Steel Door Business Case

Steel Door

PROBLEM

Steel Door is a privately owned regional manufacturer of residential and commercial garage doors. It operates in 150 markets in 11 Western and Rocky Mountain States and parts of North and West Texas. Steel Door has recorded sales gains in each of the past 10 years that exceeded the industry growth rate, and in 2002, recorded net sales of $9.2 million - Impressive gains, but the total sales volume in 2002 only represents a 2.6% share of the market in which they operate. In order to preserve its buying position with suppliers, particularly with respect to raw materials for its garage doors, it needs to attain a larger critical mass of sales volume. To make this happen, the sales target for 2003 was set at $12.5 million, which represents a 36% increase from 2002 sales, and about a 1% increase in market share. It is November 2002, and an action plan needs to be determined quickly in order to allow for a January implementation.

SWOT ANALYSIS

Strengths Weaknesses

* Growth rate has exceeded that of the industry in each of the past 10 years.

* Great relationship with exclusive dealers, who produce 70% of the company's sales.

* Only controls 2.6% of the share of the markets in which it operates.

* Appears to be the third brand in its non-exclusive dealer stores, which accounts for only 10% of individual dealer sales volume of garage doors

* Small manufacturer in an industry with many large national, regional and local competitors.

Opportunities Threats

* High market share potential in the markets that Steel Door presently operates.

* Convert some low-sales-volume, non-exclusive dealers into exclusive franchise dealers.

* Customers prefer steel garage doors 9 to 1 over wood. * Large competitors such as Clopay could concentrate more on the market in which Steel Door operates

* Residential garage door name awareness is very low.

* Price is most important to the customer - larger manufacturers with economies of scales could produce lower-cost doors.

CRITICAL ISSUES (criteria used to evaluate strategic options)

* Reach total net sales of at least $12.5 million in 2003, which represents a 36% increase (or $3.3 million) over 2002 year-end sales.

* Keep costs under the allotted 20% increase in marketing budget for 2003, which is $368,000 (see exhibit 1-1).

ALTERNATIVES (see exhibit 2 for detailed analysis of each alternative)

Alternative Pros Cons Financials

1 Use extra budget to add 100 non-exclusive dealers in the 100 markets not served by the exclusive dealers. Add at least two additional sales reps to service these new dealers.

* Has merit as a long-term distribution policy * It would not be easy to add 100 dealers in its present market during the course of 2003.

* Non-exclusive dealers are low sales volume producers for Steel Door.

* New dealers could steal sales from current dealers.

* Would cost more than budget allows for

* Does not meet sales volume target Cost of action:

2 sales reps + marketing for 100 new dealers = $685,700

Projected sales increase: $1,140,800

2 Develop a formal franchise program for 27 non-exclusive dealers, making them exclusive. Remaining extra budget goes to increase marketing in the 50 exclusive markets, and 23 non-exclusive markets. * Convert 27 already established dealers from low-volume non-exclusive to high-volume exclusive

* Still have extra budget left over existing exclusive and 23 non-exclusive dealers.

* Would meet the 36% sales increase target

* Market share would increase a full point * Could limit future flexibility

* Current exclusive dealer success was achieved without a formal franchise program

Projected sales increase:

$3.45 million

3 Eliminate 100 non-exclusive dealers. The top 50 of the remaining 200 dealers would get extra marketing. All 50 exclusive dealers get extra marketing. * Sales could increase for the remaining dealers if more sales rep time were given to fewer dealers

* Since customers don't buy based on brand name, it is difficult to estimate the sales volume increase resulting from just increasing advertising

* By eliminating these dealers, Steel door would lose $920,000 of guaranteed sales volume Projected sales DECREASE:

$699,200

4 Do not change either distribution strategy or the dealers. * Slow economic growth could be a risk * Sales volume increase would be minimal, and would be nowhere near the 36% target.

* Volume increase might not even meet the industry increase in sales

RECOMMENDATIONS

* Adding 100 non-exclusive dealers has merit as a long-term alternative, but is not the right option in this scenario. First of all, it would be extremely time consuming, and expensive, to establish 100 brand new dealers. The cost of adding these dealers and the sales reps to support them is much higher than the extra budget that was approved for the year. Secondly, even if the 100 dealers were magically added on January 1st, and produced the same sales volume as the other non-exclusive dealers, sales would only increase by about $1.14 million (exhibit 2-1).

* Eliminating 100 non-exclusive dealers is an alternative that really has no merit at all. Sure, Sales could increase for the remaining dealers if they were to get more sales rep time, but by eliminating those dealers Steel Door would automatically lose $920,000 of sales volume (exhibit 2-3). Also, there is no guarantee, nor is it likely, that the remaining dealers are going to pick up all that lost volume, and in addition to