2003, Discuss and compare the pros and cons of each option and make a recommendation on which option to chose for the future. As indicated in the case the Non Stop Yachts has achieved the expected results in the first year of full operations. However, in the end the 2003 fiscal year the target was to achieve sales of $10 million and profits of $1. 97 million. However, in 2002 the sales were $300,000 which was just 11 percent of the original business plan.

This was pressurizing Metcalf to revisit the business model. The three alternative business models that Metcalf is considering in order to improve organization’s performance are as follows: Signing an agreement with Palmer Johnson or National Marine The sales growth expected from this deal is $3 million immediately with potential for 50 percent growth in the second year, 30 percent in the third and ten percent in the subsequent years. Metcalf have to invest extra $20,000 for two extra administrative people and 25 percent in employee tax.

The gain on rent would be $10,000 per year on his rent by moving into an office without public access. However the problem in this is that NSY will be the third party and stop dealing directly to the crew of mega-yachts. Option #2 Growth through Repair and Refit Yards and Dealing Direct to Yachts-a “Hybrid” Option Metcalf believed that sales of more than $2 million in three years can be achieved. The additional growth of 15 percent for each subsequent year was expected. The additional investment required is of $ 40,000 for two employees for the brick mortar office of Palma.

The other two offices will require $24, 000 for setting up and additional $60,000 per annum for all the three offices. This will come to $124,000 for the all three offices for first year. There are two major drawbacks of this approach. The first is that it might have to stop direct dealing with the crew of mega yachts. The second is that NSY could lose it recognition at the consumer end. Organic Growth through Opening Multiple Locations Metcalf is considering this option to provide brick and mortar presence to the virtual company.

It will offer a local touch to the mega yacht owners or management. It will remove the apprehension of the yacht crew when they will have the shops at major destinations. Through this option, Metcalf has proposed to open multiple offices at several locations of the key ports across the world. The investment required was $100,000 for the two additional offices. The returns expected by Metcalf were $1. 5 million in annual sales five years from now. Each of the option has some gains and drawbacks. The risks in the option one and two are higher than that of returns.

The risks in the first two cases are of losing the right to reach or interact with customers directly. This is one important factor to consider. Company would be able to reach more customers and explore the market place, provide innovative offers and products to the customers directly. These activities can build brand and long term image. The intermediaries or channel partners will have their own margins. Organization will have less control over the final price paid by the customers. Metcalf can opt any of the three business model to deal with the current situation of the company.

The profitability or the positive growth of the company is required in order to maximize stakeholders’ benefits. Metcalf needs to ponder upon all the marketing mix and operational issues and find out the actual reasons behind not achieving the desired results and factors behind the same. The external factors can be out of the control of the CEO but the internal factors can be addressed through various strategies. It is possible that the company has not been promoted adequately in order to attract new customers and retain the old customers.

The value of repeat business for various spare parts and services are high for the mega yacht industry. There were more than 5000 mega yachts in the same year company had started its operations. The size and competition of this industry was increasing with the globalization and internationalization of the product and services. There were German, Asian and African companies competing along with US based companies to gain market share of US market. This strengthened customer’s position as a buyer but decreased the position of the suppliers or the companies like NSY. NSY has been innovative.

It identified the gap of the market place and tried to pitching in there. It has considerable start as in the first year of full operation it was able to reach its target sales and profit levels. However, in responding to the customer’s need, Metcalf realized the importance of the physical presence as well as it’s identified its weaknesses and the opportunities of the market place. The business is a niche segment with highly lucrative returns. The option three along with the best cost generic strategy will help the company to sustaining its growth and achieve the business objectives.

In my view the Option of the Organic Growth through opening multiple locations was the best options. The investments required for each of three cases is almost more than $100,000. However the risk associated with the first and second option was higher as the direct interaction of the company is being restricted. The third option has the full control of the organization over the way of reaching the customer, interacting and controlling the all the operational, marketing and strategic decisions. The company should opt for best cost provider generic strategy.

Through this option company can reach to the customers directly. This will help in controlling marketing mix strategies. The return as compared to the investment is high for this option. As indicated in the Original Financial Projections for Non Stop Yacht of the case, the sales expected in the year 3 are $10,698,465. In the case of the Option three, the sales expected in five year are $1. 5 million. The sale achievable through Barcelona and Palma offices was $500,000 without much of investment.

It can be seen as a start of the brick and mortar office and the operations can be started from here. This will help in experimenting with the new business model without much of the risk. Once the feasibility of the business model is accessed through these two offices, more offices can be opened in the key ports of different parts of mega yacht destinations. The presence of brick and mortar office will increase the trust and confidence of the crew of the mega yacht members and help company to expand its operations through human touch as well.

This will help in dealing with the drawbacks of the virtual market place. The direct sellers may be appointed in the company in later stages to convince the visiting crew members, inviting them and promoting the products and services of Non Stop Yachts. The physical presence of the company will help in building brand and promoting the company. The company needs to be top of the minds of all the decision-makers. The brick and mortar presence will help them in building the same position of the company in their mind. The pros of this option are as follows:

This option is practically feasible as compared to other options available to Metcalf.  There is no risk of losing customers to the yacht management service companies.  Company will have direct contact with customers ? Direct interactions with customer provide feedback of customer regarding products and services to the NSY. ? This feedback will provide a direction for incorporating changes in different management strategies. ? The marketing mix can be changed and aligned with changing business environment and organization’s objectives and goals.

Total control over all the strategic decisions regarding organization’s activities. ? Company can take quick decisions and will have direct control over the processes, communications and other operations of the organization. ? The long term impact of this strategy is in favor of the organization. Drawbacks of this option: The risk is borne by the company alone whereas in the case of option one and two the risk was combined for the companies involved.

Reference

1. Kotler, Philip, Marketing Management, Prentice-Hall Inc. New Jersey, 10th Edition, 2000

Softlan is a product under Colgate-Palmolive Company. The small soap and candle business that William Colgate began in New York City early in the 19th century is now, more than 200 years later. It is a truly global company serving hundreds of millions of consumers worldwide. Colgate is a global brands sold in over 200 countries; Colgate, Mennen, Palmolive, Ajax, Softsoap, and Hill’s Pet Nutrition are among the world’s most recognizable household names, trusted and relied upon by consumers everywhere (Colgate Word of Care, 2008).

Based on the research, the company’s business strategy focuses on five core businesses: oral care, personal care, household surface care, fabric care, and pet nutrition. In the household and fabric care, Colgate-Palmolive has offered the entire household cleanser product such as Toothpaste, Softlan, and body shampoo and so on.

Product Attribute

Softlan is good quality household products that provide to the family. Softlan is to help make their families clothes feel and smell their best. According to Judy Strauss book, with quality most customers know “you get what you pay for”. That is higher and consistent quality generally means higher prices, thus maintaining the value proposition (Judy Strauss, Adel, Raymond, 2005). Softlan is adapting a premium price position to comparing with other brand Softener such as Good maid, Downy, Petals and so on but the customer still will purchase it because of the Softlan quality. The offer benefits of Colgate-Palmolive Softlan are as below:

• Static free
• More comfortable to wear Makes ironing easier
• Gives your family’s clothes an irresistible softness
• Leaves a pleasant fragrance on clothes
• Long lasting fragrance for up to 16 days (Colgate World of Care, 2008)

These all the benefit of Colgate-Palmolive Softlan is offer based from customer need and wants which is be able to satisfy the users.

Branding

Branding is very important to the Colgate-Palmolive Softlan to gain the competitive advantage from the competitors. A brand is a promise to customers. Delivering on this promise builds trust, lower risk, and help customers by reducing the stress of making product switching decisions. Example like when the customer want to purchase Softlan in the hypermarket but there are many brands so the customer will choosing the brand that they will trust. The selling price of the Softlan Ultra is higher than another Softlan price but the customer still will choosing Softlan Ultra product which is because under the brand name of Colgate-Palmolive and it is also an old brand in the fabric softener product, therefore customer will more trust to the quality of the Softlan Ultra.

