You are James Middleton. You have just abandoned the safe and comfortable
surroundings of a cushy corporate job for the emotional and economic rollercoaster of a start-up company. While working at W.R. Grace, you recognized a potentially attractive business opportunity in that few companies like Grace could provide a complete machine-controls package. Most suppliers used other firms to design & build the associated controls. This cumbersome process adversely affected cost, quality and delivery times. While you have performed some assessment of key customer groups, you are still unsure of how to turn them into actual buyers. Assess the research project: 1. What is the management decision problem? What should be the marketing research objectives for PANELPro? (Include overall objective and types of information you'll need to gather) 2. Assess the cost vs. the benefit of the information that might be collected in relation to the business models under consideration. (i.e. Is market research as important for being a consultant as it would be for creating an integrated full service controls company?) 3. What are the research design alternatives? What data should be collected? What additional secondary market research sources could be pursued (Give specific relevant examples). 4. Should you conduct further research yourself, use the consultant, or use the student team? Assess the business: 5. What are the pertinent economics of the PANELPro business? Can you afford to conduct research? Estimate a rough annualized P&L (use the first Trico order for representative gross margins). 6. What is your best bet for a business model - subcontractor sales, or direct sales as a designer, assembler, distributor or consultant? The best options would leverage your skills and talents, and reflect the reality of your limited resources. This case illustrates the challenge faced by small entrepreneurs who have limited resources and are pursuing a business opportunity that lacks clear definition. Market insights about the size and attractiveness of different customer segments are critical to shaping the appropriate business model and value proposition. Customer groups differ in terms of their needs - from parts-only to fully-designed custom controls, and in their position in the value chain - from end user to OEM. This shapes their supplier selection criteria, their frequency and size of purchase and their price sensitivity. Once you determine the optimum customer segments you need to locate them and market to them effectively. Target length is few pages. Be James Middleton, not a passive bystander. Don't repeat the facts of the case in your write-up. Attack the decisions that need to be made as reflected in the six questions above. Be concise.
In January 2008, James Middleton left his management position at W.R. Grace & Co. (Grace) to devote full effort to his start-up company, PANELpro Corporation (PANELpro). PANELpro was a Boston-area company that produced controls for regulating machinery used in a variety of operations, ranging from chemical processing to metal can manufacture. Subcontracted assembly work kept P ANELpro busy, but this work was not very profitable. Middleton was looking for further opportunities, such as direct sales to customers as an assembler, designer or consultant. He was considering a marketing research project to assess alternative business and marketing strategies.
Middleton wanted to use his design engineering, manufacturing and sales experience to start his own company. "I want to do something that interests me, make some money, travel less, and have more freedom," he said. At Grace, a specialty chemicals and materials company, he had managed a 30-person unit that was responsible for package-sealing technology and had purchased production machinery from outside suppliers, including local machine shops. Few companies could provide a complete machinecontrols package. Instead, most used other firms to design and build the associated controls. According to Middleton, this procedure slowed the delivery time and raised the possibility that the panels were either of unknown quality or were more expensive than necessary. He was unsure whether other buyers were concerned about these problems, but if they were, the provision of a complete machine-controls package could be the basis of a new enterprise. The potential market was large: at his Grace unit alone, more than US$625,000 in annual orders were placed with controls suppliers.
Middleton had already collected considerable information about the controls business based on his own corporate experience and data collected from the Internet and online trade directories. Depending upon how he defined his business, the following entities could be considered potential customers or indeed potential competitors.
Entering "panel shop" and MA (i.e. Massachusetts) into an Internet search engine produced only two hits. Entering controls and MA resulted in more than 1,450 hits, mostly pertaining to Microsoft or Macintosh control panels. As an alternative, Middleton used an online Yellow Pages source, 1 and for a Greater Boston search, the Yellow Pages contained 42 company names under "controls, control systems and regulators." He consulted other Massachusetts city Yellow Pages and found another 93 companies. Except for Johnson Controls, a multibillion-dollar firm, all the names appeared to be local firms. From his work at Grace, he recognized 11 firms he thought might be competitors of PANELpro. Some firms were fully integrated and involved in design, assembly and parts distribution functions, but most had only one or two functions (see Exhibit 1 for Middleton's knowledge of the 11 firms). He knew that four firms had sales of almost $3,500,000. He also knew basic information about their operations, key people and financial strength. Although these firms were potential competitors, they could become overloaded with orders and might tum to PANELpro as a subcontractor.
Control systems firms provided controls based either on their own design or on designs provided by customers or parts manufacturers. The firms Middleton was most familiar with relied on previous customer relations and word of mouth to secure sales. They also used catalogs, Yellow Pages directories and online directories to find potential customers. Middleton could not recall any other forms of marketing promotion used by these companies.
