Question: Mainspring Mechanicals: It’s Complicated - Design a strategic plan for M2. What products should M2 offer, and what price should it charge in each market?

Mainspring Mechanicals: It’s Complicated

Introduction

The strategy meeting on the ninth floor of the offices of Mainspring Mechanicals (M2) was still officially in session, but for Jackson Flint, the firm’s chief market development and pricing strategist, it had been over for some time. Flint was already conceptualizing the next phase of M2’s launch of its new Motomaton manufacturing equipment line, now augmented with the Motomaton Enhancing Software Accessory (MESA) programming. Flint had finished an MBA only a few years earlier. Finding a job had been tough then, but M2 had also been finding it difficult to hire veteran business tacticians. The truth was that the company was a very distant second-best to Robox. This was true even in what was for M2 its main focus, namely, the market for the specialized robotics hardware and software used by metal fabric and metal coating firms.

Flint had hoped for better when he first graduated from business school, especially because he also had an engineering degree. In fact, Robox had been one of the firms at which he interviewed. Like a number of other firms, though, Robox had passed Flint over. Finally, faced with the choice between taking the M2 offer and continuing his eight-month job search, he had bit the bullet and signed on with M2. It was a big job in a small company, and it had the advantage that Flint had a lot of authority to call the strategic shots. But it was below where he had hoped to be. Still, Flint realized that if he could somehow get M2 moving— make it a real player in its current market or perhaps move it into new profitable product lines—he could really make a name for himself, as well as earn some substantial bonuses.

Now, fortune had smiled on him. Given a free creative hand by Flint, the software development division under the leadership of Simon Kalicek had finally had the long hoped for breakthrough. Its new MESA software promised a dramatic improvement in M2’s ability to compete with Robox. Flint couldn’t help salivating as Kirk Nestor, senior VP in charge of Motomaton marketing, reviewed all the advantages that MESA had that would let the company compete head-to-head with Robox. No more second-class citizenship! From now on, armed with the new MESA software, Nestor made it clear that the new robotics line "Motomaton Plus" (Nestor’s name for the new Motomaton line and MESA software tool combination) would allow M2 to claim its fair share of the market from Robox.

Yet as he listened to Nestor, Flint noted that two others at the meeting, Mackenzie Gordon and Hank Farber, looked increasingly distressed. Each was a manager in M2’s special products division. They had been called to the meeting because the new MESA software had applications beyond M2’s traditional metal fabrics and coatings market. Gordon, whose expertise was specialized construction, saw how the new software could be usefully modified to work with the robotics equipment used by makers of construction plastics. It was a relatively small market but a potentially lucrative one that M2 had not previously been able to reach with its earlier, and clunkier, robotics that ran on its old, outdated software. Similarly, Farber had special connections with small industrial textiles firms that could also make use of the new MESA software. Yet as Flint watched out of the corner of his eye, he saw Farber’s initial enthusiasm fade almost as much as Gordon’s had. Was this just corporate jealousy? Or was there something else behind these worried looks?

The meeting ended. Everybody congratulated Kalicek on the MESA software achievement. Nestor was positively beaming amid all the handshakes and backslapping. But Flint felt pretty sure that the “thumbs up” signs from Gordon and Farber were mostly cordial pleasantry that masked something less than complete satisfaction. Maybe, though, the numbers would tell him something.

So, before anyone got out the door, Flint clanged his glass and spoke. “Great work, everybody! But I’m the one who’s got to put together our overall plan. That means my work is really just beginning. It also means that your work is not over. I want your individual market analyses before the end of the day. And

I want you all back here bright and early Monday morning when I tell you all what the plan is and where you fit in. See you then.”

Background: What the Numbers Say

Flint headed back to his office. Seated in front of his computer, he dug through M2’s history and waited for the requested reports to come in by email. Luckily, it didn’t take long. As he expected, Nestor was the first to send in his analysis of the basic Motomaton Plus situation. Flint casually noted the email but decided to wait until he got all three reports before really getting into any one in particular. In the meantime, he began to look at his notes.

Motomaton Plus with MESA: Meeting Notes

1) Three markets

• The coatings market where Motomaton Plus (hardware and MESA software) will compete with the Robox line
• Construction plastics
• Industrial textiles

2) Where are we now?

