Peter Wyndale, president of Mallory Industrial, sat dejected in his chair after reviewing the 2001 first quarter financial reports on one of the company’s core products: a standard, five speed transmission (product number 2122) used in the heavy equipment industry in the manufacture of earth moving equipment. Some of the information in the report follows.
MARKET REPORT, PRODUCT NUMBER 2122, QUARTER 1, 2001
|
Sales Data |
|
|
Total sales (dollars), Quarter 1, 2001 |
$4,657,500 |
|
Total sales (units), Quarter 1, 2001 |
3,450 |
|
Total sales (dollars), Quarter 1, 2000 |
$6,405,000 |
|
Total sales (units), Quarter 1, 2000 |
4,200 |
|
Market Data |
|
|
Industry unit sales, Quarter 1, 2001 |
40,000 |
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Industry unit sales, Quarter 1, 2000 |
32,000 |
|
Industry average sales price, Quarter 1, 2001 |
$1,310 |
|
Industry average sales price, Quarter 1, 2000 |
$1,640 |
MARKET REPORT, PRODUCT NUMBER 2122, QUARTER 1, 2001
|
Profit Data |
|
|
Mallory average gross profit per unit, Quarter 1, 2001 |
$45 |
|
Mallory average gross profit per unit, Quarter 1, 2000 |
$160 |
|
Industry average gross profit per unit, Quarter 1, 2001 |
$75 |
|
Industry average gross profit per unit, Quarter 1, 2000 |
$140 |
Mallory’s strategy for this transmission is to compete on the basis of price. Mallory’s transmission offers no features that allow it to be differentiated from those of major competitors and Mallory’s level of quality is similar to the average of the industry. Also on Mr. Wyndale’s desk was a report from his business intelligence unit. Mr. Wyndale underlined some key pieces of information from the report. The underlined items follow.
• Commodity transmission components (nuts, bolts, etc.), which all major transmission producers acquire from specialty vendors, decreased in price by approximately 5% from January 2000 to January 2001.
• Two major competitors moved their main assembly operations to China from the United States in early 2000. These competitors are believed tohave the lowest unit production cost in the industry.
• A third major competitor ceased manufacture of major gear components and began outsourcing these parts from a Mexican firm in mid 2000. Thi firm increased its market share in 2000 from 10 to 14 percent following amajor decrease in sales price.
• Mallory’s production operations did not change in any material respect from 2000 to 2001.
• Mallory manufactures approximately 83 percent of the components used in the heavy industrial transmission. The industry norm is to make 57 percent of the components.
• For the balance of 2001, industry experts agree that quarterly demand for the heavy industrial transmission will be even higher than the levels posted for the first quarter of 2001.
a. Examine the information Mr. Wyndale has gathered. Analyze the data that are given to identify as specifically as possible the problems that have led to Mallory’s loss of profit and market share in the heavy industrial transmission market.
b. Based on your analysis in part (a), and the information given to Mr. Wyndale, suggest specific alternatives that Mr. Wyndale should consider to make his firm more competitive in the heavy industrial transmission market. Use concepts presented in the chapter as the basis of your recommendations.