ANALYSIS OF BEAUREGARD TEXTILE COMPANY
Beauregard Textile Company (BTC) is one of the largest organization in textile industry with annual revenue estimated at USD $82 million. The case deals with the decision-making process, conducted by the controller Mr. Beal and Sales manager, Mr. Calloway on company´s pricing strategy for the fourth quarter. The challenge comes from the decision that has to be taken on a specific product – Triaxx-30 (T-30), special outdoor application material.
T-30 is sold on oligopolistic market, where BTC faces competition from a unique rival – Calhoun & Pritchard, offering the same product. Both companies compete on the basis of cost leadership strategies and BTC´s current price level of USD$ 4 is 25% more expensive than the competition and its previous level with BTC itself (Hubbard et al, 2011; Puu et al, 2002).
Cost structure for the production of T-30 is relatively transparent and it is evidenced from the case the competition between BTC and Calhoun & Pritchard is based purely on downstream sales price. There is no margin to reduce the costs due to the product specificity and reasonably high bargaining power of suppliers. Financial figures reflect that material costs is fixed for T-30, while the benefit can come from the economies of scales, by reducing overall overhead costs with higher production volume (Donald et al, 2006).
Given the oligopolistic nature of the market it is possible to assume that total market size is represented by joint sales of BTC and Calhoun & Pritchard it clear that BTC forecasting on sales growth was based on wrong assumption due to lack of market analysis. Projected 50% growth for the fiscal year 1990 was highly overestimated. This is explained by the fact that actual market driver is the price and not the brand loyalty.
Based on the latest pricing strategy the company received USD$ 66.9 million less in sales revenue in 1990 relative to two previous years. Opportunity sales represented by 48,000 units per year and potential profit of USD$ 144.3 is the market share lost to Calhoun & Pritcher. Given the influence of production volume on overhead cost reduction, overall loss had highly negative impact on the organizational cash flow (Smith, 2011, pp. 23-30).
Conclusions and Recommendations
The objective of the company in a short-run is to increase the liquidity and grow overall profit. Current strategy of profit margin growth proved to be ineffective and the company should be looking for the solution in its operational scope capabilities. Logical strategy in this case would be to drop the price marginally down relative to competition, setting it to the level of USD$ 2.75 per yard of fabric. Healthy assumption with this price and given the consumer price-sensitive behavior would be returning to previous market share + 38% growth level, accounting for 175,000 yard of fabric production per year. This production level is optimal in terms of cost efficiency based on the case data (Mills, 2002, pp.16-25).
That said it is also important to take into consideration the prisoners dilemma that always comes to play on oligopolistic market. Driving the company into predatory pricing strategy most probably will cause reverse reaction from Calhoun & Pritcher that can drop the price even further to compete with BTC. Assuming that the market for this material does not have other substitutes, it is not possible to incorporate organic growth element into the future strategy. With that competition will continue to remain on existing volume between the same players. This will hurt profit margin of both companies and result in total revenue reduction for both of them (Rapport et al, 2002).
Alternatively, given the governmental regulations it will not be possible for the companies to engage into pricing agreements to raise market price of T-30. Potential price increase can only be justified by the actual increase in fixed and variable production costs. With all the above in mind the recommendation for the BTC controller Mr. Beal and Sales manager, Mr. Calloway would be to return the price level of T-30 to USD$ 3 per yard or apply marginal increase, justifiable by the production cost implications.
References
Hubbard G. and Beamish P. (2011). Strategic Management: Thinking, Analysis, Action. 4th Edition. Frenchs Forest: Pearson
Donald C. and Waters J. (2006). Operational Strategy. London Thomson Learning.
HBS (1990). Beauredard Textile Company. Case Study. Harvard Business School.
Rapoport, Anatol and Chammah Albert M. (2002). Prisoner´s Dillema. 2nd Edition. London: Ann Arbor Paperback.
Smith T. Jim (2011). Pricing Strategies. Setting Price Levels, Managing Price Discounts and Establishing Price Structures. New York: South Western Cengage Learning. Web.
Mills, Gordon (2002). Retail Market Strategies and Market Power. Victoria: Melbourne University Press. Web.
Jensen, Michael (1998). Foundations of Organizational Strategy. Harvard: First Harvard Universtiy Press. Web.
Puu, Tonu and Irina Sushko (2002). Oligopoly Dinamics. Models and Tools. Berlin: Springer. Print.
