Case most direct competitor Sony. A subsidiary

 

Case
Type: Decision Based

Barco
Projection Systems (BPS) could decide from several different options regarding
how to deal with a competitors more superior and cost efficient product.

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Problem:

Barco
Projection Systems (BPS) faced a serious problem when a large percentage of
their market share was at risk of potentially being compromised. When a rival
company Sony, launched a product that could become an industry leader, BPS was
challenged to respond effectively without stopping the progress of their own
growing business.

 

SWOT analysis for Barco Projection Systems

 

Strengths:

BPS
is one of the top market leaders in the “projector” industry. They specifically
target and manufacture superior projectors in niche markets, maintaining an exceptional
reputation for producing high quality products. Additionally, BPS stands out
from other industry leaders by their dedication to Research and Development
(R&D). In fact, BPS is so dedicated to improving their products that they
use about 15% of their total employees and 8-10% of their annual turnover, just
to perfect their R&D system. On a similar note, the BPS projectors scan
rate was an industry leader before the production of the Sony 1270.
Particularly, the BG400 was 64KHz which was the highest scan rate to ever be
launched in the market. All other components of the projectors were positively
affected by the high scan rate, securing BPS as the leader in projector
brightness, picture resolution and quality.

 

The following include additional general strengths
BPS portrays:

·      Leading manufacturer of
projectors.

·      Efficiently segmented
their products based on performance and price.

 

Weakness:

The
most critical weakness is that BPS is much reliant on its most direct
competitor Sony. A subsidiary of Sony, Sony Components, supplies BPS with
crucial component to complete a high quality projector; the picture tube. By
depending on Sony and not attempting to make innovations on the picture tube
themselves, BPS has involved themselves in a vulnerable position. Another
weakness that diminishes the progress of BPS is that their price is
considerably higher in comparison to some of their competitors. Although one
could argue that a premium price could be considered a strength, BPS knows first-hand
that if someone were to replicate or even perfect the quality of their
projectors at a lower price, they risk losing a large percentage of their
market share. Evidently, Dejonghe calculated that BPS stood to lose as much as
75% of its forecasted 1990 profits after the launch of the Sony 1270.

 

The following include additional general weaknesses
BPS portrays:

·      Very limited amount of box
dealers.

·      Very complex and not as
user friendly as competitors.

 

Opportunities:

BPS
has achieved full growth as a business, however, BPS has already experienced
most of their opportunities to expand further. That being said, Sony has
focused all of its energy on perfecting and developing only one of their
products; the projector. This posed an opportunity for BPS to enter and
dominate the almost untouched graphics sector. BPS has already manufactured
products that deal with graphics but if they invest their capital into
expanding, it has the potential to be a great new source of revenue. BPS could
use their relationship with Sony to its benefit. Specifically, a collaboration
with Sony could be an opportunity for BPS to save money and reduce the cost of
parts.

 

The following include other general opportunities
BPS portray:

·      Sony has decided to target
only specific areas across the world. This could be an opportunity for BPS as
they can invest more time and capital into the barely-touched international
markets. It is possible that that BPS could be significant market leaders if the company sought to expand its
international presence in sales, product development, and production.

·      This can assist BPS in its expansion within
the international market with respect product development, sales and
production. (“3 Elements BPS Strategy”, 1980)

·      At the time, the whole
world was slowly shifting into the technological era. With the capital and
reputation BPS holds, they have the opportunity to take this multi-national
company to whole new level.

 

Threats:

All
threats that could have a negative impact on BPS revolve around Sony. It is
clear that Sony is such a powerful force as they have an abundancy of dealers
all over the globe. The more Sony perfects their distribution process and
expands their resources, the bigger the threat it poses on BPS. The Sony 1270
rumoured to be priced less than BPS’s BG400 can likely threaten its market
share so significantly that they could potentially lose their title as an
industry leader in projectors. The fact that the innovation of the whole
industry relies on the supply of Sony is a compelling threat to the sole
survival of Barco.

