Strategies for Growth in Revenues and Profits
The following assignment contains one case study, please answer all to obtain the appropriate marks.
General Productions (GP) is a electronics manufacturing specialist. It customises electronic components for sale to various customers, including SMEs (Small Medium Enterprises) to MNCs (Multi-National Companies). As part of its strategy, it has made plans to create its own line of mobile phones. However, being a traditional outsource manufacturing business, it does not have much experience in the mobile phone manufacturing.
In the aspect of sales and marketing, the company had depended heavily on sales managers to execute whatever strategies they deem necessary. As a result, it was not uncommon for sales managers to under quote, in order to generate revenue, This practice was even more widespread due to the commissions being pegged against revenue.
During the last quarterly management meeting, the chairman had a meeting to hear out the different views of various senior management staff. Within the same dialogue, there were various contrasting views.
The chief marketing officer proposed the use of social media to market the company’s new mobile phones. He also described the prospect of tying up with the various local celebrities, as well as celebrity bloggers.
The head of research and development proposed placing more attention on developing attractive features on the new line of mobile phones. He believed that good designs will be critical in ensuring the success of these new mobile phones. These will also enable the company to price the new phones at higher premiums.
The vice president for finance disagreed about the need to invest aggressively on design and features of mobile phones. He highlighted the unnecessary risks in investing in technologies which are easily displaced by newer ones. These investments are likely to cause potential strains on cashflows, which he believed was not prudent.
Finally, the production director has disagreed on having too many product lines and shortening the product life cycle. He highlighted that the addition and removal of product lines should be carefully considered, since these will inevitably drive up the research costs. Another issue that occurred was the lack of experienced staff to help to maintain quality production output. The replacement of such staff has proven to be difficult, since the required skill sets are extremely niche.
(a) Discuss the views proposed by each member of senior management and propose how the company can best achieve growth in revenues and profits. Maximum 800 words.
(b) Discuss the common issues in the process of establishing budget systems and suggest how the use of budgets can be helpful in cost management for the company. You should relate your answer to the given case study. Credit will be given for relating the answer to the context. Maximum 600 words.
(c) The company frequently had difficulties in ensuring appropriate pricing and this problem was further exacerbated by sales managers who aggressively quote clients. It was not uncommon for sales managers to under quote to win deals from clients. Discuss how the ABC costing methodology can help contribute to more appropriate pricing.
(d) The vice president for finance was surprised that the gross profit had an adverse variance from budget figures. He was puzzled over whether this was the result of a change in inventory accounting method from the first-in-first-out (FIFO) basis to the weighted average basis. Discuss whether such an adverse variance will only arise from change in inventory accounting method.
In order for any company or corporation to generate sales from a specified product, potential customers need to know about the existence of such a product and why it is more preferable that similar commodities in the market. The responsibility to spread out this information rests on marketing and sales teams’ shoulders. The marketing team plays an important role at the commencement of a potential sale while the sales group follows suit in finalizing a deal and addressing consumers’ concerns. The two teams thus need to work together to create a seamless experience for potential buyers (Rehme & Rennhak, 2011). Marketing responsibilities in an organization include raising awareness about the product, engaging in an effort to build on an initial awareness campaign and conversion of potential customers into loyal consumers of the company’s product (creating a known lead) (Wilson & Gilligan, 2012). Sales responsibilities, on the other hand, include following up on the leads created by the marketing sector, relationship building which helps develop trust between the corporation and the consumers of its product and ability to close the deals, that is, turn them into customers. Retention of customers is a shared responsibility as both teams need to build a long term relationship by regularly checking in with existing clients (Götz, Hoelter & Krafft, 2013).
In the contemporary world almost everyone is engaged in the use of social media in one way or the other. Many businesses have also turned to social media with an aim of increasing their sales as well as the customer base. Social media is one of the most effective ways of creating awareness about a company’s products. It is no surprise therefore, that the chief marketing officer of General Productions (GP) suggests incorporation of social media in marketing of the mobile phones. Social media usage in marketing has the following benefits:
Potential Customers: There is a sea of interchanges taking place online about every feature of our present lives. Social media usage is therefore very effectual in finding out people from different regions and cultures who would be interested in a company’s products.