Based on the research, Colgate-Palmolive Softlan is successful to build the brand name in the customer mind in Malaysia and Hong Kong but there are a lot of new brand was market in the product so Colgate-Palmolive still need to improve and maintain the sales of Softlan in the market with another way. Based on the research information has show that in fabric softeners product, where Colgate is No. 1 in Hong Kong and Malaysia, new sizes and fragrances are adding incremental Market share (Colgate Strategy, 2006).

Competitor Analysis

Softlan being one of the top fabric softener in Malaysia would need to compete with another competitor in Malaysia market. There are few competitor brands in the market which are Downy, Petals, good maid and so on. All of this fabric softener will offer the similar benefit of softener to customer. Softlan would be competing with this entire brand by using different media, offer differentiation product and produce what the consumer wants in the market. Softlan Company is very smart; it is entered into the hot weather country market which no other softener has entered. Having the Softlan is being able to help the user solve their clothing smelly problem. The Softlan is 4x concentrated with a rich formula that deeply penetrates fabrics and with long lasting fragrance for up to 16 days.

Target Market

Softlan target market is large. It is targeting to have family people, single working people and student. Nowadays, every people were busy to work especially in Town so every people also want fast and smell best. Especially working people and student, Softlan can help them to ironing their formal with easies and fast. Furthermore, it also can help them to leaves a pleasant fragrance on clothes. Besides, some big families will not enough space to dry their clothes so all the clothes will hang it together and Softlan will help them to leaves a pleasant fragrance on the clothes.

Positioning

Positioning is an important tool those use to reach the user effectively. Softlan has positioning their product with the word “Soft as a mother’s love” in the website through their target customers (Colgate Word of Care, 2008). Which mean that Softlan communicate with the customer after using the Softlan fabric softener to wash the clothes, when wearing will feel soft and comfortable like our mother love. Softlan fabric softener is using benefits positioning to support a distinct perception in the consumer mind.

In additional, Colgate-Palmolive is providing different type and flavor of fabric softener to the customers. It is to satisfy different customer with different taste such as Softlan ultra is using four times (4x) more softening and long lasting fragrance in 16 days; Softlan relaxing is the softener that the smell can release the stress of the consumer and so on. Softlan has positioning it product in the customer mind by using special flavor which is Relaxing variant with Lavender & Ylang- Ylang essentials oils or the Energizing variant with Bergatnot and Jasmine essentials oil.

After using the Softlan, it will help the customer feel relax and wear the clothes more comfortable. Softlan has using marketing strategy of advertise in website, in television in 2007, magazines and so on. Those are few marketing strategy that has been using by Softlan to strengthen their positioning in Malaysia in the hypermarket. In the long run, Softlan has succeeded to build Softlan branding by using the strategies above. The positioning strategies will help Softlan to gain the largest market share in the market.

Pricing Strategy

Softlan position itself as a premium price of product as mention above. Although it’s pricing is always higher than another brand such as downy. The product is almost same with Softlan but in pricing downy is always cheaper than Softlan. Besides, downy sometime also will sell in offer price within add 20 liter. According to the market research, Softlan price is selling in higher price than another brand it is because it doesn’t want to play price war in the market with the competitor it will lose control in product pricing. Softlan is selling like normal price to their customer nevertheless the customer still will purchase it; it is because the customer trusts to the Softlan quality and brand name.

Consumer Behavior

Colgate-Palmolive Company was considered about the consumer situation and start to understanding the consumer behavior. Based from the vision of Colgate-Palmolive Company is want to become the best among the consumer product by understanding the consumers and consumer expectation better and by continually innovating and improving their products, services and processes (Colgate-Palmolive Company, 2006).

Therefore, Colgate-Palmolive company has successfully created several flavor of Softlan to attract more customer and student when start to market it. Until today, Softlan still strong on its position by providing different flavor, easy to use and bring a lot of benefit to the users. This reason will bring Softlan continually having a big market in fabric softener market. In the other hand, Colgate-Palmolive company also has consider that nowadays people are facing stress problem with the work or family therefore there was come out the new Softlan that the smell can be relax to the people and feel comfortable.

Besides that, using Softlan also can help the users ironing their clothes with easy and fast so can save time of the consumers. Softlan also know that nowadays the consumer was also because of the outlook, design of the bottle to buy it. Softlan understand that especially most of the younger people look for the bottle design. Besides, nowadays the consumer also likes to purchase small bottle Softlan it is because it is more portable and easy to keep. Thus, Softlan was produce the design of small bottle in the market to satisfied the consumers.

Besides, the company also has using a slogan to promote the Softlan which is “Soft as a mother love”, it is easy and effectiveness way to remember by all the Malaysia customers. 9. 0 Communication tools Softlan always having advertising and promoting in hypermarket or media. This is a useful strategy that applied by Softlan. Based on research, it has shown that 44% of supermarket shopper notice messages delivered and 34% are influenced by in sore media in making brand purchase decisions (Super Guru Home, 2005).

That is why that Softlan always has promoting their brand by using different in-store media to the customer. Besides, Cleaning Agent-Laundry ranked the third fastest growing category in the first half of 2006 due to an increase in ad spend by Softlan on Television or another media. It is the effective way to help the Softlan brand name know-well in all hypermarket of Malaysia.

Method of Advertising

A creative message strategy is one of the important factors that could determine the success of the advertisement.

Besides that, the company use advertising to create awareness to the customers which is to attract more people knows about the brand name. Presently, Softlan is adapting behavioral path to make consumers tell other people about the information of product by increase consumer purchase and continually purchasing which is almost similar like “Word of Mouth” strategies it is can expand the information to everywhere. Softlan also has using cognition path which is to send the message to users how the product can solve the consumer problem.

Based on the market research, Softlan has using few different strategies:

• A premium price
• Arrange the Softlan product in the middle space of the rack
• Innovation packaging
• Product innovative

Based on the proposed concept, there are needs to using three media advertisement in the hypermarket to engage the consumers interesting, help Softlan to build brand and to increase the sales of the product. There three advertising are floorstoppers in hypermarket entrance Aisle, Event at middle and trolley sticker. From this three advertising and promotion campaign will help Softlan to increase their market share and brand name among the competitor in the market.  Floor stoppers in hypermarket Aisle .

 Direction Floor Stopper

Floor stoppers in oversea is very famous advertising strategies in the hypermarket or everywhere of the street. Softlan is using floor stoppers to create awareness of the consumer in the hypermarket Aisle. The error floor stoppers is placed entrance on the floor of the product aisle.

When a consumer walk pass by the aisle, all the product will arrange on the shelf in one row which will very hard to attract people to saw the product and purchase it. The product would not be to attract the customer to walk close to the product and look at it. If the window shopping customer will not walk through the product aisle it because they just want to walk only but if they saw Softlan floor stoppers on the floor, it will attract them to walk close to saw the product and maybe will attract them to purchase it.

At first, the direction error with some Softlan message of floor stopper will put on the entrance floor of the aisle which is to attract the customer feel curious and walk through the aisle with follow the error direction. After that, the customer will saw the product floor stopper which is directly in front of the product it would be attract the consumer to find the product easily or attract more the new customer to know the Softlan product.

Exhibit  Product Floor Stopper

Furthermore, creative messages will be used to catch consumer attention and look at the product. In the floor stopper, the promotion message and picture is being used it which is tell the customer that saving the money if purchase the latest Softlan product which is ultra Softlan and also will using product picture in the 3D floors stopper to be more appeal to attract attention of customer. In using floors stopper would be an effective advertising in the market. It is because normally when the customer decides to buy they just will walk near the product if no they will just walk through the aisle only and cannot saw the product with easily.

