Running head: MANAGERIAL DECISION MAKING

Managerial Decision Making: Strategy and Value Creation in Traditional Industries Muhammad M. Howard July 17, 2012 AMBA 670

Introduction For organization leaders, being able to formulate and make sound strategic decisions has never been more important than in todays turbulent economic and financial environment, especially when it comes to organization survivability and sustainment in an uncertain business environment. Regardless of an organizations spectrum of operation and the value of its products or services, it is essential to formulate competitive strategies in terms of pricing, and marketing. Such decision making strategies must create, and enable the sustainment of a viable competitive advantage that does not only make a firm competitive in its industry, but also allows it to control the structural variables in a way that minimize impact of competition and maximize its profit. In the strategy simulation presented in this weeks exercise, the different levels of managerial decision making present the challenges that organization leaders encounter in their attempt to maximize profits, and minimizing impact of competitors while operating in various spectrum of market structures. Developing solution for each challenge throughout the exercise demonstrates how decision making varies across different market structures and the importance of understanding how each decision impact the overall organization performance. Quasar Computers, the company of focus in the simulation in 2003 pioneered and launched the first optical notebook, branded Neutron. The product which is faster than other products of its class has energy saving capabilities with rechargeable batteries that last three hours of continuous usage and has a three year patent will be the focus of strategic decision making as it moves through monopoly, oligopoly, monopolistic competition and perfect competition. Monopoly Quasar Computers has a three year patent on optical computers and operates in a monopolistic spectrum, which gives the company a three year barrier against any new entrants; thus protecting it against any competition in the optical computer market. As a result Quasar Computer will be able to appropriate profits that equals to the full amount of the value of the Neutron without market price control (Grant, 2011, p. 68). Maximizing profit in this monopolistic spectrum will require the production of an output level that will allow Quasar Computers marginal cost equal to its marginal revenue; this happens

if the production level is such that the marginal cost is greater or less than its marginal revenue the firm will yield lower profit; therefore its profit will not be maximized. Maximum profit in a monopolistic market spectrum occurs when MR=MC, where MR is the Marginal Revenue which is the change in total revenue in relation to the total quantity and MC is the Marginal Cost, which is the change in total cost in relation to change in quantity. Profit maximization in this market spectrum can be achieved in several ways with the first being equating MR to the MC. For a scenario where MR is greater than MC, profit maximization could be achieved through an increase in production output. For a scenario where MC is greater than MR, profit increases can be achieved through product output decrease. Since Quasar Computer is the first and only company producing the optical computer, at this point the easiest and most efficient way to maximize profit will be the first scenario which is equating MR with MC. To achieve this, the price per unit was set to $2,550.00. At this price the marginal revenue curve shifts and so does the marginal cost curve; thus intersecting and making MR equal to MC. At this intersection quantity unit output is 5.3 million with a total profit of $1.29bn; total revenue is $13.5bn which is greater than the companys total cost of $12.18bn. Increasing or decreasing the price above or below $2,550 will result in a decrease in Quasar Computers profit which will require management to increase or decrease output in order to balance MR with MC. Investment in Brand Building Even though optical computers are still a new concept and the company is still maximizing its profits, brand building will produce positive results by increasing the value of the product perceived by consumers and further drive the growth of the optical computer market and protect the Quasar Computers value. To achieve this objective $600mn was chosen as an appropriate advertising budget. Even though this decision resulted in an increase in total cost of $16.06bn from $12.18bn, it however increased the total revenue to $18.8bn from $13.5bn producing an increase in total profit of $2.74bn up from $1.29bn. Selecting a lower advertising budget of an amount between $100mn and $500mn would have also produced an increase the total profit, but choosing $600mn produced the maximum increase in

total profit allowing the company to sell more computers as Robert suggested. The advertising expenditure shifts the demand line above the original market demand, higher than an investment of $500mn. Any investment less than the retained amount of $400mn will put the demand under the market demand. To maximize profit at an advertising investment of $600mn, the product price was decreased to $2,450 which resulted in the MR being equal to MC; therefore increasing profit to $2.74bn as opposed to a total profit of $2.53bn if the price remains at $2,550 and MC is less than MR. These decisions of appropriate price setting and advertising investments will enable Quasar Company to maximize its profit throughout the three years monopoly phase of Neutron. Oligopoly In 2006 Quasar Computers patent protection finally comes to an end. After which, it began to operate in an oligopolistic market spectrum with Orion Technologies who has just entered into the optical computer market providing fierce competition for Quasar and eroding away considerable amount of its market shares; thus leaving it with 50% of its 100% market shares. According to Porter, a key characteristic of the nature of competition under competitive market spectrums (especially in oligopoly) is that firms are interdependent, meaning the reaction of firms operating within an industry is taken into consideration by its competitors (2004, p. 88). As a result, any decision made by Quasar Computers will have an impact on Orion Technologies and vice-versa. Due to the oligopolistic characteristics present, any price cut by Quasar will be received by counter reaction by Orion Technologies, which will force each firm to operate as a as a monopoly protecting its shares through prices and output strategies. The uncertainties of the demand of an oligopoly market spectrum will require Quasar Computers to assume that the curve will move as Orion Technologies responds to any pricing strategy adopted by the company. Hence, pricing strategies must take into consideration these variables (Porter, 2004, p. 89-90). Consequently, the nature of the competitive force and characteristic nature of the oligopolistic market that Quasar Computers presently finds itself in, forces a pricing decision to set the price at $1950.00. This will allow the firm to maximize its profit bringing revenue to $1,178mn and profit to $325.00 with market shares remaining at 50%. At this market price Quasar Computers will make optimum profits. It is

