Back Bay Battery Simulation

I- Case overview
As business unit managers at Back Bay Battery, we attempted to manage the firm efficiently
and achieve positive cash flows for the period 2013-2020. The firm sells two types of batteries: NiMH
and Ultracapacitor. With regard to NiMH, sales are continuously growing due to consumer demand.
However, there is a lot of competition in this field so some logical strategies should be taken to sustain
its competitive advantages. On the other hand, the Ultracapacitor is a new technology for which the
market share is not as high as the NiMH batteries, but has very bright prospects, especially in the power
tools market..
Our main mission is to identify the most reliable strategy for the the firm to prosperously handle
various challenges and explore their new market. As such, R&D spending budgets and price level must
be managed on the span of 8 years. A main concern arose as soon as we started to run our simulations:
should we invest in existing, strong market shares, and high sales projects like the NiMH or develop
the UC, a new battery technology, to its full potential? Indeed, the business’s main problem was getting
a good balance between R&D spending for NiMH which is an existing product and the new
Ultracapacitor. After playing 8-10 runs each, we evidenced the decisions that would benefit the firm the
most. This paper addresses the winning strategy we chose to follow so as to avoid going bankrupt,
maximize profit, and increase market penetration and sales..

II- Winning strategy - Focus on new product development ($239Mn)

This strategy is structured around aggressive investments in the features of the Ultracapacitator
(UC). At first, it focuses the R&D budget on energy density for UC to increase sales of power tools and
two-way radios because from the data given to us, these are the most desired characteristics that
customers want and that can attract new clients. Similarly, we focused on investing in self-discharge
R&D for UC to increase the sales of power packs. We used NiMH as a cash cow to generate revenue,
that will later be invested in R&D for UC.
As such, we anticipate the decrease in sales of the NiMH by penetrating the power tools market
with the UC; then, we invest in UC process improvement to decrease its variable costs per unit to make
it profitable. While investing in the features of UC, we were investing in process improvement for NiMH
so that we can make a profit when prices are driven down by market demand (process improvement
investments will decrease the variable cost per unit of NiMH batteries). At the middle of the simulation,
after the UC becomes market leader due to its enhanced features, we switched the focus of the
investment to UC process improvement to decrease its price and retain market share.
We envisioned this strategy before starting the simulation and we focused on the consistency
of our choices over the span of the activity; yet, we had to micro-manage the R&D budget and price
changes to be reactive to the yearly dynamics of the market. These micro-changes were learnt by trial-
and-error, since 11 simulations were run before the winning scenario; as such, we prioritised on
consistency, that we believe is key to achieve innovation breakthroughs and hence superior profit
margins.
The following is the timeline of the simulation for our winning strategy. All decisions are made
at the end of the year.

- 2013: We start by increasing the price of the UC from $20 to $25, while the price of the NiMH
stays at $10. Price for the UC is very inelastic since it is a new technology. We noticed this by trial-and-
error from our previous simulations. By increasing the price, we cover the R&D expenditure for the two
products. The R&D budget ($10Mn) is described in Appendix I.
Sales for power tools are affected positively by 20%, as expected. Two way radios and power
pack sales decreased by respectively 12% and 24% because we neither reduced the price of the cash
cow (NiMH) nor invested in new features. Our sales were affected since NiMH has a big part in the
sales portfolio. Yet, this will not affect our strategy since we are determined to be consistent with the
long-term view we described previously (divest the old NiMH to invest in the new UC). As such, for
2014, no changes to the R&D budgets and prices for the two products are recorded.

- 2014: We observe an increase in the sales of UC due to the new features, but a slow decrease
in the sales of NiMH due to the power tools and two way radios markets reaching maturity, as suggest
the following figure. We want to further penetrate the power packs market by shifting our R&D
investment into self-discharge. The new R&D budget ($10Mn) is described in Appendix I.

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 - 2015: Demand drives our prices for NiMH down to $8.80 to stay competitive and prevent
further price drops. Since the NiMH is less attractive to the consumer than before, we operate a pivot
in our R&D expenditures to discard investments in NiMH performance to the benefit of the UC process
improvement. Indeed, we need to reduce the variable costs of the latest to cover the decreasing sales
of NiMH. We believe that The new R&D budget ($6Mn) is described in Appendix I.

