Dominion Motor & Controls, Limited (1980)
Problem/issue: DMC’s potential loss of significant market share in the near and long term if DMC doesn’t respond quickly and effectively to the report concluding from the tests performed by the Hamilton Oil Company.
Evaluation of alternatives available:
1) Alternative 1 (short term) -
a) Dominion produces a motor which is very expensive, it costs more than the others in terms of energy and it is leads to over-motoring practice; this means that the product is not convenient for the purchasers.
b) The only way to sell these motors again is to cut their prices at the same level of the 7.5-hp; because companies don’t care about little savings on energy in the short period, and because the torque of the 10-hp is higher than the 7.5-hp’s. That makes these motors still convenient in the short term.
c) Although the margin will be reduced the sales volume would grow, also considering that this period is the ...view middle of the document...
3) Alternative 3 (Long term) –
a) This alternative represents the only way to produce exactly what market needs. This solution has the energy costs of a 5-hp motor with the performances of a 10-hp, and could be priced below the 7.5-hp motor.
b) But thanks to its attractiveness could be priced just a little bit more expensive than the 7.5-hp. This motor would still exceed NEMA specifications.
c) DMC engineers believe this solution will give the company an important first mover advantage over its competitors, which is expected to last for a long time. The high profit margin can allow the company to improve the advertisement investments.
d) The basic problem of this alternative is that it is not realizable before 4 or 5 months.
4) Alternative 4 –
a) Many DMC managers believe that Bridge’s conclusions aren’t completely accurate and they should attempt to persuade him that another set of conclusions could be drawn from the test results.
b) The problem with approaching Bridge directly to alter his recommendations is that it may generate ill will.
Long term- Give the market exactly what it needs: 5-hp motor with the starting torque of a 10hp unit. By doing necessary calculation it is clear that the best profit margins can be achieved by alternative 3. By choosing this alternative, the company’s market share should increase to 60% according to the optimistic forecasting. In the next five years 5,000 new wells will enter production and if the new well pumping motor requirements will be the same as for existing fields, the company could sell up to 3,000 motors thanks to the new wells.
According to our financial analysis, the Break Even Point is achieved selling 188 units, and can be also achieved selling 275 units in case of a new investment in advertising (around $35000). A stronger advertising campaign will be surely useful to promote the new motor.
Considering that the third alternative can be realized in 4 or 5 months, and that the next months are the most profitable, the only way not to lose business in the short term is choosing alternative 1. In fact it produces lower profit margins, but the sales volume will grow and it finally makes our motor convenient for the purchasers.