Josiah Doncaster Ltd.
On the 4th of March, the Board of Josiah Doncaster met for the second time in three weeks. The main item on the agenda, as before, was what decision to take on the proposed New Product Strategy, which arose out of the Consultant's Report commissioned by the Marketing Director.
Established in 1740, the company had built up a worldwide reputation for fine household china. Its management was paternalistic, very conservative financially, and committed to preserving company traditions. Yet over the last 10 years the company had extended its product range into industrial porcelains for high-voltage insulation, and it had been very successful.
Bill Hawkins, the newly ...view middle of the document...
(f) Western's don't make a thing themselves – they assemble bought-in parts. So could we. There is no technical barrier to our entry into this market.
(g) Their estimated fixed costs are thought to be £100,000; with variable costs estimated at £2.7 per unit. Total cost/unit on sales of 850,000 is thought to be £2.82.
(h) Our fixed costs are estimated at £180,000; but our variable costs are clearly lower than theirs. We estimate them at £2.12 per unit. On any kind of volume the total cost of our ceramic core is down to ½p each; their sintered bronze core costs them 60p to buy in.
(i) We have a patented technological edge over Western in the ceramic core. They can only filter down to 64 microns with the sintered bronze; whereas we can tailor ours down to any desired filtration level.
(j) Finally, we have a name which is known and respected. Everyone has heard of Doncaster. We have a 200 year reputation for quality.
. . . So I say let's make our move. Look here . . .'. He went over to the new flip chart, which was mounted on an easel, by-the Adam fireplace. Pointing, he said,
Page 1. Strategy: Exploit the anti-monopoly feeling of the market, our cost advantage, and our product superiority, by launching our Filter Unit against Western.
Page 2. Tactics: Price 10% below Western. Give 25% bulk discount. Personal selling to the key buying points, and the equipment manufacturers. Sell to the rest by direct mail and trade journal advertising.
Page 3. Targets:
10% of the market in Year 1.
15% of the market in Year 2.
25% of the market in Year 3.
Page 4. Costs:
|Sales in units |100,000 |100,000 |100,000 |
|Fixed cost/unit |£l.80 |£1.20 |£0.72 |
|Variable cost/unit |£2.12 |£2.12 |£2.12 |
|Total cost |£3.92 |£3.32 |£2.84 |
Page 5. Profit/Loss:
The average price per unit is £3.48; our estimated position is
a £0.44 loss/unit year 1 i.e. £44,000 loss
a £0.16 profit/unit year 2 i.e. £24,000 profit
a £0.64 profit/unit year 3 i.e. £160,000 profit.
Conclusion: The downside risks are small. Breakeven is at 13% of the market. With all we have going for us, there should be no problem in reaching breakeven, and soon!
. . . If we are to do our duty to the shareholders of this company ,our action is clearly indicated. Our duty is clear. No further hesitation. Let's approve the project. Let's go!'
'Bill, your last remarks are totally uncalled for. This Board does not need reminding of its duty to its shareholders,' said Paul Doncaster, almost before Hawkins had sat down.
'Sorry Paul. I apologise. I guess my enthusiasm ran away with me.' 'It's my job to see that it doesn't run away with all of us. Your proposition, as you have outlined it, is too one-sided, too easy. No real account has been taken of the risks involved. And risks...