- 2016: Demand drives our prices for NiMH down to $8.30 per unit to stay competitive and
prevent further price drops. There’re a lot of potential customers in power packs; thus, we reduced the
price of the UC to $24 per unit to penetrate the market and invested in self-discharge for the UC to
match with the customer’s desired characteristics. The new R&D budget ($6Mn) is described in
Appendix I.

- 2017: We decreased the price for NiMH to $6.75 to keep it as a cash cow and to follow market
demand and competition with Lithium-ion batteries. The price of the UC is decreased aggressively to
$21 per unit to palliate the competition. The entire R&D budget is spent in UC process improvement to
decrease variable costs, since a breakthrough in self-discharge was achieved in 2016. The new R&D
budget ($3Mn) is described in Appendix I.

- 2018: Sales for power pack increased by 97% and sales for power tools increased by 52%.
The NiMH price is decreased to $6.60 per unit to harvest under market prices. UC prices are decreased
to $20 per unit. The entire R&D budget is spent in UC process improvement to decrease variable costs.
The new R&D budget ($5Mn) is described in Appendix I.

- 2019: UC prices are decreased to $19.70 per unit. The NiMH price is decreased to $6 per unit
to harvest under market prices. The entire R&D budget is spent in UC process improvement to decrease
variable costs as sales are increasing. The new R&D budget ($5Mn) is described in Appendix I.

- 2020: the final profit for this strategy is $239Mn (Appendix IV)

III- Alternative strategies

Goal: optimizing the cash cow product development in the first time, bring the variable costs of
the NiMH and UC down to become price leader ($204Mn).

One of our strategies was to adopt a cost leadership strategy. So we allocated most of our
budget on Process Improvement of both batteries. During the first years, we heavily invested on NiMH
process improvement since it was our largest market to exploit and we wanted to attract as many
potential customers as possible. Three quarters of our budget was invested on NiMH process
improvement when the remaining quarter invested on UC battery. Our NiMH market share grew for
three years and we were able to always price it at the market price expectation or even below and still
being profitable. But the sales stagnated between 2014 and 2015, the market started to be saturated.
So we totally stopped investing on NiMH and allocated all our resources on UC batteries’ process
innovation in order to decrease its variable cost which was equal to 23.99$ in 2013. To be noted that
the initial price of UC battery was lower than its variable cost by $4 so it was not profitable. Thanks to
this strategy, the variable cost per unit decreases substantially from $23.99 to 11.6$ within 5 years. So
we gradually decrease the UC batteries’ toward the demanded price and the sales doubled, when NiMH
sales were constantly decreasing.
This strategy was focused on process improvement only, our company was therefore adopting
a cost leadership approach; meaning that we wanted to be able to sell at the lowest price in the market
by having the lowest variable cost per unit. As a result, we could attract all the customers that are more
price sensitive. However, we lost many potential customers who were more quality oriented since we
did not improve the technical characteristics of batteries such as energy density and self discharge who
were expected to be high by the customers. With a limited budget in R&D a company should focus
either on the quality of its batteries or on their cost per unit.

Learning outcomes

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 Variable costs are decreasing when process improvements are invested in. The combination
of decreasing variable costs and increasing unit sales is a success factor for the company when it
launches a new product in the market, since contribution margin per unit increases significantly. As
such, investing aggressively in process improvements while decreasing the price of UC leads to higher
contribution margin, and thus to better returns.
Contribution margin must always be improved; early investment is the key to keep the per unit
CM high from the beginning of the simulation.
Consistency is key. We learnt from trial and error to stick to one strategy, but we didn’t fail to
adapt our strategy to the market dynamics by implementing small incremental changes. Consistency in
exploration (i.e. heavy investments in new product features) led to better results ($216Mn) than
consistency in exploitation (i.e. focusing on the cash cow, described in Alternative Strategy). Yet, a
combination of exploration and exploitation yielded the most profit ($239Mn). This is evidenced in our
winning strategy.
As managers for Back Bay Battery, we observed that deciphering the environment was arduous
since the sales and revenues fluctuate due to the external environment. We concluded that our winning
strategy must be a proactive rather than reactive approach, where we focus on cost and price leadership
to expand our market in non-saturated markets.

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