 

The following are other general threats for BPS:  

·      Economic depression:
Fairly simple, if the economy fails, large companies including BPS can be
drastically impacted negatively.  

·      Consumer demands: The
needs and wants of consumers can change in a matter of minutes. BPS relies
solely on the consumer, and if their products become irrelevant to the daily
consumer, it can be a serious threat to the success of Barco.

 

 

Porters 5 Forces

 

Suppliers Bargaining Power:

·      Very high bargaining power
for suppliers: If a supplier can innovate the industry by selling products no
one else has, they immediately have the power to dictate prices.

 

·      This industry in
particular survives on a scarcity of particular components to manufacture a
high quality projector. Sony Components, for example, are the sole quality
supplier for tubes. Their competitors like Electrohome and NEC are also forced
to purchase parts from them.

·      The market itself consists
with a small number of large players. This directly correlates with why the
supplier bargaining power is at a high.

 

Buyers Bargaining Power:

·      Low-medium bargaining
power for buyers: In terms of where to buy components from, buyers are very
limited.

·      The fact that buyers
themselves depend significantly on suppliers in order to keep up with demand,
puts them in a very difficult position.

 

Threat-of-Substitute:

·      Low threat of substitute:
The market in this particular industry is very unsaturated. Specifically, since
prices are so high for each product, the products are not very well defused
(distributed) within the market.

·      The only companies that
can replicate the product are the ones already well indulged into the industry,
and they can only cause little harm to the other industry leaders.

 

Threat of New entrants:

·      The threat of a new
entrants is very low: Due to high startup costs and high economies-of-scale, it
is very difficult for new companies to enter this industry.

·      Highly consolidated market:
For the most part, there is not enough space for new competitors, unless they
have the capital to enter.

·      Companies within this
industry have already perfected their R systems, for a new company to
effectively compete with them, they would require years of rebuilding.

 

Industry Rivalry:

·     
The industry rivalry is extremely high: With each market
leader attempting to use their resources to create a product that can
outperform its competitor, the industry rivalry is very high.

·     
It is assumed that each market player is actively attempting
to innovate and eventually manufacture a better product using new technology.

 

Product Line Strategy & Price

BPS’s
product line strategy is very simple and has been outlined and enforced since
the early stages of their business. They attempted to segment the entire
industry of graphics and projectors based on their products scan rate and price.
They began this journey in 1981, when they revolutionized the projector
industry by being the first to display a motion picture on a plane. In addition
to segmenting the market, they slowly began to target a specific niche of
consumers. By increasing the technology and complexity of their products, they
isolated themselves from their competition, and created an appeal to “tech-savvy”
consumers. Once they realized they had gained a significant amount of market
share, they began to investigate an application for their products. BPS could
initially downgrade their technology and target a more broad and larger
demographic. However, this could prove to generate consequences for BPS as they
would have shifted from a blue to a red ocean market. On the other hand, BPS
could potentially upgrade their technology and develop a higher performance
video projector. By doing this, they can sell each individual product for a
higher price. However, this does not necessarily mean BPS would generate more
revenue. By narrowing down their market further, their target demographic would
be very small in comparison to their competitors. Overall, their best solution
was to continue to do what they have been doing. However, they must focus on
continuing to enter untouched markets. By applying their application for
projectors into new markets, BPS has generated a new stream of revenue, has
targeted more consumers and still maintained their niche market strategy.
Specifically, in 1983 their ratio of division of sales were 80%-20% in favour
of TV’s over projectors. Dejonghe stated that he would reverse that ratio because
the complexity of projectors will assist BPS in outperforming competitors. BPS
took action on this statement by releasing the Barco Delta 1 (BD1), the first
ever computer compatible projector, sold for $13,500 and capable of a 18KHz
scan rate. With the success of the BD1, in 1984 BPS released the BV2 which was
sold for $9,875 and the BD2 $14,750. BPS’s strategy was to have a minimum of one
type of projector to fit each of the different consumer needs. In 1989, Barco
released the BG400, the most powerful projector interns of scanning, brightness
and picture resolution. It produced an industry leading 72KHz and was sold at
$25,000. Barco projection systems planned on releasing the BD700 at the end of
October 1989 but Sony released the 1270; a more powerful and superior
projector, rumoured to be sold at a more reasonable price than BPS’s.