Therefore the benefit of floors stopper is when consumer walks near to the Softlan floors stopper they will consider to purchase the product that receiving by the 3D product picture and message on the aisle floor. It is because normally on the shelf will market a lot of similar product but different brand and it will make the customer confuse and hard to find the product. Based on the book, floor advertisement at around the product shelf can help Softlan to increase products sales by much as 25% and attract more new customer to try the product (Rosenbloom, 2004). Floors stoppers advertisement can effective to build branding in customer mind.

On the other hand, floor stopper in hypermarket aisle also can be as an extended shelf space of the product and dominance of the aisle for the advertisement of Softlan product. The pictures of Softlan floors stopper refer to exhibit  Event at middle of hypermarket By using Softlan event is an effective media nowadays trends. The product event can be like purchase the product up to ten ringgit will get chance to win the voucher or selling the product by using promotion price which is mean selling the Softlan product in the lower price and introduce the latest Softlan products.

Softlan can choose to have this event it is because the event can attract more customer attention to the product and know the product features. To having this event will be able to attract more the potentials customer, it is because the customer will think that the price will cheaper than normal day so they will go to join the event to get the free gift or purchasing the Softlan product with promotional price. With having this event Softlan Company can be face to face provide the Softlan information to customers.

The benefit s of Softlan having an event is customer data can be collect for analysis and can understand more customer behavior in the hypermarket. Thus, some cross-selling will be implementing in the events. It is also can build customer relationship to increase the customer services of Softlan and also can understand the trend of market. From the event, Softlan Company brand name will always keep in customer mind and can increase the number of new customer to purchasing Softlan products. Besides that based on the event can direct communicate with the customer and know what they wants.

Trolley Sticker

Trolley sticker is meant that the Softlan product promotion or information sticker can be stick on hypermarket trolley. Softlan can use the sticker advertisement to attract every walk in customer. It is an effective way and easy to advertise Softlan product through the sticker to create customer brand awareness. The advertisement can be saw by every customer in the hypermarket when they using the trolley. When the customer saw the promotion message or picture them will feel curious and will finding the Softlan product place to see it. The benefit of the Softlan trolley sticker is can reduce the advertising cost and also can expand the advertisement space of the products. It can be create awareness to all customers who are shopping in Carrefour.

Conclusion

As a conclusion, all of the media strategies can be effective advertising tools in the market. Softlan can be using this three media advertising to increase the number of customer, increase the sales, and create the brand awareness for the customer. It is an effective tools using by Softlan to compete among the fabric softener competitors.

References

1. Colgate-Palmolive, 2008, “Colgate world of care”, Accessed by 17/8/08, available on: http://www. colgate. com. my/app/Colgate/MY/HouseholdCare/ProductRecommender/FabricSoftener/PDPs. cvsp? product=
2. SoftlanUltra -Supermarket Guru, 2007, “Spontaneous Supermarket Sales”, Accessed by 19/8/08, available on: http://archive. supermarketguru. com/page. cfm/15585 –
3. Reuben Mark,2008, “Chairman of the Board” Accessed by 30/8/08, available on: http://www. colgate. com. my/app/Colgate/MY/Corp/ChairmansMessage. cvsp –
4. Colgat-Palmolive, 2008, “The New York Times”, Accessed by 3/9/08, available n: http://topics. nytimes. com/top/news/business/companies/colgate_palmolive_company/index. html? excamp=GGBUcolgate-palmolivecompany&WT. srch=1&WT. mc_ev=click&WT. mc_id=BI-S-E-GG-NA-CT-colgate-palmolive_company –
5. Bina Thompson, 2008, “Earning News”, Accessed by 9/9/08, available on: http://investor. colgate. com/print_release. cfm? ReleaseID=114277&ReleaseType=Earnings –
6. Farlex, 2002, “The Free Library”, Accessed by 18/9/08, available on: http://www. thefreelibrary. com/The+top+50-a090607513 –
7. Nixfon, 2006, “Brand Equity”, Accessed by 19/9/08, available on: http://www. randequity. com. my/news/news-Fifa2006. htm –
8. Global Financial Review, 2007, “Dollars in Millions Except Per Share Amounts”, Accessed by 22/9/08, available on: http://investor. colgate. com/downloads/PDF2_18-39. pdf –
9. Coloribus advertising archive, 2008, “Coloribus”, Accessed by 26/9/08, available on: http://www. coloribus. com/paedia/prints/2007/07/08/203482/
10. ColgateStrategy, 2006, “Highligh”, Accessed by 15/10/08, available on: http://investor. colgate. com/downloads/ar97. pdf
11. Book -RosenbloomJ, 2004, High Noon in Aisle Five, Published by Inc. Magazine Boone,L, E, Kurtz, D, L, (2005), Contemporary Marketing, 4th Edition, Prentice Hall. –
12. Strauss, J, Ansary, A, El, Frost, R, (2006), E-Marketing, 4th Edition, Prentice Hall.

Webster University November 6, 2011 Hewlett- Packard Company, referred to as HP, is an American multinational information technology company. Its headquarters is based in California USA. The company was founded in 1939 built in a Palo Alto garage by Bill Hewlett and David Packard and is now one of the world’s largest information technology companies operating worldwide in almost every country. It has 87,000 employees in 120 countries. HP specializes in developing, manufacturing computing, data storage, and networking hardware.

In addition it designs software and delivers services. A majority of HP’s product lines include storage devices as well as computing devices, and a wide range of imaging products and last but not least, printers. Its products are widely available to households, small to medium sized businesses, as well as through online distribution, office supply retailers, and major technology vendors. It also caters to enterprises and office supply retailers. The late 90’s brought innovation but low sales growth, as HP faced troubles in keeping up with the changing market.

It was at the point where Carly Fiorina was appointed as the new CEO. The focus then became on customer and internet sales. Carly revamped organizational structure. This led to a revenue growth however, share prices still declined and HP faced recession in 2001, which led to pay cuts and layoffs. Stock prices continues to soar which led to the consideration of acquisitions. HP is committed to the development of products, information, and services that are widely accessible to everyone including those with disabilities.

The commitment it provides in catering to everyone supports its diversity and “Total Customer Experience” objectives ensure that its technological benefits serve all. According to Dave Packard, “it is necessary that people work together in unison toward common objectives and avoid working at cross purposes at all levels if the ultimate in efficiency and achievements is to be obtained. ” HP has a vision of diversity as being a main factor that drives success as well as personal leadership from everyone within the company.

Their competitive advantage allows them to learn and to adjust through the depth of their values. It is vital for HP managers to come together regularly in order to discuss and assess the “HP Way” which ensures their top priorities through lower costs, information technology system improvements, increase in business growth, an improvement in efficiency, and customer service improvements. HP is organized in the form of two groups. The first is the Business Customer Organization, and the second group is the Consumer Business Organization (Wagonfeld, Rubenstein, and Block, 2001).

Both groups are supplied through the following product divisions: Computing systems, imaging and printing systems, and embedded personal systems. In addition HP services are available which works between the consumer, the product, and the groups. Major product lines include personal computer (PC), desktop and mobile personal computers, software solutions, copiers, scanners, networking solutions, and consulting services. In addition, the company’s support group offers consulting, education, and solution financing to its users.

Compaq was founded in 1982 by Rod Canion, Jim Harris, and Bill Murto and its headquarters is based in Houston, Texas. The three founders invested $1,000 each in order to begin the formation of their company and began their first product, a portable personal computer to run all the software being developed at the time for the IBM PC. Four years into operation, the company was able to pave way to the Fortune 500 more rapidly than any other company in the same domain. Compaq products were developed and placed in three different groups.

