Case I: CHEMCO CASE
Started in 1965, ChemCo is a leading manufacturer of car batteries in the U.K. market. Since then, it has been under the charge of Mr. Jones, the founder-owner of the firm. In 1999, the company decided to go for a diversification by expanding the product line. The new product was batteries for fork-lift trucks. At the same time, Mr. Marek was appointed the Senior Vice President of marketing in the company. However, soon after its successful diversification into fork-lift batteries, the sales in this segment began dropping steadily. Mr. Marek wanted to introduce some radical changes in the advertising and branding of the new business but the proposal was turned down by the old-fashioned Mr. Jones.
At this juncture in 2002, the firm is losing heavily in the fork-lift batteries business and its market share in car batteries is also on a decline. Mr. Jones has asked Mr. Marek to show a turnaround in the company within a year. What steps should Mr. Marek take to take the company out of its troubles?
Some of the facts on the case are:
- ChemCo is a quality leader in the U.K. car batteries market.
- Customer battery purchases in the automobile market are highly seasonal.
- The fork-lift business was added to utilize idle capacity during periods of inactivity.
- This is a low-growth industry (1% annual growth over the last two years)
- Large customers are sophisticated and buy based on price and quality. Smaller customers buy solely on price.
- There is a Spanish competitor in the market who offers low priced batteries of inferior quality.
Group Discussion Preparation Links:
- Established player in car batteries
- Losing heavily in fork-lift truck batteries
- Old fashioned owner resistance to change
- Low priced competitors
- Foreign competitors gaining market share
- High quality product, but low end customers care more about price than quality
- Mismanaged product diversification in a price sensitive market
- Alternative 1: Establish an Off-Brand for the fork-lift business
- Alternative 2: Educate the customer market about product quality
- Alternative 3: Exit the fork-lift battery business
Criteria for evaluation of alternatives:
- Establishing the firm's quality image
- Increase in market share
- Increase in sales
- Cost of the product
Evaluation of Alternatives:
- Protect firm's quality image in the automobile industry
- Redesigned product to reduce the cost of manufacture
- Low price to enable it to compete with Spanish producer
- Make use of the quality leadership in car batteries market
- Offer reliability testing, extended warranties etc. to promote quality image
- Set higher prices to extract surplus from these advantages
Alternative 3 and 4
- A passive strategy, not proactive
Alternative 1 is recommended in this case. Since the firm operates in an industry which has low growth, hence it can expand market share and sales only by taking the customers from other players. Hence, it needs to tackle the Spanish competitor head-on by aggressively pricing its product. At the same time, launching a low-priced product under the same brand name erodes the high quality image in the car batteries market. Hence, the best option is to go for an off-brand to target the fork-lift customers who are increasingly becoming price sensitive. This will enable the company to ward off the threat in short-term and build its position strongly in the long-term.
Case II: NAKAMURA LACQUER COMPANY
The Nakamura Lacquer Company (NLC) of Kyoto, Japan, employed several thousand men and produced 500,000 pieces of lacquer tableware annually, with its Chrysanthmum brand becoming Japan's best known and bestselling brand. The annual profit from operations was $250,000.
The market for lacquerware in Japan seemed to have matured, with the production steady at 500,000 pieces a year. NLC did practically no business outside Japan.
In May 2000, (much to your chagrin!) the ambitious and dynamic, Mr. Nakamura (Chairman, NLC) received two offers from American companies wishing to sell lacquer ware in America.
The first offer was from the National China Company. It was the largest manufacturer of good quality dinnerware in the U.S., with their “Rose and Crown” brand accounting for almost 30% of total sales. They were willing to give a firm order for three years for annual purchases of 400,000 sets of lacquer dinnerware, delivered in Japan and at 5% more than what the Japanese jobbers paid. However, Nakamura would have to forego the Chrysanthemum trademark to “Rose and Crown” and also undertake not to sell lacquer ware to anyone else in the U.S.
The second offer was from Sammelback, Sammelback and Whittacker (henceforth SSW), Chicago, the largest supplier of hotel and restaurant supplies in the U.S. They perceived a U.S. market of 600,000 sets a year, expecting it to go up to 2 million in around 5 years. Since the Japanese government did not allow overseas investment, SSW was willing to budget $1.5 million for the next two years towards introduction and promotion. Nakamura would sell his “Chrysanthemum” brand but would have to give exclusive representation to SSW for five years at standard commission rates and also forego his profit margin toward paying back of the $ 1.5 million.
What should Mr. Nakamura do?:
- The Nakamura Lacquer Company: The Nakamura Lacquer Company based in Kyoto, Japan was one of the many small handicraft shops making lacquerware for the daily table use of the Japanese people.
- Mr. Nakamura- the personality: In 1948, a young Mr. Nakamura took over his family business. He saw an opportunity to cater to a new market of America, i.e. GI's of the Occupation Army who had begun to buy lacquer ware as souvenirs. However, he realized that the traditional handicraft methods were inadequate. He was an innovator and introduced simple methods of processing and inspection using machines. Four years later, when the Occupation Army left in 1952, Nakamura employed several thousand men, and produced 500,000 pieces of lacquers tableware each year for the Japanese mass consumer market. The profit from operations was $250,000.
- The Brand: Nakamura named his brand “Chrysanthemum” after the national flower of Japan, which showed his patriotic fervor. The brand became Japan's best known and best selling brand, being synonymous with good quality, middle class and dependability.
