BUAD680 Module 5 Curled Metal Case Analysis PDF

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Cur l edMet al ,I nc .-Cas eAnal y s i sRepor t 1. Key Issues/Problems Curled Metal, Inc. (CMI) grew from $750,000 sales in 1991 to $55 million in 2007, but the sales had declined from $61 million in 2006 to $55 million in 2007 ( Exhibit 2, CMI income statement). Although, CMI’s Slip-Seal product was a major hit, the Company wasn’t confident of retaining its 80% market share. As a result, the company had already diversified from its heavy reliance on Slip-Seal and auto industry. CMI developed a new product - curled metal pile driver cushion pads. In field tests, the cushion pads showed that customer benefits outweighed CMI's manufacturing costs. Joseph Fernandez (CMI’s VP) and Rajiv Sanwal (Group Manager of CMI's Engineered Products Division) are responsible for formulating a strategy for marketing the new product. Some of the Key issues that CMI is facing with the new product are: i.

One of the major issues that CMI is being faced with is the feasibility of its new product, whether the product will be feasible for the commercial use and will it benefit the user if they used their traditional method.

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Second important decision was to determine an optimal price to charge for the pads (CMI needs to consider the standard industry practice for equipment rental, labor and overhead costs – Table A to come up with an optimal pricing strategy for the pads).

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Aligning price with business strategy – the company needs to determine which channels to market the pads based on the selected pricing strategy. CMI has to take into account several barriers to entry into this market. The primary barrier is that most companies viewed role of pads as a necessary accessory or tangent item instead of viewing them as a potential value add or cost reducing part of pile driving. In order to penetrate the market, CMI has to alter the point of view of pile driving pads for the opinion leaders, engineering firms, and contractors involved in the decision process.

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CMI needs to analyze market potential for the new product.

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Consider implications of a price on development and execution of integrated strategic options.

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Although CMI pads drove piles 33% faster and lasted for the entire job without much heating problems, the results were unusual. Sanwal believed that curled metal set life of 10 times more than conventional pads and performance increase of 20% were probably more reasonable and so sufficient testing and reliability of the observed exceptional efficiency of the pads needs to be assessed.

vii.

CMI needs to determine optimal sizes of the pads to be sold and used efficiently. Although the manufacturing process allowed any diameter pad, from standard minimum of 11.5 inches to over 30 inches, Sanwal was uncertain that CMI pads in larger sizes would perform equivalent to the standard size pads of 11.5 inches. Bigger sizes being more difficult to handle could contribute significantly to unproductive time on the job (Exhibit 5).

viii.

Managers at CMI were concerned that other manufacturers might discover this new application for curled metal and enter business before CMI could get patent protection. So CMI needed to not only file patent faster (which could be done only after sufficient testing and comparing performance of the cushion pads with a smaller number of contractors) but also needed an accurate marketing strategy to target the potential business players and come up with optimal pricing strategy.

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The plus point for CMI was that despite having a number of competitors, most were substantially smaller than CMI and none, thus far, had shown strong competence in technical, market, or product development.

2. Discussion of Alternative Solutions CMI needs to develop an integrated strategic option for the newly developed product (curled metal pile driver cushion pads), an option that specifies the appropriate price but also specifies the many other choices facing CMI in formulating a strategy for the product (e.g., in marketing, sales, distribution, production, finance, and other functions).

a. Assess Comparative Performance: CMI needs to find contractors who are willing to test the product and assess the performance of the Product and thereby ensure acceptance of the product by these contractors. Testing of the pads by multiple contractors will also help CMI in filing patent for the product. The initial usability and durability of the pads was assessed by Kendrick foundation Company of Baltimore. In pile driving tests the CMI pads exhibited 33% more driving efficiency, a 5 times increase in pad change efficiency, and a 20 times increase in piles per pad efficiency (Comparison Table between Conventional pads and CMI pads, Page 3). CMI’s cushion pads contained no hazardous material and did not get significantly heated like the other pads existing then. It was essential that the results be reproduced with another construction Company. The 2nd Construction Company – Corey Construction in Pennsylvania was able to reproduce the observations quite comparably by Kendrick foundation (Comparison Table between Conventional pads and CMI pads, Page 5). b. Assess Market Size: Since there were no statistics for a potential U.S. market size for cushion pads, Sanwal made several assumptions based on the information he gathered. Based on his assumptions the maximum number of set of metal pads requested annually by the market can be estimated. Since the feet of piles driven amounted to between 290 and 390 million and the new CMI set of pads would drive 10,000 feet, the market should be in a range of 29,000 to 39,000 sets per year. c. Market Segmentation: The market for CMI’s cushion pads can be segmented into three categories based on four behavioral factors: i. Equipment ownership: Customers who own their own equipment and those who rent equipment. ii. Procurement process: Customers who operate internationally and have global procurement teams v/s those who operate only in the US and do local sourcing iii. Size & Scope of work: Contractors who are large and do big complex construction projects have bargaining power and create best practices v/s contractors who are small and do smaller projects follow processes set by big players. iv. Price sensitivity: Customers who are price sensitive v/s those who prefer high quality over price. Some customers especially the renting companies are willing to buy cheaper parts while others such as the expert contractors will pay higher for the extra value delivered through efficiency improvement.

