Case Analysis on Rohm and Haas

1.1Background

This report has been written as part of the academic requirements of the Master of Business Administration.

1.2Size up

A small part ($5.4 million) of Rohm and Haas’ $1.9 billion sales (1983) is derived from the sale of metal working fluids. Currently these sales are realized through the product Kathon 886MW (886MW), which is mainly used as a maintenance biocide in central metal working systems fluid reservoirs.

Because of suggestions from the current end-users and the limitations of 886 MW in terms of minimum reservoir size, recently a new product was developed for use in smaller individual reservoir systems, namely Kathon MWX (MWX).

1.3Problem statement

The main problem stated in the case is the disappointing amount of sales of Kathon MWX. Although sales revenue of $20 million per year was estimated and the estimated sales in the first year of launch had been predicted to be $0.2 million, the realized sales for the first 5 months have only amounted to 12 thousand dollars, thereby falling short of the envisaged target.

Although the product has some excellent features, there are some factors that seem to be at the basis of the current failure. First of all the distributors seem not to co-operate, evidence of this was that 20% of packets of MWX reached the end users as part of the launch promotion. Secondly, the targeted end-users have low level of experience with the use of biocides in their metal working machines. Finally, the targeted end-users do apparently not realize that MWX could solve current problems of odor and dermatitis.

These issues will be taken into account in the subsequent analysis of the case and proposed modification of the current marketing plan.

2Recommendation

Recommendation

Based on our analysis of we recommend the following marketing strategy for the Kathon MWX:

First of all we recommend using the existing distribution channels for biocide, which include the formulators and subsequently industrial suppliers and machine tool shops. The rationale behind this decision stems from the fact that these distribution channels already exist and we do not want to upset the formulators, the latter point also in light of increased competition on the Kathon 886 MW products.

Since MWX is cannibalizing the formulators’ sales of metal working fluid, we recommend that the price the formulators charge to the end users or industrial suppliers/machine tool shops needs to be increased at least to $5.68 per packet. This price increase can be justified, as the value of MWX for the customer is estimated to be at least $40 per packet and the value to the customers of the products of our competitors is much lower than that of our product.

Next, through promotion and advertising, we need to create awareness among our customer about the benefits of our product to them in terms of cost savings in terms of metal working fluid concentrate costs as well as reduced disposal costs. Additionally customers can benefit from a reduction of rancidity and dermatitis. This awareness can be created through direct mailings and point-of-sale displays. Instruction on the proper use of the biocide and metal working fluids should be a part of the information provided.

Finally, the branding issue as raised in the case will probably vanish as the formulators have an increase in revenues from the MWX and Rohm & Haas carry the promotion costs. However if it still turns out to be an issue, a possible solution could be to have a kind of “co-branding” initiative like “Intel”-inside.

Above plan is expected to result in an increase of $3.96 million in revenues.

3Analysis

3.1Alternatives

Alternative A:

In this alternative MWX is sold through the formulators as is current done with the 886MW. In this alternative MWX can be sold with the metalworking fluid concentrate as a bundle. A promotion program of MWX should be implemented and focused towards the end users. An information campaign directed to formulators, industrial suppliers and tool shops will make them aware about the product.

Alternative B:

Direct distribution to secondary distribution networks (Industry Supply House and Machine Tools Shops). In this alternative, we will set up a very strong sales force to keep close contact with those shops. The profit margin of Industry Supply House and Machine Tools Shops will be increased by cutting first level of distribution. The Point of Sales in the shops will be strengthened.

Alternative C:

Direct distribution to end-users. In this alternative, we will set up a telesales team to contact end-users, and also receive enquiries from customer response to print advertising. The profit margin per packet to Rohm and Haas will be significantly increased by going direct to end-users.

3.2Size of the market

Current Situation:

There are 10 large national formulators; 20-30 middle size formulators and several hundred small formulators in the market. The secondary distribution level is Industrial Supply Shops and Machine Tool shops, which number approximately 18,000. The number of individual service plants (end-users) is 150,000.

To measure the size of this market we assume:

*1 packet can treat 25 gallons of fluid

*1 packet can treat fluid for 4 weeks

*The average number of machines per plant is 11 (1,701,000/150,000),

*1 machine requires 48 weeks’ maintenance biocide per year. (There are 52 weeks per year and there is no need for the first four weeks)

Therefore, 1 machine needs 12 packs per year (= 48/4)

*The individual system is most commonly 50 gallon tank.

