Solectric: Market Entry Decision
One of the most challenging activities in any organization is deciding when to invest, how much resources to invest, and the appropriate market to venture. Making these decisions can change to be a problem especially when they are made inefficiently. They can lead to massive waste of resources. The solution to this is having an understanding of the most efficient timing and resources to use in an investment. Analysis of the market and its needs helps one to understand the best decisions to consider. Raymond, who was the founder of Solectric, a company that was offering solar powered solution to electricity, was facing this challenge when deciding on whether the company should invest in residential, refrigerated trailers, or digital signage. This paper will provide a critical analysis and review to the Solectric case study.
Attractiveness of the Solar Industry
Although Solectric aimed to harness on the opportunities presented by huge electricity bills, recent market changes had made the solar industry unattractive. The market that they hoped to capture had been eroded by a decline in federal incentives for people to adopt solar power. Generally, the company hoped to sell their solar energy storing devices since they could offer reliable, free, and renewable energy. There was also the emergence of more fuel efficient engines and modern home required little energy for maintenance. To make the situation even more severe, there was the risk of imitation and importation of cheap similar products from China, which would erode most of the gains that the business would have made. The Porter’s five forces model will provide a clear insight into the business competitiveness.
Solectric was susceptible to supplier power, which could make it difficult for the company to control the market. There were few suppliers of solar powered instruments from Asia and Europe. Therefore, solar panels that the company intended to use in its devices were expensive. In addition, since the company was only selling few units of its products, it could not be able to negotiate for trade discounts.
Solectric was not exposed to pressures caused by huge single buyers, who could negotiate for low prices. However, it was even faced with a larger problem of being unable to attract customers to buy its products. In the residential market, new houses were energy efficient and did not require heating or cooling devices, which operate on electricity. In addition, this market was very volatile and could not guarantee Solectric of constant demand. In the refrigerated trailer industry, modern engines were more fuel efficient, which reduced the need for solar energy. In the digital signage market, there was a risk of importations from China that would reduce the company’s market share to 3%, which would only be enough to break even. Since this imports are cheaper than the Solectric products, they can affect the demand its solar energy negatively. Reduction in demand of the services of the company means loss of competitive ability due to the presence of alternative services that are much cheaper.
Solectric had a competitive advantage since it could patent its technologies and earn royalties. Nonetheless, this competitive position was faced with the risks of developments in the energy industry, international markets, and the government’s policies. Inasmuch as Solectric technology could be patented, there were technological developments that had a similar impact in reducing the cost of energy. To illustrate, modern engines were more fuel efficient and modern housing required less energy, which meant that buyers had little need for Solectric solar devices. In the international markets, potential competitors from China would make an almost similar product for a much lower cost. Since households prefer to maximize their utility, they would most likely buy the cheaper products, which would result in little revenue for Solectric. To meet the market trend, Solectric would be forced to reduce the cost of products, which would make it to earn little or no economic profits.
Threat of Substitution
The use of intellectual property rights had the potential of protecting the company’s market. In fact, this proposal had been raised for the residential market. Intellectual property rights notwithstanding, there was a risk of imitation. In the digital signage market for example, the risk of imitation was as high as 35%, which had the potential of reducing the business market size to 3% from 10%. Evidently, this threat was high and had a catastrophic effect on the business.
Threat of New Entry
There was a threat of new competitors entering in the solar industry, which could affect the company’s profits. As noted by the founder, imitators could quickly introduce their products into the market. In addition, there was the probability of importation of solar energy products from foreign competitors. Finally, the company did not control any strategic resource which it would use to ensure that competitors do not enter into this industry. In general, the entry of competitors who could manufacture cheap and quality products that were similar to those of Solectric posed of threat or reducing the company’s market share. As aforementioned, buyers aim at maximize their utility by buying from the manufacturer who sells the products that they want for the least amount. As a result, Solectric faced a real threat on its market from new competitors.
Solectric business strategy aimed at ensuring that the investors made maximum returns in the short term and also in the long term. To achieve this goal, the economic feasibility of the three alternative markets. Noteworthy, the company wanted to concentrate on one market so that it could not spread its capital too thin.
Retail Market: In the retail market, the business wanted to focus on the affluent members of the society who would quickly adopt its solar system of energy. They also targeted the home owners of large old houses and home builders. Generally, they used marketing campaigns to raise awareness of the effectiveness of using the company’s integrated solar energy system in reducing the long term cost of energy.
Refrigerated Trailers Market: In this market, Rayburn had the option of introducing this proven technology that would reduce fuel costs to established logistics companies in Australia. Generally, he would have to invest a lot of capital and wait for the business to repay itself over some period of time.
Digital Signage Market: Rayburn aimed at harnessing on the opportunities presented by the move by advertising companies to make billboards that have an interactive ability with customers. Generally, these billboard required reliable energy sources. To venture into this market, the company had the strategy of either making assembly the solar energy systems and integrating them into the billboards or licensing companies other companies to make digital signage using its technology.
Since this business was high risk, the company had to weight its options carefully. Firstly, it could either invest in the most rewarding options. Alternatively, the business could license other players to manufacture products on its behalf. The use of licenses would enable the company to venture into many markets, even foreign markets. Moreover, this policy would minimize the risk of capital loss due to failed investments.
|· Available technology in Solar energy
The business could use this skill to venture into the solar market by using licenses or by manufacturing and selling to directly to its customers.
