Curled Metal Inc – Engineered Product Division
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Cumberland Metal Industries (CMI) was a company which sold metal as raw material in other products. After the company had developed the product – Slip Seal that could meet the demanding specification of the automakers, it had grown rapidly over the past decade. The sales increased from $750,000 in 1991 to over $55 million in 2007. However, the sales decreased from 61 million in 2006 to 55 million in 2007, a net decrease of 9.5%, the net profit decreased from 5.7 million in 2006 to 3.5 million in 2007, a net decrease of 38.7%. The company was under the pressure to diversity its products in order to increase the sales and the net profit. CMI had developed new product, curled metal pad (CM pad) that according to Joseph Fernandez, vice-president of the Engineered Division. CMI had to consider how to enter into the market for this new products, identify the potential customers especially and determine the price of this new product. Competitive advantage
Curled metal would be made of various metal (e.g. copper, monel and stainless steel), it could be made to withstand any temperature or chemical. It was more chemical and temperature resistant. It never went above 250F and where the conventional pads can reach 600-700F. Thus more energy could be used to drive the pile with CM pads compared to using conventional pads. Besides, CM pads contain no hazardous material, which were less dangerous for health. According to the Kendrick and Corey test, CM pad had the several competitive advantages as below: -Better performance as CM pad drive pile 20% – 33% faster
-CM pad has lifetime 10 times longer
-Less CM pads required per job
-Less set changes
-Less time required for changing per set, less downtime
Thus, CMI shall focus on 11 1/2” pad and position its CM pad as new industry standard whiles emphasis on its cost efficiency and superior performance.
The Potential Market Demand
There were not virtually statistics from which a potential US market sixe for CMI pads could be determined. Thomas Simpson, the Group Manager at CMI, had gathered few statistics and made several assumption to determine the potential market size. It was estimated that about 13,000 pile hammers were owned by companies directly involved in pile driving. Industry sources estimated that another 6,500 to 13,000 hammers were leased. Sanwal assumed that this total of 19,500 to 26,000 hammers would operate about 25 weeks per year and to used 30 hours per week, which equal to 750 hours per hammer per year. He further assumed that average actual driving for most jobs was 20 feet per hours, which amounted to between 290 – 390 million feet of piles driven annually which is calculated as 26,000 hammers x 750 hours per hammer x20 feet per hour = 390,000,000feet/per year) He also assumed that 6 CMP pad would be required to drive 10,000 feet. Thus, the potential market demand for the pads could range from 174,000 to 234,000 per years (calculation: 390,000,000/10,000 x 6 pads)
CMI management had identified six types of the market players; including pile hammer manufacturers, architectural/consulting engineers, soil consultants, pile hammer distributing/renting companies, engineering/construction contractors, and independent pile-driving contractors. The company should develop different market strategy for each of the player as each of them has their own characteristics. Hammer manufacture and architectural/consulting engineers, soil consultant would not purchase significant amount of CM pads. But the company could develop good relationship with them as they could influence recommendation. CMI should allocate less resource to Pile hammer distributing/renting companies which may hesitate to provide pads that enable a contractor to return equipment faster. CMI should target Engineering / construction contractors as the potential customers. They were often large international firms and had bigger, complex construction projects. So they needed higher quality, better performance of pads for their projects. Independent pile-driving contracts represented “the frontline buying influence.” They were knowledgeable, but not sophisticated.
CMI was first manufacturer for CM pads, there was no direct competition and no available selling price in the market that CMI can take reference to. In view of that, CMI could use two test results of Kendrick and Corey to determine the economic value of CM pads. According to the Appendix I, the average economic value of CMI pad was 3,304. This value had taken into account of less CM pads required per job and the cost saving in equipment and labor . But the value to the customer should be higher due to some intangible advantage, for examples, lower accident claim as fewer set changes required for CM pads. Besides, lower health claim as CM pad contained non-toxic material. In order to gain the market share for this new product, we would recommend CMI to set the price of CMI pad around 85% of economic value, saying 2,805, promote to the market that it was much cheaper to use CM pads with superior performance and cost efficiency. Besides, different discounts can be granted to the customers depend on the length of the contracts signed and volume of the pads purchased, ranging from 10% to 25%.
CMI could position CM pads as new industry standard, while emphasis on cost efficiency with superior performance. It should demonstrate to the market that CM pads had several competitive advantage and had high value to the customers, e.g. better performance with longer lifetime, reduce the waste as less pads needed to driving the piles, lower the labor cost and equipment cost. CM pad was environmental friendly as it contained no hazardous material. The conventional pad was typically 9 dollars per pad and the price of CM pad was set at 2,805. The market may be reluctant to accept this new product when it was first lunched to the market as the price of the CMI pad was hundreds time greater than the price of conventional. CMI should educate the market that this new products had higher economic value and much cheaper to use with superior performance.
CMI could target large Engineering / construction contractors as potential customers as they were more willing to spend money to purchase pad with higher quality and better performance. The market for conventional pads was immature. No industry leaders for conventional pads. In fact, most of the pad came unbranded, having been cut by small, anonymous job shops. CMI faced no direct competition for its new products. Being the industry leader in Slip Seal, CMI could use its brand name to promote it new products. Industry sources indicated that about 75% of pile-driving contractors owned their hammers. CMI could target 25% of the market share first for large engineering/construction. Thus the market demand was around 58,500 (234,000 x 25%).
CMI has to consider whether they had enough production capacity to meet the market demand. The existing equipment can only produced 3,000 CMI pads (250 x 12), so CMI may need to add additional 19 sets (58,5000/3000) of equipment at the cost of 225,000 per each and 19 sets of permanent tooling at 150,000 per each. Total cost incurred to produce 58,000 was 19.6 million ( 444 x1,500 + (225,000+150,000)x19+207.54×3,000×19
Total revenue = 58,500 x2,805 = 164 million
Profit earned = 144.4 million (164 million – 19.6 million) Promotion and distribution channel
To increase the market recognition and awareness, CMI can build up the good relationship with Hammer manufacture and architectural/consulting engineers, soil consultant, e.g. arranging firm visit, free samples of CM pad provided as gift. So that the companies could help to promote their products and introduce new customers. Besides, CMI could advise in magazine like Oklanhoma Contractor, sponsor the professional-level “Piletalk” seminars. To gain the creditability and enhance industry acceptance, CMI should get the endorsement of the operational performance of CM pad from Professor R. Stephen McCormack. The testing results of CM pad performed by Professor R. Stephen McCormack should be released to the industry when it was completed. CMI would approach construction-oriented manufactures’ representative to help to sell CM pad to large Engineering / construction contractors.