Tim Hortons – Eportfolio

Tim Hortons: Always Fresh!

Industry and Sector

Food (restaurant) Industry – service

Main Goals

Each Tim Hortons restaurant is expected to uphold the main goal of the company: Fast and Efficient service.

The guiding mission is to deliver superior quality products and services for customers and communities through leadership, innovation and partnerships.

How They Started

Tim Hortons has become a cultural tradition in Canada.  Walk down the street, get on a bus or a train, look around the office, or take a look at your fellow students; you are guaranteed to see a Tim Hortons cup.  Tim Hortons has become a number one seller; despite intense competition.

The first Tim Hortons was opened in 1964 in Hamilton, Ontario.  After many summers of hustling to make an off-season living, hockey player Tim Horton decided to try his luck in the coffee and donut business.  Since then, it has grown into Canada’s largest national chain in the coffee and baked goods segment.  The first stores only offered two products – coffee and donuts (including two original creations, the Apple Fritter and the Dutchie).

How They Have Grown Over The Years

The biggest change in the chain’s product focus took place in 1976 with the introduction of the phenomenally successful Timbit (bite-sized donut hole), today available in over 35 different varieties. The chain’s growth into the 1980’s brought about a whole series of new product introductions: muffins, cakes, pies, croissants, cookies, and soups & chili. Sandwiches were introduced in 1993. Since then other menu items were added, from bagels and cappuccino to Danishes and smoothies.

The chain’s biggest selling feature remains its legendary Tim Hortons coffee.   The coffee is also available in cans and the newest way to enjoy the coffee at home, Tassimo DISCs.

Tim Hortons has grown from one store in 1964 to over 3000 stores, including stores in the US and Canada.  There are stand alone stores, and locations that can be found in shopping malls, highway outlets, universities and hospitals, providing prominent visibility for the chain. Most standard Tim Hortons locations offer 24-hour drive-thru service, catering to consumers on the go. Combo unit locations, which house both a Tim Hortons and Wendy’s, offer customers the convenience of both restaurants under one roof.

Who Runs The Business

Don Schroeder – President & CEO

Main Product/Service

The main product is coffee.  The menu also includes donuts, muffins, bagels, sandwiches, cold drinks and much more.

Main Target Market

The market is a broad demographic.  The primary focus would be adults and families.

Supply & Demand Of Products

When Tim Hortons buys supplies, they can get a reduced price by buying large quantities of supplies. They can save in many other ways due to efficiencies achieved from economies of scale.  Tim Hortons also has the power to adjust prices as demand changes, as they have the majority of the market share in coffee sales.  The company is also creating new products to fit the demand for “at home” coffee drinkers, with their new Tassimo Discs.

Stages Of Production

Due to the “Tim Hortons Coffee Partnership”, supplier strength is relatively low. Tim Hortons has established a solid partnership with its farmers in South America.  Tim Hortons can also change suppliers at any time they prefer since there are several other suppliers they can cooperate with at the current market price for coffee beans.

Tim Hortons ensures to keep their donuts fresh in every single outlet, this is a source of their competitive advantage.  They are however “frozen” fresh now, a change that was made to keep up with the demand of the product.

Pricing For Their Main Products

Due to an increase in operating costs, Tim Hortons restaurants recently changed the pricing on select baked goods and lunch items.  Coffee prices remained the same with a medium coffee costing $1.64 including tax

Significant Fixed & Variable Costs

Fixed Costs include; rent, salaries, research and development, advertising, machinery, ovens, coffee machines

Variable Costs include; packaging materials (take-out containers, receipt paper, recyclable utensils) and ingredients (dairy products, coffee beans, baked goods) and labour

Company Profits & Profit Margins

In 2011 Tim Hortons generated over $2.9 billion in revenues and $569.5 million in operating income

Strongest Competitors

The two strongest competitors are McDonalds and Starbucks.  Tim Hortons is the major supplier of coffee in Canada with above 70% of the coffee market.

Competitive Advantage

There is strong customer loyalty to this brand.  Tim Hortons is an iconic brand that is recognized in Canada and has strong community support.

Tim Hortons has a large percentage of market share with 41% share of the Canadian quick service restaurant industry.  Over 40% of Tim Horton’s customers visit four times a week or more and 8 out of 10 cups of coffee are purchased at a Tim Hortons location.

