Biz Sim 8 Quarter Report

Sonic Blaze

Eight Quarter
Report
Adam R. Schott
BUS 369.01
Spring 2005

Sonic Blaze Eight Quarter Report 2

OVERVIEW

The Sonic Blaze portable mp3 player is positioned to be a quality product that is

affordable to middle-class consumers. It has the most common features of in-demand mp3

players without all the bells and whistles of high priced players. Sonic Blaze is of

substantially higher quality than other models offered by our competitors in our price

bracket but not as high quality as the higher-priced mp3 players. With this in mind, I

adopted a medium-range price strategy. The original Strategic Plan and Master Budget for

the Sonic Blaze was to heavily invest in Product Development, Quality Management and

Advertising & Promotion in the first quarter to establish the Sonic Blaze brand. Product

Development and Quality Management spending would then be decreased each quarter.

Advertising & Promotional spending would remain high throughout the year to generate

demand and maintain the brand image.

PRICING STRATEGY

The initial wholesale price for the Sonic Blaze was set at thirty-five dollars per unit.

This is at the high end of the medium-price range. I felt that this was the proper price

because of the
Difference Between Actual Sales and Forecasted Sales
quality of the
$2,500

Sonic Blaze.
$2,000 $1,980
$1,925
Unfortunately, I $1,750 $1,766 $1,716
$1,815
$1,806
$1,575 $1,616 $1,698 $1,749 $1,701
$1,624 $1,597 $1,584
was mistaken: $1,500
$1,540
Sales (000)

Sales were good $1,000

but not as high
$500

as expected.
$0
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Quarter

Actual Sales Forecasted Sales


From quarters one through three sales were consistently lower than expected. Sales in

quarters six through eight were right on target. I was able to do this by carefully analyzing

the effect of the economic index on sales. The mistake I made in the previous quarters was

overestimating the increase in demand that would coincide with an increase in the

economic index. With more data on past sales to analyze it was much easier to predict

future sales.
MP3 Industry Wholesale Prices

The key Q1 - Q4
Prices remained
$45
$41 $41
constant after Q4
reason Sonic Blaze $40 $39 -$39 -
$40 -$40 -
quarter four ------$39 ------

----$35 ---- -------$35 ------ --- $35 ---- ---- $34 ----
$35
$33
underperformed in $30 $29

the market in the $25
Price

$20

first four quarters $15

$10

was because the $5

wrong price was set $0
Sonic Blaze Competitor 1 Competitor 2 Competitor 3 Competitor 4 Competitor 5 Competitor 6
Company

for the Sonic Blaze
Q1 Q2 Q3 Q4

brand given the
Comparison of Sonic Blaze Product Development Budget to Industry Average Product
strategy Development Budget
$160
$150
employed. $137
$140

$125 $125
There was $120
$110 $111 $109 $111
$103
simply too much $102
Budgeted Amount (000)

$100
$90 $90 $90 $90

competition at $80 $75 $75

the $35 level for $60

Sonic Blaze to $40

compete at that $20

price level with $0
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Quarter

Product Development Average Product Development Budget


my strategy. Of the six portable mp3 player manufacturers in the industry, four companies

positioned themselves in the mid-price range. Two other companies in the industry also set

their product’s price at thirty-five dollars a unit but spent more on product development and

quality management than Sonic Blaze.

In order to compete in the market, I either needed to invest more money in product

development or reduce the price of the Sonic Blaze. At the end of quarter three, I decided

to reduce the wholesale price of the Sonic Blaze from $35 per unit to $33 per unit. The

price change boosted demand more than expected. With 3,690 surplus units in inventory at

the beginning of
Impact of Price Change on Sales

$41 60,000 the fourth
54,718
53,509
$39
48,960
51,457 51,557
50,000 quarter and a
46,410
45,630
44,000
$37 40,000 manufacturing

Sales (Units)
$35 $35 $35 capability of
Price

$35 30,000

$33
$33 $33 $33 $33 $33
20,000
50,480 units, the

$31 10,000
manufacturing
3,971

0 0 0
plant was unable
$29 $0 $62 $0 $0 0
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Quarter
to produce
Price Sales Lost Sales

enough units to keep up with demand. In the fourth quarter the Sonic Blaze brand incurred

lost sales of 3,971 units. Normally lost sales are viewed as a negative event. In this case,

however, they should be viewed as positive. The fact the Sonic Blaze incurred lost sales

means that I have effectively increased the demand for my product.

Sales steadily increased for two quarters after the price change. In quarter six I

again incurred lost sales, but only for sixty-two units. This was due to an unexpected jump


in my product perception generated by increased advertising. This will be discussed more

in-depth later in this report.