predicted that Orion Technologies will eventually change it pricing but at present it will hold at $1950.00, because any pricing lower than $1950 will result in a loss for Orion Technologies and higher pricing will result in a loss of market shares. At $1950 Orion Technologies will also have revenue of $1,178mn, but it will only earn a profit of $91mn, and this is due to the early and proactive move that will enable Quasar Computer to outperform Orion Technologies in terms of profit making during this pricing cycle as indicated by the graph in the TATA Interactive Systems (n.d.). Monopolistic Competition Since Quasar Computers optical computer market is still not operating in a perfect competition, this means the monopoly competition production is still not taking place at the lowest possible cost. Therefore the firm still has some level of market power and is still profit maximizing. Two different options have been presented in terms of optimizing Quasar Computers profits by increasing the quantity of notebooks sold. The first approach would be to take a differentiation strategy, and create a variant note book for the publishing industry that offers additional features that could be sold at premium price and call it Ceres. The differentiation strategy will attract a new level of customers and enhance the companys value chain since the ultimate sources of differentiation will be based upon the high technology standard and brand established by the company and its products in the buyers value chain (Porter, 1990, p.34). The second option will be to concentrate on aggressively promoting Neutron through advertising investments. After reviewing both options and the possible outcomes, I believe that adapting a differentiation strategy will serve the company better in terms of cost reduction and profit maximization. Investing $200mn on product differentiation that will result in the creation of Ceres will produce total revenue of $21.6bn. This will bring Neutrons profit to $520mn and Ceress profit to $785, and a combined profit of $1,305mn as opposed to $1,143 if the company had of gone with additional advertising investment for Neutron (TATA Interactive Systems, n.d.). An option of this kind does not only create a competitive advantage for Quasar Computers, but it allows the company to produce the additional premium computers and Neutron at lower manufacturing cost using its unused optimum production capacity of over 12mn. A decrease in the overall production cost and contribution to profit maximization is the gain Quasar will

earn from its astute decision making. The new product will also create an additional market share; thereby increasing the total marketing shares of the company. To create and sustain a differentiation strategy,

the Quasar Computers must truly produce a product that is unique or be perceived as being unique to benefit from its premium profits (Porter, 2004, p. 14).
Perfect Competition In the perfect competition spectrum there are many firms competing on supplying similar products with no restrictions on entry and exit (Grant, 2011, p.68). As 2013 approaches, the market for optical computers will mature and Neutrons market will stabilize; hence, to sustain profitability Quasar Computers must formulate a strategy that will allow it to optimize profit in this spectrum of the market. Since the prices are dictated by the market, in order to optimize profit Quasar Computers will have to adapt cost reduction strategies especially in inventory level reduction; increase the firms production efficiency; increase material usage efficiency, which will reduce the level of rejects and increase the firms profitability. According to the TATA Interactive Systems Semi-annual report, to achieve these objectives the firm will invest a total of $40mn in production. An investment of this magnitude produced a total accrued savings over the period of $108/unit, and a profit of $0.2/unit. The contribution of saving methods used led to the reduction in the inventory level with a saving of $0.10/unit; a reduction in rejected rates resulting in savings of $0.25/unit; an increase in material usage efficiency saving $0.05/unit and reduction in downtime with savings of $0.15/unit (n.d.). In such a perfect competition market spectrum, cost cutting strategies will enable the firm to develop efficient practices and increase its profitability. Throughout the cycle, competitors were able to imitate Quasar Computers cost cutting strategies, decreasing Quasars profits; this is an indication that the company will not be able to sustain the high performance results over a long-term and even though process improvement will contribute to the bottom line it will not make a significant impact on the profit margin. Even though operational effectiveness and strategy are necessary for superior performance, to truly outperform rivals requires the creation of perceive difference and uniqueness that is valued by consumers (Porter, p.2). Quasar must

invest in R&D, innovation and product differentiation and develop a replacement for the optical computer. Conclusion The strategic decision making simulation illustrates the need for different managerial decision making at various market spectrums and how each decision impacts organization profitability. Optimizing profit at various market spectrums requires understanding the elements at play in each market in terms of the competitive forces. For example at the monopolistic level decisions were based upon the ability of the firm to establish its own price and gain the full benefit of its product value. Along with understanding the competitive forces, managers must also factor in their decision making process customer value chain and the impact of buyers, new entrants, possible substitutes, and suppliers on strategic decisions in relation to market entry, price setting, cost cutting strategies and advertising investments. Managers must anticipate changes in market, competitors and customer behaviors and structure their decisions in relation to present and future market trends. They must also establish elements of cost advantages and differentiation advantages such as brand reputation, extensive sales and service network, low cost supplies and labor, operation and manufacturing efficiency etc. as indicated by Porter (Grant, 1991, p.117).

References Grant, R.M. (2010). Contemporary strategy analysis (7th Ed.). Malden, MA: Blackwell. Grant, R.M. (1991). The resource-based theory of competitive advantage: Implications for strategy formation. California management Review. 33(3). Berkeley: Spring Porter, M.E. (2004). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York, NY: Free Press. Porter M.E. (2010). The five competitive forces that shape strategy: In HBRs 10 must reads on strategy Tata Interactive Systems. (n.d.). Economics for managerial decision making. Retrieved from http://info.umuc.edu/mba/public/TIS/economics/market/economics_market_part1.swf