Understanding the Market: Most people who are communicating online are not fearful of opening up about their true opinions or feelings as they feel safe due to lack of physical contact. This is thus the best way to fully comprehend what the consumers of the products truly want. It helps companies keep track of the constantly changing tastes and preferences of their products’ buyers (Patino, Pitta & Quinones, 2012). The corporation is also able to find out what people think of their products which is crucial in making informed decisions about them (Caemmerer & Wilson, 2010).
Issues in Budget Systems and the Use of Budgets for Cost Management
Analyzing Competition: It is vital to determine what consumers say about the competition’s products online(Medina & Pereira, 2012). Social media makes it possible for a company to find out the customer’s compliments and complaints about the products of the competition which enables them to gain a competitive advantage by giving the buyers exactly what they require(Stucke, 2013).
Use of celebrities
The use of celebrities in marketing is very effective, especially in technological commodities such as mobile phones. Many people look up to these known personalities as they perceive them as having great success in life. They have a huge following in social media sites and thus have the capability of reaching many people. Technological equipment such as GP’s mobile phones would generate great sales if they were advertised by celebrities on television and social media (Chavda, 2012).
Product design refers to the detailed specifications of a manufactured product. It takes into account the economical production of a commodity that performs its functionality in a safe, efficient and reliable way. In this case, mobile phones are important commodities whose features matter to their users. The internal structures in a mobile phone are very imperative to prospective buyers as they determine the ability of the phone to carry out its functions more efficiently. The attractive features of the manufactured mobile phones can lead to very high sales for the company (Homburg, Schwemmle & Kuehnl, 2015).
Growth in Revenues and Profits
The smart move for General Productions would be a reduction of the product lines and focus on those that its staff are more skilled in their production. GP mostly outsources the required skills in order to manufacture its products. Outsourcing is quite expensive and even more so in this situation since the skills required are not easily obtainable. Addition of other product lines such as its own mobile phones should be very carefully analyzed against the current financial position of the firm. This electronics manufacturing company also has neither great experience in mobile phone production nor the skilled personnel to carry out this activity. This therefore would not be a good strategy for the organization.
In addition GP should not give as much freedom to its marketing managers to execute whatever marketing strategies they consider necessary. The marketing department should be encouraged to work as a team whereby all managers come together to discuss the most operative strategy (Rehme & Rennhak, 2011).The company’s marketing sector should also work hand in hand with the sales department managers for better results. Currently, GP encourages its marketing managers to compete against each other by basing compensation on revenue. For more operational outcomes commission of the managers should be based on matters such as the quality of relationships formed with the customers, the frequency of the sales made to each customer as well as the profits generated. The range at which prices can be sold should be fixed and a policy formulated whereby all managers are required to adhere to these prices and those who do not punished, maybe by demotion (Indounas, 2015).
ABC Costing Methodology for Appropriate Pricing
Issues in Establishing Budget Systems
Setting goals: organizational goal setting requires the determination of the level of aggressiveness of the workers of the company. This may bring about arguments among the managers involved in the budgeting process as some may claim that the targets should be extremely challenging and require employees to put more hard work while others may maintain that the goals should be achievable by reasonable efforts. In GP the goal could be a definite revenue generation while observing the price control of products that is, not selling above a specified price to avoid consumer exploitation or selling below the price range which would lead to a reduction of the company’s profits. The company can use a tiered system to evaluate the performance of the employees whereby one who misses the target by far is considered off-target, one who achieves the budget goal is on-target and one who exceeds expectation is above target.To encourage hard work the best performers should be rewarded (Vaznonien? & Ston?iuvien?, 2012).
Employee Acceptance: it is very difficult to garner real employee support in budgeting. Some workers are not cognizant of the institutional budget goals during their daily workings and therefore have no motivation to work hard at all. During GP’s budgeting process, a transparent approach should be assimilated accompanied with regular meetings to help inform the personnel and keep them up to date. The workforce can only take up ownership of the budget targets if they have a thorough understanding of its importance.
