SPACEMAX
As part of the Entrepreneurship course in the M.B.A. program at McMaster University, Ashton So, Tony Valaitis and Kirk Sabo had developed a business plan for a new company. Their plan was judged to be the best submitted in the course and they were awarded a $500.00 prize. The next day, over coffee in the cafeteria, the three Hamilton-area students were trying to decide whether they should pocket the prize money or use it to start a new company.
Their Company
The three students named their company “SPACEMAX” as the mission of this business was “to provide inexpensive space saving devices for non-commercial applications.” Initially, SPACEMAX was to produce and market only one product -- a portable, inexpensive and easy-to-install locker shelf (called the “Lockermate Shelf”). The primary market for the product was students in high schools, community colleges and universities. Secondary markets included senior elementary schools and non-educational institutions such as fitness/leisure centres, factories, hospitals and police stations.
For the remainder of 2001, their plan was to penetrate the school market in the Hamilton-Toronto area. They wanted to earn a before tax profit of 35% of sales and maintain a gross margin of 55%. Market coverage was projected to be 3% and sales were calculated to be $70,000 in the first year. All these estimates were best guesses. Actual performance could be quite different.
In future years, they felt they could geographically expand the school market while penetrating the non-school market. They felt that the business could expand by launching one new product each year in the space-saving device field. Further they projected growth in sales dollars of 90% in 2002 and 32% in 2003.
The students felt they had a competitive advantage because of: 1) their knowledge of and closeness to the school environment; 2) their emphasis on personal service; and 3) low overhead costs (SPACEMAX would subcontract the manufacture of shelf components). They recognized that the school market was highly seasonal, with over 80% of sales expected to occur in September and October, thus penetration into the non-school market was essential to smooth sales during the year.
Their Product
The Lockermate Shelf had two components: 1) a single shelf board (12” x 12”); and 2) a pair of wire legs. The shelf board was made of particle board (1/2” thick), finished with a wood
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This case was written by Marvin Ryder. Case material is prepared as a basis for classroom discussion only. Copyright 2003 by Marvin Ryder, Michael G. DeGroote School of Business, McMaster University. This case is not to be reproduced in whole or in part by any means without the express written consent of the author.
veneer on one side while the legs were made of zinc plated wire 0.144” thick. (See Figure 1 for a picture) When inserted in a locker, the Lockermate shelf would stand approximately 12” high. The shelf could be collapsed into a flat unit for ease of packaging and shipping. As well, the shelf would not become a permanent part of the locker so that the purchaser could reuse the shelf in many different situations.
Before arriving at the final design, the team of students tried ten different prototypes in the lockers of Kenneth Taylor Hall. Wire legs were used with various shelf materials in seven of the designs. Thick corrugated cardboard, Coroplast, sheet metal, moulded plastic, hardwood and some combinations were all tested and rejected. Sheet metal and moulded plastic were rejected because they were too expensive. Coroplast and the cardboard were not strong enough. Hardwood had a tendency to warp. The veneer-covered particleboard was sturdy enough to take a stack of textbooks yet cheap enough for production purposes.
Suppliers quoted a cost of $0.80 for the particle board with the holes drilled and $0.50 for the wire legs. After assembly, shrink wrapping and labelling would cost an additional twenty cents. Cardboard boxes for shipping orders of 25 would cost $1.20. Suppliers required cash-on-delivery for all businesses with no previous credit history.
For the first year, the product would be distributed through university and community college bookstores. Distribution to high schools would be obtained through Student Councils which would sell the product as part of a fund-raising drive. As well, student run stores and clubs in high schools could be used as alternative sales outlets. All of these outlets would not require any middlemen. Retail stores (like Zellers, Grand & Toy, WalMart, etc.) would not be approached until 2002 as purchase deadlines for “Back-to-School” merchandise could not be met in 2001.
Market research had indicated that $5.00 appeared to be the upper price limit. To allow mark-ups of 50 to 55%, the planned selling price to the campus bookstores and student councils was to be $3.25. A recommended selling price of $4.95 would allow student councils to make a $1.70 profit per unit.
The promotion plan for community colleges and universities was somewhat different from the approach used for high schools. For the first market, campus bookstores would be contacted to identify the appropriate buyer. That person would be mailed a promotional package which would introduce the product and the company. The mailing would be followed with a personal sales call. If the bookstore agreed to carry the shelf, SPACEMAX would provide a point of purchase display/dump bin unit to stack the shelves. The shelves would be sold on consignment to the bookstore to minimize financial risk. As well, shelves would be delivered to the bookstore in time for the September “rush” when lockers would be issued and bookstore traffic would be the highest.
For high schools, the process began with identifying newly elected student council presidents. A package introducing the product, the company and the fund-raising potential of the shelf would be mailed to that person. If possible, personal contact would be made and a presentation given. If the product was accepted SPACEMAX would again provide a point of purchase display for the shelves. The shelves would again be sold on consignment with free delivery and pickup (if necessary). As well, special record keeping forms would be given to the student council to ease the bookkeeping problems.
Market and Environmental Analysis
There were approximately 1.4 million lockers in the Canadian school market (high schools, community colleges and universities). The largest regional markets were Ontario (40%) and Quebec (24%) and the largest market by school type was represented by the high schools (85%). A breakdown of the locker market by region and type of school is shown in Table 1.
