Augat Electronics Inc. -A Case Analysis 1. Critical Issues Canadian market for Cable TV connectors is expected to grow substantially in the coming years. Given the current product quality and the maturity in Value Added Services provided by the Cable TV companies, the basis for purchasing decisions seems to be changing. Given the current market share that Augat has and situation, it will be of at most importance to penetrate one or more of the multiple service operators (MSOs) that dominate the Canadian market.
Augat believes that Snap-N-Seal might be the product that would help Augat reach mainstream status The most significant problems in this case as far as Augat goes is their decision(s) pertaining to a. Pricing Strategy in Canada – Augat executives has considerable issues on pricing, positioning Snap-N-Seal. b. Sales and Distribution strategy – decisions regarding what channels to use, partnerships to pursue, penetration strategies to use etc. If Augat had introduced the product in 1988 when the LRC division first conceived it – they would have been a market leader by now (in 1990).
But in early 1989, an innovative new company, Raychem became a surprising market leader in the new connector business that was promised to have very good insulation properties for external connectors. So Raychem benefited from a first-mover advantage. Therefore, it was able to gain clout and its sales and market share soared. By launching Snap-N-Seal in Canada the company needs to overcome several problems. Moreover, those MSOs that are already using the EZF connector must be convinced to switch over to the Snap-N-Seal connector and tools.
This would involve a considerable Capital Expenditure for the MSOs, the value proposition for end-users (MSOs) should be substantially high for them to replace the existing Raychem tools/connectors (or any other competitors) for Augat’s Snap-N-Seal connector/tool. 2. Analysis a. Marketing Mix Currently for the existing connectors/tools, Augat seem to be playing an under-dog trying to undercut the competition on price i. Product – connectors, tools used in cable TV service technician portfolio ii.
Price – currently based only on under-cutting the competition iii. Place – Canadian cable TV operators (MSOs) iv. Promotion – deals with White Radio I believe that by tweaking/changing these parameters, Augat executives can come up with a compelling marketing mix – especially pricing and promotion. One other important aspect of the approach should include v. Positioning – how well or better could the value proposition be proven or explained to end-users. In other words – how does Augat ‘Frame The Comparison’ for MSOs to make the switch. b. C Analysis i. Customer Needs – end-users (MSOs) are looking for connectors that would protect the cable against external electrical noise, reduce corrosion/moisture, necessity to replace connectors often and more importantly, reduced service call cost ii. Competitors – Raychem (primary competitor in the new high-quality connector market) iii. Company Skills – high-quality product, good relationship with White Radio who in turn understands the approval process of MSOs, perceived pricing advantage compared to the primary competitor in this market iv.
Context – revolutionary connector to be sold to Canadian cable MSOs with restrictions on customers’ CapEx, import duty, high cost of inside sales reps and primarily huge market share of the competition v. Collaborators – manufacturer (of tools), White Radio At this point I believe that Augat has to make a lot of decisions in terms of pricing and distribution strategy to get the product to be mainstream. 3. Recommendation From a pricing strategy perspective, the natural instinct would be to offer the Snap-N-Seal to be a considerably lower price to MSOs undercutting Raychem’s per connector price of CDN $0. 80.
By being able to demonstrate the company’s ability to offer higher quality products at a lower price might help to convince the MSOs to switch over to the Snap-N-Seal. But given Raychem’s reputation of being Product Leader and an Innovator who doesn’t involve in pricing wars, Augat might be sacrificing potential profits by adopting this strategy. Moreover, a lower price might provide a lower perceived value by the MSOs, poor product quality as the reason for the lower price. So Augat would be better off pricing the Snap-N-Seal connector comparable to Raychem’s. By doing so, the company will be able gain better margins on their product.
Additionally, the price will not be suspect to scrutiny. Although this strategy, enables the company to compare itself to Raychem in terms of price and quality it will possibly make it more difficult to persuade the MSO to purchase the product. This is exasperated by the fact that the tools necessary for the Snap-N-Seal connector are a capital budgeting decision that represents a considerable investment for the cable provider. For the problem on distribution partner, Augat has the option to stick with White Radio, or to seek new partnerships in distribution like Anixter Canada, or Deskin Sales.
Though this would help Augat enhance the coverage in terms of suppliers (or end-users) and a potential increase in market presence. However, on the other hand, Augat would lose the exclusive relationship it was with White Radio, knowing White Radio’s Steve Quinn’ knowledge about Cable TV MSO’s approval process. In addition, the other distribution companies also carry competitor’s products and there is no guarantee that they would push Augat’s without substantial commission. a. Pricing Strategy I recommend pricing Augat Snap-N-Seal right in line with the competition – Raychem EZF.
