Drakensberg Limited Case Report. The main problems are whether to launch a new product and how to treat the residual money with the target of maximizing shareholders profit. This report will use four steps to analyze and solve the question.

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Drakensberg Limited Case Report


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Introduction

Drakensberg Limited is a specialist manufacturing corporation that operates in high cost and tightly regulated economy. The company has encountered a series of problems facing the severe competition in this industry. The main problems are whether to launch a new product and how to treat the residual money with the target of maximizing shareholders’ profit. This report will use four steps to analyze and solve the question. The first step is to give an insight into the current market position. In this part, SWOT analysis and product life cycle is the main focus.

The second step is to point out and confirm the business strategy that guides the whole company’s activity. The next step is to explore whether to launch the new product and its volume, using CVP, value chain and differentiation strategy analysis. Two scenarios (with the new product and without it) will be considered to get the proper conclusion. The last part indicates how to deal with the rich cash. Finally, some suggestions will be given for the company’s future development.


  1. Current market position analysis

The environment surrounding Drakensberg is analyzed in the macro and micro perspective respectively. SWOT analysis is used to state the internal and external condition of the company which is macro. Product life cycle theory is used to clarify the underlying situation of different products which is micro.

  1. SWOT analysis

Drakensbergcan be analyzed by four aspects in the following table:

Table1.1 SWOT analysis for Drakensberg

Source: The data of Drakensberg Limited

  1. Strengths
  1. High quality

Drakensberg offers world-class products for a range of different countries. This high-quality output can help the company establish a good image and thus win more customers’ trust.

  1. Strong market position

Drakensberg’s status as a global market player is secured by its strong market share (43%), which far exceeds its peers.Besides, it can exert a 50% price premium. Occupying nearly half of the market will make the company achieve complete powerful dominance in the marketplace and the high premium can bring more profit. This will facilitate the entrance of the new product, making it easy to be accessed, accepted and then become popular.

  1. Weakness
  1. High cost, tightly regulated economy

The manufacturing base is located in the domestic economy which is high-cost and high-regulated. It can be seen from the following graph that per unit cost was in a descending trend before 2010, however turning to a rising trend after that. The year 2011 had the largest amount of output. Considering the effect of economies of scale, its per unit cost should be the lowest. However, due to the high-cost economy the unit cost was highest in 2011. The fluctuated per unit cost may indicate that Drakensberg does not have a strong bargain power against suppliers. Some measures like changing manufacturing base or outsourcing should be taken to improve this weakness; hence it can sustain its profitable position.

Table1.2 The cost and output for Drakensberg during 2006-2011

Source: The data of Drakensberg Limited

Figure 1.1 Per unit cost for Drakensberg during 2006-2011

Source: The data of Drakensberg Limited

  1. Limiting factors

The company has three limiting factors: raw materials, skilled labor, machine hours. When calculating the optimal point of production, it can be found that the demand for skilled labor can be satisfied at present. However, it will be a scarce resource if the company wants to expand the production. Apart from that, raw materials is already a constrained factor, and it will determine the proportion of each product to a large extent.

  1. Opportunities
  1. Large excess demand

Under the circumstance of 50% premium price and operational restriction, there is still large excess demand. To take advantage of this opportunity, on the one hand, Drakensberg can implement a higher premium, whichmayrestrict the demand to its production volume. On the other hand, the company needs to expand its current production by introducing more raw materials. Cost is expected to decline as production scale rises. Through either way, net profit will be increased.

  1. Launch of new product

Drakensberg has made decision to launch a new product Dankie. Issuing new product at regular intervals will enhance the company’s offeringandshow its innovation. Moreover there are long-term contracts for the new product and the existing global demand for the new product is not small. It can find new potential customers therefore boost market share and revenue growth (Datamonitor, 2010). In a word, the new product can strengthen its global dominant status.

  1. Threats
  1. Fierce competition from foreign stores

Drakensberg’s main competitor is other manufactures that outsource to low-cost, low-regulated foreign shores. This may reduce the company’s bargain power and erode its profit margin. If the competitor develops to have a strong market position, there may present a nearly perfect competitive market. A competitive market will lead to market driven price reduction (Datamonitor, 2010). Facing this intense competition, it is hard for Drakensberg to outsource immediately or reduce the cost. The feasible solution now is to adopt a differentiation strategy which makes its product more attractive. Accordingly, it can protect its dominance.

  1. Restriction from government policy

The new government policy restricts employment of immigration. There will be an evident lack of skilled engineers and graduates. Considering the original existing limiting factor, this will be a severe threat to Drakensberg. It will impose more stress on the short supply of skilled labor.

  1. Product analysis

Product life cycle is a theory used to forecast sales and plan long-term product strategy. It indicates that product follows a sequence of stage from introduction, growth, mature to decline as illustrated in figure 1.2(Christiansen J.K. et al., 2010:797). Through the analysis of different product’s life cycle, the strategy can thus be confirmed.

Figure 1.2 Product Life Cycle Example Showing Sales and the Four Stages

Source: Christiansen J.K. et al., 2010. Living Twice: How a Product Goes through Multiple Life Cycles.Journal of Product Innovation Management, 27, pp.797-827.

Nkosi and Yabonga

The two products have existed in the market for a long time and won a good reputation. It can be easily concluded that they have already reached the mature cycle.

During this stage, sales volume reaches the peak and market is saturated. Moreover, increasing competitors are pouring into the market. At this time, the company should focus on product differentiation and feature diversification. Accordingly, Drakensberg should design and issue new product to maintain its status in global market.

  1. BusinessStrategy

From the above analysis, we can plan the long-term strategy of the company. The following two strategies are proposed:

  1. Differentiation

To make full use of the company’s strength and opportunity, Drakensberg can develop its product in a vertical perspective. This means different products have distinct features and all of them are new and unique on the market. Each product caters for a selected clientele and penetrates into that group. This strategy can avoid the weakness and threat composing on company. However, it does not mean that Drakensberg can neglect the cost factor. When its new product passes from introduction stage to growth, cost reduction will be the principal task.

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  1. Leading product development

This strategy requires the company to invent innovated product that can lead whole market. The product’s quality is guided by customers’ need. The development of new goods must be effective and efficient. It requires publish of new product at regular intervals. Thus, leading product can ensure the leading position of Drakensberg.

  1. Product Activity Analysis

Given the above background analysis, a detailed product activity will be analysed to determine whether to launch the new product and its volume.

  1. Basic definition

  1. C-V-P analysis
  1. Assumption under C-V-P analysis

Though fixed cost and variable cost of the company remain unknown, High-Low method is used to calculate and estimate the fixed cost and variable cost ...

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