5.5 Production Planning: Past Paper Case Study
(a) Define the following terms:
(i) capacity utilization
Capacity utilization refers to the measurement used to measure the rate at which their
potential output levels are met. It can be calculated using the following formula:
Capital utilization = (actual output/maximum output) x 100%
(ii) penetration pricing
Penetration pricing refers to a firm’s marketing strategy to attract customers into
purchasing their new product by initially selling it at a lower price than supposedly. This is
an example of a short-term marketing strategy as a firm using this strategy is aiming to
achieve a high market share in a short amount of time.
(b) Explain two capacity utilization issues that Pacific Blue may face.
One capacity utilization issue Pacific Blue may face is the high demand that they cannot
keep up with considering they only have 2 planes for 11 schedules flights per day, also
known as capacity shortages. This will definitely be problematic if there are delays or one of
the plane breaks down. This will eventually cause Pacific Blue to be unable to provide
services for their customers, triggering customer dissatisfaction.
As Pacific Blue uses an online booking system, the incredibly high demand due to
penetration pricing may struggle to operate effectively, as it almost caused the website to
crash. This, in turn, may be problematic for customers if they find it frustrating having to
wait for a long time when using the online booking system, making them lose interest in
making purchases. Thus, it will hinder Pacific Blue from developing further as a company for
the long run as gaining as many customers through penetration pricing is crucial for the
company to strive.
(c) Examine two problems that Pacific Blue could face when using penetration pricing.
Since penetration pricing involves the reduction of prices during the initial stage, increasing
the prices of theirs tickets in the long run may dissatisfy customers even if Pacific Blue has
already achieved a high market share. Considering that there are other airline companies
offering relatively cheap prices, including Air New Zealand and QANTAS, using penetration
pricing does not guarantee the loyalty or interest of the customers for the long run. Instead,
customers may feel reluctant to purchase tickets from Pacific Blue if the prices increase and
would rather purchase flight tickets from other competitors.
Using penetration pricing can affect the way in which potential customers view Pacific Blue
as a company. As the firm deliberately reduces the price below the supposed price or
average, it can cause the customers to have a lack of trust regarding the quality of the
services provided due to the low price. This, in turn, can cause the overall brand image to be
seen negatively by the customers and they may be reluctant to purchase flight tickets from
Pacific Blue due to suspicion regarding the low price. When this happens, it will be difficult
for Pacific Blue to reposition themselves or fix their image.
(a) Define the following terms:
(i) capacity utilization
Capacity utilization refers to the measurement used to measure the rate at which their
potential output levels are met. It can be calculated using the following formula:
Capital utilization = (actual output/maximum output) x 100%
(ii) penetration pricing
Penetration pricing refers to a firm’s marketing strategy to attract customers into
purchasing their new product by initially selling it at a lower price than supposedly. This is
an example of a short-term marketing strategy as a firm using this strategy is aiming to
achieve a high market share in a short amount of time.
(b) Explain two capacity utilization issues that Pacific Blue may face.
One capacity utilization issue Pacific Blue may face is the high demand that they cannot
keep up with considering they only have 2 planes for 11 schedules flights per day, also
known as capacity shortages. This will definitely be problematic if there are delays or one of
the plane breaks down. This will eventually cause Pacific Blue to be unable to provide
services for their customers, triggering customer dissatisfaction.
As Pacific Blue uses an online booking system, the incredibly high demand due to
penetration pricing may struggle to operate effectively, as it almost caused the website to
crash. This, in turn, may be problematic for customers if they find it frustrating having to
wait for a long time when using the online booking system, making them lose interest in
making purchases. Thus, it will hinder Pacific Blue from developing further as a company for
the long run as gaining as many customers through penetration pricing is crucial for the
company to strive.
(c) Examine two problems that Pacific Blue could face when using penetration pricing.
Since penetration pricing involves the reduction of prices during the initial stage, increasing
the prices of theirs tickets in the long run may dissatisfy customers even if Pacific Blue has
already achieved a high market share. Considering that there are other airline companies
offering relatively cheap prices, including Air New Zealand and QANTAS, using penetration
pricing does not guarantee the loyalty or interest of the customers for the long run. Instead,
customers may feel reluctant to purchase tickets from Pacific Blue if the prices increase and
would rather purchase flight tickets from other competitors.
Using penetration pricing can affect the way in which potential customers view Pacific Blue
as a company. As the firm deliberately reduces the price below the supposed price or
average, it can cause the customers to have a lack of trust regarding the quality of the
services provided due to the low price. This, in turn, can cause the overall brand image to be
seen negatively by the customers and they may be reluctant to purchase flight tickets from
Pacific Blue due to suspicion regarding the low price. When this happens, it will be difficult
for Pacific Blue to reposition themselves or fix their image.
