H

909A03

PANELPRO

Dan T. Dunn wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective
or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to
protect confidentiality.

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Copyright © 2009, Northeastern University, College of Business Administration Version: (A) 2010-02-26

In January 2008, James Middleton left his management position at W.R. Grace & Co. (Grace) to devote
full effort to his start-up company, PANELpro Corporation (PANELpro). PANELpro was a Boston-area
company that produced controls for regulating machinery used in a variety of operations, ranging from
chemical processing to metal can manufacture. Subcontracted assembly work kept PANELpro busy, but
this work was not very profitable. Middleton was looking for further opportunities, such as direct sales to
customers as an assembler, designer or consultant. He was considering a marketing research project to
assess alternative business and marketing strategies.

Middleton wanted to use his design engineering, manufacturing and sales experience to start his own
company. “I want to do something that interests me, make some money, travel less, and have more
freedom,” he said. At Grace, a specialty chemicals and materials company, he had managed a 30-person
unit that was responsible for package-sealing technology and had purchased production machinery from
outside suppliers, including local machine shops. Few companies could provide a complete machine-
controls package. Instead, most used other firms to design and build the associated controls. According to
Middleton, this procedure slowed the delivery time and raised the possibility that the panels were either of
unknown quality or were more expensive than necessary. He was unsure whether other buyers were
concerned about these problems, but if they were, the provision of a complete machine-controls package
could be the basis of a new enterprise. The potential market was large: at his Grace unit alone, more than
US$625,000 in annual orders were placed with controls suppliers.

CONTROLS BUSINESS

Middleton had already collected considerable information about the controls business based on his own
corporate experience and data collected from the Internet and online trade directories. Depending upon
how he defined his business, the following entities could be considered potential customers or indeed
potential competitors.

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Control Systems

Entering “panel shop” and MA (i.e. Massachusetts) into an Internet search engine produced only two hits.
Entering controls and MA resulted in more than 1,450 hits, mostly pertaining to Microsoft or Macintosh
control panels. As an alternative, Middleton used an online Yellow Pages source,1 and for a Greater Boston
search, the Yellow Pages contained 42 company names under “controls, control systems and regulators.”
He consulted other Massachusetts city Yellow Pages and found another 93 companies. Except for Johnson
Controls, a multibillion-dollar firm, all the names appeared to be local firms. From his work at Grace, he
recognized 11 firms he thought might be competitors of PANELpro. Some firms were fully integrated and
involved in design, assembly and parts distribution functions, but most had only one or two functions (see
Exhibit 1 for Middleton’s knowledge of the 11 firms). He knew that four firms had sales of almost
$3,500,000. He also knew basic information about their operations, key people and financial strength.
Although these firms were potential competitors, they could become overloaded with orders and might turn
to PANELpro as a subcontractor.

Control systems firms provided controls based either on their own design or on designs provided by
customers or parts manufacturers. The firms Middleton was most familiar with relied on previous customer
relations and word of mouth to secure sales. They also used catalogs, Yellow Pages directories and online
directories to find potential customers. Middleton could not recall any other forms of marketing promotion
used by these companies.

Parts Distribution

Middleton collected additional data on electrical and electronic parts distributors using Internet searches,
including Yellow Pages and the ThomasNet2 database of distributors and manufacturers, which had logged
more than 67 million product and service searches during 2007. He eventually compiled a list of more than
100 small- and medium-sized northeastern distributors for General Electric, Westinghouse and a host of
other manufacturers. Some parts were sold to panel shops, contractors and resellers, whereas other parts
went to original equipment manufacturers (OEMs), such as Grace. Parts carried a list price established by
the manufacturer. Distributors received a 49 per cent discount, panel shops and contractors received a 41
per cent discount and end customers paid the list price.

Most distributors also assembled parts into finished control panels. The motivation was to support parts
sales to customers who needed assembly. Assembly was much less important than parts sales, both in
revenue and profit, and accounted for less than 15 per cent of most sales, according to Middleton. Because
few control systems firms were design specialists, the end product was not always the most efficient. For
example, Middleton had priced out a panel built by a Grace supplier. By substituting completely adequate
but less expensive components, he had estimated that components’ cost could be lowered by 20 per cent.

