Response to Case Narrative
ElectronicCity is likely engaged in a monopolistic market. The fact that it is focusing on selling high-end, flat screen, HDTV sets merely serves to highlight how the company is striving to carve out a niche for itself by increasing the entrance costs into this particular segment of the market. However, existing market players seem to be heavily focused in the same segment and as a result the margins are low for the company, forcing it to rely on trying to differentiate its product offering with a warranty extension.
The VP of Marketing seems to follow an autocratic style of management as evidenced by the introduction of demerits and the forceful way in which salespersons are made to deliver the sales pitch for the warranties. It appears to be appropriate given the conditions, since Phil seems to agree with the strategy and also seems to be excelling at it. This type of management style has the benefit of presenting an image of a confident and well managed business.
As Father George seemed to pick up during dinner as well, the manner in which the warranty extension sales pitch was delivered to customers might lead someone to think that customers are being duped into buying something that might not be necessary. Considering that Phil himself admits he would never buy it, since the risk of failure is too low to justify the cost of buying the warranty, it seems that the salespersons should present a more neutral sales pitch that serves to educate the customers rather than push them towards unnecessary buying.
It doesn’t matter if Phil becomes more adept at predicting which of his customers will likely buy the warranty since he cannot act on the knowledge. Management requires all salespersons to deliver the sales pitch in all eligible transactions. So Phil cannot save time by only presenting the pitch to those customers whom he thinks will buy the warranty.
Maria’s comments make Phil feel proud about his job, and his success in that job.
His former professor, Dr. Smith’s comments make Phil think about the importance of being able to profile those customers who are more likely to buy the warranties, as well as those who are unlikely to buy them. Phil probably feels more confident about his abilities at his job after Dr. Smith’s comments.
Father George, unfortunately for Phil, made him think about whether or not he was doing something wrong in selling the warranties.
Since this is Phil’s first job after graduation and he is doing so well at it, he is unlikely to rock the apple cart by questioning the sagacity of selling warranties to people who would most likely not need it, especially since he is working in their flagship store. He might console himself with the thought that he would stop after he has established himself within the firm.
Phil received $360.4 as incentive pay for selling warranty extensions in January of 2007. Since, each salesperson is entitled to get a 10% commission on their monthly total of warranties sold for that period, the $360.4 that he earned would be 10% of the entire monthly warranties that Phil must have sold, meaning that the 100% of that value would be the dollar amount of warranties sold in January 2007 by him. Therefore, he sold
worth of warranties for the month of January of 2007 to earn that much commission.
The price of a warranty extension is set at 8% of the sales price of an HDTV set. If Phil sold $ 3,604.0 worth of warranty extensions in the month of January 2007, then the dollar amount of sales of those HDTV sets with which he also sold warranty extensions in that month would amount to:
whilst excluding the worth of those warranty sales. Further, given that he was able to sell warranties in 55% of the eligible transactions for that month, the value of $ 45,050.0 only includes the sales of those HDTV sets with which the warranties were also sold. Therefore, the total number of eligible transactions for that month would be worth:
which is the dollar amount of HDTV sales that he generated in January 2007.
Sales in 2007 are projected to increase by 4% from $ 710.7 Million in 2006 to:
Since the price of a warranty extension is 8% of the sales price of and HDTV set, it is expected that the total revenue generated from warranties, if they were to be sold with every sale of an HDTV set, would be:
However, since the company expects that warranties will only be sold with 75% of all HDTV sets sold, the revenue generated from warranties only is revised to:
To calculate the cost of the warranties the total number of warranties expected to be sold in 2007 needs to be determined. Given that sales in 2006 were 320,000 units of HDTVs and continuing with the previous assumptions of a 4% increase in units sold in 2007, as well as that only 75% of all sales of HDTV sets will be accompanied with a sale of warranty extension, the total number of warranties expected to be sold in 2007 is:
Of this quantity, it was estimated by the company that only 4% of all HDTV sales would result in failures, therefore, the total number of failures expected in 2007 are:
95% of these failures are expected to be small failures:
The company expects that 1.5 hours would be spent on average to fix one such case of a small failure, and that the total labor cost in this case (along with overheads) would amount to $ 100 per hour. Thus, the cost of these small failures for 2007 will likely be:
On the other hand, the remaining 5% of the failures are expected to be big:
and the cost of fixing each of these big failures amounts to $ 800 that a third party expert would demand. So the total cost expected by the company in 2007 of these big failures is:
The total cost of all the failures, big and small, and thus the overall cost of these warranties amounts to:
Therefore, the overall profit from selling the warranties in 2007 is expected to be about:
while, the profit expected from each of the 160 stores in 2007 from the warranty extension business is around:
Dr. Chattopadhyay, S. P. Case Study.