How to use the Porter’s curve and experience curve to answer Mr. Wilson’s questions
Porter’s curve is essential in understanding the profitability of firms. It is U-shaped and represents the relationship between profitability and market share. In order to apply this curve to answer Mr. Wilson’s questions on whether the company should think of a new method of marketing their products and also on the issue of product divestment, one needs to understand the Porter’s curve in two major dimensions. First, because there are already some special characteristics associated with Alcoa’s products i.e. the fact that it has a new Aluminum smelting process, then this company can enjoy a unique premium on its price based on this approach. In other words, this is what is often referred to by Michael Porter as unique differentiation. Secondly, one ought to understand the fact that it is possible to dwell on a particular aspect of one’s industry in order to be highly profitable. The worst position for this company would be if it was located on the lower end of the porter’s curve where it lacks a cost value as well as no distinction. But currently, Alcoa company is not within this position, therefore choosing to divest would not be appropriate.
The experience curve indicates the relationship between the unit cost of adding value to the business (in the vertical axis) and the cumulative output of the product. In this particular case, if all the firms within Alcoa’s industry were pursuing the same strategy then overcapacity and low prices would prevail because gaining market share would be quite difficult and this would imply a lower return on the organization’s investment. However, since Alcoa is a market leader then they are already receiving a high return on investment and this shows that there is a need to continue with their current market approach.
Analysis to be used in assessing whether Alcoa should divest their consumer product division
In order to understand the issue of divestment, then the Ansoff matrix would be an essential tool in planning for growth. The first aspect is market penetration in which a product is normally repositioned or it is promoted. However, for the case of Alcoa, there is a new product (through a different process), also there are is a need for new customers. The second aspect is market development which largely entails creation of a new audience for the commodity. In this regard, the company may opt to take their products to a different region or country for that matter. Also, the latter scenario does not apply to Alcoa.
The third aspect is product development – here a new product is brought to the current market. Examples of industries where such approaches are common include automakers. Once again, Alcoa’s consumers do not comfortably fit within this stage. Lastly, diversification involves the process of marketing new products to a new audience. A number of analysts have asserted that the ideal time to diversify is when a business is within its growth phase. In other words, it needs to have few competitors and a substantial upside should still be looming. It can therefore be argued that Alcoa’s product division has already passed this phase. The Ansoff analysis shows that this may not necessarily be the prime time to divest the latter division.
Graph depicting different stages in the Ansoff strategic planning process
The curves to be used in Evaluating Alcoa’s profit position
The most appropriate curve would be the Position curve which is a plot of profit against stock price in the vertical and horizontal axes respectively. However, because a business usually does not operate in isolation, then there may be a need to incorporate other parameters into the curve. For example, one can place a theoretical option value denoted as Value or an expected change in option value known as delta in the y axis. In the x-axis, one can also add interest rate, dividends, volatility as well as dividends. All these parameters are plotted against one another and they each give a unique view on the profit position of Alcoa.
One way in which the position curve can be manipulated is through the computer. In other words, there is software for changing such parameters through a series of approaches. For example, one may be in a position where he or she wants to change the value of dividends, here, all one has to do is alter the slider such that it indicates the amount that individual may be interested in. Also, if one needs to understand how volatility would affect the organization’s profitability, then all one has to do is alter a slide bar such that a revised value is indicated in the company’s situation curve. Consequently, new curve on the previous position curve is indicated thus permitting a re-computation through the new sets of data. One usually sees how the profit of the company under consideration has increased by altering a certain parameter and therefore it is possible to settle on the optimum condition for operation within Alcoa. If Alcoa can provide all this information, then it can be plotted and their profit position properly analyzed.