Therefore the total market volume of maintenance biocide for small size reservoir is:

2 x 12 packet x 11 machines/plant x 150000plants= 39,600,000 packet

We estimate that the market share for MWX will be 10% (Because individual systems are mainly ferrous, we estimate this based on 15-20% market share for ferrous metals of centralized systems).

The estimate for sales volume of MWX will be:

39,600,000 packet x 10% market shares = 3,960,000 packets

3.3Customer Value Created

To understand the value created for the end-user we compare the situation with use of Kathon MWX with the current situation.

Table 1.

Assumptions

1)48 gallons of diluted fluid

2)Pessimistic assumption of only eight weeks extension of fluid life. Fluid life could be longer if machines are well maintained.

The difference between using or not using MWX, is a difference of $476 per year. As a result this represents a $40 added value per packet for the end-user.

3.4Customer Demand

3.4.1Alternative A:

In order to make the MWX attractive for formulators, the MWX will be bundled with the metalworking fluid concentrate sales.

The customer demand for MWX will increase because the non replacement of metalworking fluid concentrate will decrease its costs for the end user. Moreover we assume that due to the level of competitiveness between end users will drive end-users to decrease manufacturing costs, which would make Kathon MWX very attractive. Secondly, market research has also indicated customer demand for a product that eliminates odour and bacteria and fungi that can cause dermatitis. Kathon MWX fore-fills this demand.

For Rohm and Haas customers, the formulators, maintenance products such as MWX will decrease their turnover but by bundling MWX with metalworking fluid concentrate will enable formulators to maintain their margin.

For the end-user the benefit of MWX is total since they don’t have to renew their metalworking fluid as regularly. By bundling the product end-users keep on paying the previous formulator margin, but they realize the huge saving of the formulator metalworking fluid cost.

3.4.2Alternative B:

Rohm and Hass customers are industrial supply houses / machine tool shops, who then sell the product to end-users who are the small companies using small machines.

For industrial supply houses / machine tool shops, the customer demand is to generate more margins and profits for their shops. MWX is just one small product among their range. They require convenient goods delivery and have clear communication with Rohm and Hass, so that any questions or matters can be clarified with ease.

Expectations also include the availability of MWX in the shop and expect that the product can be easily accepted by their customers. MWX will increase the variety of their supplies so as to provide their customers more choices, while at the same time offers an attractive margin.

Additionally, the end-users obtain the metalworking fluid concentrate from tool shops and Industry Supply shops. While at the shop end-users can pick-up MWX and use it to control the odour released by bacteria. End-users seldom go to the large national distributors for supplies that were not locally available. Therefore the availability of the product will be their key demand, from an Industry Supply Shop and Machine Tool shop perspective.

The main value created for the end user is that MWX can easily get rid off the odour for small size reservoirs less than 1000 gallons with safety. And the product is very easy to use and no maintenance is required. Secondary is the cost benefit of extending fluid life.

3.4.3Alternative C:

The Market survey conducted by Rohm and Hass revealed that one of the main demands from the customer was the need to reduce odour and the propensity to develop dermatitis. Customer awareness that Kathon MWX can effectively meet this demand is virtually nil despite the advertising communicating that a feature of Kathon MWX is that it reduces or eliminates odour, and bacteria and fungi that cause dermatitis. This would also reduce the need for end-users to purchase detergents to add to metalwork fluid.

Although Kathon MWX is highly effective at extending the life of metalworking fluid, this benefit was not realised as a primary motivator for end users to buy the product according to the market survey. Advertising supporting the initial launch did not adequately present this benefit, despite this being the primary benefit as seen by Rohm and Haas. Once this benefit is realised by end users, one can assume that this will become one of the primary motivators for buying the product.

These features combined in one product more than meet the demands of the customer compared to other products currently available, and given the highly favourable comparative pricing of Kathon MWX to its competitors, the product represents considerable value added for the end user.

3.5Competition

The following table presents the comparison of the price of competitors to formulators, secondary distributors and to end users in the maintenance biocide market. However as the product specifications are different, it’s hard to prepare directly. For this reason we have calculated to the 50 gallon metalworking fluid level in order to a direct comparison to be made.

1)See calculation under customer value

2)3 days compared to 28 days (4 weeks) means that Sump Saver is 28/3 times less effective when trying to achieve the same result as with MWX, i.e. the value for the customer is 3/28 * 80= $ 4,29 per 50 gallons (not withstanding the low effect against bacteria)

3)Dowcil is not really a competitor, since the product is only used in tanks over 500 Gallons. However if it is possible to break down the 2,5 pound tablet and use it in 50-gallon tanks, the heavy ammonia odour as well as the release of formaldehyde make MWX have an advantage over this product.

