Federated Industry Case Study

1. Why have price levels deteriorated so badly in this industry?

o 85% of the customers belong to the price sensitive segment, which does not really care about the quality. To bag more customers new players bid absurdly low prices.

o The big heavy-equipment market frequently sees price cut. This drags onto the capacitor market as well

o Size of orders: From the case it appears that capacitor orders are made in bulk (banks of 12K, 20K etc), usually in the form of tenders so the incentive to have lower margin increases

2. Could price erosion have been avoided? Can the situation be reversed?

Had there been some minimum price set by a regulatory authority, most of the players would price their products marginally above the minimum price (assuming the minimum price is > than the cost price). Then things like product quality, warranty policies etc will decide the sales. These will provide differences in the products offered by different companies, thus preventing price erosion.

In case of FI if their sales force spends time highlighting the high quality of equipment it offers + the potential time saved by less frequent capacitor change, they may find a segment interested in FI’s capacitors.

3. What has Federated performance been throughout the period covered in the case?

In most of the years the performance has not been good (drop in market share, losses). A significant bit of the poor performance is because of its policies. For e.g, publicly announcing a strategy to bid for tenders at a price equal to the book price, made no sense at all.

4. What is your evaluation of Federated pricing policies?

o Ad hoc ( - Mar ’80)

o No real policy guidelines during the market period. There was a book price formulated but this was useless since due to low industry capacity utilization and price cutting

o Strict book pricing

o Since most of the revenue was through...