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Ford Bets Big on Small Cars in Asia

June 26th, 2011 Comments off

Hidden in this article from The Wall Street Journal is that Ford is taking a target costing approach to sell more cars in Asia.

Last year, Ford began building the $7,600 Figo at a plant in Chennai, India. It developed the car by starting with an older version of the Fiesta originally designed for the European market. Ford modified the vehicle and stripped out about $1,000 in cost to sell it at a much lower price in India, Mr. Hinrichs said.

Rather than trying to sell the same model everywhere, Ford is looking at what local markets will bear and what consumers value and finding ways to modify its existing models to fit.

Corporate News: Ford Ramps Asian Car Plans — U.S. Auto Maker Bets Small, Inexpensive Cars Will Fuel Projected 50% Gain in Global Sales by 2020. Jeff Bennett. Wall Street Journal. (Eastern edition). New York, N.Y.: Jun 17, 2011. pg. B.7

Categories: Blocher Ch 13, Wall Street Journal Tags:

A Sweet Victory – How Krackel took it to Nestle and won

June 23rd, 2011 Comments off

Candy MacroFrom the book, Killing Giants, here is an excerpt of how a small player, Krackel, took on the mighty Nestle Crunch bar and scored a significant blow by being strategic with pricing.  Krackel (owned by Hershey) utilized the vending machine retail channel as a battlefront to take on Crunch since most vending machine operators would only stock one of the two similar candy bars.

Mullen’s proposal to management was to give the vending distributors a 30 percent trade discount on Krackel where other brands hovered in the 5 to 10 percent range. This was understandably a bold move. “I originally took it to my boss and he choked on it. He said we couldn’t afford it. Giving away thirty points was a big deal. I said, ‘Think of the options. If Nestlé tries to match us, the dollar cost to them is huge. That, or we blow Krackel out in every vending machine in the country.’” With nothing to lose — and aiming at the brand that paid for so many of its chief competitor’s other brands — Krackel could play the role of spoiler. “My boss balked at it at first, but the more he looked at it, the more he got this smile on his face. He said this is a pretty evil plot. The big guy can’t win on this and we can’t lose.”

Read more at: A Sweet Victory

Subscription Charging Plans for Electric Cars?

May 27th, 2011 Comments off

Th!nk City electric cars at a test drive event, Washington DCOn Monday, The Wall Street Journal ran a special section about transportation in the future.  The thing that caught my eye, though, wasn’t the predictions about futuristic high-speed rail networks or the fact that new fuels would replace oil-based products.  What I found interesting was that as charging networks are built-out across the country for electric cars there is a high-likelihood that a subscription-based model will take hold.  Similar to mobile phones or health-clubs, the price someone pays will be the same each month regardless of how much they use the service. In the context of what we’ve been talking about with regard to variable and fixed costs this is an important idea.  To be sure, it is a huge investment to install the equipment at very high fixed cost before many people need the equipment, but companies that do so are hoping for a payoff in the future.  Signing up customers at fixed prices (via a subscription model) will allow them to lock-in revenues rather than be subject to changing volumes over time.  I guess we’ll have to wait and see if the subscription model is really the one that comes to be, but it is interesting that it is the leading candidate right now.

Tomorrow’s Transport (A Special Report) — Charge It!: If electric cars take off,they will need a network of charging stations; but how will people pay? Mike Ramsey. Wall Street Journal. (Eastern edition). New York, N.Y.: May 23, 2011. pg. R.7

Target Costing

April 6th, 2011 Comments off

Ron Baker at VeraSage has a great book review of a Target Costing text.  Despite our minor coverage in class of target costing, it is not a widely used concept in the United States, but we should be prepared for that to change.  As I’ve said before, I think that students in the future will take a separate course that focuses on pricing and includes more in-depth target costing coverage than we see today.

Read more at: Book Review: Target Cost Management at Verasage Institute.

Categories: Blocher Ch 13, Blogs Tags:

My Review of Pricing Books

December 22nd, 2010 Comments off

The concept of pricing and using it strategically has caught my fancy of late.  Enough that I read four books on the subject while on vacation in August and wrote up my analysis for the current issue of the MNCPA Footnote.  See my thoughts online at this link: A CPAs review of pricing books.