Middleton collected additional data on electrical and electronic parts distributors using Internet searches, including Yellow Pages and the ThomasNet2 database of distributors and manufacturers, which had logged more than 67 million product and service searches during 2007. He eventually compiled a list of more than 100 small- and medium-sized northeastern distributors for General Electric, Westinghouse and a host of other manufacturers. Some parts were sold to panel shops, contractors and resellers, whereas other parts went to original equipment manufacturers (OEMs), such as Grace. Parts carried a list price established by the manufacturer. Distributors received a 49 per cent discount, panel shops and contractors received a 41 per cent discount and end customers paid the list price.
Most distributors also assembled parts into finished control panels. The motivation was to support parts sales to customers who needed assembly. Assembly was much less important than parts sales, both in revenue and profit, and accounted for less than 15 per cent of most sales, according to Middleton. Because few control systems firms were design specialists, the end product was not always the most efficient. For example, Middleton had priced out a panel built by a Grace supplier. By substituting completely adequate but less expensive components, he had estimated that components' cost could be lowered by 20 per cent.
Panel Design and Consulting
Middleton fervently believed that design work done by many distributors and assemblers ranged from very good to amateurish. Few firms employed accredited engineers, and much of the work was based on experience with similar designs or was drawn from information supplied by manufacturers. Customers, both experienced and inexperienced in design, sometimes supplied drawings. Perhaps less recognized, but important in Middleton's view, was that many control systems were not designed with factory operators in mind. Better placement of buttons and displays could make controls easier to use and speed up operations. "Maybe I can build a business around ergonomics," Middleton thought.
Many engineering firms, from freelance consultants to firms with 100-plus professionals, could provide design work. The Greater Boston Yellow Pages listed 45 companies as electrical or electronic engineers. Most company names ( e.g. MEA Engineering) said little about their underlying business operation.
Middleton's resume also qualified him to work as an industry consultant. Consultants often trained workers after a large firm installed new controls on a production line. Up to several hundred operators could require training. Trainers could earn $1,000 to $2,000 per day. Because Middleton had two electrical engineering degrees from the Massachusetts Institute of Technology, an MBA from Northeastern University and 15 years of industry experience, he felt he was exceptionally qualified to be a consultant in the control systems business.
Because large companies had their own design engineers, control systems could represent a make-or-buy decision. However, Middleton was not sure that many firms were analytical about the economic and quality trade-offs involved. He was concerned about the NIH (not invented here) factor that suggested engineers may not want to outsource design. He noted, "Engineers like their own in-house designs and unless they're swamped with work or the project is clearly beyond their field of expertise, they will choose the in-house route."
Pricing of design services varied. Distributors working off someone else's drawing did not charge for design when assembling panels. Engineering firms charged professional hourly rates. Panel shops traditionally priced delivered panels with no breakdown by design, assembly or parts.
Machine shops were independent companies that manufactured production equipment or components. The Greater Boston Yellow Pages listed 115 machine shops. For example, one Web page advertised: "We can design and build a machine to assemble most anything that you assemble by hand." Among its dozens of products were the "world's fastest" pencil-painting machine, which painted at a rate of 2,400 pencils per minute; another machine that could produce 400 medical needles per minute; and a propane valve machine to assemble tank valves for gas grills. All of these machines required process controls. Middleton recognized the names of 31 machine shops in the Yellow Pages from his corporate experience; six, in fact, had been his suppliers. Of the 84 others, he gave up trying to guess what they made and whether they might require the services of P ANELpro. "Some shops have to tum down attractive OEM contracts because they lack necessary controls capability," he said.
When Middleton revisited the Internet search results, he discovered that more than 300 northeastern mechanical contractors designed, assembled and fabricated parts, finished items and installations. Such contractors usually outsourced control systems work to electrical contractors or panel shops and thus were potential PANELpro customers.
A Greater Boston search also found more than 375 electrical contractors, which ranged from residential electricians to large commercial companies with broad lines of products and services. An unknown number designed and assembled control panels.
Large and Small End-Users
Manufacturing companies used process controls ranging from simple start-stop devices to complex systems that involve programmable controllers. Middleton viewed the chemical business as a promising target because of its extensive use of controls. "Electrical engineers are in short supply at chemical companies," he said. At least 25 large chemical plants were situated in the northeast, as were an unknown number of other process-oriented industries, such as food, beverage, petroleum, pulp and paper, and textile plants. In addition, some smaller family-owned businesses invested substantially in controls. Middleton speculated that in the New England area, which was known for its bouts of bad weather, car washes could be a perfect opportunity for PANELpro:
The day or two after bad weather can be extremely profitable for car washes if they are highly automated, fast operations. The fact they are a cash business greatly increases the need for controls. I can design a product that can count the numbers of cars that go through, and what level of service they got and match that against cash register receipts.
As far as Middleton could tell, no controls supplier had previously offered such a device.
The Greater Boston Yellow Pages listed three companies under "Auto Washing and Polishing Equipment and Supplies," in addition to hundreds of retail car washes.
