Capacity Strategies
for the 1980s
Group Members
Group 6
Rohit Patnala
Rupesh Kumar
Himanshu Dagar
Dileep Kumar
Harsh Payal
Introduction
Assume we are in the 1960s and you are the
president of virtually any investor owned electric
utility in the US.
Your customers are happy with declining electricity
prices. You and your fellow executives in the
industry saver the prospect of all electrical living,
for the commodity on which your business rests
has a 40-year history of declining prices
Introduction
Regulators are happy with your amenability to
requests for lower rates.
Environmentalists are happy with your increasing
use of clean oil, natural gas, and -in time- nuclear
power.
Even your investors are satisfied
Introduction
Here, your common strategy is to expand as
rapidly as possible.
Preempt your competition by offering inducements
to residential and industrial development. Construct
large capital-intensive generating facilities to
squeeze every last economy of scale out of new
technology
Introduction
Declining costs keep prices down and customers
and regulators happy. Also, new technologies
improve environmental quality and reward
investors.
Now, assume youre in the 1980s, and youre the
chairperson of the board of the same utility.
Introduction
But, this time your customers are outraged at rising
electricity prices. They have responded by sharply
curtailing overall demand but not of course, during
peak times when the electricity is most costly for
you to generate.
Regulators are outraged at the frequency of your
requests for rate increases. Rates in the past 10
years have risen so rapidly that they completely
offset the 50 preceding years of rate decreases
Introduction
Now your common stock is selling at less than 80%
of book value, your bond rating was recently
lowered, and you have even contemplated a
reduction in dividends. Your capacity strategy will
not work.
Rapid expansion is neither politically possible not
economically attractive. Preemptive competitive
moves merely increase the number of disgruntled
customers.
The lessons of U-Shaped Costs
The average cost curve is u-shaped (high costs when the
number of units produced is low, decreasing costs as the
number of units increases, high costs again as the number
of units gets "too" high) because of two things. The first is
fixed costs and the second is the law of diminishing returns.
Most sorts of production have some fixed costs. You can't
have a bakery, for example, without having a building and
equipment like ovens. When you first start producing baked
goods, the average costs are high because you are making
only a few goods and the fixed cost of the ovens is high.
(High costs/few goods = high average costs).
The lessons of U-Shaped Costs
As you make more baked goods, the average costs drop
because you are making more units of product in the
same ovens. (High costs/many goods = lower average
costs)
There are bound to be some inputs which cannot be
increased indefinitely, at least in the short run. When
output is high, shortages of these restrict the efficiency
with which such inputs as can be varied contribute to
more output. Thus at high levels of output marginal costs
tend to be high, leading to increasing average costs.
The lessons of U-Shaped Costs
Marginal cost is the increase or decrease in the
total cost a business will incur by producing one
more unit of a product or serving one more
customer.
If you plot marginal costs on a graph, you will
usually see a U-shaped curve where costs start
high but go down as production increases, but
then rise again after some point.
The lessons of U-Shaped Costs
Implications for Strategy
The changed economic conditions is affecting
consumer behaviour and attitudes. Can the marketing
strategies based on the understanding of the
consumers in the prosperous times still hold water now.
Consumers are changing their behaviour in several
different ways and various underlying attitudes and
values govern these changes.
It is critical for us to re-look at the consumer and refresh
our understanding to fine tune the marketing strategies.
Implications for Strategy
Not all the consumers react to the environmental changes
in the same way. Different consumers have different
reactions to the financial challenge ranging from an
extreme tightening of the purse-strings, to a nonchalant
continuation of the current indulgences.
Tightening may be reflected in different tangible and
psychological ways.
Manufacturers also need to offer a range of different
solutions and propositions to meet these changes in
behavior.
Implications for Strategy
In these times, growth may be easier to come about
through geographical expansion, than competitive fight
in the current markets.
The impact of the slowdown is more pronounced in
larger cities though the smaller towns and villages are
also affected if they relied on export based industries.
Hence while growth may be challenged in the larger
cities, it may be a good time to set forth and explore
new markets in county towns, townships and villages.
Plan to exploit the RHS Situation
A strained economic situation not only changes the consumer, but
also changes the shopper. Consumers are normally more attached
to the brand than the retail store, hence their first choice is not to
change the brand, but try to locate the same brand at a cheaper
price at another store.
With more time at hand and greater incentive to economize, more
consumers are likely to shop at hyper markets than the more
ubiquitous but pricier supermarkets and convenience stores.
The search for value and bargains will also turn the shoppers to
internet shoppingthe only channel that will grow even faster than
hypermarkets
Plan to exploit the RHS Situation
Research indicates that Chinese consumers response to the
economic challenge is cerebral. When opportunities are fewer
and the competition more fierce the Chinese consumers will
want to further enhance their skills and knowledge.
Clearly it is very good news for companies teaching English or
computer programming. But the opportunity is not confined to
these firms the FMCG industry could also take a more
educative communication stance - wine makers could try to
educate the consumers about appreciating fine wines,
cosmetic companies could offer lessons on skin care and
food companies could coach on diet and nutrition.
Plan to exploit the RHS Situation
When the going gets tough, the consumers tend to take comfort at
home and in the arms of the loved ones. Recession is the ideal
time to catch up with friends, take the children to the park and visit
the parents, and in the process enjoy emotional warmth to
compensate for the coldness of the economic climate.
The children are likely to pay a heavy price for this, with parents
having more time and inclination as well as a renewed
determination to help their children with their studies.
This offers opportunities to promote in-home consumption, rather
than out of home consumption which in many categories such as
alcohol, is much more expensive
Public Policy Issues
It is not just the product but also the message
which needs to reflect the current consumer mind.
The communication messages of today needs to
reflect sentiments of care and protection, rational
and considered behaviour and performance and
value
These tones of communication, which always
appealed to the Chinese consumers, are likely to
find even greater resonance in these times.
Public Policy Issues
For the largest internet population in the world, internet has
so far been a tool of entertainment and information less so
a tool for commerce.
However the initial barriers are being overcome and
consumers are discovering the joys of internet shopping.
The attributes consumer associate with internet shopping
are variety, enables detailed evaluation and comparisons
and competitive prices.
These are the attributes the consumer will be looking in the
times of economic slowdown.
Public Policy Issues
These are dynamic times. Things are changing at a phenomenal
pace.
As a result, so is the consumer mood and sentiment, which will
have an effect on her decision making and the brands and
products that she buys.
If marketers dont feel her pulse all the time, they could go wrong.
One can not just listen to the consumer once a year - marketers
need to put their ears firmly on the ground and listen to every
change of beat, every nuance of the consumer mood and continue
to fine tune the strategy.
Thank You!!
Group 6