Kathon MWX’s direct competitors are Tris Nitro and Dowicil 75 (only deal with tanks large than 500 gallons). Tris Nitro is sold through distributors and to end-users while Dowicil 75 is sold only through distributors. The margin of MWX to formulators is 50%, which is the same as Tris Nitro. The current margin for this secondary level distribution network is around 10% for MWX, which is also comparable with competitors.

It is important to note however, that MWX is more efficient than its competitors in terms of extending the life of the fluid, can be used in the full spectrum of reservoirs in the market, and also offers a solution for odour and bacteria.

3.6Distribution

3.6.1Alternative A

By continuing to sell the products through the same distribution channels i.e. the formulators, Rohm and Haas keeps its low distribution cost and take the most benefits from the existing formulator’s network.

3.6.2Alternative B

In Alternative B, if we want to deal with 18,000 distributors directly, logistics will be an issue. It is highly recommended that Rohm and Haas hire a third-party logistics company to deliver the box to the shops. Assume the price for deliver one box is $20. The delivery cost for R&H will be $0.14/pack (=20/144)

3.6.3Alternative C

Using this alternative to market and distribute directly to the end customer would requires distribution of product via a third party such as Fed Ex or UPS, direct to the customer.

3.7Product Characteristics

Kathon MWX meets customers expectations (even though they might not be aware of it) regarding odour and dermatitis (resulting from bacteria build up in the fluid), and exceeds customer expectations regarding the extension of life for fluids especially when compared to competitors. The product has an additional advantage as it is also compatible for smaller tanks (25-100 gallons), which is a feature that is only matched by ‘Tris Nitro Sump Saver’. However, these benefits are not adequately communicated to the target audience. The Kathon MWX can be viewed as a superior product in these three key aspects when compared to competitors.

Two final aspects with regard to Kathon MWX are that the product does not release formaldehyde, and is easy to use. But ease of use is a feature is common to all competitors, and is therefore viewed as and ‘order qualifier’ rather than an ‘order winner’.

3.8Advertising and Promotion

In all alternatives outlined in this presentation the Promotion analysis and recommendations of Kathon MWX have the following in common:

Problems with the current campaign:

1)Samples were co-ordinated by distributors who have little understanding of the product, and little interest in promoting it. It is highly likely that many samples were not forwarded to the parties who enquired about the product.

2)The advertising in American Machinist did not effectively communicate the benefits of the product. The advertising listed features of the product rather than the actual benefits. The marketing survey found that the main needs of the customers were the reduction of odour and bacteria (which causes dermatitis). Although this feature was listed in the commercial, it did not outline the benefit, i.e.: The advertising stated that Kathon MWX controls bacteria and fungi and eliminates odour. These are features of the product. In order to adequately promote the benefits, it would be better to have built the advertising around reducing dermatitis (caused by fungi and bacteria) and bringing the elimination of odour to the forefront. With regard to the benefits of extended fluid life, some indication of benefits in terms of cost savings and duration of life would be more appropriate.

Common Promotional recommendations:

1)Focused print advertising in American Machinist that emphasises the benefits relevant to the end user. The main need of the end user is the elimination of bacteria and fungi, which cause a bad odour and dermatitis.

Print advertising costing:

$3,800 per full page per issue. Campaign should run for the first 4 months.

2)Advertising campaign should also have editorial support, estimated price: $5,000 Free sampling. There are an estimated 150,000 end users and 18,000 shops, so each shop has approximately 8 consumers on average. Therefore, we need at least 10 packs of free sample for each shop.

It will cost 18000 x 8 x $0.5/pack=$72,000

3)Information leaflets and flyers: To enhance customer education information should be distributed to both distributors and end users. The primary message should be that “MWX can help you get rid off your terrible odour of the fluid”. At the meantime, how much cost can end users save by using MWX should be communicated clearly.

Advertising costing is estimated to be:

Writing$2,000

Layout$1,000

Master print$1,000

Total production$4,000

Cost per print copy$0.50 number of copies required: 300,000 (2 per customer) = $0.50 x 300,000 = $150,000.

Total: $150,000 + $4,000 = $154,000

3.8.1Alternative A

Users of metalworking fluid concentrate must be educated regarding the use of Kathon MWX maintenance biocide as part of the metalwork fluid concentrate bundle. It is important to also recognise the decreasing demand for metalwork fluid concentrate by maintenance biocide in the industry, and a continuation of this trend must be anticipated. As a result a promotional campaign will be required to educate formulators and Rohm and Haas customer’s customers (the industry supply houses / Tool shops) to anticipate these market changes, and engage end users in the perceived benefits of Kathon MWX.