The first group is the Enterprise Computing Group which designs and develops servers, internet products, and networking products. The second group is the Commercial PC Group which designs and develops commercial desktops, and small and medium business solutions. The final group is the Consumer PC Group which designs and develops consumer products such as desktops, printers, and portables. Compaq markets its products mainly to consumers from the following sectors: Business, home, government and education. In 2001, Compaq and HP engaged in a merger.

The new HP will become the second largest global technology provider with around $87 billion in revenue as well as many opportunities to create competitive advantages with their existing resources. It then had the ability to provide a multiple number of solutions and will be in position of competitive advantage in comparison to the leader IBM. Prior to Compaq’s merger with HP, its ticker symbol was CPQ, however after the merger its ticker symbol is now HPQ. . The management’s reasons for the merger included the following: Improved economics and innovation, complementary eadership in key markets, strengthened business provides critical mass in key growth market, and financial benefits. First of all, combining HP and Compaq would result in creating economies of scale, direct sales channel, and a more flexible distribution channel. Second of all, the merger would facilitate the industry leading product line in the entire server category, and gain a broader portfolio of products and services. Thirdly, having around 65,000 IT architects in 160 countries accelerates growth and leads to better customer loyalty.

Finally, financially, it estimated $2. 5 billion in annual cost savings by mid 2004 and the merger would also allow HP to increase investment in the imaging and printing business. Reasons against the merger were the following: HP’s business portfolio would be worse due to an increased exposure in unprofitable PC business, and the PC market was expected to shrink. Second of all, the integration risk of the proposed merger is substantial as no merger involving computer companies had ever met expectations, and analysts estimated a revenue loss that could be as high as 15-17%.

Third of all, it would have a negative impact on HP stockholders as a dramatic drop in stock price was announced after the proposal of the merger and Wall Street predicted low estimates for future financial performance. A fourth reason against the merger is that HP’s strategic position will not materially improve as neither company had a profitable business model nor successfully transitioned into a direct distribution model. Furthermore, a merger would not materially improve HP’s market position in high profit areas. Despite the debate for or against the merger, there was a 51. % approval margin and supporters believed it was the best option available for both firms. SWOT analysis: The strengths of the merger are Compaq-Server category and overall storage, HP high-end storage, and strong brand recognition. HP and Compaq were to save $2. 5 billion in operating costs by 2004. After their merger, there was an increase in cash flow. The weaknesses they faced are the development of a direct distribution model, consulting and outsourcing (low market share), and Compaq printers (low market share). Consumers were unsure about the reliability of new products, and HP’s market share was to increase to 18. % only. The opportunities they were faced with are the improvement the merger could have of economics and innovation namely economies of scale. It also strengthened market leadership in storage, and market growth in IT services. Finally, the threats posed were the increases of pressure by Dell in the lower-end server market, and the entrants of IBM and Dell into the market that further eroded more market share. Michael E. Porter draws upon Industrial Revolution economics in order to derive the five forces that determine the competition and the overall profitability of a market.

For example, an unattractive industry would be one that combines the five forces that drives down overall profitability. The first force in Porter’s model is the threat of the entry of new competitors. Profitable markets that yield high returns and will therefore attract new firms. The result of this is many new entrants which eventually decrease profitability for all firms in the industry. The merger that occurred between Compaq and HP raises a moderate level of threat for new entrants due to economies of scale that are achieved by the already existing players, and this is what results in their competitive advantage.

In addition, there is need for high capital requirement for any new player that wants to enter the market. Another factor is product differentiation which results in a constant need for the improvement in technology in order to grab consumers’ attention. A third factor is moderate consumer switching costs. An example of this is the ease for customers to change their laptops due to the standardization of most computer components. In addition, the access to distribution channels makes it easy for consumers to approach the desired products, due to the availability of direct customer service and both internet and computer retailers.

The second force in Porter’s model is the bargaining power of buyers. Moderate consumer switching costs makes it easier for consumers to be able to change their laptops, due to standardization of most computer components. A low number of suppliers are providing HP and Compaq products to consumers. In addition, suppliers operate with high fixed costs, which is the main reason there are a low number of suppliers. The third force in the model is the bargaining power of suppliers, which consists of a high number of customers that are fragmented and providing products to them is not an easy task, which is why suppliers bargain highly.

There are however, a few large suppliers which are trustworthy, reliable, and recognized. They provide good quality raw material such as Intel and Hitachi. A fourth force in Porter’s model is the threat of substitutes. Switching costs for consumers is high because of low price HP Compaq laptops that indicate its target towards the middle class and upper middle class segment. These people find it harder to switch from one product to another which is why they are more likely to remain loyal. In addition, frequent product introductions and constant improvements in price serve as a cause for moderate threat.

A final force in the model is rivalry. High fixed costs in the cost for setup of manufacturing units increases fixed cost, which makes it more difficult for the existing players to exit the market. Also, constant changes in products and price makes competition stiffer. It is important to note that the two big players that hold the top two market share spots in the computer hardware industry are IBM and Dell. IBM has strong research and development and marketing and gave rise to PC industry with Microsoft Windows OS. IBM global services also have strong customer assistance.

The latter is a direct business model with low inventory costs, and Dell’s close relationships with its consumers helped build loyalty, and it ranked number one in the global PC market in 2001. In July 1999, Carly Fiorina was appointed as the CEO of HP, and the board believed she was the saviour of HP. Her goal was to reinvent the company according to the HP way. Her motto was: “Preserve the best and reinvent the rest. ” At the time Carly took over, it was a collection of independent businesses, each selling a different kind of product.

Her role was to execute an “e-services” strategy that would unify them into one profitable whole. After merging with Compaq, the main strategies that are focused on are the following: Sustainability where the new HP must both retain and grab additional market share, Uniqueness by being the largest IT company world-wide, value added by which the merger must demonstrate success, an increased product line through enhancement, adaptation to market forces through flexibility, and the retention of customer base through stability. Fiorina promised balanced revenue and earnings growth, targeting 12%-15% growth in 2000.

The problem was that Carly Fiorina held too many offices as she was CEO, COO, and Chairman of the board. This led to an abuse of power, poor decision-making, and miscommunication. Both Compaq and HP were in an unwinnable price war with Dell. The merger of HP and Compaq clearly benefited both companies. From Porter’s five forces model of HP-Compaq, it is evident that there are moderate entry barriers, moderate threat of substitutes, high competition, moderate bargaining of power of buyers, and high bargaining power of suppliers.

HP focuses on making technology more simple for its users from individual customers to large businesses. Its top priorities are to lower costs, improve its technology systems, increase business growth, and improve both efficiency and customer service. Despite the fact that both HP and Compaq were mature companies before the merger, the merger is still considered to be under restructuring, which resulted in the company losing some of its ground as a mature company. Blending the culture of both companies resulted in more innovative ideas and is now more supportive in providing more effective customer service.

Through the successful merger of HP and Compaq, their costs were reduced by $3 billion annually. From the information provided above, it is important to note that the introduction of improved and more innovative products should be of focus as competition in existing players is high in order to gain market share and competitive position in the market. The company is focusing on its strategies in order to ensure achieving all business priorities by adjusting and optimizing the product line and enhancing high end services.

When analyzing a merger between two companies like Compaq and HP, it is worth noting that if we were to do a segment analysis of this merger, a different conclusion would be drawn than an increase of profits in the merged firms. In a segment analysis, the combined firms would adversely lose money while trying to gain advantage over its product line in the business sector for example. A large business segment would only see a small increase in profits in this case. Depending on the elasticity in the market and the relevant position of the firms involved, the effects of a merger would vary significantly across different segments.

