Introduction
The AAA Co. is a young and innovative technology company that operates in the market of mobile phones. It aims to create high-quality products on the basis of a design-driven value focusing on intelligent services and smart devices with optimum functionality and advanced technologies. The company has several key competitors, including FR Tech, LinkTech, iWin+, iOrange, ZĂ©la Tech, and UPro. It pays particular attention to customer satisfaction that should be created by excellent customer service and the quality of products. The company’s strategy implies the manufacturing and selling of smartphones in Europe and Asia for low-end and high-end segments to become one of the leaders in its sphere.
Market Outlook
The market outlook forecasts growth in both Europe and Asia. While demand in the European market is already high, it is nevertheless estimated to grow “by hundreds of percent annually” (“Market outlook: Decisions – Round 1,” n.d.). At the same time, the Asian market with relatively low demand is expected even more substantial growth. Forth both markets, estimated sales are the highest in the segments of high-end households and high-end companies. The period of growth is expected to last for the next two years with positive growth rates during this period. It may be followed by a slowdown and the tendency of low-end segments’ penetration of the market with the domination in sales volumes.
For all new companies who enter the market, it is recommended to thoroughly plan and make decisions related to channel and advertising investments as for them, margins will be slim and cost-inefficient marketing communication may be inexpedient negatively affecting profitability. At the same time, it is unreasonable to neglect channel and advertising investments at all as they contribute to customer awareness and the creation of the company’s image in a long-time perspective. In addition, accurate sales forecasts are immeasurably important as they will determine the success of the business, especially within a framework of a limited budget – in turn, wrong estimations may lead to considerable failures. Forecasts impact production facilities’ volumes as well according to estimated demand, and large adjustments in the case of incorrect predictions will lead to increased unit costs and a decrease in sales.
Decisions
The AAA Co. decided to enter both markets with one phone for each. Thus, for Europe, Steam in the “avant garde design” was introduced. It was equipped with no specific features except improved security, however, it had an excellent performance and battery life (“Products: Decisions – Round 1,” n.d.). Its sales price was €350 with a unit cost of €245.09, warranty cost of €3.45, the production cost of the whole line of €3500 k, and capability usage of 88% (“Products: Decisions – Round 1,” n.d.). The price of this phone was high due to the weaker price sensibility of the European market and targeting high-end households and companies.
For Asia, Elge of “classic design” was introduced. It had a premium camera and display, however, its performance and battery life were extremely weak and poor. Its sales price was €200 with a unit cost of €150.78, warranty cost of €1.9, the production cost of the whole line of €3500 k, and capability usage of 41% (“Products: Decisions – Round 1,” n.d.). At the same time, it was expected to attract predominantly high-end households and companies, selling up to 600 k units for the latter. In general, the company forecasted to sell 690 k units of Steam in Europe and 980 k units of Elge in Asia during the next year. In addition, the AAA Co. chose a six-month period of warranty with total warranty costs of €4353.9 and is expected to sell repairs predominantly in the European market.
In general, the company was planning to receive a total revenue of €438370 k with the product sales and repairs sales of €437500 k and €870 k, respectively. The total variables cost of both smartphones and gross profit were expected to be €317573 and €120797, respectively. In relation to fixed costs, the AAA Co. decided to spend equal amounts in both markets for administration (€4600 k for each), channel investments (€5400 k for each), market research (€600 k for each), and R&D investments of €2000 k in general (“Income statement: Decisions – Round 1,” n.d). At the same time, while channel investments of the company were the largest, it spent insignificant money on advertising – €350 k for Europe and €62 k for Asia. In general, the AAA Co. estimated €85731 k of total operating profit and €61552 k of profit for the first round. All in all, the company forecasted growth in both markets where prices for smartphones were designed according to price sensitivity. The company focused on channels rather than advertising expecting the quality of customer service and communication more important at the initial stage in comparison with promotion.
Thus, in the first round, the AAA Co. was introduced with an intention to operate in the mobile phones market in Europe and Asia. On the basis of market outlook, the company developed a marketing strategy that presupposed the introduction of two smartphone models, one for each market, that would address customer demands in relation to price sensitivity and income. In addition, the company made all necessary estimations related to the volume of sales and profits expecting growth during the first year. In the second round, the outcomes of the AAA Co.’s strategy will be analyzed.
Forecasts
On the basis of the first round’s results, it is possible to conclude that the forecasts of the AAA Co. were incorrect. Its gross profit accounted for 24.1% which may be regarded as the smallest among competitors (“Summary: Results – Round 1,” n.d.). In turn, operating profit and return on sales were -93% and -90.5%, respectively. On the basis of the first round’s results, the company’s sales forecasting error was 8711.7% and it is considerably higher compared with the markets’ leaders that included LinkTech and FR Tech. In addition, the company became highly unattractive for investors with a share price of €3.52 – the lowest one among competitors.
There are significant differences in companies’ products that determined the first round’s outcomes. For instance, LinkTech introduced three smartphone models with AvanGarde X that covered both markets – as a result, LinkTech’s were present in both markets providing choice for consumers. In addition, the quality of other companies’ smartphones was considerably better, and Elge was the worst model considering its characteristics. Although its price was the lowest in the market, it could not target high-end consumers due to its poor characteristics and the availability of other variants. In turn, the quality of competitors’ models was either generally good or it could be regarded as a balance in which characteristics compensated for each other. For example, FR Tech’s SportTech had relatively poor performance but an excellent battery life that allow the model to reach the price of €500 (“Market research report: Results – Round 1,” n.d.). At the same time, the AAA Co.’s Steam had the best performance among all other models in the market that allowed it to be attractive among all segments, however, it did not substantially contribute to the company’s profitability.