After reviewing the results of his search, Middleton thought his information about the seven groups was broadly correct but had no further sales breakdowns or information on buying motives per group. He wondered whether such information was critical or perhaps just nice to have.
GROWING A START-UP
Middleton had started PANELpro in his basement, and he employed several assembly workers on an hourly basis. Truck and tool expenses were $675 per month, and part-time office help cost $725 per month. He had capacity to produce $1,500,000 in orders per year.
In the first three months of operation, PANELpro had delivered $70,000 in orders and was working on a $65,000 order, a $9,500 order and two small orders. The $65,000 job had come from Trico, a machine shop filling a Grace order. Middleton knew the owner, who had subcontracted to P ANELpro the assembly of four packaging-machine control panels. The $9,500 order came from a machine shop that Middleton had cold-called. The two small orders (worth less than $1,000) had come from an electrical contractor who was a friend. A possibility existed that Trico might give P ANELpro a second order but Trico wanted the second order at 3 per cent below the price of the first order. The first order, according to Middleton, had been priced "at the market" and had generated a gross margin of 43 per cent as follows:
Sales 65 000
Cost goods sold:
Labor at $35/hour 6,500
Gross Margin 27,950
For the future, Middleton knew he would need to expand his customer base, which would possibly change the basic concept of PANELpro. More importantly, he would need to concentrate on finding new customers. Because his personal contacts had been exhausted, PANELpro would need to seek business from people who knew neither him nor his new company.
For customer groups, he could initially focus on one or more of the seven groups he had considered. How to tum them into actual buyers was unresolved. Should PANELpro promote quality, ergonomics, low price, design, parts, consulting or some combination of these offerings? Or maybe the company should remain an assembly subcontractor and leave marketing to others.
MARKETING RESEARCH ALTERNATIVES
Middleton was considering marketing research as a method to narrow his growth options. He contacted an independent marketing consultant to do some research. In response, the consultant proposed a project, and excerpts from this proposal follow.
This proposal reflects what you told me was your most serious concern - lack of detailed information concerning the market, various segments and competitors, and how and why controls are bought in different segments.
I propose a project that will begin with secondary research. University libraries with excellent business directories and databases contain a wealth of information, and I can research various potential customer groups over several days at $1000 per day. I believe I can also develop more information on the eleven firms we discussed [ see Exhibit 1 ]. I can obtain information about all but the smallest competitors from a financial rating service that I have access to at no cost to you other than my time.
To develop and pre-test a survey would take several days at $1000 per day. To implement the survey using personal interviews, which I recommend, would cost $90 per interview. If we use the phone, it would be $50 per hour for those conducting the survey. We could also consider mail, email or web-based approaches.
The purpose of the customer survey would be to probe buying habits and buying potential of various customer groups and their perception of suppliers. Is quality key, human engineering, a machine-control package from one supplier, or what? If you decide to initiate the project with me, we will sit down for a half-day and generate a series of research questions.
The total cost will be largely dependent upon how many respondents in each possible target market you want to research. You mentioned researching 25 customers. I would recommend 25 per industry, and I think we should research at least three industries or potential customer groups.
Middleton's first reaction to the proposal:
The per diem and hourly rates are high; I am not sure if I can afford a broad research project since my research budget is only $20,000. I would have to narrow the project substantially before hiring an expensive consultant. But do I have the time to do that?
MBA Course Project
After recovering from the sticker shock from the consultant's proposal, Middleton remembered that during his MBA program, a professor had divided the class into teams that each conducted a research project with the cooperation of a firm. He called the professor and asked whether he was looking for a subject company. The professor said yes, and introduced him to a team of students. In a preliminary meeting, the students proposed to Middleton the following project with a $500 out-of-pocket cost:
Telephone Survey: Sample of 25 Potential Customers
Using a list of companies provided by Middleton, the team proposed to telephone either the company's purchasing manager or design engineer responsible for controls. The list of companies would be drawn from process manufacturing companies only. The following NAICS (North American Industry Classification System/ groups were considered to be prime candidates for PANELpro: Food Manufacturing NAICS code 311, Textiles codes 313 and 314, Paper Manufacturing 321, Chemical Manufacturing 325, Plastics and Rubber Products Manufacturing 326, Computer and Electronic Product Manufacturing 334 and Machinery Manufacturing 333. Each code had numerous subgroupings. For example, the Food code comprised 70 subgroupings, ranging from Dog and Cat Food 311111 to Cookie and Cracker 311821.
The team proposed a survey comprising open-ended questions followed by closed-ended questions. Open ended questions would not limit the respondent to a set of answers but instead would generate more conversational replies. Closed-end questions required the respondent to choose among several answers. According to the students, open-ended questions could be used for "in-depth probing of customer needs and wants, in addition to their perception of competition." The team faxed a copy of the general questions they proposed to ask (see Exhibit 2), but did not provide specific survey questions for Middleton to review and suggest revisions to.
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