- The Market: The market for lacquerware in Japan seems to have matured, with the production steady at 500,000 pieces a year. Nakamura did practically no business outside of Japan. However, early in 1960, when the American interest in Japanese products began to grow, Nakamura received two offers
- The Rose and Crown offer: The first offer was from Mr. Phil Rose, V.P Marketing at the National China Company. They were the largest manufacturer of good quality dinnerware in the U.S., with their “Rose and Crown” brand accounting for almost 30% of total sales. They were willing to give a firm order for three eyes for annual purchases of 400,000 sets of lacquer dinnerware, delivered in Japan and at 5% more than what the Japanese jobbers paid. However, Nakamura would have to forego the Chrysanthemum trademark to “Rose and Crown” and also undertaken to sell lacquer ware to anyone else the U.S. The offer promised returns of $720,000 over three years (with net returns of $83,000), but with little potential for the U.S. market on the Chrysanthemum brand beyond that period.
- The Semmelback offer: The second offer was from Mr. Walter Sammelback of Sammelback, Sammelback and Whittacker, Chicago, the largest supplier of hotel and restaurant supplies in the U.S. They perceived a U.S. market of 600,000 sets a year, expecting it to go up to 2 million in around 5 years. Since the Japanese government did not allow overseas investment, Sammelback was willing to budget $1.5 million. Although the offer implied negative returns of $467,000 over the first five years, the offer had the potential to give a $1 million profit if sales picked up as anticipated.
- Meeting the order: To meet the numbers requirement of the orders, Nakamura would either have to expand capacity or cut down on the domestic market. If he chose to expand capacity, the danger was of idle capacity in case the U.S. market did not respond. If he cut down on the domestic market, the danger was of losing out on a well-established market. Nakamura could also source part of the supply from other vendors. However, this option would not find favor with either of the American buyers since they had approached only Nakamura, realizing that he was the best person to meet the order.
- Decision problem: Whether to accept any of the two offers and if yes, which one of the two and under what terms of conditions?
- To expand into the U.S. market.
- To maintain and build upon their reputation of the “Chrysanthemum” brand
- To increase profit volumes by tapping the U.S. market and as a result, increasing scale of operations.
- To increase its share in the U.S. lacquerware market.
Criteria: (In descending order of priority):
- Profit Maximization criterion: The most important criterion in the long run is profit maximization.
- Risk criterion: Since the demand in the U.S. market is not as much as in Japan.
- Brand identity criterion: Nakamura has painstakingly built up a brand name in Japan. It is desirable for him to compete in the U.S. market under the same brand name
- Flexibility criterion: The chosen option should offer Nakamura flexibility in maneuvering the terms and conditions to his advantage. Additionally, Nakamura should have bargaining power at the time of renewal of the contract.
- Short term returns: Nakamura should receive some returns on the investment he makes on the new offers.However, this criterion may be compromised in favor of profit maximization in the long run.?
- Reject both: React both the offers and concentrate on the domestic market
- Accept RC offer: Accept the Rose and Crown offer and supply the offer by cutting down on supplies to the domestic market or through capacity expansion or both
- Accept SSW: offer; accept the SSW offer and meet it through cutting down on supply to the domestic market or through capacity expansion or both. Negotiate term of supply.M
Evaluation of Options:
- Reject both: This option would not meet the primary criterion of profit maximization. Further, the objective of growth would also not be met. Hence, this option is rejected.
- Accept RC offer: The RC offer would assure net returns of $283,000 over the next three yeas. It also assures regular returns of $240,000 per year. However, Nakamura would have no presence in the U.S. with its Chrysanthemum brand name The RC offer would entail capacity expansion, as it would not be possible to siphon of 275,000 pieces from the domestic market over three years without adversely affecting operations there. At the end of three years, Nakamura would have little bargaining power with RC as it would have an excess capacity of 275,000 pieces and excess labor which it would want to utilize. In this sense the offer is risky. Further, the offer is not flexible. Long-term profit maximization is uncertain in this case a condition that can be controlled in the SSW offer. Hence, this offer is rejected.
- Accept SSW offer: The SSW offer does not assure a firm order or any returns for the period of contract. Although, in its present form the offer is risky if the market in the U.S. does not pick up as expected, the offer is flexible. If Nakamura were to exhibit caution initially by supplying only 300,000 instead of the anticipated 600,000 pieces, it could siphon off the 175,000 required from the domestic market. If demand exists in the U.S., the capacity can be expanded. With this offer, risk is minimized. Further, it would be competing on its own brand name. Distribution would be taken care of and long-term profit maximization criterion would be satisfied as this option has the potential of $1 million in profits per year. At the time of renewal of the contract, Nakamura would have immense bargaining power.
- Negotiate terms of offer with SSW: The terms would be that NLC would supply 300,000 pieces in the first year. If market demand exists, NLC should expand capacity to provide the expected demand.
- Action Plan: In the first phase, NLC would supply SSW with 300,000 pieces. 125,000 of these would be obtained by utilizing excess capacity, while the remaining would be obtained from the domestic market. If the expected demand for lacquer ware exists in the U.S., NLC would expand capacity to meet the expected demand. The debt incurred would be paid off by the fifth year.
- Contingency Plan: In case the demand is not as expected in the first year, NLC should not service the U.S. market and instead concentrate on increasing penetration in the domestic market.