In addition, the decisions of other companies and their outcomes allow the AAA Co.to learn for the future. Thus, extremely high prices are not attractive even for high-end segments – otherwise, models should be of excellent quality. Thus, the failure of UPro could be explained by the highest prices for their models and their average quality at the same time. It is possible to conclude that the AAA Co.’s either did not meet the expectation of target segments in relation to the quality or did not contribute to the company’s profit.
The company’s income statement demonstrated one of the highest sales forecasting error due to a huge difference between forecasts and outcomes. Thus, while the company’s expected total sales had been more than €400000 k, real total sales were only €26410 k (“Income statement, total: Results – Round 1,” n.d.). Similar, its gross profit was €6369 k against the expected one of €120797 k. At the same time, from the comparative analysis of fixed costs, it is clear that the AAA Co. undervalued its significance. While other companies pay particular attention to consumer care, promotion, and R&D, it ignored investments in relation to these aspects. For instance, while advertising and R&D investments of some competitors exceeded €10000 k, the AAA Co. spent only €412 k and €2000 k, respectively. As a result, competitors improved their customer awareness – in other words, more people knew about them and their products. In turn, the AAA Co. remained relatively unknown, even if its communication channels were relatively developed. In addition, the company was inferior in innovations and technologies that play a crucial role in the modern market.
In the European Market, the best selling products with volumes of almost 100 k belonged to iOrange. Its single model Orange is the New Green was a quality product that had a reasonable prime making it desirable for high-end segments, especially for high-end companies (“Overview: Europe: Results – Round 1,” n.d.). The AAA Co. received its market shares in the household segment and sold no more than 40 k items – this is considerably lower than expected. In turn, the company got its largest market share in the segment of households in the Asian market (“Overview: Asia: Results – Round 1,” n.d.). The best-selling products in the Asian market belonged to LinkTech as the sales of its AvantGarde X dominated the segments of high-end households and companies in Asia due to competitive prices and good quality. In turn, the analysis demonstrates that the AAA Co. could not target high-end segments with its products – however, products are highly desirable in the household segment of both markets.
In general, a company’s market success is determined by correct targeting of an appropriate population taking into consideration its demands, efficient price policy, and reasonable investments in promotion, communication channels, customer care, and R&D. All these elements should be examined as their combination leads to stable growth and development. Promotion help emphasizes the advantages of a product when it is introduced to raise people’s awareness and trigger purchase behavior (Kokemuller, n.d.). The companies’ investments in R&D may improve the existing products’ quality and their characteristics, create new products, and meet consumers’ needs and demands making products more attractive with time (Maican et al., 2017). For instance, both LinkTech and UPro spent considerable amounts on fixed costs, however, LinkTech has more reasonable price policies in relation to the quality of its products and the market’s price sensitivity that allowed the company to have a greater gross profit. In turn, UPro has too expensive products of average quality – thus, its investments were inexpedient and negatively impacted the company’s profitability.
In order to improve the situation, it is recommended for the AAA Co. to make several decision. First of all, the company may introduce a new product for both European and Asian markets that will have comparatively good quality and different competitive prices considering markets’ price sensitivity. In addition, the AAA Co. may increase the price of Steam to make it competitive and improve the company’s profitability. In the first round, its price is lower than the average one in the European market regardless of the fact that high-end households and companies are less sensitive to prices until the products are luxurious. At the same time, the quality of this smartphone in relation to some characteristics is genuinely good, thus it is recommended to increase its margin to bring more profit to the company. Concerning Elge, it may target households and companies in the Asian market through advertising as the expediency of this strategy is determined by this segment’s interest in this model that has already existed. At the same time, its quality does not meet the expectation of high-end segments.
The AAA Co. should not ignore the significance of promotion and technological development of the company for its stable growth and development. For a new company, it is not necessary to invest large amounts of money in advertising, R&D, and communication channels immediately. On the contrary, it may focus on market outlook and experiment with marketing strategies to define which one will be the most suitable. However, the company should nevertheless invest more in advertising to improve customer awareness and R&D to introduce innovation for consumer satisfaction. In addition, the company may increase the warranty period up to 12 months to improve customer service – with the current warranty period, they may feel that the company proposes low-quality products that will break very fast.
In general, according to the company’s financial statements, all of them finished the round with a negative profit. For some companies, these results are determined by substantial investments in advertising, communication channels, R&D, and consumer care as they will have benefits in a long-term perspective. Thus, for them, if sales increase, these expenditures will be paid back soon. All in all, for the next round, the AAA Co. should consider the increase in warranty period and advertising and R&D investments, targeting the Asian household market with Elhe, the introduction of a new model with appropriate characteristics and at reasonable prices, the adjustment of the price for Steam in the European market. In this case, with increased profits, the company will receive an opportunity to become attractive to investors and increase its share price.
References
Income statement: Decisions – Round 1. (n.d.). Web.
Income statement, total: Results – Round 1. (n.d.). Web.
Kokemuller, N. (n.d.). The importance of promotional & marketing strategies. Azcentral. Web.
Maican, F. G., Orth, M., Roberts, M. J., & Vuong, V. A. (2017). The dynamic impact of R&D investment on productivity and export demand in Swedish manufacturing [PDF document]. Web.
Market outlook: Decisions – Round 1. (n.d.). Web.
Market research report: Results – Round 1. (n.d.). Web.
Overview: Asia: Results – Round 1. (n.d.). Web.
Overview: Europe: Results – Round 1. (n.d.). Web.
Products: Decisions – Round 1. (n.d.). Web.
Summary: Results – Round 1. (n.d.). Web.