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Avon Case Study

Essay by   •  August 27, 2019  •  Case Study  •  833 Words (4 Pages)  •  1,049 Views

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Questions:

  1. Evaluate the market that Avon competes in across the AVDC, EAS and MAS segments. What are the key characteristics of the segments and the competitors?

All three products performed similar functions, each was based on different design principles, and for each there are certain applications for which it was particularly suited.

Avon had been a manufacture mainly producing ADVC. In the past year, the sales had amounted to $6 M.

There were 15 companies in the ADVC segment, and the market share of the AVDC was $70M. Therefore, Avon had 8.5% of the current ADVC market.

By introducing this new type of EAS drive, Avon would be directly competing in the EAS market plus the original AVDC market. There were 5 companies in the EAS market, and the market is $45.5 M.

The new EAS drive was easier to maintain and it was more efficient, since it required less power input relative to output than existing EAS equipment. Power output could be somewhat more closely controlled and kept within a narrower range.  

If pricing at the same level as the MAS drive, the new type of EAS drive could also be used widely, it will be competing in all three AVDC, EAS, MAS segments, and took over half of the total market (about $ 200M) after achieving fully market share.

The summary is as follows:

MAS

EAS

AVDC

WHOLE MARKET

Characteristic

Mechanical adjustable speed drive,

Speed had to be adjusted by means of a handwheel mounted on the unit, and control settings could be changed only when the unit was in operation.

Elective adjustable speed drive

Adjustable voltage DC drive,

great precision;

Used to power the rolls in a steel rolling mill.  

Advantage

Lowest price

smooth acceleration, simplicity, compactness, and ease of installation. It was possible to obtain a zero-to-full speed range which was substantially stepless for intermittent operation.

More efficient than EAS,

No high-power loss, overheating at low speed operation,

Smaller than EAS drive unit,

Best performance.

Disadvantage

-Not easy use remote control

-Not sustainable

V-belts, pulleys and bearings

A mechanical adjustable speed drive size is not compatible and bulky to install at the work location.

Inefficient used a great amount of power at low-speed operation. Overheating and unsatisfactory operation also resulted where frequent jogging, inching, or reversing were required. Vibration problems had been encountered with electric adjustable speed drives because of the way in which these machines were constructed.

Highest price,

Performance may not fully adjust the price for customers.

OEM Price

(5hp unit)

$3750

$7350

$8450

Market Share

$153.5M

$45.5M

$70M

$269M

Competitors

3 companies from EAS segment and 4 other companies. 2 companies took 50% of the market.

5 medium-sized companies. 1 company took 50% of the market.

15 companies including Avon.

  1. What are the pros and cons of introducing the new EAS drive (a) at a high price? (b) at a low price?

The answer is summarised as the following table:

Assuming 5 H.P. model

High Price

$ 7350 / unit (OEM)

Low Price

$ 3750 / unit (OEM)

Current market share

EAS $ 12.5 M

$ 135 M = MAS $ 78 M

  •    AVDC $ 12 M
  •       EAS $ 45 M

Market share in 5 years

EAS $ 17 M

$ 200 M = MAS $ 115 M

  •    AVDC $ 18 M
  •       EAS $ 67 M

Gross margin

50 %

20 %

Overhead & other expense

12 %

12 %

Profit before tax

38 %

8 %

Estimated Annual Sales

170 unit

2200 unit

Estimated Annual $ Sales

$ 1,249,500

$ 8,250,000

Advantages

  • Higher profit margin for each unit;
  • With high price, the company has more opportunities to produce higher quality products.
  • Even the overall market share may decrease, the overall margin and cash flow can be increased.

  • Larger market share -- $200M, competing in all three segments; Larger annual $ sales;
  • Penetration strategy;

Disadvantages

  • Way much less market share
  • Less profit per unit
  • Low price needs strong marketing efforts and expense.
  • With low price, customer product quality reception may be discounted. For example, is the price is lower than the competitors, customers may feel lower quality about the product.

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