Categories: Blocher Ch 13, MNCPA Tags: ,

Lessons Learned in Manufacturing Applied to Healthcare

November 10th, 2010 Comments off

We spend time in class discussing lots of things in the setting of a manufacturing plant or business.  There is always an asterisk that the same principles can be applied elsewhere such as in service industries or not-for-profit entities.  Today I ran across a great piece that looks at how manufacturing knowledge has been applied to healthcare in Canada to cut down on wait times and to reduce costs. 

A key inspiration came from an unexpected place: the shop floor. Health-care practitioners are borrowing techniques from manufacturers by streamlining operations and spinning off bits of their businesses as separate, specialized units. Clinics dedicated to one medical procedure are slowly but steadily emerging in Canada with a “focused factory” approach that produces better care for less money.

Inherent in the philosophy being promoted is a sense that incentives drive performance, which is something else we will look at in a couple weeks.

Health-care experts say the waiting-time strategy would never have succeeded without incentives for doctors to perform more surgeries. But the fee structure has not kept pace with technological advances that have dramatically reduced cataract surgery time. At Kensington, it takes 20 minutes on average to do a cataract surgery; the same procedure took an hour in the 1980s.

Read more here: http://www.theglobeandmail.com/news/national/time-to-lead/healthcare/how-the-factory-floor-inspired-a-new-model-for-health-care/article1792676/singlepage/#articlecontent

Supervalu in Pricing Vise

October 20th, 2010 Comments off

Today’s Wall Street Journal had a piece on a local giant, Supervalu, and the tricky balancing act they need to pull off to successfully set prices amid cost increases, strong price competetion, and a stagnant economy.  Given that we are talking about pricing in class right now this is especially timely and grocers are among the most price competitive businesses operating on razor-thin margins with many cost leaders vying for business.  In a way, food has become a commodity and people are looking for the lowest price in many (most?) cases.  We can argue whether or not food being commoditzed is in the best interest of our population and country, but it is the reality that Supervalu (amongst others inclusing Walmart) find themselves operating.  The pressure is intense to remain profitable while juggling the costs and prices…

Earnings: Supervalu in Pricing Vise. Timothy W. Martin, Paul Ziobro. Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 20, 2010. pg. B.4

Volkswagen to make U.S. push

October 5th, 2010 Comments off

The Wall Street Journal today has an excellent front-page article documenting some missteps made by Volkswagen in the United States market that has resulted in VW claiming a paltry 2.2% market share along with plans to turn that around in an effort to become the world’s largest automaker by the end of the decade. One of the ideas being implemented is designing, for the first time, a car to specifically meet American tastes rather than selling what works in Europe in North America in nearly identical form.  This is interesting to me because I’ve read elsewhere that Ford is taking the opposite approach trying to produce car models that are virtually identical no matter where in the world they are sold.  VW also risks, in the process, alienating the small but devoted following that it currently has.

“A lot of people worry that we are going to start making VWs for the masses,” says Mark Barnes, VW’s U.S. chief operating officer. “I like to say we’re going to bring the masses to VW.”

The retooled compact sedan marks the first time VW engineers have designed a model specifically for the U.S.

Next year, a new family-size sedan is scheduled to roll off the assembly lines at a newly built $1 billion plant in Chattanooga, Tenn. It is VW’s first U.S.-made car since the 1980s. On its heels comes a revamped New Beetle.

“I am fully aware that Volkswagen was too cautious for too long in North America,” Volkswagen Chief Executive Martin Winterkorn said at a test-driving event for the new Jetta in San Francisco this summer. His remark was a nod to the car maker’s decades-long penchant for deploying cars designed for European tastes across the Atlantic. That left its U.S. operations with models too small and expensive to go head-to-head with Asian and American rivals. Now, he vowed, “we have turned that upside down.”

Adding to the challenge is the constant change at the top in VW’s American operations:

Adding to the challenge is an unanticipated switch at the helm of VW’s U.S. operations.

In June, Stefan Jacoby, a blunt-spoken German who took to wearing cowboy boots to dealer meetings and car shows, left his post as U.S. chief to become Volvo Cars’ new chief executive. His departure came just a week after he presented the new Jetta at a splashy launch party in Manhattan’s Times Square featuring pop singer Katy Perry. VW bosses scrambled much of the summer to fill the void left by a key architect of its American comeback strategy.

Mr. Jacoby’s replacement, former General Motors executive Jonathan Browning, is new to the U.S. market, having spent most of his career at GM’s European operations and managing Jaguar under Ford Motor Co.