 

Product Development and Price (Cont…):

Sony
surprised the world and BPS when they launched the 1270. With higher
performance and cost efficient prices, Sony threatened to collapse the
traditional market segmentation and lower prices to unbeatable levels. If not
acted on effectively, this launch could potentially lose BPS’s majority market
share and an estimated 75% of profits in the next year. Due to this, BPS now
must revisit the basics and develop new pricing and product strategies. BPS
currently has only three options:

 

1.  BPS could continue
operating as planned and introduce the BD700 in that year (1989). Immediate
production of BPS’s first ever digital model was expected to increase sales
from the current year to the next period by 25%. The BD700 incorporated an
improved generator and scanning rate of 64KHz. It would price at $16,000,
making it the highest value projector BPS has ever produced. This seems like a
viable option as 180 man-months have already been utilized in the production of
the BD700. To instill customer satisfaction and maintain a high moral among
workers, it is vital to complete this operation. On the contrary, the company’s
reputation could be hurt as they would be unable to outperform the 1270 by the
time of the trade show. BPS would be forced to live in a market dictated by
Sony’s prices. Due to economics of scale, Sony’s leverage to charge lower
prices is greater than BPS’s. BPS will lose its brand image and it will have to
adapt to the new market segmentation forced by Sony.

 

2.  If BPS is willing to go in
another direction, they could use the advances already made in the development
of BD700 as a base to enhance and create the innovative digital graphics
projector, BG700. The final goal of the BG700 would be to incorporate as many
parts from the BD700, with the exception of matching the high scanning
frequency associated with the 1270. Dejonghe estimated that his engineers could
have this high performance graphics version ready for shipment within two to
three months. Unfortunately, this would postpone the process of a new BPS
projector until late December. This would affect customer relations with all
consumers, particularly with those who pre-ordered the product. This would hurt
the company’s reputation and the BG700 would technically still be inferior to
the 1270 interns of size, picture resolution and light output.

 

3.  The third and final option
BPS had was to look to the future development of the BG800. A digitalized
upgrade to the BG400, built and designed to withstand the 1270’s performance.
It would take a lot of time, effort and capital to equip the BG800 with at
least a 90KHz scan rate. In order to reach these performance requirements, BPS
would need to purchase and use the Sony 8″ tube. This particular tube requires
a special lens that only one company “Fujion” produces. Dejonghe was unsure if
Fujion would supply both Sony and BPS as it would cause a conflict of
interests. If in fact BPS managed to surpass these barriers, it is estimated
that the BG800 would require at least 80 person-months. In order to meet the
deadline of the “Infocomm” trade show, BPS would need to place a hold on all
other orders from October 1st onwards. This again, would limit the
source of revenue for BPS and ruin relationships with consumers. Additionally,
workers of BPS have been working overtime on the BD700 since mid-summer so by
stopping production, it would surly lower their moral.

 

 Effective Course of Action

The
price for the Sony 1270 is to be rumoured to be “cost efficient”. Based on the
reaction of BPS plus past prices of their projectors, it is fair to assume that
the 1270 is released at $20,000. This will allow us to dissect any margin room
BPS has interms of price:

 

Contribution
margin is basically the products price less all associated variable costs. You
are left with a value of incremental profit earned per each unit sold. For
example, Table C tells us the BG400 has a marginal contribution of 29%. This
indicates that the cost to manufacture the product is $17,040. The BG400 was
sold at around $24000, in order to remain competitive, BPS should lower its
price to roughly $18,500. This will attract consumers while maintaining a
strong profit margin. (8%)