For example, if Dell and Compaq were to have merged in 1998, it would have resulted in a negative consumer surplus. This in turn allows us to assume that the use of segment analysis can be valuable in assessing what impacts a merger could result in in various markets that have different consumer segments. The evolution of the market also plays an important factor. In the case of the HP-Compaq merger, if the same merge had occurred at a different period like 4 years earlier there would have been a smaller consumer welfare as opposed to the results yielded in its 2001 merger.

Baker and Breshnan (1985) proposed a strategy of demand and supply to evaluate the effects of mergers. Products and consumers are observed by market participants according to Baker et. al, which in turn will be correlated with equilibrium prices which will lead the price coefficient to be “biased towards zero”. Furthermore, providing the consumers with a chance to not purchase any of the products available in regards to personal computers plays an important role as it allows the uniform price increase to change the quantities purchased.

In addition, by using the demand parameters that are estimated, price-cost margins and marginal costs can be calculated without the use of actual cost information. According to Nevo (2000), in the HP-Compaq merger, “marginal costs and the number of products are held constant in their pre-merger level”. Furthermore, post-merger equilibrium elasticities are calculated based on the demand parameters in the pre-merger phase. From this, we can make the assumption that both consumer preferences and the value of the good did not change after the firms merged.

However, one cannot ignore the fact that changes in the strategy after the merger took place accounted for price sensitivity and particularly changes outside the industry that could impact demand for the product places doubt on whether such an assumption is valid. A way one can look at the estimates of different segments is by looking at the aggregate demand elasticities over time. This is portrayed in a report by Foncel and Invaldi (2000). It is important to note that the total elasticity for the whole market is increasing over time.

This is turn means that consumers are being less sensitive as the market is approaching its maturity, this would lead to the expectation that the demand for personal computers would be more elastic. Income effect plays a big role here as soaring prices means that purchasing a PC would become a smaller share of the budget over time. In addition, further developments in software widened the use of computers and have now become a necessity in our daily lives. The total elasticity of the home segment is the one that faces the largest rise.

The reason for this is that this segment became less elastic over time due to two reasons. The first reason was due to high income elasticity and the second was due to higher usage of several developments in other domains such as the internet. Qualitative analysis of coordinated effects in the HP-Compaq merger is essential in understanding the formation of the merger that took place between both companies. In order to coordinate firms that are looking into merging should be able to come to an agreement which is not always easy as products in both firms are complex and differentiated.

Compaq and HP should monitor one another’s behaviour closely to detect factors such as undercutting, and keeping rivals out by “collectively coordinating behaviour between them”, Stigler (1964). The distribution of brands and market shares varies both in time and across markets. Most firms are multi product firms which is why it is essential to bear in mind that there is a substantial number of products. Another important factor here is that firms may face elastic demands which arise from the consumers’ substitution of products in quality segments.

In addition, market transparency ensures that all coordinating oligopolists are aware of the changes in the evolving markets. In the HP-Compaq merger, there are several market features that pave way for coordination in the server industry and others that prevent it from occurring. Also, competitors like Dell and IBM did not try to stand in the way of the merger. According to Freidman (1971), the merger between HP and Compaq affects the incentive to cooperate, yet it actively decreases the firms’ incentives to cooperate in a strategic manner.

Freidman also goes on to portray that his model does not take into account either the entry or exit of a product, nor uncertainty. The reduction of costs, and enrichment of revenues, growth of the industry, and need of product diversification are several reasons why mergers and acquisitions have become proliferate over the last decade or so. When analyzing the financial results of the HP-Compaq merger, it is important to look at the profitability and efficiency ratios of the companies in the pre-merger and post-merger stages.

In order to maximize profit and minimize products, HP and Compaq understand and adjust to the constantly shifting and changing markets, which technologies need acceleration, value creation for its consumers, and global development which serves as a shield against competitors like Dell and IBM. It is essential for a firm to understand its position in the industry especially in a market that is saturated with competition like the computer industry where competitors such as Dell, IBM, Toshiba, Sony, Vaio, are present.

An organization must be able to identify the factors that have an effect on the firm such as its suppliers, consumers, and competitors. Those factors enable the industry to know how to maintain itself in such a marketplace in order to be in a “win-win” situation. One of the benefits that resulted from the HP-Compaq merger is the following. Both firms were in a no win situation price war with Dell. The merger resulted in Compaq and HP to stop competing with one another. In February 2001, Dell, the biggest competitor of HP-Compaq launched a campaign to become the largest competitor in the PC industry.

In an attempt to grab the market share, Dell announced and intentional undercut in its prices by 10%. Although some mergers produce marginal results or lead to the sinking of companies, HP and Compaq’s merger created a new corporate culture. This helped the company focus its product development efforts. The company improved its position in a number of core markets. By completing the merger when they did, HP was able to position itself by taking the extra leap ahead of trends that were working against the two companies when they existed as independent entities.

In addition, its commitment to cultural change helped the merger go through a smoother transition, although HP took certain measures like reducing its workforce size, the change of 2 CEO’s, and the reorganization of the management’s structure. “The HP-Compaq merger established what it had set out to. Its main aim was to provide the essential mass and ensure a long term-role in an industry that was undergoing a fundamental transition,” according to Jean S. Bozman, research vice president in IDC’s world-wide Server Group.

Furthermore, he added that “this deal enabled the merged company to grow revenue and profits in an increasingly competitive marketplace. ” References: Anon (2002): Investor relations- taking a fair share of the responsibility, Strategic Direction. Bradford: Vol. 18, Iss. 8, pgs. 13-16. Ahles, Andrea (2002): Hewlett-Packard Executives Say Its Company Is on Track to Produce Lasting Benefits, Knight Ridder Tribune Business News. Washington: Aug 28, pg. 1. Anon (2010): HP Hires Gail Galuppo to Lead Wordlwide Strategy and Marketing for Imaging and Printing Group, Business Wire. New York.

Brown, Meredith, Kubek, Gary (2002): Court Demands Proof of HP-Compaq vote buying International Financial Law Review, London: Vol 21, Iss. 7; pg 25. Roy, Preeta; Roy, Probir (2004): The Hewlett Packard- Compaq Computers Merger: Insight from the Resource-Based View and the Dynamic Capabilities Perspective, Journal of American Academy of Business, Cambridge. Hollywood: Vol. 5, Iss. Pgs 7,8. Freidman J. (1971), “A Non-cooperative Equilibrium for Supergames. ” Review of Economic Studies, 38, 1-12. Stigler, G. J. (1964) “A theory of Oligopoly”, Journal of Political Economy, 72, 44-61.

Baker, J. P. and T. F. Bresnahan (1985). “The Gains from Merger or Collusion in Product-Di¤erentiated Industries”, Journal of Industrial Economics, 33, 427-444. Nevo, A. (2000a). “Mergers with Di¤erentiated Products: The Case of the Ready-to- eat Cereal Industry”, RAND Journal of Economics, 31, 3, 395-421. Foncel, J. and M. Invaldi (2001). “Operating System Prices in the Home PC Market”, mimeo, University of Toulouse. Bozman, J. S. (2006). HP-Compaq merger a success five years on: IDC. URL http://www. itwire. com/it-industry-news/strategy/6879-hp-compaq-merger-a-success-five-years-on-idc

Apple I-PHONES – Elasticity of supply and demand ABSTRACT I-PHONE’ ELASTICITY OF DEMAND What determines price elasticity of Iphones demand? Demand for Iphones – It seems like Iphone sales are above expectation and Apple can’t meet current demand. People all over the world are enthralled and want to hold one of the advanced and sexiest products in the market. The degree of necessity or whether the good is a luxury – goods deemed by consumers to be necessities tend to have an inelastic demand whereas luxuries will tend to have a more elastic demand because consumers can make do without luxuries when their budgets are stretched.