Some U.S. dealers complain that the revolving door of U.S. chiefs—Mr. Jacoby was the third to go in five years—reflects a culture at VW’s headquarters in Wolfsburg, Germany, that views the U.S. as a career way station, or worse, graveyard.

Assuming that the leadership and design challenges can be met, there is still the issue of getting Americans to notice.  Marketing has been ramped up to target certain demographics such as Hispanics and families, but the results thus far appear to be mixed.  Before reading this article, I didn’t even know that Volkswagen offered a minivan even though my family purchased a Toyota Sienna less than a year ago. In an interesting partnership with Chrysler, VW rabadges the American van as it’s own with some minor tweaks but production had to be halted due to low sales.

After dropping plans for a modern version of its Microbus for fear it would be too niche and costly, it signed a deal with Chrysler to modify and rebrand the U.S. car maker’s Town & Country minivan under the VW Routan name. VW tightened the minivan’s suspension, gave it a sleeker front end and kept it in the same price range as the Chrysler. With an ad blitz featuring Brooke Shields, it aimed to capture 5%, or 45,000, of the 700,000 annual minivan market.

But the Routan’s launch coincided with the auto industry’s nose dive in late 2008. So many of them sat unsold on VW dealer lots last year that the auto maker asked Chrysler, which builds them at its Windsor, Ontario, plant, to temporarily halt production. While much of the rest of the minivan market has rebounded, Routan sales have slipped 0.8% to 12,539 vans so far this year, one-seventh of the number of Town & Country sales in the same period.

VW officials argue that the Routan has enabled them to sell to a key new customer segment. The company still expects the Routan’s market share to grow as more consumers become aware of it as a minivan option.

But Casey Gunther, VW’s top-selling U.S. dealer, says the Routan isn’t what people expect from VW.

“It’s like someone trying to sell you a piece of chicken and claiming it was a steak,” Mr. Gunther says.

VW, he argues, could achieve its 800,000 sales target, “but we need to elevate the brand with products that play up our heritage,” such as the Microbus concept or VW’s sporty Scirocco, which it sells only in Europe. “There are so many people out there who love the lifestyle VW represents,” Mr. Gunther says. “I’m worried we’ve turned into a follower and not the leader.”

There are countless other great examples in this article that address things we discuss in class like strategy, international competition, product design, and more.  It is not a short piece, but is well worth the read when you have 10-15 minutes.  Seeing where things are at in 2, 5, or 10 years will be even more interesting.

Volkswagen Aims At Fast Lane in U.S.. Vanessa Fuhrmans. Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 5, 2010. pg. A.1

Nobody Prices Better Than Airlines

August 27th, 2010 Comments off

One of the first things frequent fliers learn is that the number of fares paid by each person a plane is nearly equal to the number of passengers.  Airlines aggressively price routes to try to maximize usage of capacity while also maximizing profits.  The end result is that airlines can and do change prices multiple times a day as they jockey themselves amid a sea of competitors to sell what has largely become a commodity, at least in the eyes of leisure travelers.  Simply put, too many people have grown accustomed to searching for flights based on price (because nearly every online search defaults to sorting with the lowest priced flights first) that airlines were unable to differentiate themselves effectively from competitors because when their fares were on screen 2 or 3 of the search they never got booked.

Realizing this (and realizing that not every company can compete solely on cost/price) we’ve seen the “unbundling” of items that used to be included in airfares.  Everything from checked-baggage fees to higher penalties for changing flights (and even carry-on baggage fees at Spirit Airlines) is now seen as a way to charge customers which, in turn, makes it hard for airline passengers to compare two prices because one needs to know all the fees that each airline can assess to make a valid comparison.

The Wall Street Journal today took a look at airline pricing (more from a consumer’s point-of-view than a scientific one as this appeared in the Personal Journal section) and asked some questions about why it is sometimes cheaper to fly overseas than to fly a few hundred miles.  The short answer? Because people are willing to pay more to fly to certain places and/or the competition is not as rigorous on certain (especially international) routes.

The price you pay for a ticket is driven by a number of variables: competition, types of passengers, the route and operating costs. But the biggest factor, by far, is whether discount airlines fly in a market. Low-cost carriers often set the price in markets because competitors feel compelled to match that price or risk losing customers and flying empty seats. And when they aren’t there, big airlines behave radically differently when setting prices.

