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COMPANY BACKGROUND
midsized subsidiary of the Sun Corporation
MISSION
to develop and supply unique, cost effective fabrics and related non conventional structures to proactively support the Sun Corporation's worldwide consumer and professional market to capitalize on the resultant unique product and fabric capabilities by developing profitability franchises in selective growth-oriented consumer and industrial markets
THE PRODUCT
Super Weave
DRAWBACKS
1. Product improvements made by Smith might not be exclusive to Sanitech in the future, because Smith could sell to Sanitech's competitors. 2. Smith's capacity versus Sanitech's demand. 3. Lack of a second source. 4. Fear of monopolistic pricing practices.
SMITH'S RESPONSE
Smith's prices to Sanitech immediately dropped.
Smith introduced pricing strategies that rewarded Sanitech for high volume and provided multiyear incentives
Sanitech and Smith had developed an effective partnership Smith had been able to maximize manufacturing efficiencies and achieve lower cost
Advantages:
The division can operate as independent profit centers with the managers of these units being completely responsible for performance of their business units. This increases their motivation Makes it easy for the top management to assess the performance of the individual divisions. Tax and custom authorities favor market price method as it is transparent and they can cross check the price details provided by the organization by comparing them with market prices on that date. Problems: There is no competitive market which can provide comparable price. There is variation in the prices between one market and another due to difference in exchange rates, transportation cost, local taxes and tariffs etc.
SHOULD VERTICALLY INTEGRATED CORPORATIONS BE FORCED TO PROCURE RAW MATERIALS FROM OTHER DIVISIONS