Keneddy Capacitory Pricing in the Electrical Equipment Market

KENNEDY CAPACITOR (A)

Pricing in the Electrical Equipment Market

In the summer of 2010, Bill Moyers, marketing manager for power capacitors for the Kennedy Capacitor Company, was considering a proposal to withdraw from the market. Kennedy's high-voltage power capacitor divi¬sion had operated at a net loss since 2006. In 2009, the division lost $630,000 on sales of $4.2 million.

The principal problem was severe price competition which beset the industry. There were six firms: Kennedy, Lawford, Hamilton, AC, Stewart, and Austin, all bidding for public and private electric power utility busi¬ness. Since 2006, Kennedy had adopted several pricing policies, under the titles of "book price policy," "controlled opportunistic pricing," and . "selective price policy," all of which were judged unsatisfactory. Early in 2010, Kennedy had attempted to relinquish what it viewed as its role as in¬dustry price leader, but in the opinion of most Kennedy managers, this move had been a resounding failure.

Moyers had been named marketing manager for power capacitors in 2009. At that time, the general manager of the company had laid down three objectives for Moyers to fulfill:

1. To obtain more profitable price levels for Kennedy.

2. To restore Kennedy's historical market share.

3. To obtain more stable prices.

Moyers did not believe he had been successful in achieving these objectives.

In the spring of 2010, a series of bids at the Southern Valley Authority (SVA), a large electrical power utility, culminated in one of Kennedy's largest competitors, Lawford Electric, quoting the lowest industry price on record (the equivalent of 98 cents per kilovar - the standard en¬gineering measure of capacitor size). With this bid, Lawford won the second of SVA's 2010 orders for power capacitors. Together with the first SVA or¬der, which it also won, Lawford had now booked $355,000 worth of business with SVA for 2010.

An immediate decision facing Bill Moyers was what price to bid for a third capacitor order which SVA had just announced, with a bid date of August 5, 2010. If this competition resulted in still lower prices, Moyers was convinced there was little future for Kennedy Capacitor in this market.

The Kennedy Capacitor Company.

The Kennedy Capacitor Company, with annual sales in the $100 million range, and profits after tax equal to 5.3% of sales and 14.4% of net worth, manufactured and marketed a broad line of electrical equipment for power gen¬eration and transmission. Within the company, there were separate divisions for transformers, power capacitors, and switchgear. In recent years, profits had been squeezed in all three operating divisions. To counteract this, Kennedy managers were actively seeking new product opportunities through in¬ternal research and development. Increasingly, Kennedy participated in gov¬ernment contracts for NASA and the Department of Defense.

Description of Power Capacitors

Power capacitors were one of the simplest of electrical devices. Made from metal foil and paper insulation, assembled in a metal box and impregnated with insulating oil, a power capacitor had no moving parts and consumed almost no power. The capacity of the device was measured in kilovars (KVARs).

Utilities employed power capacitors to increase the efficiency of electrical power transmission through raising the "power factor" of dis¬tribution systems. Some modern distribution systems were designed at the outset for "100% power factor" operation; that is, for the maximum effi¬ciency available through the use of capacitors.

Electrical utilities purchased power capacitors for pole-top in¬stallation or for substation installation

The Economic Benefits of Capacitor Installation

"In AC power systems, there is a tendency for voltage and current to be out-of¬-step, or out-of-phase. When this condition occurs, more current than is nec¬essary passes through the circuit, leading to power losses and unduly heavy load¬ing of the circuit. When voltage and current are exactly in phase, on the other hand, power losses and loading of the circuit are minimized, and the power fac¬tor of the system is said to be 100% or unity. Systems which operate at less than 100% power factor can be restored to unity power factor through adding capacitors to the circuit."

Electrical utilities derived three principal benefits from installing capacitors:

1. The voltage drop on distribution feeders was reduced permitting more load to be served without adding new feeder lines.

2. Overload conditions were relieved, postponed, or eliminated on substation transformers and other KVA-rated equipment.

3. Improved power factors could reduce the cost of power for dis¬tribution utilities which were charged for power on the basis of peak KVA demand.

As a rule-of-thumb, Kennedy marketing managers estimated that 50% of a utility's installed total cost of capacitors was due to the equipment itself; the remaining 50% was due to installation work.

The Customers for High-Voltage Power Capacitors.

All 5,000 electrical utilities in the United States were potential power capacitor customers. About 1,000 of them purchased capacitors in a typical year. Of these, approximately 500 placed orders with Kennedy. The average order size was slightly under $10,000.

Typically, an electrical utility placed its orders for power capac¬itors once a year, frequently splitting the business among two or three sup¬pliers. Capacitors were commonly regarded as a "hardware" item, handled through regular purchasing channels. Capacitor purchases were frequently given low priority until more urgent capital investments had been made.

For large-scale projects, consulting engineers, occasionally made decisions concerning sources of supply. Communications among key engineers and purchasing agents in the industry were particularly well developed. Pricing and product information was quickly shared.

Kennedy sales engineers called upon the large public utilities and attempted to persuade them to write technical specifications which favored Kennedy