The students determined that a standard locker (72” x 18” x 12”) was widely used in Canadian schools. The dimensions were obtained by measuring lockers in and around the McMaster University Campus. The most prominent weakness of the standard locker was that it offered very limited space and usually had only one shelf located at the top. The lack of shelving space was an even greater problem when two individuals shared the same locker. As far as SPACEMAX could determine, no company manufactured and sold a portable shelf for use in lockers.
To understand the student purchaser of a Lockermate Shelf, surveys were taken of university, college and high school students. The first two groups were surveyed using a face-to-
Table 1 Lockers by Location and School Type
OntarioQuebecRest of Canada Total
High Schools485,000250,000 440,0001,175,000
(41%) (21%) (37%) (100%)
Community Colleges 40,000 70,000 26,000 136,000
(29%) (51%) (19%) (100%)
Universities 25,000 14,000 21,000 60,000
(42%) (23%) (35%) (100%)
Total550,000334,000 487,0001,371,000
(40%) (24%) (36%) (100%)
Note: Market size was calculated by multiplying the number of students by a “locker to student” ratio. The ratios were determined to be 15% for universities, 50% for community colleges and 75% for high schools.
face interview, while the high school students completed a self-administered survey. The surveys were administered during the winter in the first week of February. For this work “student” referred to a student using a locker. A total of 580 usable responses were obtained from the following sources: McMaster University 83; Mohawk College 101; St. Mary’s, Lorne Park, Central, Clarkson and Oakville Secondary Schools 396.
Some of the survey results are presented in Exhibit 1.
Finally, the SPACEMAX team measured the intent to purchase the Locker-mate Shelf at two price points. Students were made aware of the product (through diagrams and a verbal explanation) before being asked about their purchase intentions. Results of this part of the survey are presented in Exhibit 2.
The SPACEMAX Team
The three students who developed the SPACEMAX Business Plan came from different backgrounds. Tony Valaitis was enrolled in the Co-op M.B.A. program at McMaster. His first two work terms were spent with PetroCanada in the Human Resources Department. His third work term would begin on May 1 and as yet no co-op work placement could be found. Tony had graduated with a B.A. in geography from McMaster in 1996 and had spent three years as the Office Manager for a Hamilton firm. While pursuing his B.A., Tony had been a member of the Varsity Basketball team and he hoped to use his last year of eligibility in the fall while completing his M.B.A.
Exhibit 1 Selected Survey Results
Do you share a locker?YesNo
University Students50%50%
Community College Students67%33%
High School Students54%46%
60% of people sharing a locker were women
Do you need one extra locker shelf?YesNo
University Students76%24%
Community College Students73%27%
High School Students46%54%
33% of High School Students wanted two extra locker shelves
Do you use the bottom of your locker to stack books?YesNo
University Students77%23%
Community College Students77%23%
High School Students50%50%
Do you feel your locker is well-organized & well-kept?YesNo
University Students67%33%
Community College Students67%33%
High School Students50%50%
Is having a well-organized locker important to you?YesNo
University Students61%39%
Community College Students65%35%
High School Students53%47%
Are you dissatisfied with your current locker facility?YesNo
University Students14%86%
Community College Students48%52%
High School Students55%45%
Exhibit 2 Purchase Intentions at Two Price Points
If the Lockermate Shelf Definitely Probably Neutral Probably Definitely
sold for $3.00BuyBuy Not Buy Not Buy
University Students48%19% 11%7%15%
College Students49%31% 11%5% 5%
High School Students38%29% 12%7%14%
If the Lockermate Shelf Definitely Probably Neutral Probably Definitely
sold for $5.00BuyBuy Not Buy Not Buy
University Students29%19% 16%15%22%
College Students25%26% 27%13%10%
High School Students11%25% 29%11%24%
Kirk Sabo was enrolled as a full-time M.B.A. student. He came to McMaster after completing a B.B.A. at Wilfrid Laurier University in 2000. His work experience had been limited to summer jobs on the assembly line at the Ford Motor Company plant in Oakville and with pool cleaning companies as Crew Chief. Kirk was a member of the W.L.U. Varsity hockey team but upon being accepted to McMaster he pursued the objective of a career in marketing.
Ashton So was the only married man of the three. His undergraduate degree was a B.A.Sc. in Chemical Engineering which he obtained from the University of Waterloo in 1997. He immediately went to work for PetroCanada working in process engineering to improve the efficiency and energy conservation of the Edmonton and Clarkson refineries. He was also a full-time M.B.A. student.
Their Problem
The $500.00 that the team won for its business plan was intended to be an incentive for it to start a new business. The group could pocket the money but they knew the professor of the course would be disappointed if they did not try to sell the Lockermate Shelf.
On the other hand, the preliminary investment would be much more than $500.00. Being students, banks would probably be wary of giving them a loan. Further, even with all their work on the Business Plan, they were not sure that they wanted to take a risk and begin a new venture with an untried product. There could be problems with the survey and they had yet to do any break-even analysis. They did not know what their fixed costs would be so in any break-even analysis some assumptions would have to be made.
They would need to make a decision soon. The lead time for one production cycle was six weeks. After exams had finished at the end of May, they would not have any shelves in stock until the middle of June. Time was already slipping by if they were to have the Lockermate Shelf in bookstores for the September rush.