SunPower: Simulation Exercise

Background

SunPower, a young innovative company, with new proprietary technology. I will be seeking to maximize the cumulative profit of SunPower over an eighteen year period. The strategies selected will be founded on not only periodic reports such as key industry data and income statement, but also on the industry structure and informed prediction of customer/competitor reactions. At the beginning of Year 1, the market share is at 2.4%. I will be seeking to expand this market share over the 18 year period. In essence, this will call for the formulation of pricing decisions that are largely favorable, while at the same time bringing down unit costs and further enhancing the products utility.

Discussion

Decision 1: Beginning of Year 1: 2007 (See Appendix 1)

Module Price: $0.15

With a module price of $0.15 and a market share of 2.40%, SunPower is all set to consolidate its place in the market as the most efficient solar cells producer in the world. It is important to note that with projected explosion of solar power, and an impressive product, the company is likely to do well going forward. This is more so the case if the right decisions are made with regard to not only the short-term, but also the medium-term and long-term strategies to be embraced. The companys management ought to make the right pricing and related decisions so as to leverage SunPowers strengths (while minimizing its weaknesses) in a way that could allow the company to fully exploit the opportunities available in the market. The companys return on sales ration, against that of the rest of the companies in the industry, is not impressive. This ratio, in the words of Albrecht, Stice, Stice, and Swain (2007), seeks to measure the amount of profit earned per dollar of sales (p. 672). Return on sales ratio is a key indicator when it comes to the measurement of an entitys operational efficiency (Bragg, 2010). The fact that SunPower has a significantly lower return on sales figure than its peers in the market effectively means that the proportion of profits the company is deriving from sales is quite low. This is, therefore, a ratio that could be used to gauge how effective the companys management is as far as profit generation is, at a specified level of sales. Therefore, this is yet another figure to watch going forward so as to track the operating efficiency. Also, going forward, it would be interesting to keep an eye on product development expenditure with an aim of determining how it impacts unit costs. It is important to note that it is the percentage revenue allocated towards the improvement of processes that determines product improvements.

Decision 2: For Years 2013 2017 (See Appendix 2)

Module Price - $0.13

The company experiences a 2.85% increase in market share. This increase in market share is also accompanied by growth in annual revenues from $220.9M to $626.82M, representing a 183% increase. The growth in the annual net income is also very impressive. However, the return on sales figure remains low especially when compared to those of peers in the industry. This, therefore, means the company is yet to improve its operating efficiency. The companys management ought to do more to ensure that the firm is at par with its peers when it comes to operating efficiency. The decline in consumer net price indicates that the end consumers net price for each installed...

…cost leaders can be low cost product developers, low cost manufacturers, low cost distributors, low cost marketers, or low cost service providers (p. 15). By being a cost leader, the company will be able to effectively lock out competition, particularly new entrants, who cannot compete at its price level. This is one of the key benefits of a low-cost.

Figures 1.1 and 1.2

Figures 1.3 and 1.4

References

Albrecht, W., Stice, J., Stice, E. & Swain, M. (2007). Accounting: Concepts and Applications (10th ed.). Belmont, CA: Cengage Learning.

Bragg, S.M. (2010). Business Ratios and Formulas: A Comprehensive Guide (2nd ed.). Hoboken, NJ: John Wiley and Sons, Inc.

Heisinger, K. (2009). Essentials of Managerial Accounting. Mason, OH: Cengage Learning.

Hansen, D., Mowen, M. & Guan, L. (2007). Cost Management: Accounting and Control (6th ed). Belmont, CA: Cengage Learning.

Handerson, R.M., Conkling, J. & Roberts, S. (2007). SunPower: Focused on the Future of Solar Power. San Francisco, CA: Creative Commons.

Jennings, A.R. (2001). Financial Accounting (2nd ed.). Belford Row, London: Thomson

Miltenburg, J. (2005). Manufacturing Strategy: How to Formulate and Implement a Winning Plan (2nd ed.). New York, NY: CRC Press.

Appendix 1

SunPower

Other Solar

Market Share (%)

2.40%

97.60%

Consumer Net Price ($/kWh)

$0.17

$0.17

Unit Direct Cost ($/kWh)

$0.11

$0.09

Annual Revenue ($/Year)

$220.90M

$8.90B

Annual Net Income ($/Year)

$4.96M

$1.20B

Process Development Expenditure ($/Yr)

$11.05M

$445.06M

Unit Cost ($/Peak Watt)

$2.75

$2.35

Gross Margin (Fraction of Revenue)

.28

.38

Return on Sales (Fraction of Revenue)

.02

.13

Appendix 2

SunPower

Other Solar

Market Share (%)

4.85%

95.15%

Consumer Net Price ($/kWh)

$0.15

$0.17

Unit Direct Cost ($/kWh)

$0.10

$0.08

Annual Revenue ($/Year)

$626.82M

$14.60B

Annual Net Income ($/Year)

$35.85M

$3.65B

Process Development Expenditure ($/Yr)

$29.08M

$696.49M

Unit Cost ($/Peak Watt)

$2.47

$2.04

Gross Margin (Fraction of Revenue)

.26

.46

Return on Sales (Fraction of Revenue)

.07

.26

Appendix 3

SunPower

Other Solar

Market Share (%)

8.46%

91.54%

Consumer Net Price ($/kWh)

$0.13

$0.16

Unit Direct Cost ($/kWh)

$0.08

$0.07

Annual Revenue ($/Year)

$1.71B

$25.28B

Annual Net Income ($/Year)

$110.86M

$8.13B

Process Development Expenditure ($/Yr)

$78.09M

$1.21B

Unit Cost ($/Peak Watt)

$2.08

$1.75

Gross Margin (Fraction of Revenue)

.26

.51

Return on Sales (Fraction of Revenue)

.08

.32

Appendix 4

SunPower

Other Solar

Market Share (%)

32.88%

67.12%

Consumer Net Price ($/kWh)

$0.11

$0.14

Unit Direct Cost ($/kWh)

$0.06

$0.06

Annual Revenue ($/Year)

$21.53B

$65.48B

Annual Net Income ($/Year)

$4.24B

$20.71B

Process Development…