Read the following scenario and make the strategic decisions. You must fully exp
ID: 396445 • Letter: R
Question
Read the following scenario and make the strategic decisions. You must fully explain your reasoning for each decision.
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 $10,000 worth of raw materials, and he will ready to go. He can get paid quickly for the products that he sells. He believes that he could sell about 50,000 gallons the first year (if going through distributors) or 20,000 gallons (if selling directly to the users).
You must address each the following issues: location of the business (specifically, in what city and state would you locate), target market(s), and channel of distribution. You must fully explain your reasoning for each decision.
Explanation / Answer
Given,
Total savings 20,000, Cost price= 5$
Sell price to industrial distributors= 7$, first year estimated income = 50000*2$=100,000$
Sell price to end user= 10$, first year estimated income = 20000*5$=100,000$
Paint remover market US=40M (based on type)
Paint remover market=40M (based on region)
Total expenses= 80000$ (salary=24000$)
Investment required = 44000$
Raw material cost = 10000$
Machine cost=10000$
Answer:
location of the business: the location of business should be between East taxes and Louisiana
Explanation: because most US paint remover market is concentrated to East Texas, Louisiana and southern Mississippi i.e. 23 Million gallons (adding both Auto paint stripper and Industrial pain stripper). Moreover, petroleum companies (15 million gallons) which are the major user of industrial paint stripper are also located on Texas and Louisiana. East Texas and Louisiana also has the geographical advantage, Louisiana lies between Texas and Mississippi with Texas on its west. Geographical advantage will reduce his transportation cost.
target market(s): target market(s) must be Industrial paint strippers market
Explanation: because auto paint stripper market is diversified across US (only 3 million gallons in East Texas, Louisiana and southern Mississippi). And industrial paint stripper market is of high value and is also concentrated in a region, which makes it the first choice.
channel of distribution: Industrial distributors should be the channel of distribution
Explanation: Selling directly to the end user requires lot of time and man power, which is not advised because he is working alone. Moreover, the total estimated profit from both channel is same. When he sells to industrial distributors , he makes profit of 2$ per gallon, therefore total estimated profit from industrial distributors will be 100,000$ (if he sells 50,000 gallons). Similarly, when he sells to end users, he makes profit of 5$ per gallon, therefore total estimated profit from end users will be 100,000$ (if he sells 20,000 gallons)
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