Ralph Z. Sorenson, II
Mr. Thomas Zimmermann, manager of the European Sales Division of Computron, Inc., trying to decide what price to submit on his bid to sell a Computron 1000X digital computer to Konig & Cie., A.G., West Germany's largest chemical company. Were Mr. Zimmermann to follow Computron's standard pricing policy of adding a 331/3 percent markup to factory costs and then including transportation costs and import duty, the bid he would submit would amount to $311,200. Mr. Zimmermann was afraid that a bid of this magnitude would not be low enough to win the contract for Computron.
Four other computer manufacturers had been invited by Konig to submit bids for the contract Mr. Zimmermann had received information from what he considered to be a "reliable trade source" which indicated that at least one of these four competitors was planning to name a price somewhere in the neighborhood of $218,000. Computron's normal price of $311,200 would be $93,200, or approximately 43 percent higher than this price. In conversations which he had had with Konig's vice president in charge of purchasing, Mr. Zimmermann had been led to believe that Computron would have a chance of winning the contract only if its bid were no more than 20 percent higher than the bid of the lowest competitor.
Inasmuch as Konig was Computron's most important German customer, Mr. Zimmermann was particularly concerned about this contract and was wondering what strategy to employ in pricing his bid.
Background on Computron and Its Products
Computron, Inc., was
an American firm which had, in the winter of 1998, opened a European sales
In the – late - 1990s, the market for digital process control computers was growing quite rapidly. These computers were substantially different from the computers used for data processing and engineering calculation. They also were generally produced by companies which specialized in digital process control computers, not by the manufacturers of office and/or calculation-oriented digital computers. The companies also were different from those companies which had produced analog process control computers-the traditional units used for process control.
Digital computers were classed as small, medium, or large, depending on their size, complexity, and cost. Small computers sold in the price range up to $80,000; medium computers in the price range $80,000 to $600,000; and large computers in the price range $1 million to $6 million.
The Computron IOOOX had been designed specifically for process control application. It was used in chemical and other process industries (oil refining, pulp and paper, food manufacture, etc.) as well. as in power plants, particularly nuclear power plants.
In addition to its IOOOX computer, Computron manufactured a small line of accessory process control computer equipment. These accessories, however, constituted a relatively insignificant share of the company's overall sales volume.
During the first 6 months after its opening, the European sales office did only
about $1,100,000 worth of business. In the 1999-2000 fiscal year,
however, sales increased sharply, the total for the year being $5 million. Computron's total worldwide sales during that same year
were roughly $44 million. Of the European countries,
Computron computers sold to European customers were
manufactured and assembled in the
Prompted primarily by a desire to reduce this importation duty, Computron was constructing a plant in Frankfurt West
The new plant was to occupy 10,000 square feet and would employ 20 to 30 people in the first year. The initial yearly overhead for this plant was expected to be approximately $300,000. As of July 2000, the European sales office had no contracts on which the new plant could begin work, although it was anticipated that the training of employees and the assembly and installation of a pilot model 100OX computer in the new plant could keep the plant busy for 2 or 3 months after it opened. Mr. Zimmermann was somewhat concerned about the possible risk that the new plant might have to sit idle after these first 2 or 3 months unless Computron could win the present Konig contract
Company Pricing Policy
Computron had always concentrated on being the quality, "blue-chip" company in its segment of the digital computer industry. The company prided itself on manufacturing what it considered to be the best all-around computer of its kind in terms of precision, dependability, flexibility, and ease of operation.
Computron did not try to sell the, 100OX on
the basis of price. The price charged by Computron
was very often higher than that being charged for competing equipment In spite
of this fact the superior quality of Computron's
computers had, to date, enabled the company to compete successfully in both.the
The European price for the 1000X computer was normally figured as follows:
Markup of 33% percent (To Cover profit. Research and development on "cost" allowances, and selling expenses)
transportation and installation costs
Total European price
Prices calculated by the above method tended to vary slightly because of the country-to-country difference in tariffs and the difference in components between specific computers.2 In the case of the present Konig application, Mr. Zimmermann had calculated that the "normal" price for the 100OX computer would be $311, 200. Exhibit 1 shows his calculations.