The company also supports programs such as TimBits Hockey and has raised 9.9 million dollars for Tim Horton Children’s Foundation Camp Day.  They have great marketing success in the “Roll Up the Rim” campaign and campaigns to launch new products.  Such products include their new specialty coffees and fruit smoothies.

Why Have They Succeeded

Tim Hortons is a very recognizable Canadian Company that has created brand loyalty.  Perhaps no other brand in Canada enjoys the kind of emotional connection and brand loyalty that Tim Hortons does .  They do a great deal of marketing that reinforces the fact that they have national pride.  They build their brand with commercials and ad campaigns, such as roll up the rim.

Another key reason for their success is pretty simple….the coffee.   For many Canadians, a Tim Hortons coffee is part of their daily routine.  It is a known fact that caffeine is an addictive substance, and I am indeed addicted to having my Timmies.  I know many people would argue that the coffee is nothing amazing.  Some would even say that its weak and lacking.  I’ve even heard people suggest that there is nicotine added to it, to make it more addicting.  I think that going to Tim Hortons becomes part of a daily routine, it’s convenient, it’s recognizable and it’s quick.

Its success is also due to their ability to adapt to the demands of consumers and changing trends.  Product innovation has been performed sufficiently through expansion of their menu items, in order to satisfy customer’s growing change of tastes.

Possible Weakness

Tim Hortons has a very automated system of preparation.  This “factory line” set up is designed to cut costs and enable them to hire cheap labor that can make drinks with a press of a button.  The downfall to this is limited training and poor customer service.  This can result in poor quality of product, for example incorrect product, wrong orders or incorrect purchase totals.

The business is well known in Canada, but is not well established worldwide.  There are numerous stores in the US but they do not have the same amount of market share as Canada.

There is also increasing consciousness about health and diet; causing a shift in buyer preference for healthy products.  There is a lack of “healthy alternatives” on the menu.

Finally there is intense competition from industry rivals, as well as other non-traditional coffee providers such as Burger King, Subway and McDonalds.  Not to mention, coffee drinkers can now utilize stylish and user-friendly homemade coffee machines.

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Sources

http://annualreport.timhortons.com/#financial-results

http://o.canada.com/2012/08/03/tim-hortons-rolling-up-the-prices-on-muffins-sandwiches/

http://annualreport.timhortons.com/index.htm

Click to access en_media_kit.pdf

http://beta.fool.com/thequast/2012/12/07/a-swot-perspective-on-tim-hortons/17430/?logvisit=y&source=eednaslnk0000001&published=2012-12-07

Eportfolio – Build-A-Bear Workshop, Inc

Build-A-Bear Workshop, Inc

Guests who visit Build-A-Bear Workshop stores enter a teddy bear themed environment consisting of eight stuffed animal making stations: Choose Me, Hear Me, Stuff Me, Stitch Me, Fluff Me, Dress Me, Name Me, and Take Me Home.

Industry and Sector

This company is in the service sector in the Toy & Hobby Store industry

Main Goals

“Build-A-Bear Workshop, Inc. is the only global company that offers an interactive make-your-own stuffed animal retail-entertainment experience. There are more than 400 Build-A-Bear Workshop stores worldwide, including company-owned stores in The United States, Puerto Rico, Canada, the United Kingdom and Ireland, and franchise stores in Europe, Asia, Australia, Africa, the Middle East, Mexico and South America. Build-A-Bear Workshop is the leader in interactive entertainment retail. The Company was named to the FORTUNE 100 Best Companies to Work For list for the fourth year in a row in 2012.”

Build-A-Bear wants to remain at the height of trends and cross over into new areas of play.  The company intends to offer innovative products and provide an enjoyable experience to families.  Some of the goals that lay ahead of the company are:

–          Improve store productivity and profitability

–          Increase shopping frequency

–          Enhance the store experience with new design

–          Reinforce the company as a top destination for gifts

–          Improve cost efficiencies

–          Increase global presence

How They Started

The company was founded by Maxine Clark in 1997.  She withdrew $750,000 from her retirement account to get Build-a-Bear Workshop off the ground. That covered startup costs and the building of the first prototype store. Maxine also secured a bank line of credit for inventory and working capital, with her house as collateral. The first Build-A-Bear store opened in Saint Louis Galleria, sales were near $400,000 in less than four months.  The company started with just bears and clothes. They added shoes and accessories, then more animals. The company licensed products and started carrying costumes from Disney and Major League Baseball teams.