QUALITY MANAGEMENT STRATEGY

My quality management strategy was to keep the quality management budget at a

fairly consistent level. I wanted to make the Sonic Blaze the highest quality mp3 player on

the market in the mid-range price bracket.

My Sonic Blaze Quality Management vs Industry Average

Quality $160

$141
$140 $137
$130$132 $129 $130
$125 $127
$123
$120 $120 $120 $120 $120 $120
$120
Quality Management Budget (000)

$110

$100

$80

$60

$40

$20

$0
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Quarter

Quality Management Average Quality Budget

Management budget was only slightly lower than the industry average each quarter. Even

though my budget was slightly below the industry average I believe that I spent more in

quality management than my competitors in the same price bracket and that the industry

average was inflated by the high-priced competitors’ spending.

PRODUCT DEVELOPMENT STRATEGY


My product development strategy was to heavily invest in product development in

the first quarter, reduce spending in the second quarter, and then taper off spending to

$75,000 in the remaining quarters. The thinking behind this was to develop a product with

all the
Impact of Product Developement on Market Share
necessary
$160 16.00%
$150 15.40% 15.40%
and most 14.10%
15.10% 15.00%

$140 $137 13.30% 14.10% 14.00%

demanded 13.70% $125 $125

$120 12.00%
Product Developement Budget (000)

$110 $111 $109 $111
features at $102 $103
$100 10.00%
$90 $90 $90 $90
the outset

Market Share
$80 $75 $75 8.00%

but to keep
$60 6.00%

enough
$40 4.00%

money in
$20 2.00%

the budget
$0 0.00%
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
to make Quarter

Sonic Blaze Product Development Average Product Development Budget Market Share
minor
Increase in market share is due to price decrease
improvements if they were needed.

Starting in quarter five, I deviated from my original Product Development strategy

and increased the Product Development budget to ninety-thousand dollars a quarter. I was

spending much less than the industry and feared that consumers would view my product as

inferior and I would lose market share if I did not increase the development budget.

I believed that in the mid-range price bracket quality would be more of a price

driver than the latest technology: If people wanted all the latest technological features on

their mp3 player then they would opt for a higher-priced mp3 player; I was wrong. Quality


did play a small role in driving demand; however, product development was more

important to consumers.

Putting more money into product development would mean that I would have to

take out more bank loans. A large part of the decision to cut back on product development

so much in the first place was a desire to eliminate my need to take out any more bank

loans.

The way I saw it, I needed to finance my operations from equity, not through debt.

Quality has always been very important to me, and my production cost-per-unit was

decreasing every quarter but not as much as I would have liked it to; so cutting back on the

Quality Management Budget was not an option.

I tried to establish the connection between my Quality Management Budget and

Product Development Budget and my Product Perception Grade but found none. When I

lowered both my Quality Management and Development budgets in quarter two my

Product Perception Grade increased: In quarter three when I increased both budgets my


Product Perception Grade decreased – exactly the opposite reaction one would expect.

Relationship Between Quality Management, Product Developement, and Product Perception

$160 95.0
$150
94 94.0
$141
$140 $137 $137 93.0
$130 $132 $129 $130 92.0
$125 $125 $125 $127
$123
$120 $120 $120 $120 $120 $120 91.0
$120 $110 90
Quality Management and Product

$110 $111 $109 $111 90.0
89
Developement Budget (000)

$102 $103 89.0

Product Perception
$100 88.0
87 87 $90 $90 $90 $90
87 87.0
$80 $75 $75 86.0
85.0

$60 84 84.0
83 83.0
82.0
$40
81.0
80.0
$20 79.0
78.0
$0 77.0
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Quarter

Quality Management Product Development Average Quality Budget
Average Product Development Budget Product Perception


There also seemed to be no direct connection between the difference between

Sonic Blaze’s budgets and the industry average, as there was with market share. At the end

of quarter four I came to the conclusion that since I could not identify the direct cause of

my loss of market share the best course of action would be to stick with my Master Budget

and lower the Sonic Blaze wholesale price to reflect the lower perception.

My strategy to increase market share appeared to pay off: as soon as I lowered the

wholesale price I regained market share. However, while market share did increase for two

straight quarters it only increased slightly. I was never able to maintain more than a 15.40

percent market share.

In regards to product perception, I failed to identify the primary driver. I theorized

that it was somehow linked to product development but I was wrong. Since I could not

identify a relationship I decided to keep my Product Development and Quality

Management budgets at a constant level.

