Chapter 5

1. Chapter 5 Strategic Planning Regarding Operating Processes

2. What are the Primary Influences on Selling Price? • Customers— • customers want high quality and service at a reasonable price • Must understand customers and respond to their needs • Price increase, demand decreases • Price decrease, demand increases • These trends can be affected by • loyalty and unwillingness to substitute (ex: coffee) • staple vs. luxury item (hamburger vs steak) • Perceived high quality and service (Toyota vs Ford)

3. What are the Primary Influences on Selling Price? • Competitor— • Depending on the competitiveness of the market, competitors may influence the selling price • Must monitor and learn from them • Pure competition • Market determines selling price • Individual company is price taker (ex: agriculture industry) • Monopolistic competition • Market influences selling price • Individual companies influence selling price through advertising (ex: airlines, computers, athletic wear)

4. What are the Primary Influences on Selling Price? • Legal and social forces— • there are legal restrictions and social influences on selling price • Must monitor changes and learn from them • Monopoly (ex: utility companies) • One company controls market and selling price • Government approves price changes • Oligopoly (ex: oil companies) • Very few companies control selling price • Government monitors selling prices • Price fixing • Price gouging

5. What are the Primary Influences on Selling Price? • Cost— • In the long run, the selling price set by a company must cover all its costs and provide a sufficient return to the owners • Must control costs and eliminate non-value added activities • Markup - what is added to cost of product to ensure profit • Selling margin = selling price - cost • Selling margin % = selling margin/selling price

6. How does the External Market Influence Selling Prices? • Pure competition • Monopolistic competition • Oligopoly • Monopoly

7. What is the Difference between Penetration Pricing and Predatory Pricing? • Penetration pricing • Setting a lower initial selling price to entice customers to try the product/service • Legal • Predatory pricing • Setting a low initial selling price (usually below cost) to drive out the competition • Then raise prices once they control the market • Illegal

8. What is the Difference between Skimming Pricing and Price Gouging? • Skimming pricing • Setting higher initial selling prices due to uniqueness of product • Appeals to customers who want to be the first to own the product and are willing to pay more • Later when novelty wears off, lowers the price • Legal • Gouging • Setting high price due to unusual increase in demand (gas prices on 9/11) • Illegal

9. What is the Difference between Life-cycle and Target Pricing? • Life-cycle pricing • Setting a selling price for the life of the product/service based on cost • Determine cost, determine required markup, set selling price • Target pricing • Setting a selling price for the life of the product/service based on the market • Determine selling price, determine required return, set target cost

10. What are the Common Reasons for Holding Inventory? • Meet customer demand • Smooth production scheduling • Take advantage of quantity discounts • Hedge against anticipated cost increases

11. What are the Common Reasons for Not Holding Inventory? • Significant costs are incurred • Holding inventory allows the company the “hide” its internal process problems because demand can be met from inventory

12. What are the Common Compensation Plans? • Piece rate • Pay based on units completed • Commission • Pay based on sales • Hourly • Pay based on hours worked • Salary • Pay based on period of time

13. What are Other Compensation Issues? • Insurance • Protection for employees • Paid leave • Protection for the company • Bonuses • Additional pay based on some future event • Gross pay versus net pay • Gross = amount earned • Net = amount received