AgriChem, Inc., has introduced an innovative new product—a combination fertilizer, weed killer, and insecticide that makes it much easier for soybean farmers to produce a profitable crop. The product introduction was quite successful, with 1 million units sold in the year of introduction. And AgriChem’s profits are increasing. Total market demand is expected to grow at a rate of 200,000 units a year for the next five years. Even so, AgriChem’s marketing managers are concerned about what will happen to sales and profits during this period.
Based on past experience with similar situations, they expect one new competitor to enter the market during each of the next five years. They think this competitive pressure will drive prices down about 6 percent a year. Further, although the total market is growing, they know that new competitors will chip away at AgriChem’s market share—even with the 10 percent a year increase planned for the promotion budget. In spite of the competitive pressure, the marketing managers are sure that familiarity with AgriChem’s brand will help it hold a large share of the total market and give AgriChem greater economies of scale than competitors. In fact, they expect that the ratio of profit to dollar sales for AgriChem should be about 10 percent higher than for competitors.
AgriChem’s marketing managers have decided the best way to get a handle on the situation is to organize the data in a spreadsheet. They have set up the spreadsheet so they can change the “years in the future” value and see what is likely to happen to AgriChem and the rest of the industry. The starting spreadsheet shows the current situation with data from the first full year of production.
a. Compare AgriChem’s market share and profit for this year with what is expected next year—given the marketing managers’ current assumptions. What are they expecting?
b. Prepare a table showing AgriChem’s expected profit, and the expected industry revenue and profit, for the current year and the next five years. Briefly explain what happens to industry sales and profits and why.
c. If market demand grows faster than expected—say, at 280,000 units a year—what will happen to AgriChem’s profits and the expected industry revenues and profits over the next five years? What are the implications of this analysis?