How They Have Grown Over The Years

From the start Clark planned to implement the Build-A-Bear concept as a retail chain. To facilitate growth, she obtained all appropriate copyrights and trademarks before the first store opened, such as for Cub Condo and the company’s slogan, “Where Best Friends Are Made.” In developing Build-A-Bear into a national chain, Clark planned to open three to five stores in 1998, six to ten stores in 1999, and to operate 100 stores within five years.

The cost of opening a new store ranged from $500,000 to $700,000, but with annual sales estimated at $2 million per store, Clark easily found capital investment for expansion.

One aspect of successful sales involved the company’s responsiveness to customer feedback. Build-A-Bear learned about customer preferences and changed the product mix accordingly. New products focused more directly on the workshop experience, eliminating the greeting cards and the photo booth, and adding fresh choices to an expanded line of teddy bear-sized apparel and accessories. The company diversified its product selection by offering different animals, including horses, dogs, cats, and turtles, as well as limited-edition animals for holidays and nonprofit fundraising.

In 2012 Build-A-Bear was “Cele-bear-ating 15 years of love, hugs and smiles and over 100 million friends made.

Who Runs The Business

The company was founded by Maxine Clark.  She is the Founder and Chief Executive “Bear”

Main Product/Service

The main products are teddy bears and other stuffed animals.  The stuffed animal of choice is assembled and customized during the store visit.

Main Target Market

The concept of “building a bear” is appealing to a broad range of age groups and demographics, including children, teens, parents and grandparents.  The stores are primarily located in malls, which are destination locations and draw guests from a large geographic reach

Supply & Demand Of Products

Build-A-Bear Workshop customers do not have much power because of the control that Build-A-Bear has in the market. There is no direct competitor to Build-A-Bear and this gives them more power to control and less power to the consumer.

However, general global economic conditions may continue to deteriorate, which could lead to disproportionately reduced consumer demand for the products, which has an elastic demand.  Build-A-Bear may be unable to generate interest in and demand for the interactive retail experience.

Pricing For Their Main Products

Build-A-Bear Workshop stuffed animals are very affordable, ranging in price from $12- $30.

Significant Fixed & Variable Costs

The Fixed costs of this business include: rent, insurance, utilities, office supplies, salaries, machines, depreciation, legal services, accounting, advertising, research and design, royalties, freight and property taxes.

The Variable costs of this business include: materials used in manufacturing, goods purchased for resale, labor, utilities (used in manufacturing)

Company Profits & Profit Margins

The total revenues were $394.4 million for 2011 compared to $401.5 million in fiscal 2010

Year over year, Build-A-Bear Workshop  has seen net income shrink from a gain of $104.0K to a loss of $17.1M despite relatively flat revenues. A key factor has been an increase in the percentage of sales devoted to income tax expense from -0.64% to 3.65%.

Strongest Competitors

As stated above, this company has no direct competition in the “make your own” teddy bear and stuffed animal market.  Since the signature product is a stuffed animal, they do compete with toy retailers, such as Wal-Mart, Toys“R” Us, Target, Kmart and other discount chains.

Competitive Advantage and Why They’ve Succeeded

The competitive strengths are as follows:

–          An exciting interactive shopping experience;

–          A broad and loyal guest base;

–          Strong merchandising expertise;

–          A high level of guest service through consistent execution;

–          An attractive store economic model; and

–          A highly experienced and disciplined management team.

Possible Weakness

The following are possible weaknesses for Build-A-Bear:

–          Down turn of global economic conditions

–          Decreased demand

–          Lower customer traffic in malls

–          Marketing initiatives may not be effective

–          Mismanagement

–          Cost of product could be affected by foreign currency fluctuations

–          Recalls on products – could tarnish the brand

–          High transportation costs

–          High turnover in management

Overall Summary Of Business

Build-A-Bear focuses on delivering innovative products and providing an unforgettable experience for each and every customer.  The company is a powerful global brand, one that kids love and Moms trust.

