Harper Chemical Company Inc.

, a medium sized manufacturer of industrial chemicals served a customer base mainly in the paper industries. In 1979, to diversify risk and reduce its dependence on the paper industry, Harper Chemical decided to increase its product line by venturing into the production of a mineral called Dominite . Dominite s primary uses were as a replacement of talc in the ceramic tile manufacturing and as an extender pigment in the paint industry. Dominite had superior product features over talc and provided substantial cost savings to the ceramic tile manufacturers. Use of Dominite in paints produced superior quality paint over existing product. The company s estimated demand for Dominite was approximately 55,000 tons by the end of year 1983. However, company s optimism in the estimated sales and profits was soon misplaced when the realized demand for Dominite reached mere 8,700 tons. Given Harper s considerable sunk costs in R&D, PPE, leases and sales force, the firm management must decide whether or not to persist in its efforts to increase sales volume, target new customers and move ahead, or to divest the entire Dominite operation. In order to move forward, Harper s management team needs to evaluate its current strategy to analyze if it can raise the required revenues to sustain the operations. If not, then it should divest the Dominite business. Harper faces multiple issues as described below: 1. The projected sales estimates were highly optimistic. Target markets were developed based on the firm s expectations rather than actual market research. 2. Harper Chemicals was trying to address issues at multiple fronts in terms of R&D without focusing on customer needs. 3. The company s core sales competencies were primarily within the paper industry; Dominite was new territory both in terms of industry and product. 4. There was a lack of analysis as to the value proposition of Dominite to Harper customers. There were considerable upfront costs for the tile manufactures to
0

switch from talc to Dominite, and in case of the paint industry the larger beneficiaries were the end consumers and not the paint companies. Harper failed to segment the market for Dominite according to its value to customers. Based on the product attributes of Dominite, the applications of Dominite within the tile and paint industries, and the growth potential in each, we recommend that Harper should only target the tile industry, specifically small sized wall-tile manufacturers. A detailed analysis of each of these markets is as follows: Segmenting the Dominite Market: Ceramics The cost-benefit analysis presented in Table 1 (Appendix 1) demonstrates that using Dominite in ceramic tiles creates huge cost savings for tile manufacturers. To a large tile manufacturer, Dominite can create savings of $1.5 M per year. However, incorporating Dominate requires heavy up-front capital investment and renders their current manufacturing processes obsolete. In targeting the ceramic market, Harper management assumed that one of the top four tile manufacturers would quickly adopt Dominite simply based on Dominite s benefits, an assumption that underestimates the switching costs of purchasing new dies. Further Harper being sole supplier of Dominite deterred large manufacturers from switching to Dominite who wanted to avoid dependency on a single supplier. In addition, Using Dominite had little effect on these manufacturers market share. Overall, all these factors create very little incentive for these tile manufacturers to switch from talc to Dominite in their tiles. An example of this can be seen in Appendix 2 of the case. Sales calls to the Dover Tile Company started in 1982, but even at the end of 1986 Dover remained noncommittal about buying Dominite in their tiles. Using the funnel technique to segment the ceramics market, we recommend Harper to focus on wall tiles, the area in which Dominite has a foothold and which constitutes 70-80% of the ceramics market. Of the wall tile manufacturers, Dominite will be a more attractive talc substitute for small tile manufacturing companies entering the
1

market, similar to Lancaster Artware Company. These companies represent 33% of the wall tile market. These companies that have yet to make any large capital investments in their dies will be able to plan for Dominite in their production processes at an early stage . They can purchase dies suited to be used with Dominite--avoiding high switching costs. If Harper Chemical is able to gain market share within small tile manufacturers, it should be able to build a strong base from which to grow a base that would be comparable to their revenue stream if they had gone after large tile manufacturers.

Strategy: Paint Market A cost benefit analysis presented in Table 2 (Appendix 1) shows that adopting Dominite in paints provides little incentive to paint manufacturers. Harper estimated that using dominate in paints will save paint manufacturers 12-18 cents per gallon but in actual test runs at The Saunders Paint Company, a cost saving of only 3 cents per gallon was realized. In addition, Dominite increased the mixing time substantially. The grinding time increased from 45 min to 2 hours, and some batches required grinding three times. Therefore, the overall labor cost due to increased grinding time negated any effects of cost savings. While Dominite provided little incentive for paint companies to adopt it in their production processes, it has substantial benefit to end users who would benefit most from high-quality paint at low cost. Therefore they will be more receptive to the Dominite based paint products. It can target end users in two ways: (1) Harper could enter the paint market in a business to consumer role so that it could control all aspects of quality and create in niche market in end user segment or (2) Alternatively, Harper could consider a pull strategy in the paint market by direct advertising to end consumers creating awareness regarding Dominite-strengthened paints. If there is enough demand for these paints, manufacturers will be forced to produce and sell them. However, end user market, although extremely attractive would be a risky strategy for Harper Chemical to pursue. First, it will require substantial amount of investment and marketing efforts. Secondly, Business to consumer marketing is not one of Harper Chemical s core competencies. Therefore, we recommend that Harper should hold off on pursuing the paint market as of right now.