Augat

Augat Electronics Inc.

Executive Summary

The Canadian market for cable connectors is a relatively small one that increases at a slow rate. There are on the other hand some signs that the growth rate may increase in the coming years. Although the quality of the connectors used has not been a fundamental basis for purchasing decisions that seems to be changing slowly as the market develops. Moreover, the continued consolidation among cable TV operators will reduce the number of potential buyers. Therefore, it will be of outmost importance to penetrate the large multiple service operators that dominate the Canadian market. By launching the Snap-N-Seal, Augat is responding to those changes but its relatively small market share is a challenge that must be overcome so that sales may grow to a profitable level.

The unanticipated competition, on the other hand, from Raychem has changed the launching strategy that must be employed. Augat must price its Snap-N-Seal connector in the range that is comparable to Raychem. In addition, it must forgo some part of the revenue that is associated with the sales of installation tools. The company must do this in order to increase its chances of securing purchases from MSOs. By continuing to use White Radio as its exclusive distributor the company will continue to grow the strong ties it already has with the distributor. Furthermore, White Radio's commitment to the manufacturers it represents is valuable to Augat. Alternatively, the company could opt for competing on price rather than quality in order to potentially increase market share. However, this will position the product with lower quality products. The market has lately demonstrated a propensity towards the higher quality and more reliable connectors. Therefore, Augat should respond to those market requirements by introducing its Snap-N-Seal connector as a superior product that is unmatched in the market. The cable TV operators need to be persuaded that by using Snap-N-Seal connectors they are in fact being connected with the future.

Situational Analysis

The cable industry in Canada is rather stable and generates revenues of about $1.3 billion. The market for coaxial cable connectors, on the other hand, is relatively small with only about $1.3 million in sales in 1987. That number is expected to grow to $2.5 million by the end of 1990. This is in line with fact that the industry growth rate is relatively low. In fact, future growth will rather depend on the introduction of more sophisticated applications as well as increased value-added services offered by the cable TV operators. The cable TV industry is largely controlled by five multiple system operators (MSOs) with approximately 4.2 million subscribers. Although there are a number of smaller cable providers, consolidation is expected to grow within the industry. Therefore, the importance of the MSOs will continue to increase in the market place.

Traditionally, hex crimp connectors have been used in the installation process as the quality of the connector did not play a vital importance. As the industry has developed the quality demands have been on the increase. As cable TV operators add to their services and the applications used become more complex, there is a clear need for a high performance connector. The MSO have acknowledged this fact by their purchases from Raychem, which offers connectors of a higher quality than have been previously available. Therefore, the current market share leaders have been put on the defense as the MSOs have started to substitute their products with those of Raychem's. Thus, it is clear that product requirements are changing. In addition, cable TV operators see an added value with the higher quality connectors as they will be able to decrease their costs associated with service calls. The harsh weather conditions in Canada most surely increases the number of bad connections. Therefore, the economic value to the service provider can be significant.

In light of this, it is evident that the market as we know it is changing. Augat Electronics Inc. should be in a situation where it can use its strengths to gain a viable momentum in the market place. The new Snap-N-Seal will address the new focus demonstrated by the cable TV operators. Its added value to the end users will not only be economical today but represents a future economic value to the end user. As their need for solid electronic performance increases, so will the value of Snap-N-Seal. Furthermore, by switching to Snap-N-Seal they will be preparing themselves for the technological advances, which will in turn reduce future switching costs. Considering the changes that will be taking place, we could see the market for high quality connectors grow faster than anticipated. This will again be the result of the increased importance of quality. Therefore, the need to replace old connectors before they actually fail may become necessary sooner than later.

As the above indicates, there are many opportunities for Augat in the Canadian market. For one, Augat has the ability to offer a superior product at competitive prices. In addition, manufacturing costs will be decreasing with the full automation that will take place next year. Therefore, the company should be able to maintain its price level while incurring decreased costs. The high level of cable penetration into Canadian homes emphasizes the size of the potential market as around 6 million of the 8 million households passed are actual subscribers. This further demonstrates that potential sales may increase even more than expected as cable providers switch to high quality connectors.

In spite if the potential benefits there are drawbacks and threats that exist as well (Exhibit 1). In 1988, Augat had only 9% of the market share for "F connectors. Thus, the unexpected entry of Raychem adversely upset both the marketing strategy as well as it sales level. The strength of White Radio as a distributor must be brought into question especially when considering the limited success Augat has had in Canada. The strength of our competitor's distribution network may severely affect our success rate. Also, with the launch of the Snap-N-Seal our competitors are bound to respond. As a result, the lower quality producers may further cut their prices or develop products that match Augat's in quality. Finally, technological advances in fibre optics may change the market completely in the next decade. This highlights the importance of getting a strong foothold immediately so that the company may reap the benefits of its product.

As touched on above, the competition in the market has recently been upset by a new