Mason Instrument IncCase Analysis

BBM, NMP Term III

Group 4Argha Ray - 15 Chakra Dhar Kundu - 22 Khushal Malik - 28 Sanjay Kumar Prasad – 45

Context• Mason is a large Military equipment contractor.

• Has won two competitive bidding rounds for Avionics in Cherokee Missiles.

• Estimated $3 billion in spending lined up by US Navy for next five years on Cherokee Avionics.

• Eldridge is competitor in chief.

• Mason does not have foothold in Guided Missile market.

Naval Command’s Strategy:• Develop second source of supply for Cherokee avionics.

• Reduce cost of procurement.

• Firm Fixed Price policy.

• No progress payments.

• Prove Out Blueprints.

• Collaborative and flexible supplier who can accommodate frequent design changes.

Mason’s Response:• No profit margin in initial bid.

• Value Engineering to reduce cost.

• Division of tooling cost between government and the company.

• Competitive sourcing by Purchasing agents.

• Lowered overhead rates.

• Relationship building with contracting officer.

• However, facing problems in assembling and testing of product. Costs spiraling out of control due to inadequate Blueprint and inferior Seeker supply.

• New Naval contracting officer may not be favorable.

Eldridge’s Existential Crisis:• Weak financial position.

• Ramp down of Cherokee project.

• Personnel in Cherokee project have joined Mason.

• Non cooperation in Blueprinting shows that they are afraid and gradually losing ground.

• New project manager with authority to set prices.

• Difficult to sustain the Cherokee project.

• Pricing of only $450 above Mason in 67% of 2nd round contract and 25% higher above Mason in 33% of contract shows desperation to get 67% of contract.

• Don’t have much leeway to reduce price below $1.35 lakh. Pricing in 67% of 2nd round contract shows the maximum price hit they can take.

Yardsticks:• Eldridge may go out of Cherokee business if it is not able to crack the upcoming bid.

• Difficult for them to price too low as financial position is weak.

• Cherokee project personnel have been dismissed en masse, so it will be difficult to sustain large production quantity.

• Eldridge likely to eye smaller production quantity of around 1000 units with stable profit margins.

• Mason has to cut teeth in Cherokee to get future Guided Missile business.

• Eldridge has production experience of 1000 units and new order of another 1000 only.

• Mason has delivered 50 units till now and has new orders of 2000 units. Mason expected to be larger player in short span of time.

• Initial training and familiarization investment has already been done and gradually cost will come down for Mason as it gains experience in making the 2000 units it has now won.

• Mason has estimated $1.4 lakh/unit for 2000 units and should be able to cut corners for next 3000.

Pricing Formula:

• Bid prices computed using winning formula of 2nd round bidding.• Dominant strategy is to price low.• Profit should be secondary consideration to Market penetration.• Eldridge’s price in 33% of 2nd round 150059*1.25=187570 (approx. 1.8 in

Game Table) and little above Mason in 67% of contract (approx. 1.36 in Game Table)

Units 2.5% incremental decrease in unit cost$250 177132500 172811750 168597

1000 1644841250 1604731500 1565591750 1527402000 1490152250 1453802500 1418342750 1383753000 135000

Price in 100KMason's Options 1.8 1.36

1.6 Wins Loses1.35 Wins Wins

Eldrige's Options

Decision:• Price at $1.35 lakh to get entire 3000 unit contract.

• Concentrate on value engineering to reduce cost.

• Bulk of training cost has already been incurred so it is going to come down gradually.

• Offer to redraw Blueprints such that Naval Command do not remain captive customer of Eldridge in future.

• Concentrate on Market Penetration than on margin as window of opportunity against a jittery Eldridge is mouth watering.