The main advantage of formulating a win-win situation with formulators and thereby utilizing the current distribution network is that additional sales teams focussing specifically on Kathon MWX will not be required. However, additional effort will be required in educating current sales teams about the product and its benefits.

Finally, one needs to recognise that merchandise marketing activity is not currently a core competence of Rohm and Haas or the formulators. But solutions can be provided by utilising the services of an advertising agency. This expense would be very minimal given the size of the market and expected returns.

3.8.2Alternative B

Under Alternative B, Rohm and Haas would have to hire additional sales people to focus specifically on Kathon MWX in order to cover 17,000 distributors. Sales people will have direct contact with customers. Further promotion will come from point of sale, free sampling, and information leaflets / flyers.

a.Sales people. Assuming that one salesperson visits four shops per day, and each shop twice per year, covering 50% of the top shops, and the number of working weeks is 50, then the number of sales people we need is:

If we hire 50% junior and 50% experienced salesperson, the total salary will be (85 x $23,000+ 85 x $60,000) / 2 = $3,527,500

b.Point of Sale. Rohm and Haas provide the display stand, posters and T shirts (preferably black given the target market) to the shops to get a best presence compared with competitive products. We recommend promotion in top 50% of shops with highest turnover:

Display costs: $50 per display X 18,000 shops x 50% = $450,000.

T-Shirt costs $5 per shirt. Four shirts per shop. 180,000 shops

$5 x (4 x 180,000) = $360,000

3.8.3Alternative C

To market and distribute directly to the end-user market a call centre will need to be set up consisting of 4 telesales people to receive and make calls.

4 x telesales people ($15,000 per person) = $60,000

Bonus incentives $3,000 per person= $12,000

Total= $72,000

3.9Price

3.9.1Alternative A

The price of the MWX for the formulator is key success factor for the win-win situation outlined previously. Despite the fact that at present MWX cannibalizes the metalworking concentrate fluid market, the way to motivate formulators to resell MWX is to ensure that they keep their previous margin and decrease their costs when selling the bundle MWX/metalworking fluid concentrate. As a result by transferring the necessary margin of the metalworking fluid concentrate onto the MWX as a product bundle, the formulator will keep their previous margin. We have called this price the reseller indifference price.

Continuing with the example of a 50 gallons tank of table 1, the calculation of the MWX indifference price is the following:

Table 3.Formulator Indifference Price

Assumption

1)The margin on the metalworking concentrate and the Kathon MWX are assumed to be equal from the formulators point of view.

2)These two prices are the indifferent prices considering a well-maintained system ($5.68) and a badly maintained system ($39.68).

3)For Rohm and Haas customers, the formulators, maintenance products such as MWX will decrease their turnover but by bundling MWX with metalworking fluid concentrate it will enable formulators to maintain their margin.

4)The benefit for end-users of MWX is important since they don’t have to renew their metalworking fluid because of its infinite use. By bundling the product end-users keep on paying the previous formulator margin, but they realize the huge saving of the formulator

3.9.2Alternative B

By using direct distribution to Industry Supply Shops and Machine Tool Shops, Rohm and Haas will be able be more competitive and flexible on the amount of margin available. This alternative will be able to increase the margin for secondary distributors. And the industry supply houses and machine tools shops will put more effort on MWX due to the higher margin or increased volume of sales (given that the advertising is more effective). This will also allow Rohm and Hass to be more responsive to demands of the market.

From the Table 2, we can see that the price of MWX to end users for treating 50 gallons fluid for 3 weeks is $4.4, while the price of Sump Saver for same amount of fluid and same duration will be $14.42 (=$2.06×7). Therefore, we can conclude that the price of MWX is much cheaper than Sump Saver for treatment over the same period of time.

In Alternative B, when we set up a direct distribution network to Industry Supply Shops and Machine Tool shops, we will effectively by-pass the formulators’ level.

Assuming that we provide the MWX to secondary distributors at $1/pack, (which is the same price as we provide to formulators currently), the margin of secondary distributor will be $2.2-$1.0= $1.2/pack (55%). We think this margin is probably too high according to industry standard. Assuming we increase the margin of secondary distributor to 20%, which is higher than industry level 10%, the price to secondary distributor will be $2.2 x 80%= $1.76 /pack. Then the margin for R & H will increase the gross margin by 150% from 0.5/packet to 1.26/packet. Given that superior end users benefits from this product, the price of the product to the end user could be higher, taking a premium pricing position.