The 33 1/3 percent markup on cost used by the company was designed to provide a before tax profit margin of 15 percent, a research and development allowance of 10 percent and a selling and administrative expense allowance of 8 percent The stated policy of top management was clearly against cutting this markup in order to obtain sales. Management felt that the practice of cutting prices "not only reduced profits, but also reflected unfavorably on the company's 'quality' image." Mr. Zimmermann knew that Computron's president was especially eager not to cut prices at this particular moment inasmuch as Computron's overall profit before taxes had been only 6 percent of sales in 1999-2000 as compared with 17 percent in 1998-1999. Consequently, the president had stated that he not only wanted to try to maintain the 33 1/3 percent markup on cost; he also was eager to raise it.
In spite of Computron's policy of maintaining prices, Mr. Zimmermann
was aware of a few isolated instances when the markup on cost had been dropped
to the neighborhood of 25 percent in order to obtain important orders in the
'Depending on the specific application in question, the components of the 1000X varied slightly so that each machine was somewhat different from the rest
Factory cost $192,000
33%% markup on cost 64,000
Import duty (15% of
Transportation and Installation 16,800
Total "normal" price 311,200
Konig & Cie.,
A.G., was the largest manufacturer and processor of basic chemicals and
chemical products in
Mr. Zimmermann felt that the primary reason Konig had purchased Computron computer systems in the past was their proven reputation for flexibility, accuracy, and overall high quality. So far, Konig officials seemed well pleased with the performance of their Computron computers.
Looking ahead, Mr. Zimmermann felt that Konig, in contrast to any other single German customer, would continue to represent more potential future business. He estimated that during the next year or two Konig would have a need for another $1 million worth of digital computer equipment.
The computer on which Konig was presently inviting bids was to be used in the training of operators for a new chemical plant The training program was to last approximately 4 to 5 years. At the end of the program the computer would be either scrapped or converted for other uses. The calculations which the computer would be called upon to perform were highly specialized and would require little machine flexablity. In the specifications which had been published along with the invitation to bid, Konig management had stated that in buying this computer Konig was primarily interested in dependability and a reasonable price. Machine flexibility and pinpoint accuracy were listed as being of very minor importance, inasmuch as the machine was to be used primarily for training purposes and not for on-fine process control.
Mr. Zimmermann was primarily concerned with the competition offered by the following companies:
1997-1998 MARKET SHARES FOR
COMPUTERS TO THE WEST
Computron, Inc. 1,200,000 30.0
Elektronische Datenverarbeitungsanlagen, A-G. 500,000 12.5
Digitex, G.m.b.H. 700,000 17.5
Six other companies-(combined) 800,000 20.0
Total 4,000,000 100.0
general-purpose digital computer at a price which was roughly 22 1/2 percent
lower than the price which Computron charged for its
1000X computer. Seventeen and one-half percentage points of this price
differential was attributable to the fact that there was no import duty on the
Ruhr machine, inasmuch as it was manufactured entirely in
A relatively new company which had recently developed a general-purpose computer of a quality comparable to that of the Computron 1000X. Mr. Zimmermann felt that Elektronische Datenverarbeitungsanlagen presented a real long-range threat to Computron's position as the "blue-chip" company in the industry. In order to get a foothold in the industry it had sold its first computer "almost at cost" Since that time, however, it had undersold Computron only by the amount of the import duty to which Computron's computers were subject.
Digitex,G.m.b.H. A subsidiary of an American firm, this company had
complete manufacturing facilities in
Mr. Zimmermann was not overly concerned about the remaining competitors, inasmuch as he did not consider them significant factors in Computron's segment of the computer industry.
The West German Market for
The total estimated West German market for medium-priced digital process control computers of the type manufactured by Computron was presently running at about $4 million per year, Mr. Zimmermann thought that this market could be expected to increase at an annual rate of about 25 percent for the next several years. For 2000-2001 he already had positive knowledge of about $1,300,000 worth of specific new business. This new business was broken down as follows:
Kdnig & Cie., A.G.
Central German Power Commission 440,000
Deutsche Autowerke 160,000
The above business was in addition to the computer which Konig was presently seeking for its new experimental pilot plant None of this already known business was expected to materialize until late spring or early summer.
Deadline for Bids
In the light of the various facts and considerations discussed above, Mr. Zimmermann was wondering what price to bid on the Konig contract. The deadline for the submission of bids to Konig was August 1, 2000. Since this was less than 2 weeks away, he knew he would have to reach a decision sometime during the next few days.