Chapter 5 Strategic Planning Regarding Operating Processes

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-2 What are the Primary Influences on Selling Price?  Customers –Customer perspective of balanced scorecard  Competitors –Learning and growth perspective  Legal and social forces –Learning and growth perspective  Cost –Internal perspective of balanced scorecard

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-3 How does the External Market Influence Selling Prices?  Pure competition –Market determines selling price –Individual company is price taker  Monopolistic competition –Market influences selling price –Individual companies influence selling price through advertising

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-4 External Market Continued  Oligopoly –Very few companies control selling price –Government monitors selling prices  Monopoly –One company controls market and selling price –Government approves price changes

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-5 What is the Difference between Penetration Pricing and Predatory Pricing?  Penetration pricing –Setting a lower initial selling price to entice customers to try the product/service –Legal  Predatory pricing –Setting a low initial selling price to drive out the competition –Illegal

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-6 What is the Difference between Skimming Pricing and Price Gouging?  Skimming pricing –Setting higher initial selling prices due to uniqueness of product –Legal  Gouging –Setting high price due to unusual demand –Illegal

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-7 What is the Difference between Life-cycle and Target Pricing?  Life-cycle pricing –Setting a selling price for the life of the product/service based on cost –Determine cost, determine required markup, set selling price  Target pricing –Setting a selling price for the life of the product/service based on the market –Determine selling price, determine required return, set target cost

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-8 What are the Common Reasons for Holding Inventory?  Meet customer demand  Smooth production scheduling  Take advantage of quantity discounts  Hedge against anticipated cost increases

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-9 What are the Common Reasons for Not Holding Inventory?  Significant costs are incurred  Holding inventory allows the company the “hide” its internal process problems because demand can be met from inventory

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved What is the Difference between EOQ and JIT?  EOQ –Short-term model –Minimizes incremental ordering and holding costs  JIT –Long-term philosophy –Assumes product-sustaining and facility- sustaining costs are relevant

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved What is the EOQ Model? Q = 2DO C Where, D = annual demand O = incremental ordering cost (batch-related) C = incremental carrying cost (unit-related)

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved How is the JIT Model Different?  Demand-pull system  Kanban (visual) system  Goals –Eliminate disruptions in production –Reduce or eliminate nonvalue-added activities –Minimize inventory levels  Risk: stockouts and resulting customer ill will

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved What are the Common Compensation Plans?  Piece rate –Pay based on units completed  Commission –Pay based on sales  Hourly –Pay based on hours worked  Salary –Pay based on period of time

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved What are Other Compensation Issues?  Bonuses –Additional pay based on some future event  Insurance –Protection for employees  Paid leave –Protection for the company  Gross pay versus net pay –Gross = amount earned –Net = amount received

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved How are Bonuses Calculated?  Bonus amount –Net income before bonus (and taxes) –Net income after bonus (before taxes) –Net income (after bonus and taxes)  Bonus rate –Percentage of bonus amount