Q1: How far does Zimmermann have to cut the price to have a chance?
The cost of a 1000X computer for the European market usually consists of the cost to manufacture ($768000), the overheads, a markup of 33 1/3% ($256000) that includes the profit, research and development, and selling expenses; in addition to these components, there are transportation and installation costs ($67200) and finally the import duty ($153600).
Computron Inc. has previously assembled and manufactured its products in the US and shipped ready goods to Europe, thus having to raise the original US price in order to cover the expenses of the last component of the price, the import duty.
Given that the company has made a strategic decision to build a factory in Frankfurt that would cover the assembling and manufacturing services for the European market, that consists of 15 countries, and given that the opening of this newly constructed facility is the 15th of September 2006; it is valid to assume that the manufacturing and assembly of the 1000X computer for Koning & Cie, AG, if the order is made, would take place at the local facility in Germany, rather than in the US. This factor eliminates the expenses related to import duty ($ 153600) as well as significantly reduces the transportation costs.
Moreover, knowing that the companys policy has never permitted reducing the markup percentage in the European market and that Konings vice president in charge of purchasing is not in favor of purchasing any equipment that has a price of more than 20% higher than the lowest bid; subtracting the import duty from the original price of ($1244800) would b the first step in reducing the initial price to $1091200. The value is 4. 1% higher then $1046400, what would be the exact maximum price mentioned by Konings official.
If we do not take into consideration the potential for cost reduction from reduced transportation costs in order to make up for the loss in before-tax profit from 17% to 6% in the last year compared with the one before, the price should stay at $1091200.
However, if the financial situation permits a further reduction in price, the price should be lowered to $1046400, which is exactly 20% higher then the lowest bid of competition ($872000). This value should be final, because if Zimmermann will be tempted to further reduce the price in order to get the order, there is a very high risk of loosing on the image of superior product.
Koning has made orders from Computron before and therefore they are well aware of the flexibility, accuracy and overall high quality of its products. Submitting the bid of $1046400, exactly 20% more then the lowest bid, would show compliance with the customers budget and thus will give a certain favorability to Computron, strengthening the already existing customer relationship with Koning and ensuring future contracts for products and services.
Q2: What is gained by bidding low?
According to a reliable trade source, Koning has a total of four different offers other than Computron.
These are the four main competitors, three of which together with Computron itself, own 80% of the sales in the German Market. Since the original price, which Compuron is willing to offer, is 43% higher than the lowest bid, theres a big chance Computron loses the sale. The fact that Koning is an already acquired customer of Computron is a major strength in terms of winning the sale. If Computron offers the lowest bid, Koning will definitely consider their bid. It is simpler for Konigs to deal with a company they had purchased from already.
Koning have experienced that Computrons products are flexible, accurate and of a high quality from their previous purchases. Bidding lower then the benchmark of a lowest bidder plus 20%, could possibly ensure getting the order, as well potentially maximizing the market share of Computron in the long-run.
Furthermore, reasonable price is an important factor for Koning in acquiring this particular product and thus bidding low could be a favorable factor in this particular situation if we do not take into account the fact that Computron is already a market leader, so aiming to maximize their market share should not be of particular focus.
The focus should be mainly on maximizing the levels of trust and loyalty with the customers.
Q3: What is lost by bidding low?
Zimmermann has calculated a price of $ 1,244,800 with respect to: markup costs, factory cost, 17. 5% of import duty and transportation & installation costs. The markup cost in European market was fixed for Computron at 33 1/3%.
Considering the fact that sale in 2005-06 was 6% comparing to the 17% the year before, the company aims to increase the sales and profit for their current year. Meaning, Computron would preferably increase markup cost in order to increase profitability & sales. Although to have a higher possibility of making the sale to Koning, they have to reduce the price and recalculate their costs by much less than 43% of the lowest bid.
This leads to Computron having to decrease markup cost, or eliminate other cost from the final offer to Konigs. The reduction of markup cost will leave the company facing cash loss comparing to the amount theyre paying for selling & administrative expenses, and the price their offering. Computron are investing 8% of the total markup cost in R&D.
Research & Development has an effect on Computrons position in the German Market, whereas they have highest percentage of digital process control computer sales. Although, the company will have to invest less in R&D in order to prevent profit loss for reducing their price bid to Koning. Computron will go behind again in sales by offering low price, as it would be one of the biggest sales of the year, Computron would definitely increase their profit if they succeed making the sale with their desired price. Having to reduce the price will put Computron behind in their aim of increasing profitability.
Furthermore, the lowest bid is 872,000, its too low for Computron regarding their transportation cost, and markup costs. Its not an option for them to lower their price to that price. Even if they manage to reduce their costs enough to reach a similar price, it will affect Computrons quality image. As mentioned, they have a good reputation of quality and flexibility. Finally, if Computron reduce their price, itll be harder for them to have higher bids later in Germany, and especially with Koning, which have good experience with Computron.
Q4: What is gained by bidding high?
Computrons position in the market and relationship with Koning seems strong. The price Computron s offering represents the cost being implemented to provide high quality product that exceeds the customer needs. By insisting on bidding at the normal price, the company is actually setting a standard on their product price and the input on its enactment. As mentioned, Computron is aiming to increase their profit on sales for the current year. Bidding high in the Konings sale will prove the company stabilizes quality and performance.
