Katherine Watier
February 19, 2002
Bay City Electronics
The Situation-
Bill Roberts, the founder of Bay City Electronics has developed a new device that remotely controls the electronic closure for any door in the home. The closure was effected by a special ringing of the telephone: for example, the user could have the back door of his house locked at 8:00 PM by calling the house at 8 and waiting for the telephone to ring ten times. Bay City does about $18 million in sales with about 45 full-time employees (plus a seasonal factor staff) and previously had conducted a rather informal financial analysis of new products. This time, however the bank wanted Bill to conduct a more thorough financial analysis. Presented with a form to collect key data and a financial worksheet, Bill attempted to fill out the former and had an old college friend help him fill out the latter.
The Analysis-
The data collection done by Bill seems to be missing some depth that may raise a red flag for the bank. The numbers on his financial worksheet seem a fit fabricated and the fact that he used a friend to develop the numbers without explicitly conducting potential customer surveys. Bill lending institution will be left with a variety of questions concerning where the data is that the various calculations are derived from. The lack of substantial customer survey data is evident early on his financial data form.
The first criticism of his work lies within his explanation of economic conditions –which is extremely brief. His data on the state of the corporation don’t disclose any future economic decisions (or projects of future market fluctuations) that may effect the successful development and rollout of this new project, and there also isn’t an examination of the economic market conditions that may affect the customers purchasing such a security item. For example, if the market is in a recession, this type of item may not be viewed as essential enough for a customer to purchase. Similarly, if Bay City Electronics has other financial plans in the works for other products, the performance of those products may impact the development of this new device due to a shifting of financial and managerial priority.
The market description for this product is also very vague. There is a notation that the market is stable and is growing at a 5% rate, but there is not mention of what market this new device is being placed in. There is also no mention of the trends within this marketplace. Are customers within this market ready for this type of device? Or are security systems heading toward systems that are more protected by individual passwords? A device that locks on unlocks a house primarily based upon the ringing of the telephone without the input of an individual pass code may not be viewed as safe enough for some consumers.
The most glaring lack of data involves the demand for such a product. What is the market niche? As a new innovation, this device poses more of a financial risk than simply a product extension, and therefore the analysis of the competition is more difficult to conduct. However, there may be similar products that are currently being used. The bank is going to question whether this is where Bill came up with his list price for the product (though competitive product comparison) or if this list price is simply based upon the production cost plus the required 40% gross margin after production costs. It is not obvious whether Bill conducted a potential customer survey to gage the maximum price that can be developed for such a product in relation to customer’s willingness to create that sort of a financial investment for this sort of project.
The Suggestions-
Considering that Bay City Electronics has always been rather informal in relation to new product financial analysis, the bank may be skeptical whether this new device was created simply due to innovative creativity or in relation to a market demand. They will be interested in seeing focus group analysis of whether customers find this new feature engaging enough to purchase.
There are various models and tools that Bill can use in developing a more detailed compilation of data and analysis that may assure the bank that this loan is not a risky financial venture. Bill should first engage in some concept testing research with his current base of security devices customers. He should develop a description of the new product and its new attributes and through a survey format collect information about whether the new features are viewed as useful and worth purchasing and what price the customer would be willing to pay for such a device. (Surveying repeat purchases is not applicable due to the nature of the product). Developing this survey in a weighted fashion (with some attributes caring more importance than others) will allow Bill and even greater quality of data to analyzing to determine the market demand for his product.
Bill’s financial analysis of his new product is solely based upon using net present value of the discounted stream of earnings from the product concept) which considers all direct and indirect costs and benefits and this sort of an analysis creates a shaky financial estimate that will most likely raise questions with his lending institutions. In order to consider all the factors (including the market demand) that will impact the development and launch of his new product, he would be much better served if he collected data based upon Analytic Hierarchical Process. This process uses managerial judgment to identify the key criteria that are essential for determining a winning (vs. losing) product, obtain scores for the project based upon those criteria and make a decision based upon his findings. Specifically, it collects weighted responses based upon the following factors:
1)The dollar risk (the potential revenue vs. costs of the product),
2)the marketing fit (the timing, price, logistics, channel, product line, and sales force involved in marketing the product), and
3)the technical fit (the differential advantage, manufacturing timing, design, materials, manufacturing technology involved, and the supply of raw materials needed to develop the product).
This type of analysis will create a full screen of the impact of the product upon the market and will give Bill a fuller set of information and data to show to the bank. Presenting a more complete analysis of the market and the risks involved in debuting a new product will only aid Bill in convincing his financial institution that a loan for the development of such a product is in their best interests and is a sound financial decision.