Panel Design and Consulting

Middleton fervently believed that design work done by many distributors and assemblers ranged from very
good to amateurish. Few firms employed accredited engineers, and much of the work was based on
experience with similar designs or was drawn from information supplied by manufacturers. Customers,
both experienced and inexperienced in design, sometimes supplied drawings. Perhaps less recognized, but

1
Verizon Yellow Pages Superpages, accessed May 12, 2008, from www.superpages.
2
ThomasNet, accessed May 12, 2008, from www.thomasnet.com.

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important in Middleton’s view, was that many control systems were not designed with factory operators in
mind. Better placement of buttons and displays could make controls easier to use and speed up operations.
“Maybe I can build a business around ergonomics,” Middleton thought.

Many engineering firms, from freelance consultants to firms with 100-plus professionals, could provide
design work. The Greater Boston Yellow Pages listed 45 companies as electrical or electronic engineers.
Most company names (e.g. MEA Engineering) said little about their underlying business operation.

Middleton’s résumé also qualified him to work as an industry consultant. Consultants often trained workers
after a large firm installed new controls on a production line. Up to several hundred operators could require
training. Trainers could earn $1,000 to $2,000 per day. Because Middleton had two electrical engineering
degrees from the Massachusetts Institute of Technology, an MBA from Northeastern University and 15
years of industry experience, he felt he was exceptionally qualified to be a consultant in the control systems
business.

Because large companies had their own design engineers, control systems could represent a make-or-buy
decision. However, Middleton was not sure that many firms were analytical about the economic and
quality trade-offs involved. He was concerned about the NIH (not invented here) factor that suggested
engineers may not want to outsource design. He noted, “Engineers like their own in-house designs and
unless they’re swamped with work or the project is clearly beyond their field of expertise, they will choose
the in-house route.”

Pricing of design services varied. Distributors working off someone else’s drawing did not charge for
design when assembling panels. Engineering firms charged professional hourly rates. Panel shops
traditionally priced delivered panels with no breakdown by design, assembly or parts.

Machine Shops

Machine shops were independent companies that manufactured production equipment or components. The
Greater Boston Yellow Pages listed 115 machine shops. For example, one Web page advertised: “We can
design and build a machine to assemble most anything that you assemble by hand.” Among its dozens of
products were the “world’s fastest” pencil-painting machine, which painted at a rate of 2,400 pencils per
minute; another machine that could produce 400 medical needles per minute; and a propane valve machine
to assemble tank valves for gas grills. All of these machines required process controls. Middleton
recognized the names of 31 machine shops in the Yellow Pages from his corporate experience; six, in fact,
had been his suppliers. Of the 84 others, he gave up trying to guess what they made and whether they
might require the services of PANELpro. “Some shops have to turn down attractive OEM contracts
because they lack necessary controls capability,” he said.

Mechanical Contractors

When Middleton revisited the Internet search results, he discovered that more than 300 northeastern
mechanical contractors designed, assembled and fabricated parts, finished items and installations. Such
contractors usually outsourced control systems work to electrical contractors or panel shops and thus were
potential PANELpro customers.

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Electrical Contractors

A Greater Boston search also found more than 375 electrical contractors, which ranged from residential
electricians to large commercial companies with broad lines of products and services. An unknown number
designed and assembled control panels.

Large and Small End-Users

Manufacturing companies used process controls ranging from simple start–stop devices to complex
systems that involve programmable controllers. Middleton viewed the chemical business as a promising
target because of its extensive use of controls. “Electrical engineers are in short supply at chemical
companies,” he said. At least 25 large chemical plants were situated in the northeast, as were an unknown
number of other process-oriented industries, such as food, beverage, petroleum, pulp and paper, and textile
plants. In addition, some smaller family-owned businesses invested substantially in controls. Middleton
speculated that in the New England area, which was known for its bouts of bad weather, car washes could
be a perfect opportunity for PANELpro:

The day or two after bad weather can be extremely profitable for car washes if they are
highly automated, fast operations. The fact they are a cash business greatly increases the
need for controls. I can design a product that can count the numbers of cars that go
through, and what level of service they got and match that against cash register receipts.

As far as Middleton could tell, no controls supplier had previously offered such a device.

The Greater Boston Yellow Pages listed three companies under “Auto Washing and Polishing Equipment
and Supplies,” in addition to hundreds of retail car washes.

After reviewing the results of his search, Middleton thought his information about the seven groups was
broadly correct but had no further sales breakdowns or information on buying motives per group. He
wondered whether such information was critical or perhaps just nice to have.

