CHEMCO CASE

CHEMCO CASE

Started in 1965, ChemCo is a leading manufacturer of car batteries in the U.K. market. Since then, it has been under the charge of Mr. Jones, the founder-owner of the firm. In 1999, the company decided to go for a diversification by expanding the product line. The new product was batteries for fork-lift trucks. At the same time, Mr. Marek was appointed the Senior Vice President of marketing in the company. However, soon after its successful diversification into fork-lift batteries, the sales in this segment began dropping steadily. Mr. Marek wanted to introduce some radical changes in the advertising and branding of the new business but the proposal was turned down by the old-fashioned Mr. Jones.
At this juncture in 2002, the firm is losing heavily in the fork-lift batteries business and its market share in car batteries is also on a decline. Mr. Jones has asked Mr. Marek to show a turnaround in the company within a year. What steps should Mr. Marek take to take the company out of its troubles?

Some of the facts on the case are:

• ChemCo is a quality leader in the U.K. car batteries market.
• Customer battery purchases in the automobile market are highly seasonal.
• The fork-lift business was added to utilize idle capacity during periods of inactivity.
• This is a low-growth industry (1% annual growth over the last two years)
• Large customers are sophisticated and buy based on price and quality. Smaller customers buy solely on price.
• There is a Spanish competitor in the market who offers low priced batteries of inferior quality.

Situation Analysis:

Company

• Established player in car batteries
• Losing heavily in fork-lift truck batteries
• Old fashioned owner resistance to change

Competition

• Low priced competitors
• Foreign competitors gaining market share

Customers

• High quality product, but low end customers care more about price than quality

Problem Definition:

• Mismanaged product diversification in a price sensitive market

Alternatives:

• Alternative 1: Establish an Off-Brand for the fork-lift business
• Alternative 2: Educate the customer market about product quality
• Alternative 3: Exit the fork-lift battery business

Criteria for evaluation of alternatives:

• Establishing the firm's quality image
• Increase in market share
• Increase in sales
• Cost of the product

Evaluation of Alternatives:

Alternative 1

• Protect firm's quality image in the automobile industry
• Redesigned product to reduce the cost of manufacture
• Low price to enable it to compete with Spanish producer

Alternative 2

• Make use of the quality leadership in car batteries market
• Offer reliability testing, extended warranties etc. to promote quality image
• Set higher prices to extract surplus from these advantages

Alternative 3 and 4

• A passive strategy, not proactive
• Recommendations:
  Alternative 1 is recommended in this case. Since the firm operates in an industry which has low growth, hence it can expand market share and sales only by taking the customers from other players. Hence, it needs to tackle the Spanish competitor head-on by aggressively pricing its product. At the same time, launching a low-priced product under the same brand name erodes the high quality image in the car batteries market. Hence, the best option is to go for an off-brand to target the fork-lift customers who are increasingly becoming price sensitive. This will enable the company to ward off the threat in short-term and build its position strongly in the long-term.