Question

Universal Auto is a large multinational corporation headquartered in the United States.

For segment reporting purposes, the company is engaged in two businesses: production of motor vehicles and information processing services.

The motor vehicle business is by far the larger of Universal’s two segments. It consists mainly of domestic United States passenger car production, but it also includes small truck manufacturing operations in the United States and passenger car production in other countries. This segment of Universal has had weak operating results for the past several years, including a large loss in 2012. Although the company does not reveal the operating results of its domestic passenger car segments, that part of Universal’s business is generally believed to be primarily responsible for the weak performance of its motor vehicle segment.

Idata, the information processing services segment of Universal, was started by Universal about 15 years ago. This business has shown strong, steady growth that has been entirely internal: No acquisitions have been made.

An excerpt from a research report on Universal prepared by Paul Adams, a CFA candidate, states: “Based on our assumption that Universal will be able to increase prices significantly on U.S. passenger cars in 2013, we project a multibillion-dollar profit improvement . . .”

a. Discuss the concept of an industrial life cycle by describing each of its four phases.

b. Identify where each of Universal’s two primary businesses—passenger cars and information processing—is in such a cycle.

c. Discuss how product pricing should differ between Universal’s two businesses, based on the location of each in the industrial life cycle.

Short answer

Answer

a. Start up, rapid growth, maturity and final stage.

b. Cars in last stage while information processing in second or third stage

c. Cars and Idata should increase price

Step-by-step solution

Step by Step Solution Step 1: Explanation on the concept of industrial life cycle ‘a’

The process of passing through various phases by industries in its life cycle is known as industrial life cycle.

Though it is difficult to identify from where a stage starts and where does it end yet broadly there are four phases- start up, rapid growth rate, maturity stage, (competitive environment, profit margin and pricing strategy) and final stage.

Start up age is characterized by large potential market and potential profit.

In Rapid growth stage, markets broaden, unit costs decline and quality improves.

In maturity stage, the profits decline due to competition inroads.

In final stage, the sales slow down or decline

Explanation on the concept of industrial life cycle ‘b’

The passenger car is probably in the final stage as growth has normalized. The information processing business on the other hand is in its earlier cycle probably in second or third stage.

Explanation on product pricing ‘c’

Cars: Since in the final phase, the demand is price sensitive, hence Universal can raise prices without losing volume. This can be easily done too seeing the maturity of the market.

Idata: Since its demand is growing faster than supply, it may increase the price to maximize profits.