GROWING A START-UP

Middleton had started PANELpro in his basement, and he employed several assembly workers on an
hourly basis. Truck and tool expenses were $675 per month, and part-time office help cost $725 per month.
He had capacity to produce $1,500,000 in orders per year.

In the first three months of operation, PANELpro had delivered $70,000 in orders and was working on a
$65,000 order, a $9,500 order and two small orders. The $65,000 job had come from Trico, a machine
shop filling a Grace order. Middleton knew the owner, who had subcontracted to PANELpro the assembly
of four packaging-machine control panels. The $9,500 order came from a machine shop that Middleton
had cold-called. The two small orders (worth less than $1,000) had come from an electrical contractor who
was a friend. A possibility existed that Trico might give PANELpro a second order but Trico wanted the
second order at 3 per cent below the price of the first order. The first order, according to Middleton, had
been priced “at the market” and had generated a gross margin of 43 per cent as follows:

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 Page 5 9B09A003

Sales $65,000
Cost goods sold:
Parts 30,550
Labor at $35/hour 6,500
Total 37,050
Gross Margin $27,950

For the future, Middleton knew he would need to expand his customer base, which would possibly change
the basic concept of PANELpro. More importantly, he would need to concentrate on finding new
customers. Because his personal contacts had been exhausted, PANELpro would need to seek business
from people who knew neither him nor his new company.

For customer groups, he could initially focus on one or more of the seven groups he had considered. How
to turn them into actual buyers was unresolved. Should PANELpro promote quality, ergonomics, low
price, design, parts, consulting or some combination of these offerings? Or maybe the company should
remain an assembly subcontractor and leave marketing to others.

MARKETING RESEARCH ALTERNATIVES

Middleton was considering marketing research as a method to narrow his growth options. He contacted an
independent marketing consultant to do some research. In response, the consultant proposed a project, and
excerpts from this proposal follow.

Consultant’s Project

This proposal reflects what you told me was your most serious concern — lack of detailed
information concerning the market, various segments and competitors, and how and why
controls are bought in different segments.

I propose a project that will begin with secondary research. University libraries with
excellent business directories and databases contain a wealth of information, and I can
research various potential customer groups over several days at $1000 per day. I believe I
can also develop more information on the eleven firms we discussed [see Exhibit 1]. I can
obtain information about all but the smallest competitors from a financial rating service
that I have access to at no cost to you other than my time.

To develop and pre-test a survey would take several days at $1000 per day. To implement
the survey using personal interviews, which I recommend, would cost $90 per interview.
If we use the phone, it would be $50 per hour for those conducting the survey. We could
also consider mail, email or web-based approaches.

The purpose of the customer survey would be to probe buying habits and buying potential
of various customer groups and their perception of suppliers. Is quality key, human
engineering, a machine-control package from one supplier, or what? If you decide to
initiate the project with me, we will sit down for a half-day and generate a series of
research questions.

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 Page 6 9B09A003

The total cost will be largely dependent upon how many respondents in each possible
target market you want to research. You mentioned researching 25 customers. I would
recommend 25 per industry, and I think we should research at least three industries or
potential customer groups.

Middleton’s first reaction to the proposal:

The per diem and hourly rates are high; I am not sure if I can afford a broad research
project since my research budget is only $20,000. I would have to narrow the project
substantially before hiring an expensive consultant. But do I have the time to do that?

MBA Course Project

After recovering from the sticker shock from the consultant’s proposal, Middleton remembered that during
his MBA program, a professor had divided the class into teams that each conducted a research project with
the cooperation of a firm. He called the professor and asked whether he was looking for a subject
company. The professor said yes, and introduced him to a team of students. In a preliminary meeting, the
students proposed to Middleton the following project with a $500 out-of-pocket cost:

Telephone Survey: Sample of 25 Potential Customers

Using a list of companies provided by Middleton, the team proposed to telephone either the company’s
purchasing manager or design engineer responsible for controls. The list of companies would be drawn
from process manufacturing companies only. The following NAICS (North American Industry
3
Classification System) groups were considered to be prime candidates for PANELpro: Food
Manufacturing NAICS code 311, Textiles codes 313 and 314, Paper Manufacturing 321, Chemical
Manufacturing 325, Plastics and Rubber Products Manufacturing 326, Computer and Electronic Product
Manufacturing 334 and Machinery Manufacturing 333. Each code had numerous subgroupings. For
example, the Food code comprised 70 subgroupings, ranging from Dog and Cat Food 311111 to Cookie
and Cracker 311821.

