Chapter 5 Strategic Planning Regarding Operating Processes Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

5-2 What are the Primary Influences on Selling Price? Customers  Customer perspective of balanced scorecard Competitors  Learning and growth perspective Legal and social forces  Learning and growth perspective Cost  Internal perspective of balanced scorecard

5-3 How does the External Market Influence Selling Prices? Pure competition  Market determines selling price  Individual company is price taker Monopolistic competition  Market influences selling price  Individual companies influence selling price through advertising

5-4 External Market Continued Oligopoly  Very few companies control selling price  Government monitors selling prices Monopoly  One company controls market and selling price  Government approves price changes

5-5 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 to drive out the competition  Illegal

5-6 What is the Difference between Skimming Pricing and Price Gouging? Skimming pricing  Setting higher initial selling prices due to uniqueness of product  Legal Gouging  Setting high price due to unusual demand  Illegal

5-7 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

5-8 What are the Common Reasons for Holding Inventory? Meet customer demand Smooth production scheduling Take advantage of quantity discounts Hedge against anticipated cost increases

5-9 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

5-10 What is the Difference between EOQ and JIT? EOQ  Short-term model  Minimizes incremental ordering and holding costs JIT  Long-term philosophy  Assumes product-sustaining and facility- sustaining costs are relevant

5-11 What is the EOQ Model? Q = 2DO C Where, D = annual demand O = incremental ordering cost (batch-related) C = incremental carrying cost (unit-related)

5-12 How is the JIT Model Different? Demand-pull system Kanban (visual) system Goals  Eliminate disruptions in production  Reduce or eliminate nonvalue-added activities  Minimize inventory levels Risk: stockouts and resulting customer ill will

5-13 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

5-14 What are Other Compensation Issues? Bonuses  Additional pay based on some future event Insurance  Protection for employees Paid leave  Protection for the company Gross pay versus net pay  Gross = amount earned  Net = amount received

5-15 How are Bonuses Calculated? Bonus amount  Net income before bonus (and taxes)  Net income after bonus (before taxes)  Net income (after bonus and taxes) Bonus rate  Percentage of bonus amount