The Industry of Applied CAD Knowledge
The industry in which Applied CAD Knowledge was operating can be classified as a perfectly competitive market. One of the worries that this firm had was an increasingly competitive market environment. This means that there were free entry and exit of firms into the industry, one of the most important characteristics of a perfectly competitive market structure (Pride & Ferrell, 2006).
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Changes in the Structure of the Industry during The 1980s
The structure of this industry was changing in the 1980s, and this was demanding a new approach in managing the market. Several changes were taking place that Applied CAD Knowledge had not anticipated before. One such change was that the industry was embracing globalization. Local firms were finding it appropriate to find new markets overseas. This is shown when AT & T approached Jerry King and requested him to head one of the new branches they had opened in Australia. This means that firms were no longer restricted within a regional market. Applied CAD Knowledge had failed to realize this, while other firms had already given it serious consideration. This change was responsible for Jeff Stevens’ problem to a great extent. Being the president of this firm, it was clear to him that the firm did not have the right skilled labor that would help it affect the change as was desirable. The local market was becoming competitive and the sales were dropping (Allison, 2013). This was not something he had encountered before. He was used to a market that was ready to receive their products without much ado because of the monopoly they enjoyed. This was no longer the case. He was worried that if the firm was not able to change following the changes that were being experienced, then it would probably be forced out of the market.
Falling Barriers to Entry during The 1980s
From the case given above, it is clear that barriers to entry into this market were falling during the 1980s. The main problem of Applied CAD Knowledge was that it was getting into a new industry where the competition was the way of survival. This means that new firms were getting into the industry, a sign that barriers to entry were falling (Burrow & Bosiljevac, 2009). The effect of the falling barriers to entry into the market on Applied CAD Knowledge would depend on the approach taken by the top management, especially by the president and the vice president responsible for the marketing of the firm’s product. If the firm adopts the denial approach where they assume the presence of competition wishing that it would go away and things would return to normalcy soon, then the firm would fall. It would be consumed by the stiff competition that is building up in the local and international markets. If the management embraces competition and considers it a healthy way of developing, then it shall grow. The competition will help it determine its areas of weakness, and how they can be addressed to gain a competitive advantage. It will help it appreciate the importance of offering superior value to its customers. This will win its customer loyalty, the main recipe for a firm’s success in the market.
Did Applied CAD Knowledge Achieve Satisfactory Results in 1986 and 1987
In order to determine if Applied CAD Knowledge achieved satisfactory results in 1986 and 1987, it would be important to analyze the sales figure of this firm during this period. In 1986, the company had started realizing that the results posted by this firm were dropping, especially in terms of sales. Efforts were made in order to find a solution to this problem. For instance, the firm registered a sales value of $ 230,000 in 1986. This was considered a drop compared to the annual sales value in the previous years. The firm tried making some structural changes which included hiring a new head of the marketing department in mid-1987. In 1987, the value of annual sales experienced some increase to $ 360,000. This was a 56.5% improvement in sales. This would be considered a satisfactory result in 1987. However, given that the top management considered this unsatisfactory, it would be important to conduct further analysis to determine the reason behind this.
Serious Principal-Agent Problems at Applied CAD Knowledge
From the case given about Applied CAD Knowledge, it is clear that there is a principal-agent problem, though it may not be classified as a serious problem. When Stevens offered Jerry King the post of head of marketing, he was given an attractive package. He would earn $ 40,000 per year as a basic salary, back in 1987, a 3% commission on the company sales, and a car allowance. He was even offered a stock interest at the company. However, the report indicated that Stevenson was keen to reduce these terms to a simple employment contract because the initial agreement was not written officially.
The board of directors was also uncomfortable with the increased cost of marketing and therefore, they wanted an explanation on how this extra cost would be compensated. This means that the board of directors (the principal) and the newly hired marketing director (agent) had a problem (McDonald & Dunbar, 2012). As was noted before, this was a simple problem that did not manifest heavily in the management of this firm. Another factor that points out to the fact that there could be the principal-agent problem is that there is asymmetric information where the agent, who is Jerry King, had more information than the principal. This is demonstrated in the decision of King to work from his home when he realized that there was no private office where he could work. This means that he wanted to keep some information private to himself as a way of gaining an upper hand over the board of directors.
Prices that Applied CAD Knowledge Obtained in 1986 and 1987
As mentioned in question 4, there is a need to have a further analysis to explain why the management considered the sales in 1986 and 1987 unsatisfactory even after a 56.5% increase in the value of sales in 1987. The management considered that it was unsatisfactory to have the sales value that was obtained in 1987. However, the statistics show that this value increased by over 56%. Given that detailed data on this firm is missing in the case study given, the analysis can only be based on the hypothesis of what could have happened that made the management ignore the 56.5% increase in sales value by the end of 1987. Basing the argument on the economic state of this industry in the mid-1980s, the most probable incident must have been a fall in the prices that Applied CAD Knowledge received from its services. This means that although it appears that the value of sales was on the rise, Applied CAD Knowledge did a lot more in order to earn that increase. The price fall must have been substantial that the value of the increase could have canceled by the number of services it rendered in that particular year (Adrianio, 2012). That could be the only valid reason why the management would consider the sales unsatisfactory.
Jerry King’s Presentations to the Firm’s Board of Directors
The presentation given by Jerry King to Applied CAD Knowledge’s board of directors was impressive. It articulated how the firm was planning on how to increase the annual sales value from the current $ 320,000 to $ 1,000,000. It was impressive how he talked about the target markets that this firm would rely on, and how it would manage the increasingly competitive market. The presentation was also convincing when he mentioned how the board should be responsible for financing this firm, and the approach to be taken in production. As a board member, I would ask Jerry the following question.
- What are some of the major weaknesses of Applied CAD Knowledge in the market that you have been able to observe within the short period you have known the company?
- How will these weaknesses be addressed now that you are the head of the marketing department?
- How will your marketing department coordinate closely with other departments to achieve the estimates you have presented?
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Allison, A. (2013). The financial crisis and the free market cure: Why pure capitalism is the world economy’s only hope. New York: McGraw-Hill.
Burrow, J., & Bosiljevac, J. (2009). Marketing. Mason, OH: South-Western Cengage Learning.
McDonald, M., & Dunbar, I. (2012). Market segmentation: How to do it and how to profit from it. Chichester: John Wiley & Sons.
Pride, W. M., & Ferrell, O. C. (2006). Marketing: Concepts and strategies. Boston: Houghton Mifflin.