Mgmt 623Business Marketing

HCC Final Case

May 4th, 2005

Shah, Bhushan Hemant

HCC having already lost $7.5 million dollars on the Dominite operation has to

decide if it should continue to produce Dominite or sell the operation.

Recommendation: HCC should not divest from the Dominite operations and Mr. Hood

should look for opportunities to make the operation profitable. Additional alternative

considered was the sale of Dominite operations to Ms. Segal’s company.

The potential for Dominite to substitute Talc and whiting products exists.

Dominite is cheaper, fires in less time and provides fuel economies when compared to

talc. For potential ceramic customers there are savings up to $300/day on fuel as well as

$6-10.5 per ton on the price in comparison to talc, whereas the paint makers could save

12-18 cents a gallon in manufacturing costs. Dominite is a new chemical which can

substitute an existing chemical to improve the final product in quality and cost, thus it can

be projected as a “cost reducer”. The perennial deficits from the Dominite operations for

HCC arise because of the weak adoption of the product by the ceramic and paint industry

market leaders. In addition the high switching costs of $1,500,000 for a new die make it

difficult for organizations to accept this chemical. Some of the buyers are also wary of

the fact that by adopting Dominite, HCC would become a single source supplier. HCC

also made an error in estimating the sales for the target market and the initial estimates of

55000 tons per year (or 2% of talc and whiting business) seem highly optimistic, as a

result HCC ended up making excess capital expenditure on capacity of the plant.

The high operating costs and the lack of sales have kept the operation in red but in

1986 the loss from operations is expected to reduce to $120,000 and in the future HCC

expects the plant to become profitable. For HCC the objective of diversifying was to

reduce dependence on the paper industry as well as pursue business opportunities worth

15 % of the Return on Investment and even though the Dominite operation hasn’t been

profitable it ensures the diversity of the business. Over the years the sales of Dominite

have grown by 300% from 1983 to 1986, even though these represent a small fraction of

the original estimation the new projected sales indicate that the operation would become

profitable in a short duration and remain so in the long term. HCC has lost a lot of money

on the project but has been able to derive some intangibles which include experience in

organizing a production sales group for a new business from which the Superfine

operation has benefited. In addition HCC now has a skilled group of ceramic engineers

who are capable of exploring future opportunities in the mineral business.

The bulk of R&D expenditure is now behind HCC and the findings can now be

effectively applied to the present operations to meet customer requirements. In the next

few years it is estimated that these expenses will reduce significantly from the current

levels of $391,200. The rising prices of talc could eventually force buyers to look at a

cheaper and cost effective substitute which will retain the quality of the end product;

HCC could then anticipate a surge in sales for Dominite in the ceramic industry. If the

operation becomes profitable HCC will also be able to take advantage of the depletion

allowance. At this time lower grade Dominite is popular and the revenue from the sales

as such is lower. If adoption of Dominite increases, HCC can expect to increase its

revenues by selling significant quantity of high grade Dominite within the ceramic and

paint industry. Given that HCC’s period of significant loss on the Dominite operation

has already passed, the operation should be retained to exploit the projected future gains.

HCC could also sell the operation to Ms. Segal’s company which is seeking to be

the exclusive buyer of Dominite for the wall tile market. If HCC decides to sell the

company it will abandon its present customer base. HCC has invested a significant

amount of effort in developing this customer base; these customers are potential buyers if

HCC explores expanding its mineral business. Divesting from this operation also means

that HCC would have prematurely abandoned its diversification program. All the

derivative benefits from the project will also be gone. Eliminating the Dominite business

would also result in the loss of a skilled group of ceramic engineers who can be expected

to drive future mineral product development. The savings on cost of administration, sales

service and R&D are also unlikely to reduce proportionally after the divestiture.

Additionally the uncertainty about the potential earnings from future business ventures

makes it difficult for HCC to decide a sale price. The projected sales forecast of 100,000

tons in 1998 indicates a 15% ROI on the present project and as a result the project value

rises to $6,300,000 dollars. Ms. Segal’s company will not pay such a high price and after

negotiations HCC may have to accept a much lower price.

Plan of Action: The Dominite Operation has been a failure largely because HCC

underestimated the requirements for market development. The initial estimates were

based on the fact that HCC would be able to start supplying to large ceramic and paint

manufacturers in a short duration. The adoption of Dominite has not been significant

because of the high switching costs involved. HCC needs to educate its potential

customers about the product and do so aggressively. The lackluster response from

Saunders Paint Company, Dover Tile Company, and Lancaster Artware Company

suggest that the buyers are not willing to push their R&D research to incorporate this new

chemical as rapidly as hoped by HCC. The salespeople will have to persist with these

“big accounts” to get a breakthrough order. The availability of high grade Dominite at

comparatively lower prices with additional cost reduction possibilities should be

highlighted while making the pitch, thus emphasizing the product value.

The customers could also be educated about the quick return on the switching

costs due to “cost reduction” opportunities. HCC should target more medium sized

companies in the wall tile business which might perceive the similar threats as Ms.

Segal’s company, from smaller competitors. Marketing representatives should also

mitigate any apprehensions the buyers might have about single source supply of

Dominite, by emphasizing collaboration. R&D expenses will need to be curtailed but

marketing should work with manufacturing to meet customer requirements, the sales

agents could provide customer feedback to the manufacturing personnel. Specifically

HCC should find the reasons for the popularity of low grade Dominite.

It is important that HCC renegotiate the lease terms with HMC so that it can

reduce incremental expenses arising from the royalty payments. The Dominite operation

provided some learning experience for the Superfine product but it is important for

HCC’s long term diversification objectives to find further synergies with existing/future

products which can add to the intangible benefits derived from the operations. The

uneven distribution of sales agent efforts between Superfine and Dominite has resulted in

the sales people being more effective sellers. HCC should consider hiring a new sales

representative dedicated to the ceramic industry and improve the distribution of sales

agent’s efforts for Dominite in the paint industry to 35% Dominite and 65% Superfine.

HCC could recruit new sales agents for the Superfine project if this distribution doesn’t

suffice. It is also important that the management continue to support Mr. Hood and trust

his judgment in the future. An outlook of potential revenues is shown in Exhibit 1.

EXHIBIT 1:

1986 1987 1988 1989 1990 1998           

Projected Sales 15000 22000 30000 45000 60000 100000

Projected Revenues @ $85.5/gallon * 1282500 1881000 2565000 3847500 5130000 8550000

Plant Costs ( include Fixed costs of $788320 ) 1044820 1352620 1557820 1942570 2327320 3353320R&D Costs (Progressively Reducing) 246200 171200 71200 71200 71200 71200Sales Expense 339000 339000 339000 355950 373747.5 552195.3Administrative Expenses 120000 120000 120000 126000 132300 195467.4

Savings from Lease Renegotiation 10000 10000 10000 10000 10000 10000             Gross Profit -457520 -91820 486980 1361780 2235433 4387817

Depletion Allowance (50% of Gross Profit)     243490 680890 1117716 2193909Tax (@46%) -228760 -45910 121745 340445 558858.1 1096954             Net Profit -228760 -45910 365235 1021335 1676574 3290863

Average price = Low Grade + High Grade = (78+93)/2 = 85.5Fixed Costs = 1212800 * 0.65 = $788320Sales Expense and Administrative expenses assumed to increase at inflation after 1988Additional Sales Rep could cost $55000 but for the analysis this has been ignored.Lease savings assumed to $10000/ yearThe analysis ignores future investments which HCC can make based on project requirements.