finance paper

After the initial breakup of the monopoly in 2015, Chester decided to focus on the low tech market and introduce a new product to meet high tech market demand. The objective with Cake was to maintain a lower cost product at a price matching industry average. After introduction of Crispy as a high tech product, the price of Cake could be lowered to increase demand as a low cost leader, while using Crispy as a differentiator. Unfortunately, due to a misunderstanding of how to introduce a new product, production factories did not have capacity to produce the new product. On the financing side, borrowing was divided between selling shares, long term borrowing, and short term borrowing.

As a result of the failure in Crispy’s production capacity, Crispy was introduced to the market already a year old, damaging its appeal to the high tech market. Because of this assumption, Crispy’s price to lowered to whet market appetite for the product. While the strategy worked in selling the product, the contribution margin for Crispy was a mere 20%. Because we failed to achieve the expected cash flow, Chester was forced to borrow $1.3 million in emergency funds. After 2018, Chester began to struggle financially. Failure to invest in marketing had been driving our sales down, as most customers were either unaware or unable to purchase our superior low-price products. Sales continued to plummet into 2019, and by 2020 market share was down to 12%. During this time, Chester’s stock price plummeted. By December 31, 2020, Chester’s stock price was valued at $1 per share. With the company valued at only $3 million, as well as liabilities totaling nearly $43 million, there was doubt as to the company’s future. However, in recognition of the past failures, marketing was given special treatment in 2021, being budgeted for $21 million between promotion and sales. In addition, Chester committed to being a low cost provider and focused efforts on driving down costs by investing heavily in automation and Top Quality Management (TQM) initiatives, as well as selling some production capacity. Crispy, struggling in the high tech market, was moved to sell between both markets in the hope that the low tech market would take up the consistently leftover inventory. By 31 December, Chester had sold over 4 million units to the market, secured nearly 26% market share, and ranked highest in industry sales.

Despite struggling financially, the company was determined to stick to the original strategy, and introduced two new products at the end of 2020. The first, Creek, was designed as part of a long term plan to create an optimal product for the low tech market while also increasing market share in the high tech market in the beginning. The second, Copy, was created to replace Crispy as a foothold in the high tech market, as well as to drive forward technological advancement. Both products surpassed expectations, with Creek consistently selling at capacity over the next 3 years and Copy nearly doing the same. In addition, despite steady overproduction in the industry, Chester’s commitment to its factory employees remained strong, and refused to lay off employees, maintaining a 100% complement. Furthermore, production levels were kept high as the company worked to improve sales to ensure efficiency on the factory floor..

In addition to improving the financial position of the company, the last three years also opened the door for a change in the mission. Copy sold for $48, $3 over the maximum expected price range for high tech products. While seemingly at odds with our low cost mission, Copy’s high price was a reaffirmation to the first aspect of Chester’s vision. In order to drive technological advancement, Copy was intentionally placed at a high price to encourage competitors to improve their own products. During 2023, Chester conducted an experiment to determine whether Chester could act as not only a low cost provider, but as a differentiator. The price of Cake, our lowest priced product, was increased to reflect the value of the product, rather than maintain a lower price than competitors. The experiment proved to be a success, with some modifications needing to be made. While the product sold a considerable amount, slight improvements need to be made to Mean Time Before Failure (MTBF) will need to be made to increase viability at the new price. These changes have led to an updated mission “To provide a TOP quality product at a low cost with military efficiency.”

This change in company mission, like the pricing of Copy, is a reaffirmation of dedication to the first aspect of our vision. During the first eight years, Chester Inc. has focused on price, largely because being a low price competitor was necessary for survival. However, because of our lower cost structure, we can create high value products at a for less than competitors, allowing us to compete on both fronts.