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Tablet Inc– Case Company Description

The US Department of Justice ordered the boards of directors of the major tablet computer manufacturers to dismiss
and replace their top management due to years of cartel-like behaviour. Investigations found that the companies’
directors had agreed amongst themselves in secret banquets on issues such as deliberately stagnating technology
development plans, pricing the devices artificially high, and other key matters that had both reduced the competition
and limited the choices for the consumers. The boards of directors have understood the seriousness of the situation and
hired you to compete against the other restructured companies.

The core operations of the companies operating in the tablet computer industry consist of research and development,
marketing, production and outsourcing, logistics, and finance. Sales revenues in the previous financial year were
around 1,2 billion dollars. Profitability has been decent and the companies are also generating plenty of cash. This is a
good starting point since it is likely that the increased competition and rapid technological evolution over the next years
will tax both profitability and cash.

History of the industry as well. It became clear that the complicated and
inflexible labour laws in Europe would make the
The tablet computer and the associated special operating operations difficult and expensive.
software is an example of pen computing technology, and To ensure flexibility in R&D and production, the
thus the development of tablets has deep historical roots. companies have also actively negotiated agreements for
For example, the first patent for an electronic tablet used subcontracting parts of their production and R&D.
for handwriting was for the telautograph, with a patent
granted in 1888. The first patent for a system that
recognized handwritten characters by analyzing the
handwriting motion was granted in 1915. The first
publicly demonstrated system using a tablet and
handwriting text recognition instead of a keyboard for
working with a modern digital computer dates to 1956.
Tablet computers appeared in a number of works of
Science Fiction in the second half of the 20th century, with
the depiction of Arthur C. Clarke's NewsPad, in Stanley
Kubrick's 1968 film 2001: A Space Odyssey, the
description of Calculator Pad in the 1951 novel
Foundation, by Isaac Asimov, the Opton in the 1961 novel
"Return from the Stars", by Stanislaw Lem, The
Hitchhikers Guide to the Galaxy in Douglas Adams 1978
comedy of the same name, and not forgetting the
numerous devices depicted in Gene Roddenberry 1966
Star Trek series, all helping to promote and disseminate Future Challenges
the concept to a wider audience. (Source: Wikipedia
http://en.wikipedia.org/wiki/History_of_tablet_computers)
The pace of change in the industry has been rapid and
great expectations have been set for new technologies. The
Present Day overall trend is towards increased mobility with tested
communication speeds of the 4G technology at 1 Gbit/s
while stationary and 100 Mbit/s while moving. The
Currently, the companies are still relatively small on a overall growth potential of the industry is good but
global scale (with an annual sales revenue a bit more than development can vary heavily from one market to another.
1 billion dollars), but due to relatively large R&D
investments, the companies’ tablets are competitive and The biggest challenge for the companies may be keeping
business has developed favourably. Appealing and up with technological evolution since R&D requires
customer-driven designs have also been named as one of continuous large investments. Tablets are quickly
the key success factors in the business. replacing traditional PCs and on the other hand the
distance between tablets and smartphones is decreasing all
The companies sell their products in the US, Asia, and the time. The companies have decided to seek to utilize
Europe. Production and R&D have historically been both in-house development and technology licensing in
located in Atlanta (GA), but recently the companies have order to keep up with the fast development pace.
also got a permission to start building plants in Asia. Some
years ago the possibility to begin production in Europe The growth in the global markets is guaranteed to create
was investigated momentum for opening more production facilities at least
in Asia. Also, as the companies are continuously seeking
increased flexibility in operations they have established
contract manufacturing partnerships both in US and Asia.

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Production
Characteristic to high-tech companies, production is
Technologies
complicated and high costs are incurred in the beginning
phases of the production of new models. This, combined So far the companies have been manufacturing tablets that
with short product life-cycles, forces the companies to qualify as the first generation devices. New mobile
adapt the production process to manufacture a new product networks are developed constantly and these will facilitate
model as soon as possible, in pursuit of low costs. the use of the new technology tablets. Therefore steps
Eventually, as the company becomes more acquainted should be taken to begin developing new technologies.
with a specific technology, production cost per unit will
fall with the learning curve effect. It should be kept in The tablets are dependent on the networks in which they
mind that when subcontracting production, the learning operate . Thus, a Technology 2 tablet cannot operate in
curve effect is foregone. On the other hand, since adding Technology 1 network infrastructure.
new in-house manufacturing comes with a delay, the extra Teams should monitor the network coverage forecasts on
capacity from contract manufacturing can become very the demand-page before they plan their R&D as it
useful. Also, sometimes the contractors can provide the indicates when the various technologies are economically
tablets with significantly smaller costs. viable to be introduced.

Features
Sales and Marketing
The underlying technology for tablets is not very different
The companies have traditionally operated only in the US
from one company to another, so product differentiation is
market. Over the last years, sales networks have been
done with product features. In this simulation the features
established in Asia and Europe as well. Marketing plays a
are not linked to any particular product specification,
significant role in promoting the brand and communicating
instead they are identified as numbers. One feature, two
to consumers about the product. Marketing is particularly
features, three features, etc. Product features have different
important in the US and Europe. In Asia the effect of
effects on demand in different market areas. European
promotion is less but still considerable. Typical marketing
consumers are the most appreciative of product features,
spending in the industry is 3-5% of Sales revenue.
whereas the Asian consumers are more sensitive to price.