For end-users like Rogers, EZF connector costs around CDN $0. 80, which is ~$0. 69. I would price Snap-N-Seal at $0. 70/connector. 1. Value proposition for MSOs One of the biggest advantages or rather strengths of using Augat Snap-N-Seal is its quality and the fact that it has a 100% success rate and no additional service calls would be required. Based on really conservative estimates it appears that it would cost as much as 7 times for service calls as it would cost for the parts while using EZF.
The biggest worry for Rogers, per say is the Cap Ex involved in acquiring new tools for Snap-N-Seal. But using the Razor-Blade model of promotion, Augat should give-away the tools for free to the MSOs. This would eliminate the biggest hurdle that Augat and its distributor(s) have to overcome in convincing MSOs to make the migration to Snap-N-Seal. Besides it takes lesser time to install Snap-N-Seal (about 2 to 3 times faster than EZF), MSOs will be able to manage their service technicians better. CategoryProduct Raychem EZFAugat Snap-N-Seal Price/connector for end-user0. 690. 0 No. of connectors required (avg of 14 connections/household)2940000029400000 Tool Cost75. 000. 00 No. of tools required (@4000 customers/sales tech including Rogers)10501050CapEx78750. 000. 00 Cost for replacing all connectors (to at least 50% of subscribers)20275862. 0720580000. 00 Cost of Service calls (@$100/call, 5% failure rate for Raychem)147000000. 000. 00 Total Cost to MSOs167354612. 0720580000. 00 Savings using Augat Snap-N-Seal 146774612. 07 2. Sustainability and Profitability for Augat CategoryCosts Connector Mfg. (avg at $0. 18)0. 18 Distributor Margin (25%)0. 8 Duties (10%)0. 07 Admin+Shipping+other costs (10%)0. 07 Unit S/P0. 7 Contribution Margin0. 205 Giving-away tools52500 Break-even for giving-away tools256097. 6 Considering the fact that there is ~30% contribution margin in the product sales, and ~250,000 units required to break-even the cost of giving-away the tools for free I think this model would be sustainable from Augat’s perspective. With improvements to manufacturing process, manufacturing cost/connector might come down ~30% which would further increase contribution margins and hence the profitability. . Sales & Distribution Strategy Augat should continue to utilize the exclusive relationship with White Radio. The relationship developed is a strong one but it is clear that White Radio needs to increase their efforts in promoting the product. The higher quality and the possibility of increased market share needs to be communicated effectively to White Radio to communicate the value proposition to end-users (MSOs). Targets need to be set and we must expect White Radio to deliver or else consider other options.
The fact that White Radio does not carry competing products should enable them to be a strong representative for our product. This would in turn cannibalize the 9% share Augat has in ‘F’ connectors with perceived value to be ~CDN $117, 000. But that’s a small loss compared to the potential sales and sustainability that could be achieved with the Snap-N-Seal connector CategoryAugat Product ‘F’Snap-N-Seal Price/connector (avg price/connector)0. 220. 70 Distributor Margin (15% to 20%), higher margin for Augat0. 040. 18 No. f connectors required (avg of 14 connections/household)2940000029400000 Money to be made at White Radio11319005145000 Promotion/Advertising01000000 New Sales Force for Snap-N-Seal (3 sales / major MSO)01875000 Effective Profit for White Radio11319002270000 Based on conservative estimates, white Radio can make at least twice as much money as they can with Augat’s Snap-N-Seal. Considering the high cost of inside sales force, Augat’s potential contract with White Radio should include a clause to hire more sales representatives to pursue newer business opportunities for Snap-N-Seal.
In other words, Augat should outsource the salesforce. This would push the cost to White Radio (with a higher margin on sales) and may be potentially encouraging them to re-design their internal compensation model (if necessary) to sales-reps to mitigate the higher costs White Radio has to incur. 4. Risks, Contingencies and Other alternatives I also considered reaching out to other distributors in Canada but as described earlier, there needs to considerable commission paid for the Distributors to move away from their current portfolio from Gilbert and Stirling.
And with the relationships that these distributors have with Gilbert and Stirling – I don’t think Augat’s Snap-N-Seal connector would get the most needed push and the momentum to reach the MSOs and become mainstream One other major risk that should be noted here is that no R & D costs, advertising costs have been taken into consideration in these calculations which might skew the numbers slightly. But I still believe that the substantial gains showed in above calculations would be a convincing enough reason to even price the Snap-N-Seal connectors at a higher price (than the $0. 70/unit rates).
Given that RayChem will not compete on price, I think that these strategies by Augat will trigger Raychem to improve their spending on R & D, better margins for distributors and also on advertising. Augat has sufficient bandwidth on pricing if necessary to spend on these activities if necessary. But at the same time, Augat should start more R & D and deliver even better products – not necessarily in the connector space but in other products involving cable TV and telecommunications. Furthermore, a more detailed overview and comparison of the distributors is vital to the launch strategy.