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Sources

http://phx.corporate-ir.net/phoenix.zhtml?c=182478&p=irol-reportsannual

http://www.marketwatch.com/investing/stock/bbw/financials

http://money.cnn.com/2012/03/16/smallbusiness/build-bear-maxine-clark.fortune/index.htm

Click to access factsheet.pdf

Defining Oligopoly and Game Theory

Game Theory was developed in the 1940’s by John Neumann and Oskar Morgenstern.  In 1944 they released the book “Theory of Games and Economic Behavior” which revolutionized the field of economics.  It was originally intended for economists, but applies to psychology, sociology, politics, warfare and recreational games.  Game Theory is a method of predicting outcomes, or behaviors, of participants which takes into consideration the benefits of certain decisions made by the participants.  Each participant (or firm) is faced with courses of action, by which each may gain or lose, depending on what the competition chooses to do.  The final outcome is determined by the actions taken by each party.  Each of these outcomes is presented in the form of a matrix.  This payoff matrix helps to summarize the various interactions of the possible choices a firm can make.  It shows the pros and cons of a decision made by the participants and can help firms decide how to respond to a particular action by their competitor.  The matrix shows how in an oligopolistic market, companies can benefit from collusion.  It also explains why there may be temptation to cheat on an agreement.   While there are profits to be made by collusion, a company can achieve higher profits if they cheat the competing company.

When firms cooperate with each other this is known as collusion.  Competition can lead to lower prices for the customers and lower profits for the company.  Profit maximizing companies would prefer cooperation as this allows businesses to set prices and divide up the market.  Firms can set prices, avoid competition and lower operating costs.  A cartel effectively operates as a monopoly and can charge whatever price they desire.  Their ultimate downfall is the incentive to cheat.  Individual firms are enticed by the idea they could increase their profits by not withholding their end of the pricing or quota agreement.

A classic example of game theory or “the prisoner’s dilemma” is Coke vs. Pepsi.  If on company starts to spend money on marketing, then they may improve their market share.  Therefore the competition responds by increasing their advertising efforts, which will bring up their market share (back to the original position).  All that ends up happening is the market shares stay at the same level, but the costs of production increase due to the large marketing campaigns.

Defining Monopolistic Competition

Feature	Small	Medium	Large
Differentiated Products	Lolla cup, Tubby Dog	Scentsy	Apple, Nintendo
Control over price	Deadly Tattoos	City of Calgary (animal licenses)	Tim Hortons, Telus
Mass Advertising	Local Dry Cleaner	Sleep Country	Ford, Coke, Dodge
Brand Name Goods	Free People	Gibson Guitars, Fender	Gucci, Coach, Puma, Panasonic

Monopolistic Competition:  Is a type of market structure with four specific characteristics:

1. All firms produce similar yet differentiated products
2. There are many competing firms
3. Firms can freely enter and exit the market when they find it profitable to do so
4. Each firm makes decisions about price and output based on the product and cost of production (some price control)

Product Differentiation is a key concept in operating a successful business.  A company that displays product differentiation tries to create the perception, among target customers, that the company’s version of a product is different, better and unique.  A company wants the customer to see added value that competitors don’t display.  Differentiating a product or service gives its producer more pricing power.  Each producer is able to make their price higher for the product if that product is perceived as more desirable by the consumer.

The Monopolistically Competitive firm in Short-Run Equilibrium

Competing as Starbucks

In the modern world there are very few examples of perfect competition.  Is it possible that Starbucks could be an example of perfect competition?

First you need to look at the definition of perfect competition.  It is a market in which no participating buyer or seller is big enough to influence the market in order to set the price of the product.  For conditions must be met to determine perfect competition

1.Many small buyers and sellers (whom are price takers)

There are a great number of buyers and sellers of coffee, ranging from McDonlads, Tim Hortons, and neighborhood convenience stores.  However, Starbucks does have control over their prices, which differ from the other coffee companies in the market.  A comparable sized coffee to a medium “double, double” from Tim Hortons is about 30 cents more from Starbucks.  They are able to charge these higher prices as they have differentiated their brand from others.  They also need to charge more to cover their costs.

2.No preferences shown

Starbucks is a brand built on preference.  Their product is different from other competitiors.  Yes it is coffee, but it is a unique coffee.  Starbucks tastes different from Tim Hortons.  I can say that as I am brand loyal to Tim Hortons (proving there is preference shown when it comes to coffee).  Granted, Starbucks has recently been moving towards a more commercial experience by using packaged coffee instead of fresh ground coffee.  I still believe there is client preference for Starbucks brand coffee

3. Easy entry and exit by both buyers and sellers

In the coffee market there is an ease of entry and exit to and from the market.

4. Same market information available to all

Market information is readily available to all in the coffee industry.

The only way starbucks could be considered a perfectly competitive market is if they were only competing against themselves.

