Harvard Case - Higashimaru Shoyu Co. Ltd. (A): Price Control System
"Higashimaru Shoyu Co. Ltd. (A): Price Control System" Harvard business case study is written by Robin Cooper. It deals with the challenges in the field of Accounting. The case study is 11 page(s) long and it was first published on : Aug 26, 1994
At Fern Fort University, we recommend Higashimaru Shoyu Co. Ltd. implement a comprehensive pricing strategy that leverages activity-based costing (ABC) to accurately determine product costs, considers market dynamics and competitor pricing, and incorporates a flexible pricing model allowing for adjustments based on customer segments, product variations, and market conditions. This approach will ensure profitability, maintain market competitiveness, and support the company's long-term growth strategy.
2. Background
Higashimaru Shoyu Co. Ltd., a leading Japanese soy sauce manufacturer, faces a challenge in managing its pricing strategy. The company's existing cost accounting system, based on traditional volume-based methods, fails to accurately capture the true cost of producing different soy sauce varieties. This leads to inconsistent pricing and potential profitability issues, particularly as the company expands its product portfolio and targets diverse customer segments.
The case study focuses on the company's decision-making process regarding pricing for its flagship product, 'Higashimaru Soy Sauce,' and its new product, 'Reduced Salt Soy Sauce.' The company is grappling with internal pressures from departments concerned with profitability and external pressures from competitors and market trends.
3. Analysis of the Case Study
This case study can be analyzed through the lens of cost accounting, pricing strategy, and strategic management.
Cost Accounting:
- Traditional Cost Accounting: Higashimaru's current system relies heavily on volume-based cost allocation, which fails to accurately capture the complexities of its production process. This leads to misallocation of costs and inaccurate pricing decisions.
- Activity-Based Costing (ABC): Implementing ABC would provide a more accurate picture of the true cost of producing each soy sauce variety. By identifying and allocating costs based on specific activities involved in production, ABC would enable more precise pricing decisions.
Pricing Strategy:
- Cost-Plus Pricing: Higashimaru's current approach relies heavily on cost-plus pricing, which adds a markup to the calculated cost of production. This method is prone to overpricing in a competitive market and may not be sensitive to customer value.
- Value-Based Pricing: A value-based pricing strategy would consider the perceived value of the product to the customer, taking into account factors like quality, brand reputation, and perceived health benefits. This approach can lead to higher margins and customer satisfaction.
- Competitive Pricing: Understanding competitor pricing strategies is crucial for setting competitive prices. Higashimaru needs to analyze competitor pricing models and positioning to ensure its products remain competitive in the market.
Strategic Management:
- Growth Strategy: Higashimaru's expansion into new product lines and market segments requires a flexible pricing strategy that can adapt to different customer needs and market dynamics.
- Profitability: Accurate cost analysis and a robust pricing strategy are critical for maintaining profitability and ensuring long-term business sustainability.
- Competitive Advantage: Developing a pricing strategy that differentiates Higashimaru's products based on value and quality can create a competitive advantage in the market.
4. Recommendations
- Implement Activity-Based Costing (ABC): Higashimaru should implement ABC to accurately determine the cost of producing each soy sauce variety. This will involve identifying and analyzing activities related to production, such as raw material procurement, packaging, and distribution.
- Develop a Flexible Pricing Model: The company should adopt a flexible pricing model that considers different customer segments, product variations, and market conditions. This model should incorporate both cost-plus and value-based pricing elements, allowing for adjustments based on market demand and competitor pricing.
- Conduct Market Research and Competitive Analysis: Higashimaru should conduct thorough market research to understand consumer preferences, competitor pricing strategies, and market trends. This information will be crucial for setting competitive prices and positioning its products effectively.
- Develop a Pricing Policy and Guidelines: The company should establish clear pricing policies and guidelines for its sales team. These guidelines should outline the pricing model, acceptable price ranges, and factors to consider when setting prices for different products and customer segments.
- Regularly Monitor and Evaluate Pricing Performance: Higashimaru should regularly monitor its pricing performance, analyzing sales data, profitability, and market share. This analysis will help identify areas for improvement and adjust pricing strategies as needed.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: Implementing ABC and adopting a flexible pricing model aligns with Higashimaru's mission of providing high-quality soy sauce products while ensuring profitability.
- External Customers and Internal Clients: The recommendations address the needs of both external customers, who value quality and affordability, and internal clients, who require accurate cost information for decision-making.
- Competitors: The recommendations incorporate competitive analysis to ensure that Higashimaru's pricing remains competitive in the market.
- Attractiveness: The recommended approach is expected to improve profitability, enhance market competitiveness, and support the company's long-term growth strategy.
6. Conclusion
By implementing a comprehensive pricing strategy that leverages activity-based costing, considers market dynamics, and incorporates a flexible pricing model, Higashimaru Shoyu Co. Ltd. can achieve accurate cost allocation, optimize profitability, and maintain its market leadership position. This approach will enable the company to navigate the complexities of the soy sauce market, expand its product portfolio, and achieve sustainable growth.
7. Discussion
Other alternatives not selected include:
- Maintaining the current cost accounting system: This option would continue to rely on inaccurate cost allocation and potentially lead to pricing errors and profitability issues.
- Adopting a fixed pricing model: This approach would lack flexibility and could result in missed opportunities to capture market share and maximize profitability.
The key assumptions of the recommendations include:
- The accuracy of the ABC model in capturing the true cost of production.
- The willingness of customers to pay a premium for high-quality products.
- The ability of Higashimaru to effectively implement the recommended changes.
8. Next Steps
- Develop an ABC model: The company should engage with internal accounting and operations teams to develop a detailed ABC model that accurately captures the cost of producing each soy sauce variety.
- Conduct market research and competitive analysis: Higashimaru should conduct thorough market research to understand consumer preferences, competitor pricing strategies, and market trends.
- Develop a flexible pricing model: The company should develop a flexible pricing model that incorporates cost-plus and value-based pricing elements and allows for adjustments based on market conditions.
- Implement the new pricing model: Higashimaru should implement the new pricing model across its product portfolio, ensuring that the sales team understands the new guidelines.
- Monitor and evaluate pricing performance: The company should regularly monitor its pricing performance, analyzing sales data, profitability, and market share to identify areas for improvement.
This implementation plan should be completed within a timeframe of 6-12 months, with key milestones established for each stage of the process.
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Case Description
Illustrates how Japanese firms use profit pressures to increase efficiency. In particular, explores how pseudo profit centers create pressure on workers to increase revenues and reduce costs, and the use of semiautonomous teams in a traditional Japanese workforce.
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