commercial organizations exist for the purpose of making money, and opinions to launch a product have to be made on the possibility of the product being profitable or not. There are many methods of analyzing the problem. The simplest method based on the facts given in the case is to find out the expected gains made on each tire, and then finding out the number of tires that the company must sell to make a profit. Then one will have to view the possibility of the number being sold or not.
Let us first look at the costs. Of them, research and development costs have been given as $10 million. This is a developmental cost and has to be viewed as a sunk cost. This means that the decision to incur research and development is a corporate decision and cannot be linked to any product. Another cost has been incurred on marketing, and that is of $5 million. This has been incurred by the brand. The other cost is of $120 million for production equipment. This is directly linked to the brand. Thus the first objective will be to recover $120 million directly incurred on the brand and the second objective or goal in relation to this will be to recover $35 million which are incurred in total terms with regard to the brand. It would be only after that the profits would tend to arrive. All of this needs to be done within a duration of 4 years which is considered to be the expected life time period of the brand. In order to recover this, one needs to next understand the contribution which is expected from each of the tires.
The tire will be sold in the Original Equipment Manufacturers –OEM market for $36 a tire and the direct cost for production including materials etc. is $18. Thus the overall contribution per tire will be $18. From this a 15.9% discount will have to be given for the company to evaluate new product decisions. There will be an expenditure of $25 million on marketing and general administration. Thus we need to understand that if the product is to sold only in the market of OEM, there needs to be a sale of about 1.65 million tires. This is because each tire contributes about $15.138 for the purpose of marketing and also for the purpose of general administration. In order to cover the other part of $120 million to be spent on the level of production facilities, there need to be a sale of about 7.93 million tires more. Further to cover the capital expenditure of the amount of $15 million, there needs to have sale of about an amount of 0.99 million tires. While taking the entire duration of 4 years or so, there need to have another sale in terms of 15.52 million tires and this is to be during the expected lifespan time period of the product. Any sale which is to be conducted over that figure will add more to the company profits which is at about $15.138 per tire. The prospects have to be assessed and understood then by means of expected sale figures.
Now let us look at the other market of replacement tires. Here the sales price is $59 per tire and the direct costs are still $18 per tire. Thus the total overall contribution is at the rate of about $41 per tire. From this amount an amount of 15.9 per cent discount is being made and after that the contribution in terms of each tire is considered to be as $34.48 per tire. In order to bring about a recover in terms of marketing and expenditure relating to general administration, it would need a sale worth of 0.73 million tires in annual records as this is because each tire is contributing to an amount of $34.48. The next question to be discussed is that of covering an amount of $120 million which is being spent on that of facilities relating to production and this would require a sale worth of about 3.48 million tires. The other item which is left to cover is that of capital expenditure worth $15 million and for this there need to have a sale of about 0.44 million tires. Thus while taking into consideration of the entire full period of four years during which the brand would tend to be active, there needs to be a sale of about 6.84 million tires. This is however against the required sale which is of 15.52 million tires for the other kind of sale to that of the OEM. Both these calculations have ignored the increase in price by 1% a year and the impact of depreciation which is increased by 3.25% a year. Those will only bring about a change in the total amount of figures, but the ratios however will not change too much. The important question which is to be discussed here is to judge the level of possibility in relation to meeting these targets, as Goodweek Tires will be only entering into a loss making proposition otherwise. The general trends with regard to these figures are considered to be accurate as the sale to be held to that of OEM is considered to be in large levels and they have to fix tires in all of the cars that they need to sell. Individuals tend to buy less and are not always in quantities of four or five tires. Since the OEMs tend to buy in huge quantities, they usually tend to negotiate price to the maximum lowest as possible.
Let us look at the shape of the market. The total market in North America for tires is worth $24 billion and this is made up of more than 60 million OEM tires and more than 200 million replacement tires. There are a large number of brands with 28 brands and 700 models for replacement tires and among the manufacturers and brands there are complex partnerships. The top four brands of Michelin/BF Goodrich/Uniroyal, Goodyear/Dunlop, Bridgestone/Firestone and Cooper control more than 60% of the market. The OEM tires have a short lifespan of 2 years or less as the new cars are driven more and the tire warranty comes separately from the cars. (Overview of Ecos Consulting’s Presentation)
Yet, the trend is that 42% of the buyers of the cars will replace the tires with the same brand. For replacement tires, low prices and lasting duration is viewed to be more important than 2 years and again 35% of the buyers replace their tires with the same brand. (Overview of Ecos Consulting’s Presentation) Considering these figures, one can expect that sales of the new brand will be in the same pattern and other marketing facts should have been taken care of. Thus the largest portion of sales is expected to be in the replacement market, and this means that the total sale required over the four-year period should be around 8 or 9 million tires. This is felt to be achievable with the sales building up from the second year onwards.
At the same time, it is important that the new tires are of high quality and this is seen in the case of Prima X tires whose sales have been growing at more than 40% a year when the total sales of tires do not even grow more than 1% a year. (An Introduction to Our Organization) Another important point to note is that independent dealers and distributors account for 72% of all replacement tires that were sold in United State in 1999. (Cooper Tire & Rubber 1999 10-K Report) Since the viability of the new tires depends on the support that it gets from this section, extra care should be taken to satisfy them. Thus it seems that since Goodweek Tires are a well established company, and has suitable avenues for marketing, then it would be possible to make money from this brand, though there would be risks also, and that has been clarified in the discussion. Research has stated clearly that there is a good market for the tire.
To conclude, development of any organization depends on its ability to expand profitably and this seems such an opportunity for Goodweek Tires.
“An Introduction to Our Organization” Retrieved from http://www.primextire.com/about.aspx Accessed 9 October, 2005
‘Cooper Tire & Rubber 1999 10-K Report” Buckmaster Annual Stockholder Reports.
Retrieved from http://buck.com/10k?tenkyear=99& idx=C& co=CTB& nam=DEMO2& pw=DEMO2
Accessed 9 October, 2005
‘Overview of Ecos Consulting’s Presentation” Retrieved from http://www.energy.ca.gov/transportation/tire_efficiency/documents/2002-09-19_workshop/ECOS_CONSULTING.PPT Accessed 9 October, 2005
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