Case Study Analysis - Pyramid Door

Case Analysis – Pyramid Door

Situation Analysis

               Pyramid Door, Inc. is a regional garage door manufacturer. One of the smaller manufacturers in the residential garage door industry, the company distributes residential and commercial garage doors through 350 dealers, servicing 150 markets in 11 western and Rocky mountain states and parts of Texas. Of the 350 dealers that sell Pyramid doors, 300 are independent dealers that also sell competing brands, while 50 are exclusive dealers that sell Pyramid only.

               Strengths of Pyramid Door include their effective supply chain management; they operate out of two distribution centers and have 50 exclusive dealers, which produce 70 percent of their sales and with which they have established long-term relationships. Weaknesses of Pyramid include their limited market share (2.6 percent) and their absence in home center chains such as Lowe’s and Home Depot, which offer their competitors. Opportunities for the company include the projected rise (by 2.4 percent) in residential garage door sales to the home remodeling market in 2006, as well as the continued aging of housing stock nationwide, which will add to the rising demand for replacement garage doors. Finally, threats to Pyramid include their many competitors in the residential garage door market, many of which are larger and more well-known.

               In November 2005, Pyramid executives established a sales goal of $12.5 million for 2006, which would mark a 36 percent increase in sales compared to their sales for 2005, which were projected to reach $9.2 million by the end of the year.

Problem Definition                     

Pyramid has added 50 dealers throughout the last decade, while attaining yearly sales gains that consistently exceeded the industry growth rate. However, the company remains a minor player in the industry, with a market share of 2.6 percent. Richard Hawly, director of sales and marketing, has expressed discontent with this market share. To gain a stronger foothold in the market, Hawly and fellow executives agree, for the most part, that two things have to happen.

First, Pyramid must invest more in advertising and promotion. In turn, Hawly has raised the marketing budget by 20 percent for 2006, which is set to be directed at 50 independent dealers and 50 exclusive dealers, which together comprise the 100 highest-potential markets currently served by the company. Second, Pyramid must devise a new distribution strategy that will support its ambitious sales goal for 2006. Presented with four viewpoints (each expressed by several executives), Hawly must decide which strategy to implement.

Causes

               In spite of continued growth for the past ten years, Pyramid is not a major player in the industry in which it operates, with less than three percent of the market share. Causes for this include the difficulty for garage door brands such as Pyramid to establish a unique brand image that attracts new customers, due to the homogenous nature of the products within the industry. As a study commissioned by Hawly illustrates, prospective buyers of residential garage doors have very low brand awareness - in the study, just ten percent of buyers could name even one brand. The study also found that most buyers turn to trusted members of their social networks (friends, neighbors, etc.) to obtain information about garage doors, more so than The Yellow Pages or newspaper advertisements. This also explains why Pyramid has been slow to catch up with the leading players in the market. Though Pyramid has benefited from their Yellow Pages advertising, the principal source that prospective buyers turn to are not The Yellow Pages, but friends and neighbors, who are likely to have experience (and by extension, are likely to recommend) a leading manufacturer, such as Amarr Garage Doors, Raynor Garage Doors, or the Clopay Corporation. With so many leading players, it takes time for a company like Pyramid to deeply penetrate the market, especially considering the low frequency at which garage doors are purchased.m

Alternative Solutions

               Again, Hawly must choose between four potential solutions, each of which present a different strategy for furthering the company’s market share. The first option is to increase their number of dealers, adding 100 independent dealers in their present markets, which would naturally drive up sales. However, adding 100 dealers (twice as many as they’ve added over the past decade) in one year would not be easy, and would require an increase in sales force. Adding one sales representative has the incremental direct cost of $80,000 per year. Further, the executives who supported this solution acknowledged that the plan would have more merit in the long run, rather than supporting next year’s sales goal.                         

The second option is to develop an exclusive franchise program, in which 27 nonexclusive dealers (each representing a different market) would agree to sell off competing lines, selling Pyramid exclusively. In exchange, Pyramid would drop present dealers in their markets and agree not to add new ones. Considering that exclusive dealers drive the majority (70 percent) of sales - despite comprising less than 15 percent of their 350 dealers - this strategy would certainly enhance sales. Further, since Pyramid has already been approached by the 27 dealers, this solution is more realistic than the aforementioned first option; adding 100 sales representatives in one year would be hard - and costly. Meanwhile, with the second strategy, Pyramid would make money not only from boosted sales, but also from the franchise fees paid to them by the 27 dealers.

               The third option is the opposite of the first: to reduce the number of dealers that sell Pyramid garage doors. By focusing on a smaller number of dealers, the company could devote more time to each dealer, improving its sales-force effort and in turn, raising profits. More specifically, executives who supported this idea proposed a reduction of 100 non-exclusive dealers, resulting in 250 dealers in 150 markets. Similar to the second option, this strategy would be easy to implement within the given time frame. Further, it would allow Pyramid a better understanding of the individual performance of each dealer. However, in the short term, this would lead to a decrease in sales. As such, achieving the sales goal for 2006 would be highly unlikely.

               Finally, the fourth option is to make no alterations to their distribution, focusing instead on doing “a better job” with their current distribution. This option provides a cost-effective method for a rise in sales in the long-term, but is unlikely to meaningfully raise sales within a year, which is needed to achieve the sales goal.

Decision

               Ultimately, we believe that Option 2 is by far the best option. Options 3 and 4 are very unlikely to produce the intended sales goal. Further, in order to achieve a higher market share, changes must be made to Pyramid’s current distribution strategy, and reducing their amount of dealers would lead to less profits in 2006, while ending long-term, mutually-beneficial relationships with a large number of dealers - which, to potential future dealers, could send a negative message. Given that Pyramid has experienced above-average sales gains for each of the past ten years, a dramatic reduction in their dealers simply does not make sense at this time, considering that Pyramid’s goal is a rapid expansion of market share. An increase in their number of dealers (as suggested in Option 1) would make far more sense - yet adding 100 dealers in one year is unrealistic and expensive. In turn, Option 2 is the best option - it is realistic and cost efficient to implement, and is likely to raise profits, both in the long term and for 2006. It is also the solution most relevant to the problem at hand, which is not an underperformance or insufficient quantity of dealers, but the competition from larger, more well-known brands, which serve as barriers to increased market share. Option 2 is the only solution to address this problem; by increasing the number of stores that sell Pyramid exclusively, the threat of competitors is notably reduced. At independent dealers, the dominant brand of the several options have been shown to account for 60 percent of sales, putting Pyramid at an inherent disadvantage. Meanwhile, exclusive dealers have been proven to account for the majority of Pyramid’s sales.