Read the following scenario and make the strategic decisions. You must fully exp
ID: 395862 • Letter: R
Question
Read the following scenario and make the strategic decisions. You must fully explain your reasoning for each decision. (15 points)
Jack Parker had always been an entrepreneur; he loved buying and selling things to make a profit. He had always wanted to be his own boss. He recently got a degree from ULM in Marketing and has an apartment in Monroe. He has a life savings of $20,000 that he saved while working off-shore (South Louisiana) in the oil patch during summers since high school. On the job he did maintenance work such as scraping and stripping paint and was considered an expert at removing paint. He worked during the school year for an auto body shop; his job was stripping and painting cars.
Jack had used many paint removers over the years and noticed performance differences among the various brands. He loved to experiment with blending chemicals. He developed several excellent formulas for removing paint that are as good as the best in the industry. He decided to form a company to manufacture industrial paint removers.
He went to his banker, Mandy Strope, with a brief business plan and was told that perhaps he could borrow what he needed if he pledged his pickup truck, coin collection, and stamp collection as collateral and if he developed a specific marketing strategy concerning the location of the business, the target market, and the channel of distribution. Jack needs your help in developing this plan to convince the Mandy to lend him the money he needs to get started.
It will cost Jack $5.00 per gallon to make the product. He can sell it to industrial distributors for $7.00 per gallon, or he can sell it direct to the end user for $10.00 per gallon.
There are 50 firms competing in the manufacturing of paint removers. The largest has a 15% market share. The second largest has a 12% market share, and the third largest has a 10% share. The others have a very small part of the market. There is no one dominant player in the market.
The total U.S. market (for the industrial paint stripper market and the auto paint stripper market combined) is 40 million gallons. The total market in east Texas, Louisiana, and southern Mississippi is 20 million gallons. The auto paint stripper market is 10 million gallons in the U.S., 1 million of which is in the 3 state region mentioned above. The industrial paint stripper market is 30 million gallons in the U.S., of which 19 million is in the 3 state region mentioned above. Of this industrial market, 50% is used in the petroleum industry. Most of the petroleum industry is located in south Louisiana and southeast Texas.
Jack estimates the operating expenses of the business will be $80,000 for the year, which includes his salary of $2,000 per month. He can live on this salary. After much research, he decided that he would not have any cash flow problems if he had a total of $44,000 to invest in his business.
Jack was planning to have no employees at first (only himself). He could buy some second hand equipment for $10,000 and buy $10,000 worth of raw materials, and he will ready to go. He can get paid quickly for the products that he sells. He believes that he could sell about 50,000 gallons the first year (if going through distributors) or 20,000 gallons (if selling directly to the users).
You must address each the following issues: location of the business (specifically, in what city and state would you locate), target market(s), and channel of distribution. You must fully explain your reasoning for each decision.
Explanation / Answer
Location of business:
Louisiana and east Texas are most ideal places to start the business. This is because Louisiana and Texas have petroleum industry and Auto paint strippers industries. As per data provided 50% of Chemical is used in petroleum industry and these cities have highest concentration of petroleum industry. Which means bulk of 50% of 19 million gallons demand come from these area. 10% (1 million gallon) of nations demand for auto paint stripper market is from these area.
Target Market:
If company is set up in Louisiana or Texas it would be ideal to target petroleum industry. This is because market size of industrial chemical in these area is 19 million of which 50% is in petroleum sector. Which means on theory market size of chemical is 9.5 million gallon which is roughly size of auto paint stripper nationally.
Additionally market size of industrial chemical is 30 million and 10 million in auto stripper. This means demand for chemical in industries is high.
Channel of distribution:
Jack production capacity is 50,000 gallon per year. This is very small compared to demand of 9.5 million gallon in the market also these chemicals are used by industries and not individuals. Hence it would be ideal to have tie up with the industries directly. That means direct selling would be ideal business channel.
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