It’s likely to assume that Iphone considered as a luxury and in an economic recession customers can cut their spending on Iphones. The cost of switching between different phones – there may be difficulties involved in switching between different phones. In this case, using Iphone, with its unique applications and software might involve with issues of transferring data from one phone to another. This also imply when moving from using another phone to Iphone. I consider this part for some extent as an insignificant.

Summarizing, Iphone is a very unique product, differentiated but have some competitors. Price elasticity of demand is definitely not inelastic but not perfectly elastic. If prices go up significantly, there’s no doubt that quantity demanded declines. I-PHONE’ ELASTICITY OF SUPPLY Price elasticity also affects supply. Products with an inelastic supply usually have a long lead time, with little power over the quantity produced. Hotel rooms are one example, because if there’s a price change, hotel owners can’t decide halfway through the growing season to provide more or less of rooms.

On the other hand, products with a high elasticity of supply tend to come from industries that can change their production levels more quickly – for example, milk and dairy products. If we examine Iphone elasticity of supply we should consider Apple manufactures for being able to adapt to high demand. From past publications, we could learn that Apple had some issues with facing demand, and that it couldn’t meet demand. From my perspective Apple incorrectly predicated its sales, and that was the basis for the shortage. should be more elastic than inelastic at the end of the day.

The new classical macroeconomics model was originated in the early 1970’s by the economists working in the University of Chicago and the University of Minnesota. Robert Lucas, Thomas sergeant, Edward Prescott and Neil Wallace are the economists who were behind the formulation of this macroeconomic model. New classical Macroeconomics model opposes John Maynard Keynes – Keynesian macroeconomics and it develops its analysis on a completely neoclassical framework. It focuses on rigorous foundations, where macro economic model is built in a similarity to the actions of individual agents, behaviors of whom are modeled by micro economics.

New classical models have several assumptions such as:

• All agents are assumed to possess rational expectations and also are perceived to infinitely lived
• The macro economy is perceived to have unique equilibrium at potential output or full employment at any one time and the equilibrium is assumed to come into existence every time via wage adjustment or price. New classical economics has developed the use of representative agent models that has recently faced tremendous neoclassical criticism. Real Business cycles is the most famous new classical model which has been created by Robert Lucas, Edward C. Prescott and Finn E. Kydland.

Considering the Keynes’s approach, the classics analyzed the price system as efficiently and effectively enabling the mutual adjustment of supply and demand in a free economy in all markets including the labor market as well. Only market imperfection could lead to unemployment – the action of the labor unions or the intercession of the government – elimination could be possible by removing the imperfection. Keynes analysis focused on the whole economy rather than the individual markets and argued that aggregate demand might fall short of aggregate productive capacity of its capital and labor even without imperfections of the market.

Such a situation makes unemployment involuntary which means that workers stay unemployed even though they are ready to work on lower rates of wages then that offered by the firm to their current workers. Later Keynesian economists achieved or we can say developed a measure to accept the classics a bit. Neoclassical Synthesis was developed in which classical economics was considered as a ruling resource allocation when full employment was assumed in the economy through judicious government policy.

Consumption investment, money demand and other important elements of the Keynesian model were explained by other Keynesian economists assuming that individuals behave optimally. This was regarded as the “micro foundations” for macroeconomics. Origins of the New Classical Macroeconomics The name if we consider shows the revival of classical economics and rejection of Keynesian economics. The basis of New Classical Macro economics started with the Leonard Rapping’s and Luca’s attempt to provide micro foundations for labor market of Keynesian.

The rule applied by them was that the equilibrium in market occurs when quantity demanded and quantity supplied equals whereas involuntary unemployment is when the amount of labor supplied exceeds the amount demanded in actual, therefore their analysis proved not to be appropriate for involuntary unemployment at all. Keyne’s view of recession was that it occurs when the aggregate demand falls due to the result of decrease in private investments which eventually results in firms producing below their capacity. Hence due to producing less, employment falls as now firm needs only few workers.

Firms due to this reason fail to reduce wages to a lower level such as a job seeker will accept and this is from where the involuntary unemployment starts. The New Classical rejects and approves this step to be regarded as irrational. Firms get an opportunity to raise profits in the case of involuntary unemployment by employing a worker on a lower level of wage. Firms would not be optimizing if they are not able to benefit from the opportunity. Since unemployed labor is even ready to get employed on lower wages, the employed workers are not able to resist such wage cuts effectively.

Keynesian economics would not hold true then as it would either approve on irrationality or market imperfections and both Keynes denied (Moss, 2007). Two Fundamental factors of New Classical macroeconomics are illustrated by these criticisms of Keynesian:

• Individuals are considered as optimizers as they always choose the best options for themselves let it be prices such as wage rates or any other asset they possess even including their training and education.
• People maximize utility and firms maximize profits
• The choices made by the individuals also changes to align quantity demanded and supplied with the change in the adjustment in prices and therefore changing the incentives to the individuals.

New Classical macroeconomics model states that unemployment rate rises in slumps and falls in boom. When a worker is unemployed, he tends to seek a new job. He then compares the value of adjusting to a lower paid job that he might find easily against that of a better paid job which is almost impossible for him to find in that particular time.

The New Classical don’t say that the job searcher is content and happy with his decision rather it says that the worker still chooses what he feels is the best option available, even when the options he has chosen is actually poor. If he chooses to remain unemployed it’s based on the judgment that costs are outweighed by the benefits of the search, but this is again not an exception to the rule that amount demanded and supplied equals.

References

1. Moss, D. A. (2007). Concise Guide to Macroeconomics: What Managers, Executives and Students Need to Know: Harvard Business School Press.

TEST QUESTIONS

True-False

1. The utility created through the basic marketing activities is known as place utility. ANSWER: False, Page 40
2. Transportation is the physical movement or flow of goods. ANSWER: True, Page 42
3. During the 1990s and 2000s, logistics costs as a percentage of gross national product declined. ANSWER: True, Page 47
4. An aircraft manufacturer is a good example of an organization with a heavy inbound flow and a simple outbound flow. ANSWER: True, Page 63
5. Acme Battery distributes its batteries to warehouses, where they are stored until ordered by a retailer. The warehouses are located close by the retail markets served. This is the logistics channel approach to logistics. ANSWER: True, Page 66
6. In a logistics system, warehousing should be optimized at the expense of related logistics activities, such as transportation and procurement. ANSWER: False, Page 69
7. The mathematical calculation of the point of equality between systems under analysis is used for short-run/static analysis. ANSWER: False, Pages 61-62
8. To hold down distribution cost, the lowest cost carrier should always be used. ANSWER: False, Page 64
9. The inverse relationship that exists between the cost of lost sales and inventory costs is the inventory effect. ANSWER: True, Page 55
10. Ensuring the availability of the right product, in the right quantity, and the right condition, at the right place, at the right time, for the right customer at the right cost, is which definition of logistics?

