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Higashimaru Shoyu Company Ltd A Price Control System Case Solution
The effectiveness of the system is measured by considering the qualitative aspect of this project i.e. the extent to which the price control system has enabled the management to achieve its objective of building up the managerial skills of the senior employees, to reduce costs as prices are flat due to imbalances in the supply and demand of soy sauce products and to be able to sustain and grow by earning profits. Moreover, efficiency in the case of the price control system is described as the amount of benefit obtained as an output as opposed to the costs incurred for the resources consumed to implement the system.
Following questions are answered in this case study solution
How does Higashimaru compete?
What is the purpose of the price control system?
What are the strengths and weaknesses of the price control system?
Was the price control system effective, efficient?
What was the role of the monthly meetings?
Why is Okuno-san telling other companies about Higashimaru’s price control system?
Case Analysis for Higashimaru Shoyu Company Ltd A Price Control System
1. How does Higashimaru compete?
Merger of the two companies, Higashimaru is a Japanese company; dealing in a variety of soy sauces, dressings for the salad, porridge, seasoning for cooking food, various soups and sauces for noodles. The company is targeting the specific needs of the customers regionally and nationally by becoming the 3rd largest seller of the basic food products, as well as, by conforming to the culture of the country and to the health habits of the general Japanese public.
The company was operating in the industry which is gradually concentrated with the small number of large firms, including Higashimaru with the 5% market share. However, as the soy sauce industry became concentrated with the additional small and local firms which approximated around 2000 in 1992, the supply exceeded the demand for the product. The imbalance between the supply and demand of soy sauce in the market reached at such a level where the prices of the product decreased sharply. This gave a huge blow to the company because prices were so low that some companies with the existing cost structure of sixty percent fixed costs and thirty percent variable costs were not able to cover their costs. Hence, some of the companies had to exit while other stable firms experienced a decline in their profit margin.
Besides, Higashimaru was one of those companies whose profits fall to 5.5% from 10% profits, during the normal phase of the industry. Though, one of the reasons was the lesser prices of the products, but there was another major reason that contributed to the lower profitability and simultaneously assisted in the growth of the company. This specific strategy was the need of the hour to compete with its rivals. Hence, following up with the industry trends of introducing new and unique products each year the Higashimaru took a step further by anticipating the changing industry trends of flat soy sauce demand. Therefore, it started developing and launching multiple new products every year. On average, Higashimaru was introducing 15 new products annually. Nevertheless, there exists an argument that despite the excess supply and low demand the company was producing new products. The statement was further validated by the fact that this newly adopted strategy also contributed to the increased fixed costs due to the complexity in the production structure due to the new additions in the product. However, the rapid introduction of the newly devised products is that wise strategy which upon implementation ensured the company’s stability and ultimately growth even in times of threatening competition and compromised profits. Consequently, this growth and stability enabled Higashimaru to compete within the industry.
2. What is the purpose of the price control system?
Introduced in 1980, Price Control System was like virtually small businesses within the company. The production process of the company was divided into six groups with a clear set of objectives and standard operating procedures for each group. The groups were treated as profit centers where each department needed to buy its resources from the preceding department in the chain i.e. the finished good for one group was the raw material for the succeeding group. Moreover, an expectation was tied up with each group i.e. they were needed to earn profits. In order to establish formal procedure for the price control system a virtual bank was also formulated by the plant manager.
Every strategy has a purpose attached; hence, the whole exercise of the development of price control system was not without any purpose. Considering the level of education of its senior employees, Mr. Okuno gauged the need for the development of the managerial skills of the senior employees. Though, they were far more experienced, but the lack of high education raised obstacles in their adaptation to the changing modernized system of business. Hence, price control system will help in inculcating the attitude of being the president among the employees of the group i.e. enhanced strategic decision making skills for earning better profits and saving costs as much as possible. It was believed if the responsibility of making its centre profitable will be on the shoulder of these senior employees they will resort to adapt to cost saving efficient techniques as well as it will lead to the improvement in their ability to manage the process resourcefully. For instance, in the case of bottle testing, automated system replaced the employees; resulting into efficient use of resources by reducing the labor costs and by following efficient quality assurance. The reason for diligently working for improvement in the skills set of the senior employees was their great achievements in the past which signifies their valuable experience and their ability to lead the junior employees within the company.
Moreover, by making the groups as separate profit making entities Mr. Okuno, the plant manager will be able to instigate the profit making attitude among the employees. Hence, this strategy will enhance their understanding and application of cost benefit analysis in each process of production in order to save costs and enhance profits. Moreover, the PCS was devised to be a simple procedure to develop an understanding of the system. Consequently, it will facilitate the employees within each group so that they can trace improvements made on their part and ultimately be able to translate the results in greater motivation of the employees due the high visibility of the results.
3. What are the strengths and weaknesses of the price control system?
Following are the major weaknesses of the price control system:
The profits earned by each group were not linked with the actual profits of the company. The explanation for this purpose was to keep the PCS simple to comprehend and easy to implement. However, this lack of translation of groups’ profits into the expected profits of the company may deviates the groups from the final objectives of the company due to the misalignment of company’s objectives with the objectives of the employees working for each group. Therefore, though the groups are striving to make profits, but they may not get translated into company’s earnings.
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