I’ve started looking at one of the pieces of pre-work for the strategy course.
Summary notes of the problem are here.
The challenge is to make the system profitable, with a strong steer to focus on increasing revenue. This post contains my first thoughts about a solution.
My first thought was to look at the constraints in the system – how could the management increase Throughput without increasing Operating Expense or Investment?
It would appear that there are different constraints at different times of the year.
In the peak summer season the trams run near capacity at all times, suggesting that there is excess demand, and the constraint is in the contribution received for each passenger carried. An easy strategy to try here would be to increase the fare price and thus the contribution per passenger carried. The case asserts that for the affluent tourists the current fare is insignificant, so the market should bear this.
In the early and late weeks there is excess capacity on the trams that run, suggesting that the market is the constraint. The passengers are mostly locals, and are price-sensitive. A 20% price rise has created a drop of 40% in passenger numbers in the early weeks of the season. If this is reversible then reducing prices in the off-peak part of the season should be offset by increased passenger numbers.
So strategy 1 is seasonally-adjusted pricing, with a reduction in the off-peak weeks and an increase during peak periods. There is a policy constraint that requires the average fare across the season to remain at $2.
Assuming that the price-sensitive drop in passenger numbers is reversible, then initial analysis suggests that reducing the price to $1.66 (i.e. a reduction to prices from 20 years ago) in weeks 1-13 and 25-32, combined with a price rise to $2.50 in weeks 17,18, 22-24 and to $2.60 in weeks 19-21 (the increases calculated to meet the average price constraint) will move the company to profitability, even accounting for the loss of state subsidy, wage increases and loan repayments.
To sense-check this would need some detailed figures on capacity which are not available in the study.