• Seven Rs
• Council of Logistics Management
• Society of Logistic Engineers
• supply chain logistics

ANSWER: a, Page 37 inside Table 2.1

1. Logistics is the process of anticipating customer needs and wants; acquiring the capital, materials, people, technologies, and information necessary to meet those needs and wants; optimizing the goods- or service-producing network to fulfill customer requests; and utilizing the network to fulfill customer requests in a timely manner. This is a a. definition from an inventory perspective. b. general definition. c. definition offered by the Society of Logistics Engineers. d. a definition provided by the Council of Logistics Management. ANSWER: b, Pages 38-39
2. All four subdivisions of logistics have some common characteristics. Which of the below does not belong in the list: a. transportation b. marketing c. scheduling d. forecasting ANSWER: b, Page 38
3. The value that is added to goods through a manufacturing or assembly process is: a. form utility b. place utility c. time utility d. possession utility
   ANSWER: a, Page 39
4. Which of the answers below is an example of the creation of form utility by a logistics activity? a. when lumber is cut and made into a chair
   b. when a firm’s finance manager approves customer purchases on a credit basis c. when Dell combines components with software to produce a computer to a customer’s specifications d. the breaking bulk and repackaging at a distribution center ANSWER: d, Page 39
5. The utility that is created by moving goods from production points to market points where demand exists is referred to as: a. form b. place c. time d. possession ANSWER: b, Page 40
6. Logistics creates which utility through production forecasting, production scheduling and inventory control? a. form utility b. quantity utility c. time utility d. possession utility ANSWER: b, Page 40
7. Time utility depends on a. when the carrier picks up the shipment. b. transportation companies delivering on time. c. proper forecasting. d. having the product available when the user wants it. ANSWER: d, Page 40
8. What is often the largest component of logistics costs? a. inventory costs b. transportation costs c. shipper-related costs d. administrative costs ANSWER: b, Page 42
9. Materials handling is concerned with a. inventory levels. b. breaking bulk. c. scheduling trade-offs. d. short-distance movement. ANSWER: d, Page 43
10. Marketers have begun to recognize the strategic value of place in the marketing mix, as well as the benefits resulting from high-quality logistical services. As a result, which has been recognized as the interface activity between marketing and logistics? a. product b. promotion c. price d. customer service ANSWER: d, Page 52
11. It can be argued that ? is the second language of logistics and supply chain management. a. quality b. manufacturing c. finance d. sales ANSWER: c, Page 53
12. What activity is described as the movement of goods into a warehouse, the placement of goods in a warehouse, and the movement of goods from storage to order picking areas and eventually to dock areas for transportation out of the warehouse? a. materials handling b. physical distribution c. business logistics d. order fulfillment ANSWER: a, Page 43
13. A(n) _______ relationship exists between the cost of lost sales and inventory cost. a. reverse b. proportional c. inverse d. non linear ANSWER: c, Page 55
14. Water Cruisers is located in Jacksonville, Florida, and makes small yachts and luxury pontoon boats for customers on the East coast of the United States. Each boat requires thousands of parts purchased from over 1,000 vendors. A number of boats are in production at any one time, so a large number of parts constantly arrive and are stored. Once a boat is finished, it is sailed up the coast to a convenient port for customer delivery. Which type of logistics system does Water Cruisers use? a. balanced system b. heavy inbound c. heavy outbound d. reverse system ANSWER: b, Page 63
15. The product’s dollar value typically affects the cost of logistics activities. Which is not one of these costs? a. warehousing costs b. transportation costs c. promotion costs d. packaging costs ANSWER: c, Page 56
16. When a specific point in time, or level of production, is chosen and costs are developed for the various logistics cost centers, it is called a. least cost analysis. b. short run analysis. c. cost center analysis. d. link node analysis. ANSWER: b, Page 60
17. A ______ analysis examines a logistics system over a long time period or range of output. a. cost center analysis b. dynamic c. link node analysis d. least cost analysis ANSWER: b, Pages 61-62
18. What are fixed spatial points where goods stop for storage or processing? a. nodes b. links c. cost centers d. fulfillment centers ANSWER: a, Page 65
19. An important sustainability issue that has received much more scrutiny in recent years is the: a. focus on adequate inventory levels b. reduction in packaging waste by using alternate materials c. effort to move warehouse storage closer to consumers d. emphasis on materials handling and warehouse design ANSWER: b, Page 43
20. What technology has helped make the physical inventory-taking process more efficient and effective? a. advances in forecasting b. transportation management systems c. just-in-time inventory d. scanning of bar-coded RFID tags ANSWER: d, Page 44

Essay

• What is the primary challenge of logistics?

ANSWER: The challenge is to manage the entire logistics system in such a way that order fulfillment meets and perhaps exceeds customer expectations. At the same time, the competitive marketplace demands efficiency—controlling transportation, inventory, and other logistics-related costs. Cost and service tradeoffs must be considered when evaluating customer service levels and the associated total cost of logistics, but both goals—efficiency and effectiveness—are important to an organization in today’s competitive environment. (Page 36)

• What is the definition of logistics which the authors choose and what group had formulated it?

ANSWER: The definition offered by the Council of Supply Chain Management Professionals is: “That part of the supply chain process that plans, implements and controls the efficient, effective flow and storage of goods, services and related information from point of origin to point of consumption in order to meet customer requirements.” (Page 37)

• The text mentions four subdivisions of logistics. Pick one, define and discuss.

ANSWER:

• Business logistics: That part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, service, and related information from point of origin to point of consumption in order to meet customer requirements.
• Military logistics: The design and integration of all aspects of support for the operational capability of the military forces (deployed or in garrison) and their equipment to ensure readiness, reliability, and efficiency.
• Event logistics: The network of activities, facilities, and personnel required to organize, schedule, and deploy the resources for an event to take place and to efficiently withdraw after the event.
• Service logistics: The acquisition, scheduling, and management of the facilities, assets, personnel, and materials to support and sustain a service operation or business. (Page 38) 34.There are five principal types of economic utility that add value to a product or service. Name four of the five and pick one to discuss in more detail.

ANSWER: The five principal types of economic utility are form, time, place, quantity, and possession. Generally, production activities are credited with providing form utility; logistics activities with time, place, and quantity utilities; and marketing activities with possession utility. (Page 39)

• The logistics definitions discussed indicate 14 activities for which the logistics manager might be responsible. Name at least eight and briefly discuss any two in detail.

ANSWER:

• Transportation
• Warehousing and storage
• Industrial packaging
• Materials handling
• Inventory control
• Order fulfillment
• Inventory forecasting
• Production planning and scheduling
• Procurement
• Customer service
• Facility location
• Return goods handling
• Parts and service support
• Salvage and scrap disposal (Pages 41- 42)

• The micro perspective of logistics examines the relationships between logistics and other functional areas in an organization. What are these other functions? Select one and discuss how it interacts with logistics.

ANSWER: The micro perspective of logistics examines the relationships between logistics and other functional areas in an organization – including marketing, manufacturing or operations, finance and accounting. Logistics, by its nature, focuses on processes that cut across traditional functional boundaries, particularly in today’s environment with its emphasis on the supply chain. Consequently, logistics interfaces in many important ways with other functional areas since the logistics-related flows, as well as supply chain flows, tend to be horizontal in an organization, cutting across other functions. (Page 49)

• What are the 4 “Ps” of marketing? Select one, and discuss how it interfaces with logistics.

ANSWER: Logistics has an important relationship with marketing. The rationale for this strong relationship is that physical distribution, or the outbound side of an organization’s logistics system, plays an important role in the sale of a product. In some instances, physical distribution and order fulfillment may be the key variables in the continuing sales of products; that is, the ability to provide the product at the right time to the right place in the right quantities and the right cost might be the critical element in making a sale. (Pages 50-52)

• What is ROA? Discuss how it can impact logistics.

ANSWER: Finance has become increasingly important to logistics and supply chain management during the last decade. The impact that logistics and supply chain management can have upon return on assets (ROA) or return on investment (ROI) is very significant. Logistics can positively impact ROA in several ways. First, inventory is both a current asset on the balance sheet and a variable expense on the income statement. Reducing inventory levels reduces the asset base as well as the corresponding variable expenses, thus having a positive impact on ROA. Second, transportation and warehousing costs can also influence ROA. If an organization owns its warehouses and transportation fleet, they are fixed assets on the balance sheet. If these assets are reduced or eliminated, ROA may increase. Similarly, if an organization utilizes third parties for warehousing and transportation, variable expenses will be incurred, which impact the profit margin. Finally, the focus on customer service can increase revenue. As long as the incremental increase in revenue is larger than the incremental increase in the cost of customer service, ROA will increase. (Page 53)

• There are a number of product-related factors that can affect the cost and importance of logistics. Identify the factors, and pick one to discuss further.

