Curled Metal, Inc.

- Case Analysis Report

1. Key Issues/Problems
Curled Metal, Inc. (CMI) grew from $750,000 sales in 1991 to $55 million in 2007, but the sales had declined
from $61 million in 2006 to $55 million in 2007 (Exhibit 2, CMI income statement). Although, CMI’s Slip-Seal
product was a major hit, the Company wasn’t confident of retaining its 80% market share. As a result, the
company had already diversified from its heavy reliance on Slip-Seal and auto industry. CMI developed a new
product - curled metal pile driver cushion pads. In field tests, the cushion pads showed that customer
benefits outweighed CMI's manufacturing costs. Joseph Fernandez (CMI’s VP) and Rajiv Sanwal (Group
Manager of CMI's Engineered Products Division) are responsible for formulating a strategy for marketing the
new product.

Some of the Key issues that CMI is facing with the new product are:

i. One of the major issues that CMI is being faced with is the feasibility of its new product, whether the
product will be feasible for the commercial use and will it benefit the user if they used their traditional
method.

ii. Second important decision was to determine an optimal price to charge for the pads (CMI needs to
consider the standard industry practice for equipment rental, labor and overhead costs – Table A to
come up with an optimal pricing strategy for the pads).

iii. Aligning price with business strategy – the company needs to determine which channels to market the
pads based on the selected pricing strategy. CMI has to take into account several barriers to entry
into this market. The primary barrier is that most companies viewed role of pads as a necessary
accessory or tangent item instead of viewing them as a potential value add or cost reducing part of
pile driving. In order to penetrate the market, CMI has to alter the point of view of pile driving pads
for the opinion leaders, engineering firms, and contractors involved in the decision process.

iv. CMI needs to analyze market potential for the new product.

v. Consider implications of a price on development and execution of integrated strategic options.

vi. Although CMI pads drove piles 33% faster and lasted for the entire job without much heating
problems, the results were unusual. Sanwal believed that curled metal set life of 10 times more than
conventional pads and performance increase of 20% were probably more reasonable and so sufficient
testing and reliability of the observed exceptional efficiency of the pads needs to be assessed.

vii. CMI needs to determine optimal sizes of the pads to be sold and used efficiently. Although the
manufacturing process allowed any diameter pad, from standard minimum of 11.5 inches to over 30
inches, Sanwal was uncertain that CMI pads in larger sizes would perform equivalent to the standard
size pads of 11.5 inches. Bigger sizes being more difficult to handle could contribute significantly to
unproductive time on the job (Exhibit 5).

viii. Managers at CMI were concerned that other manufacturers might discover this new application for
curled metal and enter business before CMI could get patent protection. So CMI needed to not only
file patent faster (which could be done only after sufficient testing and comparing performance of the
cushion pads with a smaller number of contractors) but also needed an accurate marketing strategy
to target the potential business players and come up with optimal pricing strategy.

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  The plus point for CMI was that despite having a number of competitors, most were
substantially smaller than CMI and none, thus far, had shown strong competence in technical,
market, or product development.

2. Discussion of Alternative Solutions

CMI needs to develop an integrated strategic option for the newly developed product (curled metal pile driver
cushion pads), an option that specifies the appropriate price but also specifies the many other choices facing
CMI in formulating a strategy for the product (e.g., in marketing, sales, distribution, production, finance, and
other functions).

a. Assess Comparative Performance: CMI needs to find contractors who are willing to test the
product and assess the performance of the Product and thereby ensure acceptance of the
product by these contractors. Testing of the pads by multiple contractors will also help CMI in
filing patent for the product. The initial usability and durability of the pads was assessed by
Kendrick foundation Company of Baltimore. In pile driving tests the CMI pads exhibited 33% more
driving efficiency, a 5 times increase in pad change efficiency, and a 20 times increase in piles per
pad efficiency (Comparison Table between Conventional pads and CMI pads, Page 3). CMI’s
cushion pads contained no hazardous material and did not get significantly heated like the other
pads existing then. It was essential that the results be reproduced with another construction
Company. The 2nd Construction Company – Corey Construction in Pennsylvania was able to
reproduce the observations quite comparably by Kendrick foundation (Comparison Table
between Conventional pads and CMI pads, Page 5).
b. Assess Market Size: Since there were no statistics for a potential U.S. market size for cushion
pads, Sanwal made several assumptions based on the information he gathered. Based on his
assumptions the maximum number of set of metal pads requested annually by the market can be
estimated. Since the feet of piles driven amounted to between 290 and 390 million and the new
CMI set of pads would drive 10,000 feet, the market should be in a range of 29,000 to 39,000 sets
per year.

c. Market Segmentation: The market for CMI’s cushion pads can be segmented into three
categories based on four behavioral factors:
i. Equipment ownership: Customers who own their own equipment and those who rent
equipment.
ii. Procurement process: Customers who operate internationally and have global procurement
teams v/s those who operate only in the US and do local sourcing
iii. Size & Scope of work: Contractors who are large and do big complex construction projects
have bargaining power and create best practices v/s contractors who are small and do
smaller projects follow processes set by big players.
iv. Price sensitivity: Customers who are price sensitive v/s those who prefer high quality over
price. Some customers especially the renting companies are willing to buy cheaper parts
while others such as the expert contractors will pay higher for the extra value delivered
through efficiency improvement.