The team proposed a survey comprising open-ended questions followed by closed-ended questions. Open-
ended questions would not limit the respondent to a set of answers but instead would generate more
conversational replies. Closed-end questions required the respondent to choose among several answers.
According to the students, open-ended questions could be used for “in-depth probing of customer needs
and wants, in addition to their perception of competition.” The team faxed a copy of the general questions
they proposed to ask (see Exhibit 2), but did not provide specific survey questions for Middleton to review
and suggest revisions to.

Secondary Research

Some students at the meeting seemed eager to use the Internet to collect additional information. Others
wanted to gather statistics on industrial growth and capital expenditures for Massachusetts and northeast
industries because they viewed the numbers as prime indicators of PANELpro’s prospects. Another student
3
U.S. Census Bureau, “North American Industry Classification System,” accessed February 9, 2009, from
http://www.census.gov/eos/www/naics/.

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 Page 7 9B09A003

volunteered to collect basic demographic and economic information on the major manufacturing cities in
Massachusetts. Finally, one student wanted to visit the state house saying, “States collect all kinds of
information on companies for tax and legal purposes. I may be able to describe your competitors’ financial
situation better.”

Final Course Project Report

The team expected the final report, including exhibits and data collected, to be very comprehensive, as
required by their professor. At perhaps 100 pages, the project report would include recommendations about
PANELpro’s basic business model, target customers and its marketing–selling strategy.

Concerning a possible PANELpro project, the professor suggested the report cover standard areas:

What should be the marketing research objectives for PANELpro?

What is the cost versus value of the information that might be collected?
What are the research design alternatives? What data should be gathered?

The professor also suggested the report cover topics specific to the PANELpro start-up:

What are the economics of the PANELpro business?

What is the best business model for this start-up: subcontractor, designer, assembler, distributor or
consultant? Can market research assist in assessing the alternative models?

DECISION

Within the northeastern control systems industry, Middleton knew of no company that had conducted
formal market research. Should he conduct further research himself, use the consultant or the student team?
As part of this consideration, what were reasonable output expectations of each approach?

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Exhibit 1

PANELPRO

List of Possible Competitors or Customers

Company Panel Panel Parts

Name* Designer Assembler Distributor Other Known Information
Beltway Control Inc. X Close ties to Componapart. Uses
Componapart almost exclusively for
Beltway customers who need panels

Control Design X X X Has excellent engineering

capabilities, but fortunately for
PANELpro does not use them well

Rustin and Co. X X ? Heard they build panels

Electro Controls X X The owner was formerly an electrician,

turned panel builder

Commercial Controls ?

Systems Service and ?

Controls, Inc.

Micro Controls X X ?

Componapart X X Close ties to Beltway Control

Uses Beltway as a parts supplier and major
source of its design and assembly business

Wyatt Company X X PANELpro buys parts from with Wyatt,

with whom it also competes, in terms of
assembly operations

Industrionics ? ? Heard they build panels

Mekontrol ? ? Heard they build panels

*Company names have been disguised

Source: Company records

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 Page 9 9B09A003

Exhibit 2

PANELPRO

Proposed Question Areas in Student Team Survey

1. Name of firm, address, phone number, NAICS/SIC code

2. Purchasing manager or design engineer name

3. Products manufactured

4. Use of process controls in manufacturing

5. Controls presently used

6. Use of outside sources to design and/or assemble panels

7. Rate the following on importance when buying from outside:

Price, Quality of system, Ergonomics/human engineering, Sales representative, Amount of time
supplier has been in business, Supplier reputation

8. When process controls are needed does potential customer: Design it and assemble it themselves,
Design it and have an outside source assemble it, Have an outside source design it and assemble it in-
house, Let outside source handle everything

9. When an outside source is involved, the buying process is: Competitive bidding process, Referral,
Outside source handles everything

10. From planning to completion, how long does a typical process controls project take

11. Use of an outside controls source presently, and if so whom

12. Should sales rep from outside concern be highly trained in electronics, e.g., have a degree in the field

13. Company classification questions collected in survey:

Sales, Number of factory workers, Number of design engineers, How much spent on process
controls in past two years, How much spend in next two years

Source: Company records

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