HARPER CHEMICAL COMPANY 1

The Harper Chemical Company (HCC) was a medium sized producer of industrial chemicals, which sold its products primarily to customers in the paper industries and the paint industries. In 1980, HCC diversified into the production of a mineral called Dominite. By acquiring the Dominite activities, HCC hoped it would yield at least 15% return on investment after taxes. In early 1980, the HCC board of directors authorised the construction of a processing plant having a 40 000 tons capacity at a cost of $4.5 million. As of the end of 1985, the Dominite operation had accumulated a $75 million before-tax loss and the general management of HCC is confronted with the decision to re-launch or to sell the Dominite operation. The product benefits of Dominite Dominite can be used as raw material as a replacement for talc in two major industries: the ceramic (55%) and the paint (35%) industries. Dominite can also be used in a wide variety of products (10%) such as cement, insulating materials, plastic floor tiles and certain types of glass. The ceramic industry Dominite has a potentially large use as a replacement for talc in making ceramic wall tiles. It could be used in proportion from 2% to 70% of the tile body weight depending on the other materials used, the process employed and the type of tile desired. The strength of the tile could be increased and manufacturing breakage reduced by using Dominite instead of talc. In addition, a Dominite tile had minimal moisture expansion, which lessened the tendency for the glaze to crack in use. Tiles containing 20% or more of Dominite had a low coefficient of thermal expansion, which allowed rapid heating and cooling without cracking. Therefore, tiles made with Dominite could be fired in the kiln in less time than talc tiles (1/2-15 hours for Dominite tiles compared to 18-40 hours for talc tiles). Tiles made with Dominite could also be fired at lower kiln operating temperatures than talc tiles (1800 F versus 2100 F). For these reasons tile manufacturers using Dominite could effect fuel economies and could increase the firing capacity of their kiln. Kiln capacity usually determined total capacity in a tile plant, and the cost of the kiln represent up to 25% of the total capital cost of the plant. Firing costs, including fuel, labour and depreciation typically amounted to 25% of the cost of goods sold. The cost of firing a Dominite tile at 1800 for 15 hours was about one third of the cost of firing a talc F tile at 2100 for 40 hours. In 1986, one medium sized tile company, using about four tons F of Dominite per day, reported savings of $300 per day in fuel costs alone after shifting from talc to Dominite. To convert from using talc to Dominite however, tile manufacturers had to replace their dies at a substantial cost to allow for the differences in shrinkage factors for talc and Dominite tiles. In some instances they also had to develop new set of glazes. One large tile manufacturer, using 40 000 tons of Dominite per year, reported that a new set of dies would cost $1,500,000. Smaller tile producers would incur proportionally lower die investment costs.
Adapted from: Corey E.R., (1991), "Industrial Marketing: Cases and Concepts", Prentice-Hall International Editions, pp.133-142.
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The paint industry. Dominite could also be used as an extender pigment or a filler in making paints. The cost of the extender pigment accounted for up to 5% of the total manufacturing cost of the paint. In this application, Dominite competed against talc and calcium carbonate (whiting), a lower-cost material than talc. Dominite could be used as an extender for house paints and as white prime pigment; it has high brightness, and it produce a paint with superior durability. Dominite had lower oil absorption characteristics than talc, which meant that less of the expensive vehicle was needed. For this reason, it was possible to reduce manufacturing costs by 12-18 cents per gallon by using Dominite. Dominite was harder than talc and more abrasive; in some cases it made scratches in mixing equipments, thereby shortening their technical life. The market potential Robert Moore, a chemical sales engineer, and John Moe, a production engineer, received from General Management the assignment to appraise the market potential for Dominite and to investigate production and capital requirements. In March 1980, Moore and Moe reviewed the information collected by the market research and, using their best judgement, concluded that Dominite sales could be 55,000 tons a year by 1983. Talc and whiting sales for 1983 to both the paint and ceramic industries were forecast at 1.1 million tons. They further estimated that 55% of Dominite sales could be for ceramic applications, with 70-85% of that amount being sold to wall tile manufacturers. The paint industry was expected to account for 35% of Dominite sales and the remaining 10% of sales was to come from the use of Dominite in a wide variety of other products. The ceramic industry was rapidly expanding with wall tile manufacturers leading the trend: 4 large tile companies had 33% of the market, 12 medium-sized companies had another 33% and the remaining portion was divided among 30 small companies. The paint industry was dominated by 10 large companies, which had 25% of industry sales. 1,500 smaller companies accounted for the remaining 75%. The paint industry was growing rapidly and its growth had been aided by extensive new product development. The launching strategy A Special Products Department was established to administer the Dominite program. Jim Hoog, who had been in charge of sales for one HCC product line, was made general manager of this department and John Moore was named sales manager. Two special sales people were hired and assigned to work under Moore, one to cover the ceramic industry customers and the other to work in the paint industry. In 1980, Moore also initiated a modest advertising program to promote Dominite through trade journals advertising and appropriate trade shows. When the Special Products Department added a second new product called Superfine to its line in 1982, this product was also assigned to the paint sales people. Anticipating that Superfine would be a very profitable product, the Special Products Department hired four more paint sales people, to bring the total number to five. These five sales people were instructed to spend 75% of their time on Superfine and 25% on Dominite. In promoting Dominite, given the firms greater familiarity with the paint market, selling efforts were mainly concentrated on the largest paint companies. In setting a price schedule, Moore and Moe reasoned that Dominite prices should be equal to talc prices, grade for grade, what is for the most popular grades, $78 per ton.

At these prices levels and at projected sales volume, the Dominite operation would breakeven in a year and a half and would have a 10% pretax profit in the fifth year. Dominite sales engineers were aided in their work with potential customers in the paint and ceramic industries by HCCs research laboratory. In 1984, Hood rented a tile plant owned by Northern Artware, to conduct research on ceramics manufacturing methods. Northern Artware was in weak financial condition. At a cost of $135 000 plus the cost of the time of laboratory technicians, HCC representatives experimented for six months with processing refinements for using Dominite in tiles and in improving Northerns tile quality. The success of this work was evidenced by the fact that, in 1985, Northern Artware was the larger user of Dominite. The problem As of the end of 1985, the Dominite operation had accumulated a $7.5 million before-tax loss. Between 1981 and 1985, annual sales of Dominite grew only to 8,700 tons, falling far short of expectations. While a number of potentially large users had been experimenting for a long time with Dominite, no large ceramic company had used Dominite for tile production, and the big paint companies had not yet used Dominite in any of the best-selling paint lines. In 1986, the major users of Dominite were generally smaller companies, but by far the largest potential market was still with the large manufacturers. Any one of the big four tile companies could have used 30,000-40,000 tons of Dominite a year and a large paint company could use 4,000 tons a year in a single product popular line of paints. It may be noted, however, that some managers, especially ones in large tile companies, had expressed reluctance to use a material for which there was only a single source of supply. In January 1986, Jim Hood general manager of the Special Products Department, received an unsolicited offer to purchase the complete Dominite operation. HCCs management asked Hood to consider the offer and to recommend what action the company should take. Questions 1. Describe the product benefits for the different customer groups. 2. How would you segment this market? 3. Evaluate the attractiveness of the different identified market segments. 4. What market coverage strategy would you recommend to HCC? 5. Is the adopted pricing strategy sound? Should HCC sell the Dominite operation? If not, what do you propose?