Dmc Case
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Dominion Motors & Controls, Ltd. Case Write-Up
Decisions to be Made:
Dominion Motors & Controls, Ltd. (DMC), a large Canadian supplier of motors and controls must decide on a strategy to avoid losing its share of oil field motor customers due to potentially harmful results from a study conducted by Hamilton Oil Company. The options under consideration include reducing prices, reengineering a current motors specifications, designing a new definite-purpose motor, or attempting to counter the importance of the test results. The company must take into consideration factors such as future market demands, market share, affects on profits (manufacturing costs and price reduction), product design and regulatory specifications, market entry timing, and effects of Hamiltons study on the demand for DMC motors.
Relevant Facts:
Future Market Demands: Currently there are approximately 5,500 producing wells in Northern Canada with approximately twenty-five oil companies owning fifty or more. According to an industry estimation, an average of 1,000 new wells will be drilled each year for the next five years. Therefore, the market for oil pumping motors should grow steadily to meet the growing demand in the next several years (>18% growth rate for next year). Timing of sales to the market is also very important since over 80% of the sales to this market were made between April and September.
Market Share: Currently, Dominion has over 50% of the available market for oil well pumping motors in northern Canada. Their strong market position is due to its early foothold and an extraordinary salesperson from the start. In 1984, DMC sales approximated $323 million, with 26% sales coming from the segment of 1-200 horsepower motors. Dominions competitors were other well-known Canadian motor manufacturers and a number of foreign companies. DMC did not have pricing advantages, like their foreign counterparts, since most Canadian manufacturers maintained close competitive pricing structures. Foreign competitors usually sold 10% and 20% below Canadians prices. However, unlike their competitors, DMC offered packages including both a motor and control panel. Because of that, DMC had about 15% of the total control panel market (22% of DMCs total sales). DMCs marketing and promotion programs were low-cost and focused on a general catalog. In order to maintain its market lead position, it was important for DMC to maintain its sales in the 1-200hp motor and control panel segment (48% of DMCs total sales).
Product design and regulatory specifications: Because of the low winter temperatures in northern Canada, the motors used for oil well pumping require a high starting torque. Approximately 80% of the units sold for pumping applications have been the 10-horsepower (hp) models, which deliver the sufficient amount of torque. Most manufacturers follow National Electrical Manufacturers Association (NEMA) specification as the industry standard. To assure sufficient starting torque, many oil companies were using 10-hp motors, which were more powerful than what is required to produce the oil. These “overmotoring” practices would most-likely cease when the power companies threaten to impose penalties and changed their flat user-rate schedule in 1984. It is beneficial for oil companies to use a motor with the lowest hp that still meet their torque requirements in order to keep costs down.
Hamilton Oil Company Results: Hamilton conducted tests to define the specifications of a motor which could be used most economically as a result of the 1984 power rate change and possible penalty for “overmotoring”. Being the only firm operating in the Canada oil fields that maintained an electrical engineering staff and having an influential chief electric engineer, Hamiltons conclusion could carry great weight in the entire industry. The test results, however, were not at DMCs favor. DMCs 7Ð-horsepower motor was ranked third in the tests behind Spartan and Universals products due to its lower starting torque. In conclusion, DMC could lose market share in the 1-200 horsepower motor segment as a result of Hamiltons test.
Alternative Courses of Action:
Alternative 1: As the oil market moves out of the winter slump, sales of oil field tools will be on a rise. In order to get in when the market is at its full potential, DMC will have to act quickly to maintain their share of the market. By lowering the price of the 10hp motors, DMC hopes to attract customers looking for a more powerful motor, at the price of the 7.5hp model. There are several benefits to this option. First, this alternative allows for a short response time since it will not require any physical changes to their motor designs. This option would satisfy the engineers, since they are already over worked. The production group would also be happy with this decision, since no their production lines would not be directly affected. And of course, this alternative will satisfy the customer since they will save $330 to $360.
This alternative also addresses Bridges study. His results indicated that DMC was the third choice of three motors. By offering a stronger motor at the discounted rate, they should be able to keep their customers even with the negative study results.
This option seems favorable, but only on the surface. Perhaps the most obvious negative aspect of this alternative is the profit losses DMC will be incurring by lowering the price of one of their most popular engines. If DMC can maintain their 50% market share and about 1000 new wells are drilled each year, they will incur a $355,000 loss in profit (Table 2).
In addition, new guidelines have been announced concerning potential penalties for “over-motoring.” That is, using motors with a higher than required power. While oil companies have not been penalized yet, they will most likely avoid the potential consequences by discontinuing over-motoring practices. These oil companies might perceive breaking these new rules as unethical and harmful to their reputation.
Another negative aspect of this option is that customers will have an additional $465 utility cost when using 10hp motors versus using the 7.5hp (Table 3). However, it is unknown whether this cost difference is large enough to deter a customer from purchasing this product.
Another unknown is whether the discount on the motor will signal to the customer that there is a problem with their product. By lowering DMCs cost for the 10HP engine, DMC is essentially agreeing with Bridges study, that the 7.5hp engine is not sufficient,