After looking over all the data and drawing several graphs I have come to the

conclusion that there is no primary driving force behind market share. It is determined by

the overall relationship between Sonic Blaze’s budgets and the industry average budgets.


Relationship Between Sonic Blaze Budgets, Industry Average Budget, and Product
Perception

$180 96

$160 94 94

92
$140

90 90
$120
89

Product Perception
88
Budget (000)

$100 87 87 87
86
$80
84 84
$60 83
82

$40
80

$20 78

$0 76
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Quarter

Advertising & Promotion Quality Management Product Development
Average Advertising Budget Average Quality Budget Average Product Development Budget
Product Perception

ADVERTISING & PROMOTION STRATEGY

With four of the six companies in our industry competing in the mid-range price

bracket I decided to invest heavily in advertising and promotion. Each quarter Sonic

Blaze’s advertising and promotion budget was higher than the industry average.


Sonic Blaze's Advertising and Promotion Budget vs The Industry Average

$180

$160 $160 $160 $160
$160
$150
$140
$140 $137
$130
Advertising & Promotion Budget (000)

$126

$120
$110
$104 $105
$100 $102
$100 $96 $96

$80

$60

$40

$20

$0
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Quarter

Sonic Blaze Advertising & Promotion Budget Industry Average

My strategy was to create more demand for the Sonic Blaze mp3 player than the

competition through advertising and building the brand image. The goal was to make

consumers think “Sonic Blaze” when they think of mp3 players.

FINANCIAL PERFORMANCE

I am happy to report that net profit increased each quarter. Net profit tripled

from quarter one to quarter four and our shareholders enjoyed an increase in stock value

each quarter. Net profit and stock price skyrocketed from quarter four through eight.

Stock price soared from $8.88 in quarter one to $54.10 in quarter eight - a growth rate of

over six hundred percent! Net profit grew 8.33 percent in the same period of time. Because

of Sonic Blaze’s rapid growth I was able to increase dividends from five thousand dollars

(thirteen cents a share) to twelve thousand dollars (thirty cents a share) over the course of


eight quarters.

Relationship Between Net Profit, Dividends, and Stock Price

$140 $60.00

$125
$54.10
$120
$50.00

$100 $94 $41.35
Net Profit & Dividends (000)

$40.00

$80 $74
$31.78
$30.00

$60 $57 $26.38

$45 $20.43
$42 $20.20 $20.00
$40

$24 $13.00
$10.00
$20 $15 $8.88
$10 $10 $12
$8 $8 $8 $9
$5

$0 $0.00
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Quarter

Net Profit After Taxes Dividends Current Stock Price


The net profit margin on Sonic Blaze grew at a faster rate than the gross profit

margin. The reason for this is that gross profit is determined solely by the amount of sales

minus the manufacturing cost of the products sold. Reducing interest costs, product

development costs, and advertising costs have no effect on gross profit: They do, however,

affect net profit margin. Though I was not able to effectively boost sales, thus raising gross

profit margin and market share, I was able to cut spending and interest expenses thus

boosting the net profit margin. Reducing spending also increased the company’s return on

assets.

Profit Ratios
Gross Profit Margin, Net Profit Margin, ROA, ROE

60.0%

54.3% 54.6% 54.9%
53.7% 52.77% 53.06% 53.38% 53.68%

50.0%

40.0%

30.0%

20.0%

11.4%
9.4%
10.0% 7.4%
5.7% 6.5%
4.2% 5.5%
4.2% 4.5% 3.4%
1.5% 2.4% 2.6% 2.8% 2.8% 3.3%
1.0% 1.5% 1.3% 1.4% 1.7% 2.2%
0.5% 0.7%
0.0%
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Quarter

Gross Profit Margin Net Profit Margin Return on Assets Return on Equity

The increase of Sonic Blaze’s stock price is directly proportional to return on

assets. Investors will value the
Relationship Between Return on Assets and Stock Price

company more and be willing to 4.0% $60.00

3.7%
3.5% $54.10

invest more if it is managing its $50.00

3.0%
2.8%
$40.00
assets better, not to mention
$41.35
2.5%
Return On Assets

Stock Price

2.2%
$31.78
2.0% $30.00

regularly increasing dividends. $26.38
1.7%
1.5% $20.43
$20.20 1.4%
$20.00
1.3%
1.0%
$13.00
$8.88 0.7%
$10.00
0.5% 0.5%

0.0% $0.00
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Quarter

Return on Assets Current Stock Price


As operations become more efficient and by reducing inventory plant assets are

better utilized bringing about a better return on assets.

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