In 2008 Starbucks made the decision to close down 600 of their locations.  “Starbucks is closing most of its unprofitable stores”.  Part of the reason these stores are not profitable is “because many of the unprofitable stores were being cannibalized by nearby Starbucks locations”, as stated in the Seattle Times.  Basically the market was over saturated.  Another factor is the changes implemented in order to achieve growth, development and the scale to grow the number of locations.  Such changes were; generic stores, new machines, bagged coffee and a less personal and warm feeling environment. (outlined in Starbucks Gossip, email from the CEO Howard Schultz)  The need to close so many locations is an example of diseconomies of scale.  When a company becomes so big, it becomes inefficient.  Starbucks was expanding their firm and increasing costs while the demand was declining due to the economy and the emergence of comparable substitutes at a lower price.  Costs and profit are the driving force behind the decision to close these stores.  The stores aren’t showing a profit and must not be breaking even.  Obviously these location are suffering losses that are more than their fixed costs.

Yes, Starbucks is typically more expensive than most other businesses in the same market.  Part of the expense is for the higher quality beans, higher scale décor/environment and quality of service.  If the coffee prices were lowered there would be an increase in demand, as it is an elastic demand product.  But the increase in demand may not increase profits.  The fixed costs would remain the same and the variable costs would rise.  In the end that could result in a lower net profit.

Long Run Costs and Economies of Scale

When I first started brain storming business that I would be interested in opening, I initially thought a restaurant would be a good choice.  Upon further investigation (and after watching far too many episodes of Eat Street), I decided on a food truck business.  A food truck is basically a restaurant on wheels, and has several advantages over a brick and mortar restaurant.  A food truck can go to the customer, has lower overhead and requires less staff.

First things first, I would need a concept.  The menu on a food truck can range from artisanal hot dogs, gourmet comfort food, deserts, to good old burgers and fries.  The key is to bridge the gap between expensive dining and fast food.  I thought that gourmet comfort food would be a good concept.  The menu would have something to satisfy everyone.  Food trucks thrive by being playful and experimental in the kitchen.  People who eat there are more open to foods outside of the norm, which is great for giving more freedom to try new dishes.

 

When starting this company, it would be fairly small, one food truck to begin with.  As with all businesses, a key to success is branding.  I would ensure that the food truck has it’s own identity, that it doesn’t look like your average dirty water hot-dog cart.  The appeal of food trucks to the consumer is that they are cheap, fast and fun.  A food truck needs a creative concept and brand with an eye catching logo.

The beauty of this industry is that you can change your location to reach new customers.  Once they know how delicious the menu is the will be excited to see the business in different locations.  A food truck can increase sales by catering office lunches, weddings and special events.  It can even be arranged with large business to come by on a daily or weekly basis.  To reach more customers, the use of social media is a wonderful option.  Social media outlets empower on the go customers to follow the business and network with others about it.  Such media sites are Twitter, Facebook, Foursquare, etc.  These sites can help boost sales and expand the market via cheap/free advertising and word of mouth.  The market size of this business would start out small but could really expand through advertising and media.

The costs of a business in this industry are as follows:

Fixed:  Truck payments, insurance, permits, storage of the truck (garage), banking fees, design/development

Short Run: Inventory, gas, parking, wages, equipment repair and maintenance

Long Run: New Trucks, replacement of equipment

I found an article that focused on three food trucks.  I decided to comment on the strengths and weaknesses of Drewski’s Hot Rod Kitchen.  Obviously, in order to succeed in the food truck business, you need to have an appetizing menu.  Drewski’s has four main sandwiches that appeal to a variety of customers.  They even have a sandwich with honey and almonds for the more adventurous customers.  They offer a small range of menu items at a good price.  It is suggested that they provide more menu options or the ability to tweak or upgrade sandwiches.  Notable strengths are the speed at which they serve customers, creative combinations and high quality ingredients.

Law of Diminishing Returns

I found the article, “The Diminishing Returns to Tobacco Legislation” by Pierre Lemieux very interesting.  He discusses the issue of government intervention, to reduce tobacco consumption.  Tobacco is one of the biggest public health threats, as it kills 5.4 million people per year (as stated by the world health organization).  The government use tobacco control to help reduce the prevalence of tobacco use and exposure to smoke.  In this article, Pierre conveys his belief that the new directive to print color pictures illustrating the effects of tobacco consumption is an illustration of diminishing returns.  As is the cigarette taxation, where there is indication that the decreasing returns have kicked in.  The point of diminishing returns for the governments effort in reducing tobacco consumption is reached when the rate of smokers who are quitting hits its maximum and begins to decline.

