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COST PRODUCTION OVERAL MARKET RECOMMENDATIONS

Cost Production – Overall Market – Recommendations

Joseph Aguirre

Southern New Hampshire University

Snap-on’s costs of production for their goods show an increase each year. Costs went from 604.3 in 2010 to 647 in 2011, a 42.7 increase. Gross profits for 2010 ends up being 435.6 and 506.4 in 2011, which is a 70.8 million increase. Costs goes up to 728.9 in 2012, an 81.9 increase and gross profits goes up to 543.1, a 36.7 increase in profits. In 2013 cost goes to 772.6, increasing by 43.7. Gross profits are then 585.5, a 42.7 increase. Then in 2014 costs increases by 52.3, totaling to 824.9, and with gross profit of 630.3. The gross profits increase by 44.5. The past five years shows a trend of increasing cost of production of goods and at the same time gross profits are increasing just as well. It shows Snap-on has been able to balance the cost of production with its sales to make a reasonable profit.

Snap-on faces increase in costs; from operational costs to investing in new technologies, in order to meet the increase demands f or its products. There are numerous factors that contributes to the level of outputs Snap-on makes. One being the availability and cost of raw materials, which is a variable cost. Currently Snap-on has acquired enough materials to ensure stable supply and does not anticipate any pricing issues (Annual Reports, n.d.). Unforeseen spikes in prices of raw material would impact Snap-on’s ability to meet production demands, as well as increasing additional costs. Another variable cost would be maintaining its labor force. So far, Snap-on has not experienced any work slowdowns or disruptions. Which is contributing to increase cost as production rises. In addition, leases of manufacturing facilities, warehouses, research centers, and office facilities needs to be maintained. However, these are fixed costs, meaning the cost is always constant and won’t increase as production changes. As these factors continue to increase, it has not slowed down or hinder Snap-on’s abilities to meet its demand.

An important cost which helps Snap-on’s production is technology. Technology has proved to be one of the biggest trend affecting businesses throughout the years. As technology improves, Snap-on relies on investing in these changes in order to develop better products and increase production, while keeping costs low. Positive technology advancements also helps Snap-on stay ahead of competitors. Snap-on’s ability to be innovative and obtain many patents, prevent competitors from developing the same products.

Market share can help determine how well the company's products or services is doing compared to competitors. As the total market for a product or service grows, a company that is maintaining its market share is growing revenues at the same rate as the total market. Market share increases can allow a company to improve profitability.

The chart above shows the market share for Snap-on and its competitors for the years 2012-2014. Looking at the chart, Snap-on’s market share percentage has increased by 1%. It may not be much but it has positively changed, while Matco decreased by 1% and Stanley stayed the same. Note: Many of Snap-on’s competitors in the tool market are subsidiary companies created by much larger corporations, like Sears, Danaher, and etc. So, Annual Reports where not easily accessible. Matco Tools is owned by Danaher, and only 2012-2014 information was available.

Snap-on’s founders understood what their consumers wanted and needed; the demand for quality, plus innovative, tools to get their jobs done efficiently. They also understood mechanics do not have the time to leave their jobs to go to retail stores to get what they need. So they created a mobile business to meet this niche. It was not difficult for other companies to follow. There are no barriers to new firms entering the industry. In turn, as more competitors are able to easily enter the market, it will impact Snap-on’s sales. When more competition enter the market and offer similar products, Snap-on’s demand curve will shift to the left and become more elastic. Snap-on then risks losing consumers and profits if they raise prices for their products.

Even though it was easy for competitors to join in the industry, their products are not identical to what Snap-on offers. The products that Snap-on and its competitors sell are differentiated rather than identical. The mobile tool market has monopolistically competitive characteristics, so Snap-on is able to affect the market’s price to its benefit. However, Snap-on has to keep in mind raising prices will drive customers to go to competitors. Also, Snap-on has to stay innovative to justify its prices and beat out competition.

Currently, Snap-on has successfully distinguished themselves from competitors by its value. Snap-on is known for quality and is perceived to offer better value than anything else in the market. For future success, it is recommended that Snap-on invest in new technology to create products in a more cost efficient way. As sale’s demand increase, cost to supply its demand increases. Improving and investing in new technology would help reduce production costs. In addition, Snap-on must create innovative ways to draw in new customers and strengthen loyalty with current customers. One way is to develop loyalty programs and reward customers with discounts. Lastly, improving marketing strategies would help Snap-on build on its value and branding. For example, improving Snap-on’s social media methods, such as Facebook, Twitter, Instagram, offers a low cost opportunity to be connected to consumers and lure in new prospects.

Snap-on is a leader in the industry, however, competitors could easily swoop in and take the lead. If Snap-on does not stay current or innovative, other firms investing in improvements could develop products better than what Snap-on has to offer. In a monopolistically competitive market, even the strongest firm is at risk as more competition enters the market.

Furthermore, understanding the demands trends and price elasticity in the market is important for Snap-on success. Firms need to know where it stands in the market, and more importantly, know what consumers need and want. This would help the firm grow on a larger scale by knowing where to make improvements and changes. Being in the dark or refusing to pay attention to demand trends, would only do more harm than good.

References:

Snap-on 2014 annual Report – Strategy, business.2014.

https://www1.snapon.com/.../Snap-on2014AnnualReport_reducedsize.pdf

How Snap-On tools ratchets its brand. Strategy + business, Marketing, media & sales. Glenn Rifkin

Cost of Goods (In Millions)20102011201220132014

604.3647728.9772.6824.9

201220132014

Snap-on15%16%16%

Matco Tools33%32%32%

Stanley Tools51%51%51%