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The segments that CMI can tap into are: 1 - Large company contractors, 2 - Small contracts who rent and 3 - Rental companies d. Utilize Marketing Channels: There are several different channels available to market the CMI pads. For example, the company could hire a sales force and attempt to directly sell to customers or attempt to go through distributors. CMI could direct Sales Team for the initial years till break-even is achieved and customers are aware of the product and value created by it. Account managers could target larger engineering and construction contractors. Another option is to Solution Service Providers (SSP) for pile hammer distributors and renting companies and pile manufacturers. The SSPs can be given targets geographically. Future Plan: Once the product is commoditized, it can be sold via hammer sales outlets and construction supply outlets e. Make use of Purchasing Influencers: In order to sustain, CMI needs to introduce a successful product to increase revenue and profits. There is a list of possible influencers that can be utilized for purchasing the pads and in the pile driving industry, there are entities that participate in the distribution of what CMI is about to introduce. CMI was able to spot the following influencers: pile hammer manufacturers, architectural or consulting engineers, soil consultants, pile hammer distributing and renting companies, engineering and constructing contractors, and independent pile driving contractors. CMI can make use of these influencers to promote their product to the ultimate consumers. f.

CMI Pads Pricing: According to Corporate management, CMI would like to see a contribution margin of 40-50% of the selling price after manufacturing costs. CMI can use two options for determining pricing of CMI pads: i. Cost-Plus pricing: This is the simplest way to determine how to price the pads to distributors. As shown in Exhibit 6, there are two sets of projected costs for manufacturing that are dependent on whether or not CMI plans on investing in permanent tooling. This means that, depending on CMI’s manufacturing plans, price per pad or set of pads will differ, if CMI utilizes existing equipment (and hence not investing an additional $150,000 into production), the total manufacturing cost is $444.36 per pad. With a contribution margin of 50%, the price per pad will be approximately $890 and the price per set will be approximately $5334. If CMI decides to purchase permanent tooling, there is an additional up-front cost of $150,000 alongside the total manufacturing cost per pad of $207.54. In such case, the price per pad and per set with contribution margin of 50% will be $415 and $ 2490 respectively. This pricing method takes into account the target margins that corporates prefer and may allow CMI to penetrate the market and drive volume sales by having lower prices compared to pricing with other methods that take into consideration external factors. ii. Value-Add pricing: In this pricing methodology, CMI can take into account the additional value gained by consumers (e.g. reduced labor costs, raw material savings and energy savings). This pricing alternative has the ability to capture hidden margins that alternative 1 does not factor in. The additional value received by the end consumer justifies the higher costs they are paying. If CMI chooses this pricing option then they would be able to take into account an additional 3

savings of 34 hours for the consumer. This is based on an average savings of 12 hours (average 396 and 996 minutes) in addition to the average 22 hours saved from feet driven/ hour while pile driver is at work. CMI’s product has a total savings of $4488 (based in labor cost per of $132) for the end consumers. The total buyer value for their product is $9822 a set ($5334 plus $ 4488 from value added) and $1637 per pad. This option is very lucrative for CMI because it allows them to capitalize on the additional savings that their product offers to consumers.