According to the statistics in this article, the point of diminishing returns was reached some time during the first tax increase.  Between 1985 and 1995 the decrease in smoking was 18%.  The following tax increase only resulted in an 11% decrease in smoking. The points regarding the graphic warning and sin taxes are valid to the argument.  Pierre Lemieux states that these interventions by government are becoming less effective.  He believes that individuals do not respond to the “panic warnings” anymore and that “most of the potential improvements in consumer awareness have already been achieved”.  Increased taxes on tobacco seem less effective at persuading smokers to quit.  This is because those individuals that are easily persuaded by advertising and increased cost have already quit.  However, there is one statement that Pierre Lemieux made that does not support his position.  He wrote “more and more regulations and taxes are required”.  This statement contradicts the previous points that were made.  If the point of diminishing returns has been reached, then more advertising and taxes will have less effect.

There are many other measures that can be taken to increase success (or lessen the diminishing returns) in lowering tobacco consumption.  I believe that education is very important.  This can be accomplished with comprehensive education and public awareness programs on the health risks and addictive characteristics of tobacco consumption.   Also, the government can offer counseling and medication to smokers.  Cessation assistance and support groups could lessen the diminishing returns.  Tobacco products have an inelastic demand, meaning the quantity demanded is not very responsive to change in price.  This means that when government raise taxes (sin taxes) the revenue will increase but the demand will not drop that much.  Therefore, sin taxes are not the best way to persuade smokers to give up something they see as a necessity.

Income and Cross Elasticity

Tourism in Canada

According to the Canadian Tourism Commission, the tourism industry is making a recovery.  Tourism dipped due to the economic turbulence in the past few years.  Arrivals into Canada increased from 2010 to 2011 by an estimated 7.4% (Up to 78.8 billion from 73.4 billion).  Canada, being the second largest country in the world, has incredible geographical diversity.  This diversity is a great tourist attractor.  From British Columbia, with its beautiful mountain scenery, mild winters, whale watching and ski resorts to Newfoundland, which is a poplar stop for cruise ships, Canada is a great travel destination.

The concept of income elasticity deals with how responsive consumer demand is to an income change.  If demand hardly varies with an income change, demand is elastic.  If demand changes greatly, the demand is elastic.

As mentioned above, Canadian tourism fell as a result of the global economic issues.  This is an example of an elastic industry.  Travel is a luxury, not a necessity and in times of economic turmoil luxury items are the first to go.

Elasticity and Revenue

Elasticity of demand measures the responsiveness of quantity demanded to changes in price, income, and the price of related goods.  Elasticity of demand is important because it predicts what may happen to total revenue received when a company changes the price of a product.

Video game consoles have a high price elasticity of demand.  The fact that there are close substitutes is one of the factors that increases price elasticity.

There are three main gaming consoles available to consumers, the Playstation, Xbox, and the Nintendo.  When the prices of these gaming units increase, the demand will decrease, or visa versa, when the price decreases, the demand increases.   In addition to game consoles, the games purchased as complimentary products also have an elastic demand.  Dropping the value of a video game increases revenue for the producer, as more individuals are willing to purchase the product.  Video game consoles and video games are a good example of cross-elasticity of demand, as they are complementary products.  A decrease in console price would result in an increase in game demand.

The article I found discusses the elasticity of the Playstation 3 console.  Sony had a weak year in sales for the PS3.  It was originally launched at a price of $500 USD it was thought that there would be  yet another price drop, due to a decline in sales of hardware.  Consumers base their  buying decisions on price, especially with an item that is considered a luxury (an income elastic product).  Yet, at this years’ E3 Sony made no mention of a price change.  It’s been nearly six years since the release of the console and it still has a fairly high price tag ($299). It is possible that the price point of $299 is the lowest that Sony can go, before the demand becomes inelastic.   Consumers don’t want to spend that amount on such dated hardware.  The article states that, eventually market realities will win out and Sony will drop hardware prices, regardless of the impact on financials.  I looked into the cost of manufacturing a playstation 3, to discover that the latest playstation 3 slims cost $336.27 to manufacture.  At the release date in 2006, it cost $806 to manufacture the consoles.  Advances in technology have decreased the amount lost on the units, but sill leave a net loss on the sale of each console.

 An increased demand in hardware would increase sales of games (negative cross-elasticity of complimentary products)

The graph below shows the an example demand curve.