TerraCog Global Positioning Systems: Conflict and Communication on Project Aerial

WAC ASSIGNMENT I

Letter of Transmittal
Date: 29th Sept 2011 Voltamp Electrical Corporation To: - Vice President, Specialty Appliance Department. From: John Carter, Manager Audio Products Section.

Subject: Decision regarding commercial operation of TGW.

I hereby enclose a report showing all the options available regarding the commercial operation of TGW and the decision that has been taken regarding the same. The decision whether Audio Products Section (APS)manufactures TGW for interdepartmental sale, Magnetic Materials Section (MMS)manufactures TGW for interdepartmental sale as well as sale outside Voltamp Electrical Corporation (VEC), or MMS manufactures TGW exclusively for consumption by VECs sections for the first two years and then starts selling it to buyers outside VEC for the next two years and later, besides manufacturing TGW itself, licenses the manufacturing process for TGW to competing companies has to be taken. All these options are evaluated on the basis of profit and product leadership to respective sections as well as VEC as a whole.

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Executive Summary
The Audio Products Section (APS) of Voltamp Electrical Corporation (VEC) discovered TGW, a new kind of magnetic material, after developmental research based on the theoretical concept offered by The Advanced Development Laboratory (ADL). Magnetic Material Section (MMS) being the operating section for manufacturing magnets wants to manufacture and sell TGW commercially. After evaluating all the options on the basis of profit and product leadership to respective sections as well as VEC as a whole, it is recommended that MMS manufactures TGW for consumption by VECs sections for the first two years. Then, starts selling it to buyers outside VEC for the next two years. Later, besides manufacturing TGW itself, licenses the manufacturing process for TGW to competing companies. Word Count: 118

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TABLE OF CONTENTS

Sr. No.

Particulars

Page No.

1.

Situation Analysis

2.

Problem Statement

3.

Options Available

4.

Evaluation Criteria

5.

Evaluation of Options

6.

Recommendation

7.

Action Plan

8.

Exhibits

10

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Situation Analysis
TerraCogs competitor Posthate launched BirdsI-the only handheld GPS device that displayed satellite imagery. Though BirdsI technology did not offer any considerable performance improvement over the standard maps in TerraCogs GPS system, a number of key buyers and product reviewers found BirdsIs satellite imagery an exciting innovation. The sales representatives at TerraCog noticed increasing customer demand for a GPS with satellite imagery like BirdsI and TerraCog had started losing market share. Therefore, Project Aerial was started by TerraCog to develop TerraCogs own version of GPS with satellite imagery. In order to speed development of Aerial and avoid the costs of new moldings and major reconfiguration, the existing GPS platform was redesigned. Aerial is superior in both accuracy and reception quality than BisrdsI. But Aerial is slower in speed than the current full-featured TerraCog GPS because satellite graphics require four times more processing power. The Design and Development team was not very enthusiastic about developing Aerial for two major reasons. Firstly, according to the product development team a redesign of the total platform was feasible if management could extend time to market by six more months and the product would be superior and more stimulating technically to the product development team members. Secondly, the product development team had several other ideas for new products that would position TerraCog to capitalize on growth in cycling and fitness GPS applications which project Aerial was forcing the product development team to put aside. Also, with Harold Whistler, TerraCogs cofounder and vice president of design and development preparing for retirement, Allen Roth, director of design and development wanted to prove his competency to be the next vice president of design and development and Project Aerial hindered his building of a product line he could call his own. Ed Pryor, vice president of sales, was determined to bring Aerial to the market. At the pre-launch meeting of Aerial, Tony Barren, director of production stated that taking into consideration the cost of production Aerial should be priced at not less than $475. BirdsI is selling at $400 and the current full-featured TerraCog GPS is selling at $375. Ed Pryor, vice president of sales suggested that Aerial should be priced at a maximum of $425 since the market is very competitive and TerraCog is already late by two years in introducing Aerial. Garmin, another competitor of TerraCog, announced the launch of their GPS with satellite imagery at $395. All this would make it difficult for Ed Pryor and his team to sell Aerial at a price higher than $425. Harold Whistler suggests that TerraCog should currently introduce the existing Aerial to the market and in the mean while the design and development team could redesign Aerial and try to reduce the production cost of Aerial further. According to Allen Roth, the design and development team can not reduce the cost of Aerial any further by redesigning Aerial given the product requirements. Becky Timmons, CFO does not want to reduce the profit margin on Aerial and wants Aerial to be priced at $500 keeping in mind the rising fuel costs which would increase the cost of transporting Aerial from Shenzhen, China to Chicago, USA and thus, reduce the profit margin. TerraCog needs a decision whether to launch Aerial or not and if launch Aerial, then at competitive price hoping that the production cost might reduce in future or at a high price keeping adequate profit margin. If Aerial is launched at $425, it would be easier for the sales team to sell Aerial but the profit margin would be low. The design and development team can then focus on developing other products that would

