INTERACTIVE COMPUTER SYSTEMS CORP

Summary of Decision Situation

Interactive Computer Systems was a multinational manufacturer of computer systems and equipment. The Company was primarily a U.S based corporation with the majority of its engineering and manufacturing facilities located in the eastern United States. The company was headquartered (parent company) in the U.S and worldwide offices referred as subsidiaries. For example, when a customer in France orders a system, the order is processed by the local European subsidiary. The order then is transmitted to U.S to have the system built. Upon the building of the system, the subsidiary buys it from the parent company at an inter-company discounted price. Furthermore, when a subsidiary sells the product, its selling price is based on interactive Computer System’s U.S Master List Price uplifting it by the increased cost of doing business. The Master List Price is for standardized products only and subsidiary sets a local price for any specialized products. Each company was held responsible for achieving profit before tax of 15%.

One of the specialized products, “model 2000”, designed and manufactured in Europe was only offered in Europe. Due to the popularity of the product in Europe, the U.S customers demanded the product to be sold in the U.S. The product eventually became available in the U.S at a much lower price due to market conditions such as competition. Due to the lower prices in the U.S markets, the European customers started to order from the U.S offices. This made the European subsidiaries furious as they started losing the sales volume. At the same time, the U.S markets were performing really well. Both groups stated that they followed the corporate pricing guidelines in order for them to accomplish the 15% profit margin.

Comprehensive Analysis of Alternative Decisions

The marketing manager of Interactive Computer Systems, Peter Mark became aware of the pricing use of model 2000 between the U.S and European subsidiaries. The European and the U.S markets provided him with the suggestions. The U.S market explained that due to the intense competition in the U.S markets, they are unable to increase the price of model 2000 or they will not be able to achieve the 15% profit margin. Their suggestion was to place model 2000 on the Interactive Computer System’s U.S price list. Whereas the European subsidiaries complained that the low production volumes are driving the escalating direct and indirect costs of model 2000. They were unable to lower the price of model 2000 because by doing so, the costs will increase the profit margin. They suggested having the U.S markets increase the price in the U.S markets.

I believe that the above suggestion indicated by the individual markets will only help and provide fruitful results in the individual markets and will not help the Interactive Computer System’s overall profits. These suggestions will help one market but will harm the other. Model 2000 cannot be added to the ‘Master Price List” because it is a specialized product and not a standard product. These two products are different, specialized product’s production volume is low compared to standard products; hence the production costs are higher than standard products. Standard products are offered at a much lower price because their production ...

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The European subsidiary’s recommendation to have the U.S lower the cost will only provide positive results for the European markets and in turn end up hurting the U.S market. This will prove not to be beneficial as the U.S markets are extremely competitive in the computer industry. In order for the U.S markets to stay competitive, they must price the model 2000 at a price similar to its competitors and to retain their existence in the market. If the price is too high, the customers will purchase other brands and if the cost is too low, the profit margins will hurt and eventually can drive the product out of the market.

According to Cianet.org and Cuntrywatch.com, the investment is greater in the computer industry in the U.S as opposed to the other countries. Which simply implies that the competition is much greater in the U.S than the European countries such as the United Kingdom, Germany, and France. The U.S holds great enterprises such as Lucent Technologies, Cisco Systems, Microsoft and IBM whereas the key enterprise in the United Kingdom is Royal Dutch/Shell, key enterprise in Germany is Deutsche Telekom and France Telecom in France. Almost each one of these enterprises has a market cap in USD in millions greater than any of the key enterprises found in the United Kingdom or France. Following is the market cap to compare U.S, Europe, Germany and France.

On the basis of competition market prices for the same product may differ from county to country. The high competition mentioned above can significantly affect the prices (Jeannet). As a result of high competition in U.S, the prices are lower when compared to the European price. That is, the competition in Europe in the Computer industry is not as great and therefore they have better pricing flexibility.

Furthermore, the income level of a country’s population affects the amount of goods and services bought. Based on the country’s data profile generated by the World Bank Group, in 2003 the U.S. had GNI of 10.9 trillion which is much greater when compared to the European counties such as U.K.'s GNI of1.7 trillion, Germany's GNI of 2.1 trillion, and France's GNI of 1.5 trillion. As a result, the price of 2000 is priced according to the purchasing power of the country. For instance, Coca-Cola prices its product as a portion of disposable income (Jeannet).

Recommendations including a specific implementation plan

Many companies are growing and becoming market and global leaders. To reduce costs and save tax money, many companies similar to Interactive Computer Systems use the Inter-company pricing method. I work for The Gillette Company which practices the Inter-company pricing procedures. The prices at Gillette are predetermined; each market has different prices that are based on local market regulations, exchange rates, taxes, freight regulations etc. The prices are constantly reviewed and updated due to the fact that some countries have volatile currencies and different inflation rates.

I would recommend a strategy for Interactive Computer System’s model 2000 which is similar to what we utilize at The Gillette Company for Inter-company pricing. Each individual market should continue to charge a different price based on their local market condition, currency exchange, tax, freight and custom implications. Also, I believe that both markets need to change their price for model 2000. The European manufacturing and direct costs will change as the volume of systems purchased changes. Plus, in order to be fair to its parent company, the European subsidiaries need to start to markup model 2000 when they sell it to the U.S. The U.S. market already marks up the cost when they sell a standard product to European subsidiaries. A similar approach should be considered for European subsidiaries. Overall, the price markup will enable European subsidiaries to reduce their price to manufacture model 2000. At the same time, the U.S. market will need to consider the markup cost and adjust their price of 2000 accordingly. As a result, both markets will be satisfied with their results because both markets will achieve the 15% profit and European subsidiaries will not lose its customers or sales volume.

Conclusion

The overall goal of any global company is to minimize the price gap between various markets. In this case, Interactive Computer Systems was charging two different prices in two different markets. The price of model 2000 had a gap that needed to be minimized. Another major goal for any global company is profit maximization. For instance, customers’ purchases are important to Interactive Computer Systems because they are the ones to increase sales. Internal management is important because they grant employee sale bonuses based on sales. Even though investors and creditors look at the Total Company profits, sales, etc. each one of Interactive Computer System’s subsidiary contributes to the Profit and Loss Statement.

Pricing is one of the most difficult tasks to determine for any global company. There are many factors that need to be considered including company’s internal factors, market factors, and environmental factors. Some of the internal factors include profit and cost factors. For instance, Interactive Computer Systems should evaluate its costs and ensure that the costs don't exceed their profits. Market factors that affect pricing are income levels and competition. As previously mentioned above, Interactive Computer Systems should analyze its competitors on a regular basis and price their products according to the purchasing power in a particular country. The external factors are particularly important because they are more difficult to control. For instance exchange rate and inflation rates should be closely monitored. Interactive Computer Systems should continue to hedge the currency to avoid or minimize future risks and costs.