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Assignment Questions

Decision Making In The United States’ Business Industry

Recommend an appropriate course for your chosen organization to make business decisions based on the projected credit markets.

Describe the business decisions related to trade and specialization you would recommend based on the effects of future global conditions.

Explain the evidence that supports these recommendations and how your recommendations might need to be modified for the alternative economic futures.

Larson Inc.

Larson Inc. is an international company that has operated in America for 5 years and in Germany for over 15 years. The company supplies batteries for electronic equipment. Batteries are sold for anything from laptops to toys. The company has always maintained a decentralized structure regarding decisions in the areas of marketing, pricing, and trade. After reviewing the profitability of both the American and Germany divisions, profits were much lower than expected and the company decided that decisions of high magnitude should be reviewed and approved through the corporate office.

Corporate decided that a team would be put together to review any results in the aforementioned areas and offer recommendations for change. Your group will be reviewing these results. The following is information you need to make informed decisions.

America

Unemployment 9.9%

Inflation 2.3%

GDP (Purchasing Power Parity) $14.6 trillion

Output per person (GDP per capita) 2007 $46,800; 2008 $32,560

Fed Funds Rate .25

Discount Rate .50

Population 305 million

• Export goods production machinery and equipment, 32.4%; industrial supplies, 26.5%; non-auto consumer goods, 11.7%; motor vehicles and parts, 11.5%; aircraft and parts, 7.6%; food, feed and beverages, 7.3%; other, 4.0%. (2008)

• Average battery cost $80 in raw materials and production costs, and at current sales volume or anticipated initial sales volume, fixed costs come to $30 per unit. Your total cost is $110 per unit. Present markup is 35%.

Present pricing strategy in use: cost-plus pricing

• There is a great deal of competition in the American battery market. Larson finds product differentiation a bit difficult. Packaging is lackluster and commercials are of a serious nature and run infrequently. No other advertisement is present.

• Major slowdown has occurred because of the present financial troubles in the economy. Liquidity has almost evaporated in major markets. Banks have exposed themselves to a great deal of credit risk because of tricky dealings with securitized or not so securitized products. These troubles have spilled over into the global markets but remain much more serious in the United States.

• Problems in the housing market coupled with high unemployment have caused individuals to save more, spend less, and turn from essential items. Though the value of the United States dollar has dropped over the past year, America’s Current Account Balance is running a large deficit of $568,800,000,000, which affects the global view for trade.

Germany

Unemployment is 10.8%

Inflation 1.7%

GDP (Purchasing Power Parity) 2.8 trillion

Output per person (GDP per capita) 2008 $34.2

Population 82.3 million

Main industries: steel, cars, electronics, chemicals, cement, textiles, and food

• The average battery costs $95 in raw materials and production costs, and at current sales volume or anticipated initial sales volume, fixed costs come to $40 per unit. Your total cost is $135 per unit. Present markup is 25%.

Present pricing strategy in use: cost-plus pricing

• There is less competition in the Germany battery market. ,Population is smaller, however, and represents fewer sales. Larson finds product differentiation a bit difficult. Packaging here is lackluster but commercials are more humorous and are coupled with magazine ads. No other advertisement is present.

• A small slowdown has also rippled through Germany. Liquidity and spending is slightly higher in Germany because of the favorable unemployment payments made to German citizens. Banks are less exposed than their American counterparts except for the larger international banks. Germany’s Current Account Balance is much more favorable ($ 267,100,000,000), which makes exporting Larson products much easier.

Added Information

• Asian markets are growing in personal income and desire for American goods; however, protectionism is prevalent in the communist countries.

• African countries are starting to resolve their differences, though some tribes still fight amongst themselves. At times, westerners are kidnapped and held for ransom.