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position TerraCog to capitalize on growth in cycling and fitness GPS applications. If Aerial is launched at $475, the profit margins would be adequate but the sales team will find it difficult to sell Aerial since the market is very competitive and TerraCog is already late by two years in introducing Aerial. If the launch of Aerial is put on hold for six months and further redesigning is done, the design team will not be able to focus on other projects that could help in TerraCogs growth and there is low probability that the design team can further reduce the production cost of Aerial with the given product requirements satellite imagery, speed and accuracy. There will be no revenue generated for the next six months. If Project Aerial is abandoned, the design and development team can work on other new projects that could help in TerraCogs growth but the consumers demand for TerraCogs handheld GPS with satellite imagery will not be satisfied and the time and resources that TerraCogs team has put in developing Aerial would go waste.

Problem Statement
When to launch Aerial in the market and at what price.

Options Available
1. 2. 3. 4. Launch Aerial now at $425. Launch Aerial now at $475. Put the launch of Aerial on hold for six months, redesign Aerial and launch Aerial after six months. Launch Aerial now at $425, collect post sales feedback from customers and launch an upgraded version of Aerial.

Evaluation Criteria
Likely impact on TerraCogs market share. Likely impact on TerraCogs profits. Likely impact on TerraCogs cross-departmental co-ordination.

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Evaluation of Options
1. Launch Aerial now at $425.
Likely impact on TerraCogs market share. TerraCogs GPS products outperformed competing products in both navigation accuracy and reception quality. Futhermore, BirdsI(retail price-$400) technology did not offer substantive performance improvement over the standard maps in TerraCogs GPS. Also, customers are techsavvy and are demanding TerraCogs version of GPS with satellite imagery. So, customers would not mind paying a premium for Aerial (better quality product with satellite imagery). Thus, the sales of Aerial would lead to increase in TerraCogs market share. Aerials slow speed because of high processing power needed for satellite graphics, might make the customers dissatisfied and thus could lead to low sales. Likely impact on TerraCogs profits. Low profit margin because of high cost of production is likely to generate low profits for TerraCog. If the cost of production of Aerial increases due to increase in fuel costs or input costs, TerraCog might suffer losses. Likely impact on TerraCogs cross-departmental co-ordination. It would be easier for the sales team to sell Aerial at $425 as customers are tech-savvy and would not mind paying a small premium for a better quality product. The design and development team can focus on developing other products that would position TerraCog to capitalize on growth in cycling and fitness GPS applications. The production team has no problems as long as Aerials cost of production is covered by the selling price. The finance department would be discontent because the profit margins are low.

2. Launch Aerial now at $475.

Likely impact on TerraCogs market share. BirdsI is priced at $400 and Garmin has announced their satellite image version of GPS at $395. At $475, Aerials price would be very high. Aerial does not have any major added features (compared to competing products) in order to command such a high price. Also, Aerial has slow speed because of high processing power needed for satellite graphics. All this might not attract the tech-savvy customers. Thus, TerraCogs market share might not increase. Likely impact on TerraCogs profits. Adequate profit margin is likely to generate adequate profits for TerraCog. If the cost of production of Aerial increases due to increase in fuel costs or input costs, TerraCog would be in a position to bear the increased costs. But TerraCogs total profit would not be high because of Aerials low sales due to high selling price.

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Likely impact on TerraCogs cross-departmental co-ordination. It would be difficult for the sales team to sell Aerial at $475 as customers are tech-savvy and might not pay a high price when they are getting similar competing products at $400. The design and development team can focus on developing other products that would position TerraCog to capitalize on growth in cycling and fitness GPS applications. The production team has no problems as long as Aerials cost of production is covered by the selling price. The finance department would be content because the profit margins are adequate but TerraCogs lower total profits because of Aerials low sales due to high selling price might make TerraCogs finance department dissatisfied.

