Microeconomics Week 7 Study Assignments

Toyota: The Accelerator Crisis

1. Try visiting the following video links: a. Prius driver’s 911 call> http://www.youtube.com/watch?v=5IdJqG07orA&feature=fvwb. S&P’s analysis of Toyota’s damage control>

http://www.c;ipsyndicate.com/video/playlist/13089/1312222?cpt=8&title=ir_alert_video_news&wpid=6864

c. Toyota’s commitment>http://www.youtube.com/watch?v=XZoBfpm1zHgd. Toyota’s recall>http://www.youtube.com/watch?v=vD2dwz4GcfE&feature=channel

2. Why was Toyota facing a recall crisis? Did the way the firm was organized globally have anything to do with the crisis? (Tip: efficient alignment in transaction cost economics)

3. In pursuing aggressive global expansion, do you think Toyota managed their value chain activities effectively? Why do you say so? In what product market structures were they competing?

4. How would you manage the tension between global standardization and local responsiveness? Will you favor the cost leadership strategy or the differentiation marketing strategy? Why?

Clean Edge Razor

1. How do you see the structure of the product market for nondisposable razors changing? What was, and is, its market structure? Why do you say so? What will be its likely market structure in the near future? Why do you say so? (Tip: Samuelson and Nordhaus Table 9-1, p.172)

2. Given your economic outlook re product market structure in no. 1 above, will you launch Paramount’s new razor as a niche or mainstream entry? What do the comparative economics of the niche and the mainstream launch programs show? To sharpen your insight, develop a forecasted profit and loss for two years, to cover the following 15 items:

a. Unit sales –razors f. production costs –razors k. operating profitb. $ sales –razors g. production costs –cartridges l. profit as % of salesc. Unit sales –cartridges h. capacity costs m. cost of cannibalization-razorsd. $ sales- cartridges i. advertising and promotions n. cost of cannibalization-cartridgese. Total dollar sales j. total costs o. profit after cannibalization

To facilitate class case discussion, assume cannibalization at 35% for the niche strategy, and at 60% for the mainstream strategy. (Pls obtain the soft copy of the Excel spreadsheet you can use so you don’t have to retype the exhibits.)

Cost of cannibalization = % cannibalization from Avail and Pro * unit sales * cannibalization per unit , where the contribution per unit average for Avail and Pro is $1.76 for razors and $2.80 for cartridges (see case footnote 2)