Research Proposal on "Duncan Industries"

Research Proposal 5 pages (1521 words) Sources: 0

[EXCERPT] . . . .

Duncan Industries

Mark Duncan wants to continue to grow his company, and has a number of options on the table to do this. Duncan Industries has substantial growth prospects in the U.S. market, but is hampered by a niche product and a lack of distributor motivation. The European market is enticing as well, and there are three distinct options for entering that market. Mark Duncan needs to examine each of these options, plus the U.S. option, in order to determine the future of his company.

Duncan Industries needs to determine the best strategic direction for the company and thus must decide between options for expansion in both the United States and in Europe.

Mark has a number of different considerations to take into account when making his decision. These include overall corporate strategy, the profitability of each option, the firm's resources, and the opportunity cost of each option.

Duncan Industries has a number of strengths including technological competitive advantage, good cost controls, established relationships in the business and a good reputation. Their weaknesses come in the form of lackluster distributor support in the U.S., inability to break into large accounts in the U.S., and the fact that the product has become a niche product rather than a general use product. There are significant opportunities for the company, including further development of the U.S. market, entry into Europe and new product development. There are a number of threats, including currency fluctuations, new competition in the wheel alignment segment and the threat of economic downturn hurting car sales.

With respect to corporate strategy, the company has experienced strong growth since entering the U.S. market three years ago. Duncan Industries sales expanded 19.8% in 1998 and 30.2% in 1999. Because the firm controlled its costs during this period of sales expansion, profits increased 61.4% in 1998 and 131.2% in 1999. This is strong performance by any measure. Strategically, it is important to consider the company's position in the U.S. market. Duncan Industries has only been in the U.S. market three years and since entering has seen strong, escalating growth. They have not yet had a chance to properly establish their brand and their distributor is relatively unmotivated, yet they have quickly captured 45.5% of the North American scissor lift market. They have one regional competitor and only one national competitor in this segment.

The major problem in the North American market for Duncan Industries is that the hoist market is highly segmented, and the Duncan Lift has become pigeonholed as a wheel alignment product. The design concept, however, seems to allow the life to be adapted to multiple uses. Thus, there is reason to believe that Duncan Industries can, with perhaps some product tweaking and better marketing, move well beyond the 2% market share in hoists that they hold overall. They have a differentiated strategy, competing on quality, which gives them a unique market position vis-a-vis the large national competitors. The relevance of this is that safety is a key selling factor in this industry, thus customers are often willing to pay a premium for a safer product.

Europe, on the other hand, is a poor fit for corporate strategy at this point. If Duncan Industries switches focus to the European market, especially if they send Pierre overseas, they are essentially abandoning the possibility of strong U.S. expansion and leaving sales in the hands of their unmotivated distributor. Because of the small size of the organization and relatively few capable managers, it is highly likely that Duncan Industries cannot effectively grow in the U.S. And launch in Europe simultaneously. The only exception to this is if they license to Bar Maisse.

In terms of profitability, the firm has already demonstrated that it is profitable in North America. The contribution margin for 1999 was 27.9% and the net margin was 13.8%. Although some investment in the U.S. market would be required, and therefore likely lower the net margin, it is highly unlikely that incremental sales growth in the U.S. would compromise profitability.

The various European options hold different profitability metrics. If Duncan licensed the Duncan Lift to Bar Maisse, the company would receive 5% of gross. There are few if any direct costs to Duncan Industries for those sales, so that money would be pure profit. The second option has the same fuzzy sales projections, but with Duncan involved the sales would probably be lower, since they do not have the same expertise and connections that Bar Maisse has. However, a 50-50 arrangement would give Duncan a greater cut of the profits to go along with the up-front cost of the manufacturing facility. The numbers are therefore going to roughly the same for Duncan on the second or third option, because Duncan splits both the costs and the profits. The second option is more likely, however, to hit the sales targets as a result of Bar Maisse's experience in the EU wheel alignment market.

The third option has up front costs of $1.53 million. If the company maintained its price of $10,990 and its contribution margin of 28%, each lift would contribute $3,077.20 before marketing and administrative expenses. With this third option, Duncan would absorb those fully. Thus, they would have a net margin of $1,526 per lift to contribute to the fixed costs of startup. This means that the breakeven for the European operation would be 1002 lifts sold. The North American market is 49,000 hoists for 160 million vehicles. The European markets total 158.6 million vehicles, which would result in approximately 48,500 hoists. Thus, Duncan Industries would need to capture about 2% of the market in its first year to pay back the initial investment. While this is unlikely, the company may be able to sell 1000 units in three or four years.

There are three major resource constraints that Mark needs to consider. The first is human resources. Duncan has few talented managers. Sending Pierre to Europe would severely limit the company's ability to expand in North America, especially considering the fact that the business relies heavily on personal relationships and direct selling. The company may not be able to handle such a drain on its managerial talent at this point. The second resource constraint is money. The company profitable, but the cost of entering Europe under the second or third option is very high. There is substantial risk, even with Bar Maisse as partner, such that the high cost of market entry could damage the company severely if the European market entry fails. The third major resource constraint is intellectual property. Duncan Industry has a technologically superior product, but has few protections. They have four patents on the product. Patent protection in North America does not necessarily extend into Europe, however. This significantly increases the risk of a licensing agreement with Bar Maisse. After three years, the French company could market its own version of the Duncan Lift, and Duncan would have difficulty gaining redress for that. There is a very real possibility that the 5% residuals for three years could amount to next to little and after that Duncan could be effectively shut out of the European market should Bar Maisse decide to go solo.

Lastly, there is the question of opportunity cost. There is considerable untapped potential for the Duncan Lift in the U.S. The product is capable of handling a wide number of tasks, but has become somewhat pigeonholed as a wheel alignment lift. This limits the growth opportunities but if the product were better marketed, or perhaps tweaked to meet the unique needs of other users, the market could open up substantially. If the U.S. distributor was more motivated, sales could also improve significantly. Moreover, the product has barely moved beyond the introductory phase in the U.S. market. The current growth trajectory will have Duncan Industries… READ MORE

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