Computron, Inc. (2006)
In July 2006, Thomas Zimmermann, manager of the European Sales Division of Computron, was trying to decide what price to submit on his bid to sell a Computron 1000X digital computer to K?nig & Cie., AG, Germany?s largest chemical company. If Zimmermann followed Computron?s standard pricing policy of adding a 331/3% markup to factory costs and then including transportation costs and import duty, his bid would amount to $1,244,800; he feared, however that this would not be low enough to win the contract for Computron.
K?nig had invited four other computer manufacturers to submit bids for the contract. A reliable trade source in Zimmermann?s opinion indicated that at least one of these competitors was planning to name a price in the neighborhood of $872,000. This would make Computron?s normal price of $1,244,800 higher by $372,800, or approximately 43%. In conversations he had had with K?nig?s vice president in charge of purchasing, Zimmermann was led to believe that Computron would have a chance of winning the contract only if its bid was no more than 20% higher than the lowest bid.
Since K?nig was Computron?s most important German customer, Zimmermann was particularly concerned over this contract and was wondering what strategy to employ in pricing his bid.
Background on Computron and Its Products
Computron was an American firm that had, in the winter of 2002, opened a European sales office in Paris with Thomas Zimmermann as its manager. The company?s main product, both in the United States and Europe, was the 1000X computer, a medium-sized digital computer designed specifically for process control applications.
From 2002 to 2005, the market for digital process control computers kept growing rapidly. These computers were substantially different from those used for data processing and engineering calculation. They were generally produced by specialized companies, not by the manufacturers of office and/or calculation-oriented digital computers. These companies also were different from those that produced analog process control computers (the units traditionally used for process control).
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Professor John A. Quelch prepared this revised case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. This revision updates Professor Benson Shapiro?s 1979 revision, ?Computron, Inc., 1978.? The original version, entitled ?Computron, Inc.,? was written by Ralph Sorenson for l?Institut pour l?Etude des M?thodes de Direction de l?Entreprise (IMEDE), Lausanne, Switzerland, copyright 1965. The names of all individuals and companies have been disguised.
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9-597-063
REV: AUGUST 30, 2007
597-063 Computron, Inc. (2006)
Digital computers were classed as small, medium, or large, depending on their size, complexity, and cost. Small computers sold in the price range up to $320,000, medium computers from $320,000 to $2.4 million, and large computers from $4 million to $24 million.
The Computron 1000X was designed specifically for process control applications. It was used in chemical and other process industries (oil refining, pulp and paper, food manufacture, and so on) as well as in power plants, particularly those for nuclear power.
In addition to its 1000X computer, Computron manufactured a small line of accessory process control computer equipment. This, however, constituted a relatively insignificant share of the company?s overall sales volume.
During its first six months the European sales office did only about $4,400,000 worth of business. In the 2005-2006 fiscal year, however, sales increased sharply, totaling $20,000,000 for the year.1 Computron?s total worldwide sales that year were roughly $176,000,000. Of the European countries, Germany constituted one of Computron?s most important markets, having contributed $4,800,000, or 24%, of the European sales total in 2005-2006. England and Sweden were also important, having contributed 22% and 18% respectively. The remaining 36% of sales was spread throughout the rest of Europe.
Computron computers sold to European customers were manufactured and assembled in the United States and shipped to Europe for installation. Because of their external manufacture these computers were subject to an import duty, which varied from country to country. The German tariff on computers of the type was 171⁄2% of the U.S.