Research and Development Transportation and logistics


The companies have a choice of performing their own
Transportation to export markets is handled by an
R&D or by purchasing licenses for the technologies and
independent freight company and the cost of the service
their related features. The first step of the R&D process is
cannot be influenced by the teams. The total logistics cost
to develop the base technology upon which up to ten
per unit is transportation cost + tariff. There is no logistics
technology-specific product features can be added. The
cost involved when the good is produced and sold in the
difference between in-house R&D and technology licenses
same area.
is the time to market. When R&D is performed internally,
the technologies and features are available in the next
period. When licensing is used, the new International taxation
technology/feature is available immediately. Technology
licensing fees are one time payments. The cost will International taxation and transfer pricing are sensitive
decrease as the technology ages. issues. The companies have created a system that allows
A typical company in the industry spends as much as 10% some flexibility, but the ultimate purpose is to even out
of Sales revenue on R&D. the cost-impact of the R&D expenditure. R&D functions
are located in connection to the production facilities and
It should be noted that R&D expenditure will not be the costs are allocated on the profit and loss statements
capitalised on the balance sheet. That is, all R&D expenses with the following principles:
are considered as operating expenses and as such R&D
investments may cause substantial fluctuations to the Let’s assume that we have 10 plants in the US and 2
companies’ P&L. plants in Asia, i.e., 12 plants in total. Our total R&D
expenditure for the period is 200 mUSD.
Respectively, 10/12 x 200 mUSD is allocated to the
US P&L and 2/12 x 200 mUSD is allocated to the
Asian P&L.
While determining transfer prices, multipliers (between 1
and 2) are applied to the direct variable cost of production.
In practice this means that the direct variable cost of
production can be multiplied with a number between 1
and 2 and the outcome is the transfer price. When used
wisely, these multipliers can also be used to benefit from
differences in corporate tax rates in different areas. At a
minimum, the company should use the multipliers to take

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benefit from any accumulated losses that may have been
created.

Finance

In addition to income financing, the companies can obtain


financing from equity investors and lending institutions.
The companies are listed on the stock exchange, enabling
effective equity financing by issuing shares. Shareholders
expect a return on the equity invested in the form of
dividends and capital gains.
Over the past few years, the industry has been in a rapid
growth phase, and shareholders have not been able to
enjoy large dividends. On the other hand, the increase in
share price has been remarkable and the companies have
outperformed the Nasdaq Composite Index over the last
couple of years.

You can redistribute your earnings in the form of


dividends or share repurchases. Share issues and buybacks
are made according to the market valuation at the
beginning of the round.
Lending institutions provide short- and long-term loans
with an interest rate depending on the company's financial
condition. Short-term debt always carries a premium over
a long-term loan. For this reason short-term loan is a last
resort that is only used when the minimum cash level is
not reached.
You can also transfer funds between different countries by
internal loans (International Treasury Management). You
may want to use internal loans if you have accumulated
substantial cash reserves in Asia or Europe that can be
repatriated and distributed to the owners, or if for instance
you need to finance some plant investments in Asia.

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MARKET AREAS
USA
The US is the home market of Tablet Inc and at the same does not seem to be the primary concern for the US
time its largest market. The country is generally known to consumers.
be a leader in high-tech industries and that seems to hold
true for the tablet computers as well. However, in terms of Demand is expected to grow steadily about 15-20% p.a. at
mobile network infrastructure Europe has been slightly least for the next 2-3 years. There seems to be no reason
ahead and it is possible that some technologies may why growth should stop even after that. According to
develop faster in Europe than in the US. Product features some of the less conservative estimates, in a few years
are highly appreciated in the US and the customers are with the introduction of new technologies, growth in
always lining up for the new product releases. The price demand may show peaks of up to 20-25% p.a.

Europe Asia
Europe has yet not developed a big appetite for the tablet It is predicted that the highest growth potential is in Asia.
computers, but the market is expected to grow a solid 10% Currently the market grows at 20% p.a., but long-term
per year for the next years to come. Even higher growth is growth prospects are hard to make due to the vastness of
not out of the question if the consumers start adopting the the potential market size. The growth will largely depend
devices in masses. Europeans seem to be quite prudent on the stability of the economies and their ability to
with their discretionary spending and the tablets need to cultivate a healthy middle class with predictable
prove their practical value. purchasing power.

Europe is and will remain a pure export market for the Overall, average Asian consumers are rather sensitive to
companies. Rigid labour laws have made production price and at the same time quite appreciative of the
facility investments unattractive. product features.

MEASURES OF PERFORMANCE

The primary objective of the firm is to maximize the value to its shareholders. In this case the return to shareholders is
measured by a ratio called cumulative shareholder return. This ratio takes into consideration both the dividends paid as well as
the share price development over time. This ratio is reported as an annual average percentage.

Share price correlates well with the profitability and growth of the company. Dividends are considered to earn 8-9% annual
return after they have been paid out of the company.