Discussion paper
Paul Hanson became the Publisher and chairman of News Express at a very
young age of 34 when his father expired. He had only 4 years of Experience.
2. 1991 he made several poor decisions resulting in loss of £100,000.
3. Paul hired Wessling as a GM from competitor with an understanding of full
authority and development of Pauls leadership under him.
4. Several of the competitors were larger and the dominant was Telegraph who
announced rate annually and other followed suit.
5. Three products To Let 1, To Let 2 and To Let 3 sold in varying proportions &
has market share 12%, 8% & 10% respectively. Rates/inch were £4.9, £5.16 and
£5.5. Wessling Analyzed the detail expenses of each product for year 1991 and
shared with Paul.
6. Paul concluded to drop product 3 as there was no scope to reduce expense but
Wessling was final authority to decide as per understanding. Wessling continued
all three product and after six month it highlighted as a successful period.
7. Second half sales was less but market share was retained, Telegraph announced
price reduction of To Let 1 from £4.9 to £4.5/cm. Wessling Forecasted that price
reduction will increase the sales volume.
8. It was anticipated that material and supply cost will reduce in the next year but
still a sales price of £4.5 will be below cost.
Class Discussion:
1. EFFECT ON PROFIT IN FIRST 6 MONTHS: Certain costs (Indirect Labour,
Light and heat, Building Services) are independent of the product 3 remains or
not, Hence in absence of product 3 there will be loss of £1248. Whereas
considering product 3 the profit is £160. Hence continuing product 3 was a wise
decision.
2. SHOULD COMPANY REDUCE PRICE OF PRODUCT 1: Reducing the price
will increase the sales volume, with an forecast of 1000000 volume sales the CV is
£2.4M vis-à-vis £2.1M with volume of 750000. This analysis is not sufficient to
take the decision of droping the price. We need to obtain the Volume point of
difference which after comparing with last year gives us the value of 859106. If
the forecasted sales is above this value then it makes sense in reducing the price
of product 1.
3. NEWS EXPRESS MOST PROFITABLE PRODUCT: The per unit contribution
of Product 3 is much larger even after cash discount of 1.72%. Product 2 is
Hanson's most profitable product. It has a profit margin of Re 0.57 per unit sold
whereas the other products are making a loss. In the first 6 months, the most profitable
product, Product 102, has been sold more than the other products. Compared to
1029654 units sold for the entire period of 1992, 712102 in the first 6 months of 1993.
Key Take away/Learning’s from the class:
1. Decision of dropping the product should be based on data and not supposition.
Revenue Management program has to be adopted, requires to understand the
window of opportunity and volatility. It should not be based on experience, gut
feel, tradition or rule of thumb.
2. Decision on dropping the price to increase the sales volume has to be worked on
the basis of volume point of difference with proper forecast.
3. Product wise detail expenses and earning statements need to be monitored
monthly to make minor sales or production changes
4. P&L statement misleads us while taking the strategic profitable decision, this
statement needs to be properly converted considering operational fixed and
Variable cost.
5. The detail explanation for nature of each costs and their expected future
behavior need to be understood properly.