Over a year ago when Southwest began serving MSP, I offered my own examples coupled with a Marketwatch article of the wide disparity in fares on routes where discount carriers are strong vs. those where they are absent.  The Wall Street Journal piece largely comes to the same conclusion.

And when there’s not low-fare competition, prices soar. The most-expensive average domestic ticket in the first quarter was $786 for round-trip flights between San Francisco and Philadelphia, according to the DOT. That 2,521-mile route is dominated by United and US Airways, who are competitors but also partners in the Star Alliance. Fly to Boston from San Francisco—183 miles farther by air than Philadelphia—and you paid an average $296 less round-trip in the first quarter, according to DOT. The difference: JetBlue Airways has 17% of the San Francisco-Boston market, but none of the San Francisco-Philadelphia market.

As you will discover in this course (and in life) the cost of something often has little to do with the price that is charged.  Does it really cost 100 times more to make a Coach bag that sells for $4,000 as it does to make the one at Target that goes for $40?  Of course not…yet many still fall into this trap with regard to their expectations about prices.

The Middle Seat: You Paid What for That Flight? — It Can Cost More to Fly to Hartford Than Barcelona; How Airlines Determine Ticket Prices. Scott McCartney. Wall Street Journal. (Eastern edition). New York, N.Y.: Aug 26, 2010. pg. D.1

E-Readers Go Mainstream As Pricing Model Changes

July 30th, 2010 Comments off

One of the most interesting pricing events we have playing out before our eyes right now is in the market of e-readers.  Several weeks ago, Barnes and Noble kicked of a mini-price war by dropping the price of their 3G Nook from $259 to $199 while pricing their wifi-only version at $149.  Within hours, Amazon had responded by undercutting the 3G Nook by selling their 3G Kindle for $189:

Barnes & Noble, the national bookseller, announced Monday that it was dropping the price of its six-month-old Nook e-reader to $199 from $259 and introducing a new version of the device, which connects to the Internet only over Wi-Fi networks, for $149.

Responding rapidly, Amazon.com then cut the price of its popular Kindle e-reader below the Nook, to $189 from $259.

In Price War, E-Readers Go Below $200. By Brad Stone. New York Times. June 21, 2010

As mentioned in the article above, some analysts chalked the price cuts up to the increased threat of the Apple iPad gaining a foothold as an e-book reader while Amazon, in particular, has downplayed that idea.

This week, though, things escalated a bit more.  Amazon announced the next generation of their hardware to be released August 27th.  They are keeping the 3G model at $189 but announced a new wifi-only model for $139; $10 less than the comparable Nook.

Amazon offers $139 wireless Kindle for mass appeal. By Alexandria Sage. Reuters.com. July 29, 2010 7:07pm EDT

Kindle to Go ‘Mass Market’ — Amazon Digs in Heels by Introducing New, Cheaper Version of E-Book Reader. Geoffrey A. Fowler. Wall Street Journal. (Eastern edition). New York, N.Y.: Jul 29, 2010. pg. B.6

While all of this has played out, an important shift has happened.  According to the NY Times article linked above, until recently Amazon and Barnes and Noble have sold e-books at a loss while making minimal profits on the hardware.  That has changed now, to where a WSJ piece speculates that the hardware is now selling at a loss with the idea being to make up the shortfall in volume by selling the e-books.  This is more like how printer and cellphones are sold with the “consumables” (ink or minutes, as the case may be) being the profitable item.

Amazon’s price-cutting won’t be cheap. The company said last year that its Kindle manufacturing costs were “significantly higher” than an estimate from iSuppli of $185.49. Costs likely have come down since then, and not offering cell-network access reduces costs as well. Still, it is a good bet the company is losing money at $139 a unit.

The High Cost of a Cheap Kindle. Martin Peers. Wall Street Journal. (Eastern edition). New York, N.Y.: Jul 30, 2010. pg. C.12

I’m guessing things will continue to evolve as we head to into the holiday season and some articles I’ve read predict a sub $100 e-reader by then.

I’ve finally made the plunge myself and opted for the $189 Kindle coming out on August 27th but I’m hopeful that even while I have it preordered the price may drop.  Looking at what has happened in the past 5 weeks makes it seem reasonable to expect some price cuts in the next 4, doesn’t it?  Stay tuned…