• Should we go after all three markets?
• If not, which ones do we target?
• How do we hit our targets?
• Choices: prices; product markets; other?

Flint’s email chimed again. Farber’s report was in. A second later, there was another chime as Gordon’s report appeared. Flint downloaded the three reports into one folder. Then he opened the folder and printed out a hard copy of each. “It’s always good to have a backup,” he muttered to no one in particular. He reached over to his desktop printer and pulled up the copies of the three reports. Nestor’s was first, and that’s where Flint started reading.

The Motomaton Plus Market

Nestor’s report was a detailed history and analysis of the metal coatings and fabric market that had been dominated for so long by Robox. Both Robox and M2 had offered a standardized product in this market comprising the basic robotic equipment and associated implementing software. For Robox, this product was the CAL2+3 hardware/software bundle. This was a superior product that offered fine motor control and programing flexibility. M2 had competed against the CAL2+3 with its original Motomaton SE robotic product and special engineering (SE) software. Although usable, this product was nowhere near as good as the CAL2+3. So, M2 had historically been at a significant disadvantage in competing against Robox. Nestor went on to explain that with enough tweaking the Motomaton SE could be worked to produce a product that was of roughly the same quality as the CAL2+3. However, this was expensive. This was in fact what M2 had done at significant cost. After reviewing the data and interviewing as many people as he could, Nestor had determined that in producing a good of comparable quality to Robox’s CAL2+3 using the old Motomaton SE technology, M2 currently incurred a cost of $6,000 per unit. By Nestor’s estimate, this was twice as high as the cost Robox incurred per unit of its CAL2+3 packages, which was about $3,000. This cost advantage was clearly a major reason that Robox was so dominant. Currently, M2 was selling only 1,000 units a year in the coatings and fabric market from which it earned $1 million in operating profit before subtracting its market monitoring and development overhead of $400,000.

Nestor argued that the new Motomaton Plus with its MESA software would change all that. Because the metal fabrics and coatings supply industry was filled with a lot of small firms with different needs and budgets, Nestor had been unable to identify any single customers that M2 should target. Instead, he had asked market research to look at the data from the last 10 years and get some sense of what the industry demand looked like. Then Nestor had plotted out their results. The overall market demand for the needed software-driven robotics equipment seemed to be described by the linear relationship:

P = $12,000 – Q. Because Robox and M2 were the only two firms in the industry, that total output Q was the sum of their individual outputs. Right now, Nestor claimed that Robox was outselling them four to one. But he was sure that the new Motomaton Plus with MESA would totally eliminate the Robox cost advantage. Effectively, it would allow M2 to compete with Robox as if it also had a unit cost of $3,000. “It’s a no-brainer!” Nestor concluded. They would earn a higher markup and sell many more units—all at the expense of Robox. Although it wouldn’t change the overhead, the operating profit would soar.

The Construction Plastics Market

Flint considered Nestor’s analysis. It looked sound as far as it went. And it had one more advantage, namely, the personal satisfaction of dealing a blow to the snobby folks at Robox who had passed Flint over in the job market all those months earlier. Still, he remembered the looks on the faces of Gordon and Farber. He opened up Gordon’s report and began to read.

Basically, Gordon viewed the construction plastics market as comprising a few firms that, in total, could lead to annual sales of 800 units. Each was willing to pay at most $6,900 for the hardware-software combination that was currently available from Robox and M2. The new product mix would change that quite a bit, however. In Gordon’s view, the new Motomaton Plus with MESA would be worth $7,500 per unit to the plastics firms. That wasn’t what Gordon was really excited about, though. He had worked carefully with engineering and spoken extensively with plastics representatives and come up with what he viewed as a potentially much more lucrative plan.

As Gordon saw it, the new MESA software offered M2 another option. Customizing the MESA software to work with cheap machines from other suppliers or, in Gordon’s words, selling a stand-alone software package that he called MESA1, offered something of considerable value to the plastics firms. Gordon estimated a typical willingness to pay for this package of $3,400. The cost of modifying and installing the MESA software as MESA1 was a fairly miniscule $200 per unit. Gordon was worried, though, that the aggressive campaign that Nestor planned vis-à-vis Robox might cut into the MESA1 market in plastics that he envisioned. “Ah,” thought Flint, “that’s the source of their worries.”