3. Put the launch of Aerial on hold for six months, redesign Aerial and launch Aerial after six months.
Within six months, the design and development team would redesign Aerials total platform and the resulting product would be superior in quality and faster in terms of speed. Though the production cost is not known as of now, the design and development team has clearly indicated that it is not possible to lower Aerials production cost anymore. So, Aerials production cost may remain constant (then the selling price would be $425) or may increase for increasing processor power for satellite imagery (then the selling price could be at a maximum at $475). Likely impact on TerraCogs market share. If Aerials cost of production remains constant after the total platform redesign, TerraCogs market share would increase as customers would be delighted with a superior product at a small premium price. If Aerials cost of production increases, Aerial would sell but not all customers would like to buy Aerial at such a high premium price. Likely impact on TerraCogs profits. If Aerials cost of production remains constant and the selling price is $425, the profit margin would be low but the high sales volume would result in high profits for TerraCog. If Aerials cost of production increases and the profit margin would be low and the total profit for TerraCog would be low because of moderate sales of Aerial. Likely impact on TerraCogs cross-departmental co-ordination. It would be easy for the sales team to sell Aerial at $425 because of superior product quality at a little premium. It would be a little difficult for the sales team to sell Aerial at $475 because not all customers would be willing to buy a premium product at a premium price. The design team will not be able to focus on other projects that could help in TerraCogs growth and there is low probability that the design team can further reduce the production cost of Aerial with the given product requirements satellite imagery, speed and accuracy. The production team has no problems as long as Aerials cost of production is covered by the selling price. TerraCog would generate no revenue for the next six months. The finance department would be content because of adequate total profits due to high sales at selling price $425.The profit margins would be adequate

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at selling price $475 but TerraCogs lower total profits because of Aerials low sales due to high selling price might make TerraCogs finance department dissatisfied.

4. Launch Aerial now at $425, collect post sales feedback from customers and launch an upgraded version of Aerial.
Likely impact on TerraCogs market share. Tech-savvy customers would not mind paying a premium ($425) for Aerial (better quality product with satellite imagery). Also, the upgraded version (selling price $475) developed after incorporating customer feedback would be launched after six months. This would delight customers because of superior quality product at little premium price. Thus, the sales of Aerial would lead to increase in TerraCogs market share. Likely impact on TerraCogs profits. TerraCog will generate high total profits due to high sales of Aerial at $425 selling price even with lower profit margin. TerraCog will generate high total profits due to moderate sales of the upgraded Aerial with adequate profit margins at selling price $425. Likely impact on TerraCogs cross-departmental co-ordination. It would be easy for the sales team to sell Aerial at $425 because of superior product quality at a little premium. It would be a little difficult for the sales team to sell Aerial at $475 because not all customers would be willing to buy a premium product at a premium price. The design team will not be able to focus on other projects that could help in TerraCogs growth. But the design team will find it stimulating to work on upgrading the existing Aerial based on customer feedback for the next six months. The production team has no problems as long as Aerials cost of production is covered by the selling price. TerraCog would generate revenues for the first six months as well as in the future. The finance department would be content because of adequate total profits due to high sales at selling price $425.The profit margins would be adequate at selling price $475. All this would make the finance department satisfied.

Recommendation
TerraCog should launch Aerial now at $425, collect post sales feedback from customers and launch an upgraded version of Aerial at $475. This way, TerraCog will not have to delay anymore in entering the market with Aerial, the feedback from the customers will help build a better upgraded version of Aerial in the next six months with a premium price. TerraCog will increase its total market share and profits as it will be able to cater to both types of customers- the price sensitive ones as well as the quality sensitive ones. The sales team will be able to sell the existing Aerial to price sensitive customers at $425 and the upgraded Aerial with superior quality and faster speed to quality conscious customers at $475. The design team will find it stimulating to work on upgrading the existing Aerial based on customer feedback for the

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next six months. After that the design team could work on other projects which would help in TerraCogs growth. The production team would have no problems as Aerials cost of production would be covered by its selling price. The finance department would be satisfied as TerraCog would generate profits by selling both the existing Aerial and the Upgraded Aerial.

Action Plan
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