Transformation concepts and applications

PDA SIM Final

For the final run of the simulation, the proposed strategy was a slight variation on the previous strategy. The prior strategy worked well, but there was an error in the analysis of the X6 that lead to the assumption the price elasticity of demand could was sufficient low to cross the $450 threshold. This proved false, in particular in light of the fact that R&D money had been funneled strong to the X7 product. The strategy for the final round therefore is as follows:

Year by Year Decisions: Pricing & R&D Allocations

Price $250

Price $250

Price $250

Price n/a

R&D %

R&D %

R&D %

R&D %

Discontinue-N

Discontinue? N

Discontinue? N

Discontinue? Y

X6

Price $450

Price $450

Price $440

Price $430

R&D %

R&D %

R&D %

R&D %

Discontinue? N

Discontinue? N

Discontinue? N

Discontinue? N

X7

Price $137

Price $137

Price $137

Price $137

R&D %

R&D % 67

R&D % 98

R&D % 99

Discontinue? N

Discontinue? N

Discontinue? N

Discontinue? N

The price is lowered on the X6 instead of raised in the final two years. . This better reflects the product's value proposition. There is risk that the lower degree of R&D investment will still hamper sales in the final year, but this is offset by the drop in price. The strategies for the X5 and X7 are believed to be fairly close to optimized, so those strategies will remain the same.

The result from this round was a total profit of $1,932,793,281. This represents an increase of 1.3% over the previous simulation. This figure was the highest among the simulations, but was a little bit disappointing. The strategy undertaken was to improve X6 performance, which faltered under the last scenario. While the interpretation of the price elasticity of demand this time was correct and resulted in a slight improvement in the overall performance of the X6 (4.74%), that product only reached 80% saturation, fall short of the expectation. This indicates that quality (R&D) may have been a more significant variable. The issue of R&D is tricky, however, because unlike price it involves a choice between mutually exclusive options. In this case, the decision to funnel R&D funding into the X7 was based on the view that the X7 product has the strongest upside by far of the three products. Therefore, R&D money spent on the X7 would be of better value than R&D spending on the X6.

Year over year, the net profit was as follows:

Total

Year

2006

498911095

498911095

495634116

2007

347730553

347730553

321768363

2008

498343976

482354679

384767715

2009

587807657

574749386

608367025

1932793281

1903745713

1810537219

What this shows is that the performance in 2009 was best in the second simulation. Under this scenario, the price of the X6 was held at $450 and it was given three years of R&D. The lower price during Sim IV did not make up for the loss of that third year of R&D. It is also worth noting that the price of the X7 during that year was $150, whereas in the other two simulations it had been dropped to $137. Around $21 million of potential profit was lost in the pricing decisions made between Sim II and Sim IV, and that came from the X6 product. That product was closer to being optimized early -- the higher price point in the final year of Sim II on the X6 delivered more profits than in Sim IV when the price point was lower. Consumers did not respond to the lower price point. Their response, therefore, during Sim III that lead to sharp profit declines was likely more related to the cutting of the R&D budget than the increasing of the price.

To run this simulation again, it is clear that the R&D for the X6 must be maintained. In terms of fundamental business theory, this makes sense. The X6 is a premium product, and the demand for this product is more likely to be derived from features than from price. This was learned early when it was determined that price elasticity of demand was low. Elasticity of demand from features was high. While taking R&D funding away from this product to plugging it into the X7 resulted in an increase in X7 sales, that increase was not sufficient to negate the decline in sales of the X6. The result was a decline in total profit in 2009 in Sim III and Sim IV.

While the final run of the simulation was the strongest of the group, it could have been made stronger by blending some of the strategies from Sim II and Sim III. This would have allowed for a stronger 2009-year, which would have increased the total results. The strategy for the X7 was fairly strong, and the product was a major contributor to profit in all three simulation runs. The optimal price point was easier to understand for this product because it is less dependent on R&D investment. Thus, the adjustments to price on the X7 translate more directly to profit than price adjustments on the X6. R&D adjustments on the X7 are more difficult to determine, and early R&D strategy may have been a weak point in the running of these different simulations. However, the understanding that the X7 had margins that were too high initially was probably the biggest success in the entire simulation, as that added hundreds of millions to the bottom line immediately. Everything after that was tinkering.

Each round of adjustments increased the profit, something that can also be viewed as a success. It is believed that further rounds would continue to increase profit, especially as our understanding of the relationship between R&D investment and demand is understood with the X6 and the X7. It is hypothesized based on the first three runnings of the simulation that more R&D investment in the X6 may allow that product to near saturation, which would be the ideal scenario. It is entirely possible that this may not come at the expense of profit on the X7, as long as the price of that product is kept low.