3. Recommendations: Since CMI pads are a new product and are not only innovative but also unique to the market, this presents an opportunity to CMI to be the leader in high-quality pads as well as independent from contractor in its pricing methods. In the first year of production, it would be wiser for CMI to begin at 50% margin to give itself room to adjust margins as cost of production is lowered with increased economies of scale. Higher margins translating to higher end prices to distributors and end-users also sets CMI apart as a premium, high-quality product compared to the products currently available in the market. Pricing Recommendations: Regardless of the alternative selected, marketing the new steel pile cushions will require redefining consumer perceptions of pile pads in two ways. First, CMI must show that pads are an integral part of pile driving efficiency and thus an industry cost driver. Second, the company must change the way consumers view pricing of pile driving pads from a price-per-pad or set of pads mind-set to price-per-foot driven mind-set. Some companies may directly compare the price of a set of micarta pads, $150, against the price of a set of metal pads, exceeding $3,000, without considering the per foot ramifications. CMI needs to make sure that customers understand the $3,000 pads are actually cheaper on a per-foot basis than the $150 micarta pads. I would recommend CMI to go for the 2nd alternative of value-add pricing: Invest in $150,000 for permanent tooling as that reduces projected costs and makes it viable for CMI to sell cushion pads at $6,000 per set and provide a 40%-50% margin across all sizes. Further investments to expand production should be continued as sales materialize. At the price point of $6,000 per standard set (6 pads, including retailer margin and all costs) satisfies the management requirement of 40% - 50% of contribution for the permanent tooling option. It would also provide retailers a higher dollar margin amount (due to higher price) compared to traditional pads (30%-40% margin) and reduce their hesitation to promote CMI pads. Also, CMI pads provide savings of $18,730 for the Kendricks test job (one set of 6 pads used) and provide almost $1.8 per foot in cost savings. Savings are calculated using input costs provided in Exhibit 2. These savings allow CMI to charge more for their pads. These savings should be promoted to contractors to attract them to switch to CMI cushion pads. Further, launching and marketing all cushion pad sizes would allow CMI to become a one-stop shop for all contractors and construction requirements and would help CMI gain more market share as non-standard sizes are frequently used in the market (Exhibit 5). Channel Recommendations: I would also recommended that CMI market the new pads through distributors using a push method. They should also market directly to contractors and engineering firms by educating them on the efficiency and safety benefits of the new CMI pads (a pull approach). The safety hazard posed by micarta pads provides another marketing opportunity. The company should lobby the labor unions to push for higher safety standards and abandon the use of hazardous 4

pads. This avenue may prove to be an effective long-term strategy to force adoption of the new pads and increase market penetration. Promotion Recommendations: CMI should focus on B2B branding and ensure that the value propositions of the product are communicated clearly to all the potential customers and influencers. CMI should use industry events, trade shows, seminars and conferences to communicate the advantages of using the curled metal based cushion pads in pile driving. CMI should also think about using professional magazines targeted towards construction industry to advertise this product. Although word of mouth is a great tool to promote products organically, the feasibility of word of mouth recommendations in this industry is limited since trade secrets are not revealed. Instead CMI should have Professor Stephen McCormack, a well-respected authority in the pile driving academia, to endorse the operational performance of CMI cushion pads and enhance industry acceptance of the new product. Professor Stephen has tested the pads and seems enthusiastic about the positive results. As a scientist he can easily recognize the superior quality of CMI pads and be a fundamental resource for company’s brand building and promoting. Asking him to show to the community (writing a paper or with a conference) the properties of the new pads, the company can reach the main target of its marketing that is the “Soil consultants” and engineers that work on the most expensive projects. This strategy should enable the company to gain a market share large enough to generate a substantial profit and simultaneously small enough to keep investment and production costs low. Also make a partnership with Prometheus Iron Works, asking them to use the pads on their top level product can be a good marketing strategy. For the long term, considering the product life cycle, CMI can focus its effort in cost reduction to allow a progressively decrease in price. In fact, CMI should be aware that other competitors could enter into the market as the product is easily imitable. Building a strong brand image of quality with alternative 2 can bring to a major market penetration when the price will be lowered. For this future opportunity, marketing has to focus on publication in magazines like “Oklahoma Contractor”, sponsor seminars like “Piletalk” in various cities to bring designers, contractors and equipment developers together to discuss practical aspects of installation of driven piles.

4. Discussion of Potentials Drawbacks of Proposed Solution Alternative 2 (value-add pricing) provides the highest markup but however it would yield low market penetration. Although the cost could be justified, I believe it would be hard to convince contractors that the premium price is worth the cost savings based on efficiency. Furthermore, competitors might take advantage of the high price and penetrate the market with a similar performing product at a much lower price. Drawbacks of Cost-Plus pricing: Pricing lower also sets a precedence for future CMI pads line extensions or changes by creating a standard price at either $2490 or $5334 per set in customer’s mind. This may hurt future needs to change CMI pads pricing or create obstacles for pricing new products later on. Additionally, CMI’s breakeven units will be higher by pricing lower. Despite potentially higher market penetration, CMI will lack branding with its pads and face the task of educating consumers on a new product which may make hitting breakeven units for CMI more difficult.

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Hiring a sales force seems to be an unnecessary expense. Since the pads are not considered a high profile product by the users, the leverage held by current distributors should be enough to drive sales. In fact, an internal sales force may confuse the purchasing process because contractors may not be willing to take the time or effort to talk to salesmen for such a small factor in their overall project. The purchasing decision is as such that if a distributor recommends or supplies a certain brand of pads, the construction crews are likely to use it without much consideration.

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