· Management that is skillful in solar energy. The company’s management has skill in the electric energy. Therefore, they would have an added advantage over competitors in this field.
· Support from UNSW University. This support would enable him to protect the business technology through patency, which would prevent them from imitation.
|· Little in capital to invest in various market opportunities. The lack of sufficient capital reduced the investment opportunities available for the business.
· Inability of the business to become profitable. Although the company had operated for a while, it was unaware of the investment to focus in. This had led to it making less profits.
|· Large homes in Australia would require this system to reduce their cost of energy. This market presented Solectric with a potential market for the business.
· Major logistics companies such as Linfox were ready to install the solar energy system in their trucks. These truck companies presented Solectric with an opportunity to invest in the refrigerated business.
|· Risk of imitation from China. The imitations from China would reduce the market size of Solectric.
· Ability of competitors to venture into the market. Since this market was open, there were threats from competitors who would have reduced its market share.
· The recent federal government reduction of incentives discouraged potential customers. The company had to maximize on its marketing strategies.
· The emergence of energy efficient engines reduced the need for solar energy. This would reduce demand for products. The best action for this was to adopt new efficient technologies.
Risks With Respect to Each Strategy
The strategy of approaching the residential market was facing a lot of problems due to changes in the political scene and technology. In terms of construction, there were technological risks since modern houses were more energy efficient. As a results, they needed less energy for cooling and heating systems, and accordingly needed less of Solectric energy system. There was also political risk, which was presented in the form of possible reduction on incentives to adopt solar energy. As for wealthy early adopters, the costs of energy could not limit their desire for solar energy. However, just like all other individuals, they were skeptical on the capacity of Solectric’s instruments to keep solar energy. Therefore, Solectric had to first market their products and assure all residents of their reliability.
Refrigerated Trailer Market
The risk in this market was inability to accurately predict future incomes. As a result, there was a risk of inability to recover the huge portion of cash that was used in initial investment. There was also a risk of failure to attract Sandia to acquire the business. The investors hoped that the strategy of entering the refrigerated market would be successful and lead to the company’s acquisition by Sandia. Naturally, it was impossible for the management to make Sandia acquire them. Such a decision could only be made by the Sandia shareholders and not Solectric. The fact that the change would fit well with the services offered by Sandia was what would entice it to buy the investments of Solectric. In order for Sandia to buy Solectric Company, they had to be convinced that they would make a profitable investment in the company. As a result, it was the duty of Solectric to increase its market share in order to attract Sandia.
There was a risk of imitation. This risk was so high that the company had noted there was 35% chance of imitation of its products in this market. There was also the risk of advertisers failing to accept solar energy. Although the Solectric had shown that it is possible for advertisers to reduce costs by using this methods, these individuals still had the right no to adopt Solectric’s solar energy system.
Actions That Solectric Could Perform to Win in Organization
In order to have traction in the solar industry, the business must develop new and innovative business tactics. This method would ensure that it had a constant flow of work. Some of the actions that the company could undertake were establishing contracts with buyers, using efficient supply methods such as just-in-time method, leasing of solar power electric systems, and including service and maintenance activity. The best strategy to make all these implementations functional is to form mutually benefiting partnerships and contracts with involved stakeholders. Before this, the stakeholders had to understand the power of the technology of Solectric.
The company could also make contracts with home builders, refrigerated trailer companies, and digital signage companies, depending on the market segmented it selected, so that it would have a sustainable flow of work. This answers the question of where the company would invest resources. Through this contracts, the company could commit to offer discounts and bespoke products that would match the characteristics of each customer. The trade discounts, the negotiated payment and financing plans, and specialized products would enable the company to tap into this market.
The company could also consider leasing its products. The use of lease agreements would reduce the amount of cash that individuals would need to have in order to acquire its products. As a result, Solectric products would be affordable to most potential customers, which would increase the market share for the company and in turn its profits.
The company could also include offering of repair, service, and maintenance of solar electric power systems. This services would make the skeptical residential home owners to trust the company’s ability to offer high quality products. In addition, it would enable the company to offer repair, service, and maintenance for solar power energy products that are manufactured by competitors, which would make it have more profits and revenues.
|Year||Details||Discounted Value (5%)|
|1||Present Value Cost||-150,000|
|3||Staffing cost ($500,000)||-431,919|
|Future Cash inflows||750,000|
Volatility is 80%, therefore incomes can reduce to
(0.2*750,000)-(150,000)= 0, The business will only breakeven
Normal discount rate 5%
Uncertainty interest rate 15%
|Year||Marketing cost||Technical Cost||Revenue||Total Income/Loss||Discounted Value (15%)|
The trailer business offered more discounted value. Therefore, it was a better strategy than the residential home option. In fact, a less discount rate would result in more incomes for the business. Since the trailer business was the most reward, the company would use the capital it had raised with the shareholders. Once the business had gained momentum, it could issue a public offering to increase its capital.
Diamond E Analysis
The analysis is meant to help in understanding the relationship between the business and its environment.