Koning will have no doubts of the price reduction, where elimination of cost could be related to the performance of the machine, especially if the price is drastically reduced. Computron is affirming their quality by sticking to their highest bid, although competitors are offering 43% lower prices. Furthermore, by insuring the image of their superior product quality, supported by Konings opinion on their past machines, will add up to Computron reputation, and stronger market position.
If the idea of quality and performance was introduced to Konings properly, and the fact that they provide them with after-sale service, could convince the Konings to choose Computron over the competitors. If Computron wins the sale, theyd reach their goal of increasing profit on sales. Selling to Koning with a high bid and their quality will only provide the company with a stronger brand image and customer loyalty and respect. Considering their past experience and the prove of new good investment by purchasing Computrons 1000X.
Q5: That is happening in the market?
It is predicted that the market will grow by 25% in the next several years. The market is valued at 16,000,000 dollars per year, of which Koning is a major part of, which leads to the conclusion that whoever seals deal, is likely to continue selling to Koning in the future. There worth of new business to come about in the period 2005-2006 is estimated to be worth 5,200,000 dollars, which includes; Koenig & Cie AG Frankfurt Plant$ 1,200,000 Dusseldorf Plant$ 1,000,000 Mannheim Plant$ 600,000 Central German power commission$ 1,760,000.
Deutsche Autowerke $ 640,000 $ 5,200,000 The European market is in fact not so active, as Koenig happens to be the only major purchaser in the continent. Furthermore, Computron hasn’t been receiving any major orders from big companies for their products; so far it has only been small businesses demanding Computrons computers. It seems all the big purchasers already have what they need, and are only interested in post-sales servicing/maintenance/updates. The submission deadline for Koenig is 1st, August, 2006.
Q6: What is the competition doing?
Ruhr Machinenfabrik AG are developing a computer specifically for Konings bid, and their pricing is substantially lower than that of Computrons 1000X. This is partly because they have an import duty advantage; as they are based in Germany, they need not to have this additional cost. This consequently allows for a 17?% price differential. This reiterates the aggressive nature of the firm. Up until now, they only engaged in the sale of general-purpose computers. However, their drive to increasing their market share is the likely explanation for such an aggressive reaction.
Elektronische Datenverarbeitungsanlagen AG is seen as a long-range threat to Computron. They produce their product of a similar quality to that of Computron 1000X. In order to secure their position they sold their first computer at a break-even cost, and ever since then they have been selling below Computrons price (by a differential of Computrons import duty subject). Digitex produce a product of only a fair quality compared to Computrons 1000X however uses a price cutting tactics/ sells at low cost (sometimes 50% below Computrons). All the production is done in Germany.
Their inferior quality has hindered their competitive capabilities. The rest of the competition is unlikely to cause any threat according to Zimmermanns point of view.
Q7: What is Konings thinking about the situation? Konings invitation for bids was basically for the reason of wanting to pay a reasonable price along with high dependability of the machine. Since the machines are going to be used for five years training, these requirements would best suit what its being used for. Koning wants to probably reduce the cost of machines used in training.
It would be a good investment for the company to have five years training computers and still use it after for other duties, although the low price could be aimed to abandon the machine after. Requiring a machine specified for training wouldn’t have the same specifications as the computers needed for the on-line process control. Clearly the case showed the differentiation between having a flexible accurate machine, or a machine that is highly dependent for training purposes.
Koning looking at the situation from a perspective which he wants o gain the best opportunity on having the lowest price for a training machine, even if the quality wasn’t as good as accurate machines needed. Koning already bought three machines from Computron, and are satisfied with the results of the machines performance and quality, and seems to match the requirements needed for their plants. The company is most probably now aiming to invest less in the machines they want to purchase, which means having less concerns with the machine quality performance, as its not being used directly on their process.
Q8: What is Zimmermanns position as manager of the European sales?
Zimmermann is in a rather sticky situation because it is imperative that he seals the sale with Koenig who is their most important customer and satisfies the buyers demands. However at the same time he must comply with Computrons pricing guidelines. The pricing guidelines reinforce the customer perception of a high quality, superior and reliable product (diligence element).
Furthermore a reduction in price in this case, will lead all future purchasers to believe that from now on, Computrons products are cheaper and will automatically (wrongfully) anticipate lower prices from Computron in the future.
There is no turning back. This situation is further accentuated with the factory construction in Germany. If the deal is not sealed, it is likely that that factory will remain idle for several months due to lack of business. This will have a devastating impact on their brand image. Lastly, and most importantly, they biggest strain placed on Zimmermann is from the competition. There are several competitors who have different advantages ranging from technological factors to pricing advantages. All want to make a sale just as bad. Zimmermann is going to have to address all of these, if hes to seal the deal.
Q9: What should Zimmermann do? * Price reduction $1046400 (85. 4% of the original price) * Offer the price reduction + inform Koning & Cie, AG of the local manufacturing and assembly facility local support (opening 16. 09. 06) * Focus on the absolute necessity of getting the order long-term business relationship & added credibility * Should NOT reduce the mark-up for the European market (other customers will expect similar conditions with future orders) * Emphasize on Konings familiarity with the standards of Computrons products affirm the quality