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 The segments that CMI can tap into are: 1 - Large company contractors, 2 - Small contracts who
rent and 3 - Rental companies
d. Utilize Marketing Channels: There are several different channels available to market the CMI
pads. For example, the company could hire a sales force and attempt to directly sell to customers
or attempt to go through distributors. CMI could direct Sales Team for the initial years till break-
even is achieved and customers are aware of the product and value created by it. Account
managers could target larger engineering and construction contractors. Another option is to
Solution Service Providers (SSP) for pile hammer distributors and renting companies and pile
manufacturers. The SSPs can be given targets geographically.
Future Plan: Once the product is commoditized, it can be sold via hammer sales outlets and
construction supply outlets

e. Make use of Purchasing Influencers: In order to sustain, CMI needs to introduce a successful
product to increase revenue and profits. There is a list of possible influencers that can be utilized
for purchasing the pads and in the pile driving industry, there are entities that participate in the
distribution of what CMI is about to introduce. CMI was able to spot the following influencers:
pile hammer manufacturers, architectural or consulting engineers, soil consultants, pile hammer
distributing and renting companies, engineering and constructing contractors, and independent
pile driving contractors. CMI can make use of these influencers to promote their product to the
ultimate consumers.

f. CMI Pads Pricing: According to Corporate management, CMI would like to see a contribution
margin of 40-50% of the selling price after manufacturing costs. CMI can use two options for
determining pricing of CMI pads:

i. Cost-Plus pricing: This is the simplest way to determine how to price the pads to distributors. As
shown in Exhibit 6, there are two sets of projected costs for manufacturing that are dependent
on whether or not CMI plans on investing in permanent tooling. This means that, depending on
CMI’s manufacturing plans, price per pad or set of pads will differ, if CMI utilizes existing
equipment (and hence not investing an additional $150,000 into production), the total
manufacturing cost is $444.36 per pad. With a contribution margin of 50%, the price per pad will
be approximately $890 and the price per set will be approximately $5334. If CMI decides to
purchase permanent tooling, there is an additional up-front cost of $150,000 alongside the total
manufacturing cost per pad of $207.54. In such case, the price per pad and per set with
contribution margin of 50% will be $415 and $ 2490 respectively. This pricing method takes into
account the target margins that corporates prefer and may allow CMI to penetrate the market
and drive volume sales by having lower prices compared to pricing with other methods that take
into consideration external factors.

ii. Value-Add pricing: In this pricing methodology, CMI can take into account the additional value
gained by consumers (e.g. reduced labor costs, raw material savings and energy savings). This
pricing alternative has the ability to capture hidden margins that alternative 1 does not factor in.
The additional value received by the end consumer justifies the higher costs they are paying. If
CMI chooses this pricing option then they would be able to take into account an additional
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 savings of 34 hours for the consumer. This is based on an average savings of 12 hours (average
396 and 996 minutes) in addition to the average 22 hours saved from feet driven/ hour while pile
driver is at work. CMI’s product has a total savings of $4488 (based in labor cost per of $132) for
the end consumers. The total buyer value for their product is $9822 a set ($5334 plus $ 4488
from value added) and $1637 per pad. This option is very lucrative for CMI because it allows
them to capitalize on the additional savings that their product offers to consumers.

3. Recommendations: Since CMI pads are a new product and are not only innovative but also unique
to the market, this presents an opportunity to CMI to be the leader in high-quality pads as well as
independent from contractor in its pricing methods. In the first year of production, it would be wiser
for CMI to begin at 50% margin to give itself room to adjust margins as cost of production is lowered
with increased economies of scale. Higher margins translating to higher end prices to distributors
and end-users also sets CMI apart as a premium, high-quality product compared to the products
currently available in the market.
Pricing Recommendations: Regardless of the alternative selected, marketing the new steel pile
cushions will require redefining consumer perceptions of pile pads in two ways. First, CMI must show
that pads are an integral part of pile driving efficiency and thus an industry cost driver. Second, the
company must change the way consumers view pricing of pile driving pads from a price-per-pad or
set of pads mind-set to price-per-foot driven mind-set. Some companies may directly compare the
price of a set of micarta pads, $150, against the price of a set of metal pads, exceeding $3,000,
without considering the per foot ramifications. CMI needs to make sure that customers understand
the $3,000 pads are actually cheaper on a per-foot basis than the $150 micarta pads.

