Simon Howe, the marketing manager of Long Beach Plastics, wants to increase sales by adding sales reps rather than “playing with price.” That’s how Simon describes what Judy Howe, his mother and Long Beach Plastics’ president, is suggesting. Judy is not sure what to do, either. But she does want to increase sales, so something new is needed.
Long Beach Plastics—of Long Beach, California—is a leading producer in the plastic forming machinery industry. It has patents covering over 200 variations, but Long Beach Plastics’ customers seldom buy more than 30 different types in a year. The machines are sold to plastic forming manufacturers to increase production capacity or replace old equipment.
Established in 1970, the company has enjoyed a steady growth to its present position with annual sales of $50 million. Judy took over as president 15 years ago, after her husband Charles, the founder of the company, died of a sudden heart attack. The first few years were tough, but Judy emerged as a strong executive who has steered the company well. She is well respected in the industry.
Twelve U.S. firms compete in the U.S. plastic forming machinery market. Several Japanese, German, and Swedish firms compete in the global market, but the Howes have not seen much of them on the West Coast. Apparently the foreign firms rely on manufacturers’ agents who have not provided an ongoing presence. They are not good about following up on inquiries, and their record for service on the few sales they have made on the East Coast is not satisfactory. So the Howes are not worried about them right now.
Each of the 12 U.S. competitors is about the same size and manufactures basically similar machinery. Each has tended to specialize in its own geographic region. Six of the competitors are located in the East, four in the Midwest, and two—including Long Beach Plastics—on the West Coast. The other West Coast firm is in Tacoma, Washington. All of the competitors offer similar prices and sell F.O.B. from their factories. Demand has been fairly strong in recent years. As a result, all of the competitors have been satisfied to sell in their geographic areas and avoid price-cutting. In fact, price-cutting is not a popular idea in this industry. About 15 years ago, one firm tried to win more business and found that others immediately met the price cut—but industry sales (in units) did not increase at all. Within a few years, prices returned to their earlier level, and since then competition has tended to focus on promotion and avoid price.
Long Beach Plastics’ promotion depends mainly on six company sales reps, who cover the West Coast. In total, these reps cost about $880,000 per year including salary, bonuses, supervision, travel, and entertaining. When the sales reps are close to making a sale, they are supported by two sales engineers—at a cost of about $130,000 per year per engineer. Long Beach Plastics does some advertising in trade journals—less than $100,000—and occasionally uses direct mailings and trade show exhibits. It also has a simple website on the Internet—the main Page 632content on the site consists of PDF files of all the company’s sales brochures. But the main promotion emphasis is on personal selling. Any personal contact outside the West Coast market is handled by manufacturers’ agents who are paid 4 percent on sales—but sales are very infrequent.
Judy is not satisfied with the present situation. Industry sales have leveled off and so have Long Beach Plastics’ sales—although the firm continues to hold its share of the market. Judy would like to find a way to compete more effectively in the other regions because she sees great potential outside the West Coast.
Competitors and buyers agree that Long Beach Plastics is the top-quality producer in the industry. Its machines have generally been somewhat superior to others in terms of reliability, durability, and production capacity. The difference, however, usually has not been great enough to justify a higher price—because the others are able to do the necessary job—unless a Long Beach Plastics sales rep convinces the customer that the extra quality will improve the customer’s product and lead to fewer production line breakdowns. The sales rep also tries to sell the advantages of Long Beach Plastics’ better sales engineers and technical service people—and sometimes is successful. But if a buyer is mainly interested in comparing delivered prices for basic machines—the usual case—Long Beach Plastics’ price must be competitive to get the business. In short, if such a buyer has a choice between Long Beach Plastics’ and another machine at the same price, Long Beach Plastics will usually win the business in its part of the West Coast market. But it’s clear that Long Beach Plastics’ price has to be at least competitive in such cases.
The average plastic forming machine sells for about $220,000, F.O.B. shipping point. Shipping costs within any of the three major regions average about $4,000—but another $3,000 must be added on shipments between the West Coast and the Midwest (either way) and another $3,000 between the Midwest and the East.
Judy is thinking about expanding sales by absorbing the extra $3,000 to $6,000 in freight cost that occurs if a Midwestern or eastern customer buys from her West Coast location. By doing this, she would not actually be cutting price in those markets but rather reducing her net return. She thinks that her competitors would not see this as price competition and therefore would not resort to cutting prices themselves.
Simon disagrees. Simon thinks that the proposed freight absorption plan would stimulate price competition in the Midwest and East and perhaps on the West Coast. He proposes instead that Long Beach Plastics hire some sales reps to work the Midwest and Eastern regions—selling quality—rather than relying on the manufacturers’ agents. He argues that two additional sales reps in each of these regions would not increase costs too much and might greatly increase the sales from these markets over that brought in by the agents. With this plan, there would be no need to absorb the freight and risk disrupting the status quo. Adding more of Long Beach Plastics’ own sales reps is especially important, he argues, because competition in the Midwest and East is somewhat hotter than on the West Coast—due to the number of competitors (including foreign competitors) in those regions. A lot of expensive entertaining, for example, seems to be required just to be considered as a potential supplier. In contrast, the situation has been rather quiet in the West—because only two firms are sharing this market and each is working harder near its home base. The eastern and Midwestern competitors don’t send any sales reps to the West Coast—and if they have any manufacturers’ agents, they haven’t gotten any business in recent years.
Judy agrees that her son has a point, but industry sales are leveling off and Judy wants to increase sales. Further, she thinks the competitive situation may change drastically in the near future anyway, as global competitors get more aggressive and some possible new production methods and machines become more competitive with existing ones. She would rather be a leader in anything that is likely to happen rather than a follower. But she is impressed with Simon’s comments about the greater competitiveness in the other markets and therefore is unsure about what to do.
Evaluate Long Beach Plastics’ current strategies. Given Judy Howe’s sales objective, what should Long Beach Plastics Mfg. do? Explain.