Advantages of Budgeting to an Organization
Budgeting brings to light the problems of the company in relation to expenditures and revenues. It enables the organizational managers to determine the performance gap between the expected outcomes and the actual results achieved. According to the current operations of GP, the revenues would most likely surpass their budget goals. This would lead to the company carrying out an investigation to find out the reasons for this which would then solve the product quotation problem (Ingenbleek, Frambach &Verhallen, 2013).
It helps the management to comprehend and co-ordinate several functional activities. The functions of the management include decision making, organizing, controlling, planning and directing (Bufan, 2013). With a common financial goal, GP’s management would be able to carry out its functions more actively due to the resulting cooperation. The corporation would be progressed and its operations expanded by the managers in all departments working together to accomplish a specific goal and not against each other.
Relationship between Marketing and Sales Teams
Budgeting standardizes processes, production and equipment. It indicates the financial usage of each production process to develop which product(s). In the case of General Productions, a decision has to be made on whether to reduce the product lines and product life cycle or not. Budgeting would help in making the right decision in this instance by portraying an estimation of the expense incurred in production of each product. It would bring to light the processes that are not needed, hence aid in allocation of finances in the most essential practices in each product’s production.
Activity Based Costing (ABC) is a cost accounting process in which costs of overhead activities are identified then assigned to products. The method establishes the relationship between overhead activities, costs and manufactured products and through this it consigns those costs to products less randomly as compared to traditional methodologies.Unlike traditional methods that depend on volume count such as direct labor hours or machine hours to allocate overhead costs, ABC strategy classifies activities into five broad levels which are unrelated to the units produced ton a certain extent.
It is mostly amalgamated inmanufacturing since it improves the reliability of data on costs thereby generating nearly true costs. It also enhances the classification of the expenses incurred by the company in its production process.ABC costing procedure is based on activities. An activity in the production process is defined as unit of work, task or any event with a specified goal. Activities in manufacturing include setting up a machine for production, operating machines, designing products as well as distribution of products. Unit-level activity, batch-level activity, product-level activity, customer-level activity and organization-sustaining activity are the five activity levels according to the ABC costing methodology.
This costing system is used in product line profitability analysis, service pricing, product costing, customer profitability analysis and target costing. ABC costing strategy is widely used as it grasps organizational costs better hence enabling companies to come up with improved strategies and corporate focus (Rof & Andreica, 2011)).
In General Productions, the ABC method would help establish all the overhead costs according to the various classes of activities. This would thus mean that all the costs incurred in manufacturing have been classified. The company can then set up prices for its products putting into account all its expenditures. This costing methodology would ensure that the organization does not suffer any losses as determination of the all costs correctly ensures that the price set covers them and generates some profits (Al-Halabi & Shaqqour, 2018).
Use of Social Media and Celebrity Endorsements for Marketing
4.The gross profit can vary adversely from the budget figure due to various reasons. A change in inventory accounting method is just one of them. In GP’s scenario, a low gross profit would be as a result of uninformed marketing strategies. Under quotation of product prices in order to close a deal with clients, leads to selling those products at lower prices which obviously impacts the company’s profit generating capability (Smith, 2012). It might generate revenue due to selling of products to many customers but the total revenue will not cover the total costs incurred in the production process of the product leading to losses. Continuous under quotation severely affects the profits of the company over time (Liozu & Hinterhuber, 2014).
In summary, it is evident that social media is a great asset in marketing and sales in a corporation. It leads to an increased consumer base, a better understanding of an organization’s customers as well as a comprehension and analysis of the competition. General Productions manufacturing specialist can engage social media and celebrities in the marketing of their products. However, the company should encourage more corporation among its marketing managers to reduce under quotation of its products which could adversely affect its ability to increase profits. Activity Based Costing system would be a great help in GP as it would bring to light all the overhead costs included in the production process. This then would enable the company to set a fixed price or a range of price for its products to avoid making losses or exploiting its consumers through improper quotation of products.
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