ANSWER: Among the more significant product-related factors that affect the cost and importance of logistics are dollar value, density, susceptibility to damage, and the need for special handling. (Page 56)

• Spatial relationship is extremely significant to logistics.

Discuss why this is true. ANSWER: “Spatial relationships” refers to the location of fixed points in the logistics system with respect to demand and supply points. Spatial relationships are very important to transportation costs, since these costs tend to increase with distance. The distance factor or spatial relationships might affect logistics costs in ways other than transportation costs. For example, a firm located far from one or more of its markets might need to use a market-oriented warehouse to make customer deliveries in a satisfactory time period. Therefore, distance can add to warehousing and inventory carrying costs. (Pages 59-60)

I am the assistant financial manager of PWC and I have been asked by my manager to write a report for one of our profitable clients Nike. I will evaluate and justify recommendations on ways in which problems with cash flow, working capital, costs, budgets and break-even may be addressed for them. The first thing they need to consider is cash flow. Cash flow is the movement of cash going in and out Nike over a period of time. Nike may encounter a problem with having low profits or losses which can effect cash flow.

I recommend that Nike increase their selling price of their products. If their prices increase their sales revenue will increase leading to an increase in profits. However, Nike must be aware, if they increase their prices to high, it could lead to a lower demand in their products, which will lead them back into losses. Furthermore, I suggest that Nike reduce their costs. They can do this by finding cheaper supplies or making some staff redundant. If Nike can reduce their costs it will mean that not as much money needs to be paid out which will improve cash flow.

Furthermore, allowing customers too much credit will cause cash flow problems because they won’t be gaining the cash they need. Therefore, I suggest having a cash only policy. This would be good as they would always gain their cash for their products, and wouldn’t have to worry about people not paying them. However, this may lead customers going elsewhere. Alternatively, they could use a credit factoring service with their debtors. This would mean they will gain cash, improving cash flow. Or another way to resolve cash flow would be to chase up bad debts. Nike could have a solicitor threaten legal action.

This will persuade Nike’s debtors to pay their debts and Nike will gain the cash that’s owed. Furthermore, Over-investment in capacity can lead to cash flow problems; this happens when a business spends too much on fixed assets such as machinery and premises; these assets are very expensive. Therefore, I suggest that Nike lease fixed assets. This would be a cheaper alternative and if it breaks down the leasing company is responsible. However, if Nike already own many fixed assets, they could sell the assets that are unused; this will help them gain cash preventing less cash flow problems.

Additionally, holding too much stock will lead to cash flow problems; this will be tied up as only when they sell their stock will they be able to gain the cash for it. Therefore, I suggest that Nike estimate a reasonable amount of stock they will sell; they can do this by looking at their previous sales to determine their production levels. From this they will see how much they sold and base that information on the amount of stock they buy to ensure they sell all of it. Moreover, over trading can lead to cash flow problems.

Over trading happens when they open up stores to quickly which costs lots of money. I suggest that Nike do market research to ensure that any store they open will be profitable. From this Nike will know if there is a demand for their store and they can decide if they want to open a new store. This will help with cash flow problems because they won’t be using money on unnecessary things that won’t provide a profit. In addition, unexpected changes will lead to cash flow problems. For instance, a machine may break down. Therefore, I recommend that Nike lease their machinery.

This is because if it breaks down it will mean that the leasing company is responsible not Nike. So, Nike wouldn’t need to pay to repair or replace the machine which can improve cash flow. Lastly, seasonal demand can lead Nike to cash flow problems. Therefore, I recommend Nike to have promotions. For instance, they can sell their summer stock in winter with promotions. Promotions could include buy one get one free or half price off. This will help with cash flow problems as they can get rid of stock that may be hard to get rid of initially.

Working capital can become a problem if it becomes insufficient. Working capital is the cash available to a business that allow them to operate on a day-to-day basis. Insufficient working capital means that Nike will be unable to take advantage of new opportunities or adapt to changes. It also means that trade and cash discounts are lost and Nike will be unable to offer a credit line. As well it means financial reputation is lost due to not paying and creditors may apply for court action. If Nike face these problems, I suggest to employ a good collection system.

This could include adopting a cash only policy so that Nike always gain their cash for their products. Or they could also hire a solicitor to threaten court action to gain cash from debtors who haven’t paid. Furthermore, I also recommend Nike to offer quick payment incentives. By having incentives, such as a discount for paying early will encourage customers to pay earlier and will help with working capital. Moreover, Nike can reduce their fixed costs to help with insufficient working capital. Nike can do this by finding cheaper suppliers. For instance, they can find a cheaper mortgage payment or electricity.

Also they can reduce variable costs. They can do this by finding a cheaper supplier for their raw materials. Nike should also manage their inventory well. Nike should ensure they only buy the stock they know they will sell; they can do this by looking at previous sales. Lastly, Nike can solve working capital problems buy increasing their sales revenue. They can increase sales by using promotion and marketing. This will all help gain more cash to go towards working capital. Costs are another thing Nike need to consider for business survival.

Costs are an amount that has to be paid or given in order to get something. A problem Nike may face with costs is that their raw materials may increase. Therefore, I suggest Nike find cheaper suppliers so that they can keep their prices the same which will mean they won’t lose any customers as still gain cash. Another problem they may face is that fixed costs must be paid. Therefore, I suggest Nike have reserve funds in case this happens to ensure that they can always pay them. Or they could obtain an overdraft to gain the cash to pay the costs.

Furthermore, costs are estimates and may vary from actual costs therefore I suggest Nike look at previous cost data when dealing with cost figures. This means they will have an idea of how much you spent previously which will give you a more realistic estimate meaning they won’t have a problems with budgets and break-even. Additionally, costs can be calculated inaccurate which can effect budgets break even and cash flow forecasting. Therefore, I recommend have a team involved including qualified accountants. This will ensure they won’t have any other problems and will be more efficient and profitable.

Another factor Nike need to take into consideration is budgets; a budget is a financial plan to achieve a certain target. Budgets can be inaccurate and can lead to problems. Therefore I suggest Nike have a team involved including qualified staff to calculate the budget. This will ensure the budget is accurate and won’t lead to any problems. Furthermore, budgets can be unrealistic. If budgets are unrealistic it can demotivate employees; this is because they will have to work hard to ensure they don’t go over the budgets, but this may be impossible and could lead to lots of stress.

Therefore I suggest that Nike’s managers consult with their staff. This means they can get realistic budgets that staff can work with which could reduce stress and motivate them more leading to more efficient work. Budgets can also restrict business activity which may lose the firm business. Therefore I recommend that Nike are more flexible. For instance, if the raw materials selling price goes down, they should buy more than budgeted as they could sell more leading to more profit. Break-even is another factor to consider. Break-even occurs when the total costs are equal to the total revenue.

The break even model isn’t always accurate, this is because break-even is based on a number of assumptions. For instance, costs will remain the same. However, this isn’t true as raw material pricing is always increasing. Therefore, I suggest Nike to find cheaper suppliers or increase their selling price of their products to maintain the same break-even point. Moreover, break-even assumes all the output can be sold in which could cause problems if Nike do not sell on their products. Hence I suggest Nike to use previous data to determine output sales so they don’t have too much stock and can ensure they sell it all.

This means that their break-even point will be correct and useful. Furthermore, each product has a breakeven point which means it is very time consuming therefore, once again I suggest hiring a team which will make the process faster. Lastly, it may be inaccurate. Therefore employing a team of qualified staff including cost accountants will ensure data is accurate; this will make Nike work more efficiency. In conclusion, if Nike take the solutions I have suggested when they face problems, they will be able to run their company successfully and efficiently.