The first probability is that the current economic environment will not change much over the next five years. Larson will continue to face a competitive domestic battery market without foreign competition within the domestic economy. Some competitors will close for be forced to close operations while other competitors will enter the market over the next five years. The degree of competitiveness will not change a great deal, Larson will need to continue advertising to keep its market share and build brand loyalty with the next generation of customers. Larson must continue research and development expenditure in order to differentiate its battery products within the market. The company should build on any new ideas for product innovation internally as well as studying competitor products to see if improvements can be made to its own (Larson’s) products.
The likelihood the current market will remain in monopolistic competition (assumed) ranks second on the probability scale. It is assumed that ease of entry and exit from the market, and differentiation of products, placed the battery market within the monopolistic competition market category in Milestone 1. If the market continues on in this category the recommendations for Larson will remain as originally stated. The company should commit financial resources to advertise product capability and reliability, as a means of differentiating its products within the industry. Profits generated from its operations should be flowed back into research and development so Larson can maintain a competitive edge over its competitors. The branding and projected improvement of its products is designed to force other competitors to follow Larson’s example or leave the market. A price reduction was recommended in Milestone 1 which will remain in effect for Milestone 2.
The second forecasted probability is that the battery market will enter an oligopoly state. In oligopoly a few firms dominate the market and act as price adjusters for all firms within the market. In this scenario ease of entry and exit from the market is fairly restrictive. There will most likely be one or two other firms that sell differentiated products and a fairly high rate of customer loyalty. It is important that Larson build a loyal customer base to fend off any possible intrusion into its market share. In this type of market Larson should look to acquire any competitor that may be losing market share or showing signs of decreasing sales and profits in current years. Capitalizing on any weakness in competition is a way to increase market share and receive windfall from any important features or capabilities in another companies products, such as patents and copyrights. If Larson is able to capitalize on any weakness of its competitors it can increase its market share and force other competitors to respond to Larson’s decisions in the market. Forcing the competitor, or competitors, to follow Larson’s lead will add to Larson’s brand building within the market.
The likelihood that the battery market may enter an oligopoly type market environment should be ranked as the most likely probability. Competition will come from a few firms within the market and product prices among competitors will be closely aligned. Growth may be realized through mergers and acquisitions or following exit by one or more firms from the market. To maintain an edge Larson must commit resources to further research and development as well as advertising and promotion of its products. A distinctive packaging design must be developed immediately as a means of drawing customer attention to Larson’s products. It is recommended that Larson increase its unit price by $0.50. The intent is to project an image that Larson’s batteries are of a better quality and should be priced above its current sales price.
The third forecasted economic probability is would be perfect competition. In this type of market the firm is a “price-taker”. In short the market sets the price, if any firm attempts to sell above the market price the most likely result is that the firm will suffer financial loss and possible exit from the market altogether.
If Larson finds itself in this type of market, the market will dictate the product price at which Larson may sell. Larson should make every effort to streamline its operations so it can deliver products that are high quality but produced at the lowest possible price.
Recommendation 1:

The highest probability facing Larson is that it will be competing within an Oligopoly. The best thing for Larson to do is increase its sales price per unit to capitalize on its brand building efforts. The brand building can be achieved through advertising and promotional campaigns to make customers aware of Larson’s quality batteries by discussing its capabilities and reliability and how it meets customer needs. Larson should concentrate on advertising its laptop computer batteries. Customers within the United States and the rest of the world are in love with personal computers that can be carried over their shoulder. There is a great probability that quality laptop computer batteries will be in demand for the foreseeable future. Larson must continue to pour operational profits back into its research and development division to continue extending the useful life of its batteries.
The current macroeconomic environment within the United States and throughout the world favors firms that are able to provide a product or service that supports the current electronic infrastructure that many developed nations possess and which developing nations want to possess. Larson should have a favorable market opportunity, in that the electronics market will most likely be around for a long time, but it must be first to reach beyond the borders of the U.S. China and the Far East is prime selling territory for Larson’s products. African countries are demanding more electronic assets but stability is a concern. Larson should be begin advertising in China immediately in order to establish relationships and marketing channels within that country. There is a debt crisis looming throughout the world, as witnessed by the European Union’s economic pain caused by Greece’s monetary troubles. The same can be said for the United States and Asia. In the near future borrowing to fund operations will become more difficult. Larson needs to immediately promote its products overseas, especially in China and the Far East.
Recommendation 2
The company should pay close attention to cost control. When the cost of inputs increases, the gains in cost control that Larson makes will allow it to maintain pricing stability at the wholesale level, something that its competitors likely will not be able to do. This tactic should give Larson the opportunity to grow market share by undercutting its competitors during the inflationary stage. The risk to this tactic is that if the double dip materializes, the inflationary period is unlikely to occur. Not that cost savings are a poor strategy, but they are only the ideal strategy if they can be used to leverage competitive and advantage and build out market share at the expense of competitors. Also, if the economy does recover, then Larson should be ready with a next-generation battery to meet the needs of next generation devices, which are likely to see a surge in demand as consumers who had delayed such purchases during the recession come back into the market.

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