DECISION

Kandarp Pande
REPORT ON Himanshi Kathuria

TECHNOTRONICS
1979

Memorandum
Date: 1 August, 1979
WAC Report on Technotronics, Inc.

To: Vice President, Specialty Appliance Department.

From: Ms Ilene Carter, Section Manager, Audio Products Section

Subject: Analysis of X-27's commercial operations prospects

The report provides a detailed analysis and evaluation of the available options for the
commercial operations of X-27. It includes the recommendations for the next course of action
for the commercialisation of X-27.

Thank you

Content Page

Executive Summary 4

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WAC Report on Technotronics, Inc.

Situation Analysis 5

Problem Statement 6

The Options 6

Criteria for Evaluation 6

Evaluation of Options 6

Recommendation 7

Action Plans 7

Exhibits 8

Executive Summary
The Audio Products Section (APS) of Technotronics has developed a superior quality magnet X-
27, improving the overall quality and market position of the company's products having
magnetic components. The Magnetic Material Section (MMS) is responsible for selling magnetic
materials outside the company. Handing over the commercialisation of X-27 to MMS
immediately will take away market leadership opportunity for other Technotronics products
but can give huge profits if being sold directly in the market. After a detailed analysis of each
option, the recommendation is to let APS sell X-27 within the company for 18 months. Later,

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APS can license the manufacturing process and earn the royalty. This option will give time to
redesign products for X-27 and create a competitive advantage after its market
commercialisation.

Situation Analysis
Technotronics Inc. has been successful in the last ten years with increasing production and sales across
46 states with various electrical and allied products. The decentralisation policy has been in effect for
the previous five years, which has shifted the responsibilities and decisions closer to the operations. It
has also created healthy competition among divisions by making them separate cost centres.

The Audio Products Section (APS) comes under Commercial Products Division, contributing 2.4% to the
entire company sales. Its product profile comprises audio devices and can sell these devices outside the
company.

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Magnets play an essential role in the quality of Technotronics' products and are a major component for
75% of Audio products having a cost of 3.1% to the total sales. Therefore, the company's Advanced
Development Laboratory (ADL) offered APS to do developmental research on a new magnetic material.
APS saw this opportunity and invested $1.2 million over five years to develop a commercial magnetic
material called "X-27" and received the patent for the manufacturing process.

X-27's strength and stability are greater than traditional magnets, which will benefit 20% to 30% of
Technotronic's products. It will give a competitive advantage to the respective sections in the market if
X-27 is manufactured and sold within the company. X-27's low manufacturing cost and superior physical
properties will also allow the Magnetic Materials Section (MMS) to sell the material at the same price
with higher demand and a higher margin. But the manufacturing process in MMS would have to be
changed to produce X27. Overall, replacing traditional magnets in Technotronics products with X-27 will
be profitable for the company.

There is a huge opportunity of gaining product leadership for APS, and other sections since X-27's
properties also make new products commercially feasible. But it is only possible if X-27 is kept off the
market for a certain period. A period of 18 months will also give a head start to most sections that can
adopt X-27 into their production. Having the experience, APS can start manufacturing X-27 quickly, but it
cannot sell outside of the company due to the company's Specific Product Responsibility Policy.
Therefore, the company must transfer X-27's manufacturing techniques to MMS for large-scale
operations in the long run.

The development cost taken by APS is a liability on its accounts due to the decentralisation policy. The
company should clear the same to maintain the entrepreneurship culture and incentivise the risk taken
for innovation. The risk taken here is justified because there is a massive impact on the demand of the
Audio products of the quality by the magnetic material.

Since APS is the patented owner of X-27, it can solely manufacture X-27 for its Audio products and other
company sections. It can also earn royalty from the licenses of the manufacturing process of X-27. MMS
has offered to sell the licenses through their department and reimburse the development cost. But they
have raised concerns over the leadership in the magnetic materials market. According to the Section
Manager of MMS, selling X-27 now will give MMS a competitive advantage, and the profits will be
enough to cover the development costs of X-27.

Problem Statement
To determine the best commercial exploitation strategy of X-27 for Technotronics under the
decentralisation policy.

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The Options
Commercialisation of X-27
1. APS manufactures and sells X-27 for five years within the company.
2. APS manufactures and sells X-27 for 1.5 years within the company.
3. MMS is handed the commercialisation of X-27.

Criteria for Evaluation

The primary criteria for evaluation are the company's profit through the commercialisation of X-27, cost-
efficiency of manufacturing and potential risks in the available options. Incentivising APS for taking the
risk and developing X-27 should also be considered.

Evaluation of Options
The first option is to allow APS to manufacture X-27 and sell it within the company for five years. The
second option is to reduce that period to 1.5 years and then give the commercialisation operations to
MMS. The third option is to start the commercialisation of X-27 immediately. The above options need to
be evaluated based on its profits, opportunity cost, and risks.

In the first option, the company will restrict sales of X-27 only within the operations sections for that
period to give the opportunity of product leadership in their markets. This leadership will give significant
profits since magnetic products have the largest share in the company (Exhibit 1). However, this long-
duration would attract market pressure to sell or license the manufacturing process of X-27. There is a
considerable risk of X-27 becoming obsolete in the market and adoption failure by the products within
the company.

According to the second option, APS will continue the operations for only 1.5 years, which is a proposed
adoption period for X-27 by other operation sections. The shorter time restriction of X-27 from the
market will still allow MMS to sell X-27 with lower cost and higher demand because it has the highest
proportion of magnet cost. (Exhibit 2) The risk of adoption failure by the products is lower than the first
option.

With the third option, the commercialisation of X-27 will be handed over to MMS, which will start
making profits in the least time. The gross margins and return on sales will be higher than that of Audio
products. (Exhibit 3). However, this will take away the product leadership advantages of Audio and
other section products. There will be a loss of profit opportunity from the increased sales of superior
Technotronics products using X-27 (Exhibit 2,4). There is also a risk when redesigning the manufacturing
process for X-27 in MMS due to high fixed costs amounting to $ 13.8 million (Exhibit 3).

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Recommendation
The recommendation is to let APS manufacture and sell X-27 within the company for a period of 1.5
years. It will give the manufacturing experience to APS and competitive advantage to Technotronics
products having magnets as key components.

Action Plans
APS should take over the commercial operations of X-27 and share the composition of X-27 within the
company for its early adoption. It should ramp up its manufacturing plants to produce X-27 for other
sections of the company. After 1.5 years of X-27 sales within the company, APS should license its
manufacturing process and share the techniques with MMS to commercialise X-27 for the larger market.
It should then sell the licenses and earn royalties from indefinite demand.

Exhibits
Exhibit 1

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All Audio Products sold($ 50 million) have magnetic components.

MMS sells magnets directly to the market.($ 40 million)
30% of Products Sold ( $ 2,010 million) by Other Sections have magnet components

Exhibit 2

Cost of magnets given in the case

Exhibit 3

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Exhibit 4

Sales data ($2,100 million) given in the case.

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