Question

In the following case, assume that the company is a manufacturer of sports watches and other wearable electronic sports technology. A new entrant from China has just entered the market. The new competitor offers low prices, good quality, and good service. You determine that the brand could start to become very well established internationally with one year. Although the breadth of the new entrant’s product line is small (four products at four different price points), it will be possible for it to offer a full line of products (about 8, ranging from low-end to luxury products) within two to three years. Clearly, the new entrant has upset the balance of your firm and those of your competitors. (In this example, you could understand the product as anything from perfume to automobiles, from jewelry to athletic shoes.)

The new entrant offers prices that are about 20% lower than the market currently sees. You believe that its operating expenses are lower and that it wishes to recover a lower profit than is customary in this industry. The company’s strategy is to “buy in” to the market and then recover over time through volume. It is a similar strategy that your firm used 10 years ago to enter into this market.

So, the question is: how do you respond strategically? What areas of the firm must be cut? How do you prioritize the elements of the company and retain current operations in one area and cut in others? To say, we need to reduce our costs by X% across the board is not an answer, because it means nothing without details behind it.

In considering your response to this problem, identify any product that you are familiar with and try to analyze what you could do without: do you need after-sales service? Do you put a high value on customer relations? Is quality always important?

Please note, answer may vary. All products have different mixes of activity and are perceived differently by consumers.

Answer 1

a) To manage the lower price entrant to the market we can explore the following options:

• Explore possible discounts to develop an immediate response to such market turbulences.
• Work on product cost optimization through efforts like kaizen, etc. to ensure that our product has a price cushion to fall back on, in case of sudden price reductions.
• Part from product’s cost reduction, overall plant processes need to be re-considered to improve their efficiency and thereby reduce the overall plant expenses.

b) In this case, the firm can keep the direct revenue generating departments like operations and sales running, while cut into other areas which are cost centers like R&D, etc.

c) To prioritize cost cutting in areas, the firm must consider pareto principle in this case, and try to identify that what 20% area within the plant are contributing to 80% of the product costs. Once the highest cost generators are identified, their costs can be controlled.

d) We need to identify the products that are highest revenue generators. For the products that are not generating substantial revenue, we need to assess if those products can be up-scaled with other products, or can the company shun them all-together to free up money to invest in the revenue generators. The after-sales services, high value on customer relations and quality of the revenue generating products should not be compromised with.