Share
Explore BrainMass

Cost Effectiveness of Market Product

1. This is based on another real situation. A company was looking at developing a high throughput urinalysis device for central laboratory hospital settings. The company had only a minor presence in such markets so this was a major strategic initiative. The system would consist of a large analyzer with reagents. Marketing initially hoped that they could sell 5000 units. Engineering then developed a preliminary cost estimate of $50K for the machine. Marketing argued that with the standard gross margin requirements, the cost to the end user would be so high that they could sell only 2500 units. The engineers replied that at that volume some of the automated steps and specialized molds and jigs used to assemble this machine would not be cost effective. Without them, the cost for this lower volume would rise to $62K. Marketing's response was that at that volume, they could only sell 1200. This death spiral continued until the proposed project was abandoned.

With this project abandoned the company was left without any access to the strategically important area it was trying to enter. With the abandonment of the project, the strategy was in fact also abandoned.
(a) How could management intervene in this situation to make tradeoffs that would enable them to fulfill the strategic aim?
(b) What assumptions are being made?
(c) Can the validity of these assumptions be tested early in the project?

2. When evaluating the strengths and weaknesses of a company the two most critical elements are availability of funding and the available human resources. All too often when people look at human resources in a company they focus on the top management. The skills and experiences of top management are critical. However I believe that the real strength or weakness of a company lies lower in the organization. In a military analogy, not only do the generals of an army have to know what they are doing, the sergeants have to know too and without the later the former will fail. Why? Because the sergeants get things done and solve problems that constantly arise. In a company these people have varied titles such as manager, director, senior scientist, specialist, etc. Not everyone with these titles is strength to the company. The thing that characterizes them is usually experience (not education necessarily) and sound judgment about their work responsibilities. A personal example: a company I worked for was developing a new glucose test strip. This was a critical strategic project for the company and was being pushed hard by management. The project was not considered to be too challenging technically since somewhat similar products had been developed and sold by the company for years. After initial rapid success the project hit a major snag. The lot to lot variability was terrible. The manager of the group (the only PhD scientist on the project) asked for more resources. He wanted more technicians since his approach to the problem was to vary the amounts of different components in the formulation until he found the one that gave the best reproducibility. So they made a very large number of experimental manufacturing runs at great cost in money and manufacturing capacity and the lab techs did the testing on them. Enormous amounts of time and money was spent with this approach with no success. Finally the lab director overseeing this and other projects, took several scientists off whatever they were working on. They had not been previously involved with the glucose project at all. He assigned us to review this glucose project and see if we could see something that was being done incorrectly or to find alternate approaches to the problem. After an all day meeting, this group focused on one major issue. The chemistry of the test was a series of coupled enzymatic reaction. Blood plasma was the test medium. It seemed to the scientists that there was inadequate buffer in the test to have the reactions run at optimum pH for the enzymes. Direct measurements proved that the pH of the many different lots that had been made ran at significantly different pH values when different plasma sample were applied. Greatly increasing the concentration of buffer in the formulation solved the problem within two weeks.

If someone had assessed this company in a SWOT analysis everything would look good. The company did have the resources needed to complete this vital project promptly. In assessing the project itself, it would have a giant NPV, and the commercial and technical risks would have been assessed as very low. Initially the development costs needed to complete the project would have been considered modest with respect to the NPV; before the difficulties surfaced of course. All of the financial tools we used for measuring projects would have indicated it was a winner. Yet it suffered very long delays and huge unanticipated costs and would have been discontinued if it wasn't so important strategically.What are the lessons here? The wrong person was running a critical project with the wrong resources. Solving this variability problem was not a task that can be accomplished by throwing random resources at the problem. You had to solve a problem you didn't know how to solve at the time.

(1). While fault can be found with many people in this scenario, where were the major weaknesses in the business that led to this situation?
(2). How easy do you think it could be to identify these weaknesses in an analysis of the strengths and weakness of the company? Why?
(3). Can you suggest ways that a company could structure itself so that previously undetected weaknesses can be corrected as quickly as possible?

Solution Preview

I am happy to provide you with some ideas on each part of these two questions and I hope these ideas will help you formulate your own responses.

Question #1

(a) How could management intervene in this situation to make trade offs that would enable them to fulfill the strategic aim?

One problem seems to be the gross margin rate. If the strategic aim is to enter the business, perhaps management should be willing to accept a lower gross margin rate than would normally be expected.

(b) What assumptions are being made?

One assumption is that the new machine and business would be unprofitable without using the current gross margin rate. Another assumption is that consumers are price sensitive about the cost of the machine and demand would fall by 50% if the machine cost increased. However, that assumes the company passes on those ...

Solution Summary

The cost effectiveness of market products are given.

$2.19