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1) The problem:
DMC's potential loss of significant market share in the near and long term, of oil well pumping
motors if DMC doesn't respond quickly and effectively to the expected change in motor specs
for the industry.

2) Causes of the problem:

Hearsay concerning a study by the trend setting buyer in the market, which, if true, will
promote the motors of DMC competitors and relegate DMC to third choice in the oil pumping
market.

Also DMC's perceived late discovery of the study. (Other manufacturers don't seem to know so
DMC may still be ahead of the others in information, but their machine is 3rd choice so timely
information is more critical to DMC)

3) Is this a brush fire or an important problem?

1000 wells per year over the next 5 years (possibly more) DMC has ~51%=510. per year=2550
over 5yrs ( plus whatever replacements)
510/yr @$1200=$612000.yr

(1200.= price of 7 ½ hp which is 3rd in torque but above 70pf or the price of
the 10hp reduces to the 71/2hp price)

(Potential $loss if reduce price = 94962.yr but losing market would be a bigger problem.)

612,000/85,000,000= .0072% (~3/4 of 1% of revenues in 1-200hp market { what % is 5-10hp

sales?})

If DMC loses Hamilton, other than lost dollars, which doesn't seem to be significant, DMC could
lose brand image and reputation as a result of being downgraded in the industry. This could
be worse than lost dollars. In addition it could lose the industry by losing the leader of the
industry. Although this market is a small slice of DMC's revenues, one cannot afford to easily
lose market share. In addition, this could have spill over affects in it's other markets when it
circulates that DMC was a "failure" in one market.

In the end I would say it's an important problem not for the immediate dollars, but for the
future dollars that could be lost with a "tarnished" image as well as losing market share.

4) The profit impact of each of the four...

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What, precisely, is the problem here?

The problem is that DMC's largest consumer of oil well pumping motors has ranked them the
#3 supplier, and not only could this impact purchasing from this customer (Hamilton), other
smaller companies follow this large company for their purchasing decisions, so that they get the
benefit of copying their R&D decisions.

What are the causes of the problem?

Power companies implemented a graduated monthly base charge per HP at installation, to

mitigate ineffieciencies caused by overmotoring in order to improve power factor. Upon the
announcement of this change, the head of Hamilton's EE department conducted testing on
motors from different manufactures and used starting torque as the deciding parameter, in
order to define the specifications of a motor which could be used most economically.

Is this just a "brush fire" or an important problem?

*This is an important problem because†

Look
at sales potential for DMC in this particular market.

1,000 new wells will enter production over the next 5 years, so that's 5,000 wells. Since DMC
has 50% of this market, that would mean 2,500 potential sales. Per exhibit 2, the total cost to
manufacture a 7.5 HP unit is $714.00, and it is sold to large users for $1,200, for a net profit of
$486.00 per motor (the profit on mfg cost is 536.49 per motor.) Additionally, there DMC sells
about 15% of the control and panel-board applications.

Other than lost dollars, what are the other implications if DMC looses Hamilton?

Other smaller companies that do not have their own engineering staffs follow the purchasing
decisions of the larger companies, so that they can avoid the R&D investment. Therefore, DMC
could stand to lose some of that market as well (This is somewhat analogous to Zoll Medical,
where ambulance companies were highly influenced by hospital buying trends. However, there
is no interdependence here as there was in the Zoll case, only...
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John Bridges, the chief electrical engineer of Hamilton Oil Company, has concluded through
motor testing that DMC competitors Spartan Motors and the Universal Motor Company of
Canada offer the first and second choice motors on the market, respectively. DMC͛s position
as the third choice could prove quite detrimental to its market share because Hamilton is the
largest active oil company in Canada, operating over 30% of producing wells, and Bridges is
extremely influential in Hamilton͛s purchasing policy. The test results will probably carry
significant weight throughout the industry because no other company operating in Canada͛s oil
fields has an electrical engineering department. Thus, DMC will likely lose sales from
companies industry-wide, as many will decide to follow Hamilton͛s purchasing policy.

Unit Contribution per Alternative

Alternative 1:
Price of 7 ½-hp motor (P): $1,200
Manufacturing cost of 10-hp motor (k): $816
Unit contribution = P ʹ k
= $1,200 - $816
= $384

Alternative 2:
Price of 7 ½-hp motor (P): $1,200
Manufacturing cost of reengineered

motor (k): $790

Unit contribution = P ʹ k
= $1,200 - $790
= $410

Alternative 3:
Price of definite-purpose motor (P): $1,045
Manufacturing cost (k): $665
Investment (Fixed Cost): $75,000
Unit contribution = P ʹ k
= $1,045 - $665
= $380

Break-Even Volume = "Fixed Cost" /"Unit Contribution"

= "$75,000" /"$380"
= 198 units
Alternative 4:
Price of 7 ½-hp motor (P): $1,200
Manufacturing cost (k): $663.51
Unit contribution = P ʹ k
= $1,200 - $663.51
= $536.49

Recommendation:

Alternative 4, trying to convince Bridges and Hamilton executives that their test conclusions
overly emphasize the importance of having the maximum starting...

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1. The information received from the sales person following up with ͚Hamilton͛, had put the
executives under jeopardy as to what steps must be taken to maintain the market share and
grow in the market.
2. The change in the schedule of power rates, could affect the specifications of oil well pumping
motors. Power companies also demanded that over motoring must be stopped.
Analysis for solving the issues:
Alternative-1
1. Reducing the price of the motor will be a feasible option only for a short period. As in the
industry the companies want more of starting torque. So it will work until the report is out.
People who wanted 10 horse power will also get advantage as all those wanted 10hp will get it
at a lesser price. We should also reduce price because if the report is out at the right time then
the 10hp stock will not sell. So we need to reduce the price and sell it in the market.
Alternative-2
2. This is not at all a profitable idea
3. 1st way-$790 (cost) - The Company
has to lower down its margins. It follows NEMA. Competitors can also do. Torque war will start.
4. 2nd way-$867 (cost) - High cost and so we sell it in lower quantities and margins.
Alternative-3
5. Until the formal report comes out in the public domain till then there is no large benefit for
going for a new product. So wait till then. Manufacturing cost + investment will have to be
made. The economies of large scale production will not come in. 22000 in 1-200hp at
50%market
6. If it goes up to 60% to 26400, then 4400*1045=4598000.Even without including that oil wells
grow by the anticipated fig of 1000 then even the company can earn profit.
Alternative -4
7. The 3rd alternative will encourage the trend of definite-purpose motors; they won͛t remain
competitive in the market. So there is a need to contact and ask them to test it again as tests
had not produced data sufficient to define oil pumping requirements. But it is tough to meet
Hamilton.