The Industrial Textiles Market

Flint was still thinking about Gordon’s analysis when he opened Farber’s report. He was wondering what Farber was going to say about Nestor’s plan to take on Robox, but, somewhat to his surprise, Farber did not speak very much to that issue. In Farber’s view, what happened in the metal coatings and fabrics market had little impact on the market strategy that had been his focus. Instead, what Farber wanted to talk about was the small new niche market of industrial textile users that he had worked hard to develop. Farber’s research showed that these firms were willing at most to pay $3,000 for the new Motomaton Plus and MESA combination and less than that for the current Robox product. Because the Motomaton Plus with MESA had a unit cost of $3,000, Farber saw this market as essentially irrelevant to the textiles strategy he envisioned. Instead, like Gordon, Farber wanted to push a new product that he had similarly worked with engineering to develop. This was also a modified version of the MESA software called MESA2. Truth be told, engineering had originally modeled this second modification, MESA2, directly from the MESA1 program. So, the two products were similar. But the MESA2 had features in it and a capacity for customization to each textile maker’s situation that made it particularly useful to those firms.

Farber acknowledged that the textiles makers were a smaller market. Annual sales of MESA2 programs would amount to just 500 units per year. He also was upfront about the fact that the textiles makers could get by with the MESA1 software package. Indeed, his market research indicated that the textile firms would willingly pay the same $3,400 for each installation of MESA1 as the construction plastics firms would. However, the flexible customization embodied in the MESA2 software made it particularly valuable to the industrial textiles firms. By Farber’s estimate, these firms would willingly pay $4,000 for each MESA2 installation. Given that the cost of making each such modification and installation was again $200, Farber viewed the industrial textiles market as potentially very lucrative. He was more than eager for M2 to go after this new clientele.

Decision Time

Flint finished Farber’s report and exhaled. He pushed his chair back, placed his palms together, and then raised them to his face. Continuing to hold his hands in a prayerlike posture, he rubbed the sides of the bridge of his nose just below each eye. He then looked back at his notes from the meeting. “Okay,” he said to himself, “what do we know now that we didn’t know before?”

As Flint saw it, there were three markets and three products. The markets were the metal coatings/fabric market, the construction plastics market, and the industrial textiles market. The products were the Motomaton Plus with MESA, MESA1, and MESA2. M2 faced competition from Robox in the metal coatings/fabric market. It stood alone in the other two markets. But the markets were not unrelated. The metal coatings/fabrics firms were interested only in either Motomaton Plus with MESA or Robox. However, the plastics firms could potentially use either that product or the MESA1 or MESA2 stand- alone products. Somewhat similarly, the textiles firms could use either the MESA1 or MESA2 software. That complicated matters. Flint knew that the software/robotics production equipment market was a fast-changing one. All the analyses were probably good for only two or three years. Still, that was long enough that the decision would be important.

Flint looked again at his original list of questions and found himself thinking again about M2’s original market focus of metal castings and fabrics. A new question arose in his mind. Then he remembered what his predecessor, the now retired Jairo Cadena, had told him. “We survive in this market, yes? Yes. You want to know why? Here is why. It’s not cutthroat pricing. We have higher cost, fine. Or not so fine. But we get by because it’s not cutthroat pricing. You say Robox does better, yes? Yes. Robox definitely does better. But the way this market works, we still have our little place. That’s why I’ve been happy here. You can be happy here, too.”

Flint thought about competing for the metal coatings and fabric firms’ business once again. An idea began to form in his head. Then the phone rang. It was M2’s CEO, Don Friedman. “Well, Flint, what can you tell me? Do we have a plan?” Flint hesitated. He gathered up his notes and the three reports into his briefcase. “Working on it,” he said. “I’ll have a detailed strategy worked out by Monday.” “Well,” Friedman replied, “that sounds like a plan.”

Assignment

Design a strategic plan for M2. What products should M2 offer, and what price should it charge in each market? Explain the reasoning behind your plan. Your write-up should be roughly four to five pages—perhaps longer if you include detailed tables (not strictly necessary).  The length will depend a bit on the font size and paragraph spacing you choose.