I would recommend CMI to go for the 2 nd alternative of value-add pricing: Invest in $150,000 for
permanent tooling as that reduces projected costs and makes it viable for CMI to sell cushion pads at
$6,000 per set and provide a 40%-50% margin across all sizes. Further investments to expand
production should be continued as sales materialize.

At the price point of $6,000 per standard set (6 pads, including retailer margin and all costs) satisfies
the management requirement of 40% - 50% of contribution for the permanent tooling option. It
would also provide retailers a higher dollar margin amount (due to higher price) compared to
traditional pads (30%-40% margin) and reduce their hesitation to promote CMI pads. Also, CMI pads
provide savings of $18,730 for the Kendricks test job (one set of 6 pads used) and provide almost
$1.8 per foot in cost savings. Savings are calculated using input costs provided in Exhibit 2. These
savings allow CMI to charge more for their pads. These savings should be promoted to contractors to
attract them to switch to CMI cushion pads. Further, launching and marketing all cushion pad sizes
would allow CMI to become a one-stop shop for all contractors and construction requirements and
would help CMI gain more market share as non-standard sizes are frequently used in the market
(Exhibit 5).

Channel Recommendations: I would also recommended that CMI market the new pads through
distributors using a push method. They should also market directly to contractors and engineering
firms by educating them on the efficiency and safety benefits of the new CMI pads (a pull approach).
The safety hazard posed by micarta pads provides another marketing opportunity. The company
should lobby the labor unions to push for higher safety standards and abandon the use of hazardous

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 pads. This avenue may prove to be an effective long-term strategy to force adoption of the new pads
and increase market penetration.

Promotion Recommendations: CMI should focus on B2B branding and ensure that the value
propositions of the product are communicated clearly to all the potential customers and influencers.
CMI should use industry events, trade shows, seminars and conferences to communicate the
advantages of using the curled metal based cushion pads in pile driving. CMI should also think about
using professional magazines targeted towards construction industry to advertise this product.
Although word of mouth is a great tool to promote products organically, the feasibility of word of
mouth recommendations in this industry is limited since trade secrets are not revealed. Instead CMI
should have Professor Stephen McCormack, a well-respected authority in the pile driving academia,
to endorse the operational performance of CMI cushion pads and enhance industry acceptance of
the new product. Professor Stephen has tested the pads and seems enthusiastic about the positive
results. As a scientist he can easily recognize the superior quality of CMI pads and be a fundamental
resource for company’s brand building and promoting. Asking him to show to the community
(writing a paper or with a conference) the properties of the new pads, the company can reach the
main target of its marketing that is the “Soil consultants” and engineers that work on the most
expensive projects. This strategy should enable the company to gain a market share large enough to
generate a substantial profit and simultaneously small enough to keep investment and production
costs low. Also make a partnership with Prometheus Iron Works, asking them to use the pads on
their top level product can be a good marketing strategy.
For the long term, considering the product life cycle, CMI can focus its effort in cost reduction to
allow a progressively decrease in price. In fact, CMI should be aware that other competitors could
enter into the market as the product is easily imitable. Building a strong brand image of quality with
alternative 2 can bring to a major market penetration when the price will be lowered. For this future
opportunity, marketing has to focus on publication in magazines like “Oklahoma Contractor”,
sponsor seminars like “Piletalk” in various cities to bring designers, contractors and equipment
developers together to discuss practical aspects of installation of driven piles.

4. Discussion of Potentials Drawbacks of Proposed Solution

Alternative 2 (value-add pricing) provides the highest markup but however it would yield low market
penetration. Although the cost could be justified, I believe it would be hard to convince contractors
that the premium price is worth the cost savings based on efficiency. Furthermore, competitors
might take advantage of the high price and penetrate the market with a similar performing product
at a much lower price.
Drawbacks of Cost-Plus pricing: Pricing lower also sets a precedence for future CMI pads line
extensions or changes by creating a standard price at either $2490 or $5334 per set in customer’s
mind. This may hurt future needs to change CMI pads pricing or create obstacles for pricing new
products later on. Additionally, CMI’s breakeven units will be higher by pricing lower. Despite
potentially higher market penetration, CMI will lack branding with its pads and face the task of
educating consumers on a new product which may make hitting breakeven units for CMI more
difficult.

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Hiring a sales force seems to be an unnecessary expense. Since the pads are not considered a high
profile product by the users, the leverage held by current distributors should be enough to drive
sales. In fact, an internal sales force may confuse the purchasing process because contractors may
not be willing to take the time or effort to talk to salesmen for such a small factor in their overall
project. The purchasing decision is as such that if a distributor recommends or supplies a certain
brand of pads, the construction crews are likely to use it without much consideration.