1)Before introducing its inkjet printers, did H-P have to estimate the demand curve for them? Why or why not?
In 1984 HP came up with first Inkjet Printer, which was quite far from the perfect to be a complete knock-out. HP was not only the inventor of the Inkjet printer it was as well the manufacturer of the low cost inkjet printers. Before HP has launched its Inkjet printers there were no market existed for it as dot-matrix printers were the market leaders and consumers barely had any idea of Inkjet printers. There were basically existed no way to determine how consumers are going to react to these new Inkjet printers. But at the same time the new printers have many advantages over the existing Dot-matrix printers like advanced technology, low price etc. HP by their market analysis, consumer surveys, research became quite confident over the success of its new Inkjet printers which were surely going to replace old leader i.e. Dot-matrix printers.
Despite of having economies of scale HP could have chosen Direct Methods of Demand Estimation, like;
oConsumer Interviews, by taking a representative sample of consumers briefing them about the new product and taking their opinion & views over it. oMarket studies can be the second idea for Demand Estimation, which was chosen by HP and it has shown serious flaws of dot matrix printers like poor print quality and color, at the same time it has also shown their marketing strategies etc. oExperiments performed in laboratory or field without going to the real market could have also been used for estimating the demand of Inkjet printers.
Above mentioned techniques would yield fairly positive results and given HP more confidence to launch its new product to the mass market.
2)When studying Epson before going after the Japanese dominated dot-matrix market, did H-P try to determine which factors would have an important influence on the demand curve for its product? If so, what factors seemed to be particularly important.
In the year 1984 HP has first invented its Thermal Inkjet Printer but it was not of that quality to meet consumers’ expectation. But HP continued to improve and produce its Low – cost Inkjet Printers. It has also introduced a series of expensive laser printers by using “learn from Japanese” policy it continued to build family of product. In 1988 HP introduced its first Deskjet, the plain paper printer but it was not meeting expected sale targets. In 1989 HP started its research, surveys etc. to look into the factors which would have importance influence on demand of its product, though it was not possible to assume a demand curve. Following findings gave HP more opportunities to make its product a knockout and leader;
The market leader Dot-Matrix printer had serious flaws like poor print quality and color. Epson – the market leader in Dot – matrix printer, its marketers intended to customer’s attention and advertise it at the same time for this they got stores to keep their printers at most prominent spots. Epson used tactical weapons like price cut to fend off challenges and it has an influence on market demand by reducing prices as required by business strategy. Consumers liked Epson printers for their reliability.
Epson printers were easy to manufacture and they got huge mileage out of the same product by creating a broad line consisting of variations of the same basic printer.
After learning the current market, technology and consumer behavior, HP responded to these in following manner:
HP engineers created a completely new Inkjet color printer which was simpler and less sophisticated to suit the needs of mass market. This was done after finding Epson’s less complex manufacturing technology which appealed to the consumers as well as to produce a low cost printer. HP marketers demanded stores to put their printers alongside Epson’s. Here HP recognized the importance of advertising and to grab customer’s attention to sale its products.
HP tripled its warranty period to three years in accordance to respond to the customers’ need for reliability. As HP was a pioneer in the field of inkjet printers and by patenting all its innovations it made the entry of all its competitors to the market just more difficult and had monopoly over the Inkjet printer market in 1990s. It had almost 50 patents to cover its technology. By the time HP had economies of scale like technology, low production cost etc which helped it to reduce prices whenever any rival tried to enter the market to suit consumers, need and demands. HP also kept making continual improvements in manufacturing new printers with variations. These strategies of HP made it a market leader and yielded enormous overall growth results.
3)H-P cut the price of its black and white printer from $995 to $365. If the quantity of such printers that it sold per year increased ten-fold, does this mean hat the (arc) price elasticity of demand for this product was about 1.8? Why or why not?
The formula for arc price elasticity is as below:
By the given problem,
= Initial quantity of printers sold in 1988.
= Quantity demanded at present = 10 (by the given condition)
= Initial price = $995
= Current price = $365
So, = (10 – )*2 / (10 + )
= 18/11 = 1.636
And = (995-365)*2 / (995+365)
Therefore, Arc E = 1.636/0.926
= 1.76 (Ans)
Hence it may be concluded that arc price elasticity for the product was about 1.8.
4)If you were hired by H-P to forecast how many inkjet printers it would sell next year, how would you go about doing it? What data would you need? What techniques would you use? How accurate do you think your forecast would be?
In order to forecast demand of Ink jet printers of HP in the next year, we can use Time – Series Forecasting, which simply uses time-series history of variables to predict future values. For this forecasting method, we will require all available data pertaining to sales volume of HP inkjet printers for each of the previous years.
As indicated from the case we can assume that sale of inkjet printers have increased steadily over the last few years, a Linear Trend Forecasting Regression model may be used. Assuming a linear relation between sales and time, we have
^Qt = a + bt
Where, Q =Sales for any year
and t = Year of sales
Using the method of least squares as the regression model, we would then look to estimate the values of ‘a’ and ‘b’ to a desired level of statistical significance, say 5%. Thus we can be 95% confident that the estimated values of ‘a’ and ‘b’ are correct. Once the estimated values of ‘a’ and ‘b’ are available, we may substitute them in the trend equation and find out the forecasted sales for the next year. Assuming that the linear trend equation fits the real world demand for printers, we may be relatively confident (determined by the significance level) that our estimates are correct. However this estimate precludes the possibility of any change in the existing market structure for printers. Entry of a new competitor or a new kind of substitute cannot be taken into account under such a model. While making forecast we must be careful to recognize that further into the future the forecast will be made wider will the region of uncertainty due to occurrence of change in the existing market structure, which may cause some turning points in variables of forecast. Many times these turning points cannot be predicted.