3.9.3Alternative C

From the Table 2, we can conclude that the price of MWX is much cheaper than Sump Saver for treatment over the same period of time. Therefore, we recommend maintaining the same retail price in order to have a big advantage over competitors.

In Alternative C, Rohm and Haas should provide the MWX to end users at $2.2/pack, (which is the same price shops provide to their consumers currently). Considering that Rohm and Haas have to hire in third party logistics to deliver the boxes directly to customers, the delivery cost per box is around $20, so $ 0.14/packet should also be included. Then the margin of R & H is $2.2-$0.5-$0.14= 1.56/packet.(71%)

3.10Effects on company sales, cost and profits

Current situation:

As we calculated in chapter 3.2 (size of market), the sales volume of MWX will be 3,960,000 packets.

3.10.1Alternative A

The total sales revenue added from MWX is:

3,960,000 packet x $1 /pack $3,960,000

Variable Cost:

Manufacture cost: 3,960,000 packet x $0.5 $1,980,000

Logistics: 0

Gross Margin: $1,980,000

Fixed Cost:

POS: $450,000

Sampling: $72,000

Information Leaflets$154,000

Advertising:$20,200

Net Profit:$1,283,800

3.10.2Alternative B

The price direct to secondary distributor is $1.76 /pack.

The total sales revenue added from MWX is

3,960,000 packet x $1.76 /pack $6,969,600

Variable Cost:

Manufacture cost: 3,960,000 packet x $0.5 $1,980,000

Logistics: 3,960,000 packet x $0.14 /pack$ 554,400

Gross Margin: $4,435,200

Fixed Costs:

Sales force: $3,527,500

POS: $450,000

Sampling: $72,000

Information leaflets: $154,000

Advertising:$20,200

Net Profit:$211,500

3.10.3Alternative C

The price direct to secondary distributor is $2.2 /pack.

The total sales revenue added from MWX is

3,960,000 packet x $2.2 /pack $8,712,000

Variable Cost:

Manufacture cost: 3,960,000 packet x $0.5 $1,980,000

Logistics: 3,960,000 packet x $0.14 /pack $554,400

Gross Margin: $6,177,600

Fixed Cost:

Sales force: $72,000

POS: $450,000

Sampling: $72,000

Direct Mailing: $154,000

Advertising:$20,200

Net Profit:$5,859,400

Assumptions:

1 packet can treat 25 gallons fluid;

1 packet can treat 4 weeks

The average number of machines per plant is 11 (=1701000/150000),

1 machine needs 48 weeks’ maintenance per year. (There are 52 weeks per year and there is no need for the first four weeks)

Therefore, 1 machine needs 12 packs per year (= 48/4)

The individual system is most commonly 50 gallon tank.

Conclusion

AlternativesA Through FormulatorsB Direct distribution to shopsC Direct
distribution to end users

Advantages to R & H1.Maintain the current distribution channel, no more investment needed.

2.Economical benefits for end customers, formulators and the company

3.Low cost in publicity and promotion

4.Keep good relationship to continue to sell 886 MW through formulators

1.Higher margin to R & H

2.More flexible to change because of the direct communication to shops1.Higher margin to R & H

2. Close to the end users, understand consumer easily

Disadvantages

To R & H1.The formulators will not care it too much since it is only small part of their business.

2.No direct contact with end users1 Upset Formulators

3.Huge investment on sales people

4.No direct contact with end users

1.Upset Formulators

2.Cannot reach end users easily

Based on the advantages and disadvantages in the table above as well as the economic benefits, we recommend alternative A.

5Implementation

The implementation of the recommended alternative A will be done through the following steps:

a)The implementation of promotion programs and advertisements towards the end customers to create a demand. Seminars program to specialized professional associations will be planned.

b)First educate the formulators by presenting advantages of selling the MWX compared to the metalworking concentrate fluid. Second to convince them about the benefits in associating their product to the MWX brand as a bundle. This rebranding will enable formulators to benefit from the MWX superior quality.

c)The education of formulators to the MWX by training their technical supports and sales forces to make them more knowledeable to the benefits of the product.

d)The development of a dedicated MWX stamp or packaging easily recognizable by end consumers to associate the product to the promotion and advertisement program and to make the brand better known.

e)The association of formulators in the implementation planning of the product to involve them in its development. This involvement will make them more concerned about MWX and it will associate the MWX to the formulator product.