ECO-561 Week- 5-TEAM PAPER Recommendation for pricing strategy, product differentiation and barriers to entry during Trough: U. S. economy entered its 10th recession in late 2007 since 1950 and still recovering from recession in 2010. The rise and decline in the level of activity are called business cycles. Business cycles occur because disturbances to the economy of one sort or another push the economy above or below full employment. Four phases of business cycles are Peak, recession, trough and expansion. The duration and intensity of such business cycle may vary from one business cycle to another.
Different phase of business cycle calls for different set of business decisions to adjust or overcome the business situation. The trough phase of business cycle refers to the stage where economy is about to change its course from recession to expansion. In the trough of recession or depression, output and employment “bottom out” at their lowest levels. Pricing Strategy: Since trough phase marks the turning point in the economic activity, Larson Inc. should adopt a pricing strategy that allows the battery price acceptable to the buyers. Larson Inc. s current mark up of 35 % should be revised to 10% to 15% to increase sales and market share. Quantity discount and other price related incentives would have a positive impact on subsequent price hike when the battery market grows in future. Product Strategy: Since Larson Inc. is operating in competitive battery market, product differentiation is even more important. It should attempt to differentiate its product in terms of quality, weight, size, and eco friendliness. This can be achieved by increased investments in research and development and uilding stronger brand name. Non-price barriers to entry: Non-price barriers refer to steps to distinguish product from that of competitors which can also work as deterrent to potential competitors. Such steps can be to improve on style, delivery, location, atmosphere, brand name, advertising, packaging, free delivery, after sales service, customer loyalty, etc. Non-price competition is often used by firms that wish to differentiate between virtually identical products (batteries, food products, cigarettes, etc). Larson Inc. an use following measures as non price barriers. Increase advertising outlay- Currently there is great deal of competition in battery market in America. Investing a substantial amount in ad campaign would help Larson, Inc. to build strong brand name and trademark. Heavy investment in ad by existing firm will make ad more difficult to afford for new competitor and work as a barrier. 1 Advertising can create perceived difference in consumers’ minds about its brand from other brands and see its product slightly different from existing or potential competitors.
Since brand is associated with products Competitors’ will find it hard to substitute established firm’s brand. Control of resource- Increasing access or control over essential resources such as raw materials, technical know-how, supply, and distribution network can work as deterrent to new firms. Patents and License- Increasing investments in R & D can lead to break- through in product or process improvement. Once patents or exclusive licenses are obtained, they will work as barriers to new firm to enter an industry.
Large companies like GE, Intel, Pfizer and Microsoft have been able to prevent new competitor from entering their industry through their patents, copyrights. Secure supplier/distributor agreements – Exclusive agreements with key links in the supply chain can make it difficult for new competitors to enter an industry by limiting their access to suppliers and distributors. Strengthen Network- When a good or service has a value that depends on the number of existing customers, then new competitor may have difficulties in entering a market where an established company has already captured a significant percentage of customer bases.
Vertical integration – Increasing a firm’s coverage of more than one level of production, while pursuing practices which favor its own operations at each level, is often cited as an entry barrier to new competitor. Reference: 1. McConnell, C. , Brue, S. , Flynn, S. (2009). Economics: Principles, Problems, Policies, 18e. Ch. 26 2. http://economics. about. com/library/glossary/bldef-market-power-theory-of-advertising. htm retrieved on 10/18/2010