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S w9B08A006SAT & CO.: MARKET ORIENTATIONSatyendra Singh wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality.Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright © 2008, Ivey Management Services Version: (A) 2008-02-25In early 2006, poor management of resources and lack of market orientation hit machine tool manufacturer Sat & Co. and led it to a loss of 50 per cent of sales. The company consisted of two divisions: the lathe division that manufactured the lathe machines, and the computer numerical control (CNC) division that assembled CNC machines. Both divisions were operating at barely half of their capacity and even struggling to achieve that. The lathe division manufactured very basic lathes, whereas the CNC division assembled very technologically advanced machines. Yet both divisions had failed to satisfy their customers’ needs. The chairperson of the board of directors, Sat Cartland, was adamant that both divisions must survive, which meant that he was faced with making some harsh decisions. Directors also thought that recovery could only be achieved through the implementation of a market orientation strategy; i.e., the company must meet the customers’ needs. Following this decision, John McGuire was hired as marketing director to implement the concept of market orientation. McGuire had a master’s degree in new product development and an MBA in marketing and had significant experience in conducting market research as well as developing industrial products. He was a fellow of the Institute of Mechanical Engineers, England, which was the United Kingdom’s qualifying body for mechanical engineers with about 83,000 members worldwide. McGuire was faced with several challenges: first, he must increase the plant utilization and second, develop and/or modify the current range of products/machines to meet the customers’ needs, and thus regain the lost market share. McGuire was required to see Cartland in about six months with his recommendations.THE MACHINE TOOL INDUSTRYOperating a conventional machine tool was a task requiring a high skill level. The operator positioned the work piece, selected the appropriate tools in their correct sequences for each job, and manually operated the handles and levers that controlled the relative position and speed of the tool and work piece to produce parts with the required dimensions and features. The degree of automation of machine tools was as varied as their area of application. One of the major areas of the operation of machine tools was cutting. Innovation in the machine tool design was only limited by the degree of technological development. The automation and flexibility of machines depended on the nature of the components and the quantities to beproduced. For example, single-purpose or special-purpose machines were available to the user, as were universal machines offering a wide range of applications.In the 1940s, it became possible to make machine tools that could carry out a sequence of operations automatically by employing complex arrangements of cams and gears. It was therefore no longer necessary to have one operator at each machine. The operator’s job was reduced to loading the work piece, switching on the machine, removing the finished part, and replacing dull tools. Removing dull tools and resetting the machine to carry different sequences of operations was a demanding and time-consuming job. Although these machines could be altered to carry out a wide range of different functions, the long set-up times and high costs of new hardware programs meant that they were only effective with comparatively long production runs or with job order applications where each job required different configurations of tools.In the 1950s, the computerization of machine tools took place. To make the task of setting and resetting the machine tools easier and quicker, the automatic mechanical controls were replaced with electronic logic circuits. Beside the machine tool stood a plug board (like a telephonist’s switchboard) into which the operator plugged the required sequence of operations. This was the first version and it was called a numeric control (NC) machine.In the early 1960s, machine tools were joined to small computers. The sequence of instructions that the machine followed was stored on a paper tape. To change the sequence of operations, the operator had to change the tape prepared by a programmer. The increased demands in both the performance and precision of machine tools saw further automation of the machine tools, which resulted in the development of a wide range of alternative controls. For example, the development of electronics and computer programs had a marked effect on machine tool controls. The arrival of the microprocessor chip made control techniques even easier than before.During the 1970s, the machine tool contained a built-in, programmable computer with a conversational video display unit and keyboard. This removed the need for paper tape. The availability of small, reliable computer components in the form of a microprocessor expedited the development of computer numeric control machines. These machines were equipped with adaptive controlling devices which could adjust their speeds and other operating characteristics by taking into account any adverse working conditions that could arise during the manufacturing process such as tool wear, torque deflection, etc. Human intervention at this stage was reduced to loading and removing work pieces and replacing dulled tools. If each machine tool could be operated and controlled by its own computer, it was possible to schedule and control the work of several machines from one central computer, which indicated to the operator through a video screen which work pieces to fit on to which machines. This technology was commercialized in the 1980s. Exhibit 1 shows the development and level of mechanization of machine tools.Clearly, without the development of these types of machines, the high living standards of the present time would be unthinkable. In some of the most developed countries, approximately 10 per cent of all machines built were machine tools and about 10 per cent of the workforce in machine manufacturing was concerned with machine tools. In the United Kingdom, the machine tool industry was a small but important sector of the manufacturing industry. Machine tools were essential for reproducing the technologies required in an industrialized economy. As machine tool manufacturers typically sold their products worldwide, a weak domestic machine tool industry meant that manufacturers risked losing access to the latest manufacturing technologies. Further, as the machine tool industry supplied capital goods to other capital goods industries, it suffered from the cycles of economic demand (see Exhibit 2). In addition, this industry helped foster innovation in manufacturing processes and played a key role in defence production and the automotive industry. Exhibit 3 shows trends for the machine tool industry in the United Kingdom from 1995 till 2005.GEOGRAPHICAL LOCATION, EMPLOYMENT AND CONCENTRATIONMachine tool manufacturers were spread across the United Kingdom, particularly located in West Yorkshire, the West and East Midlands, and to a lesser extent in the southeast regions. Differences in skill levels or employment conditions had created employment fluctuations that had been substantially sharper in the machine tool sector than in the durable goods sector of the country. Average changes in employment in the machine tool industry were more than average changes in employment in the durable goods sectors. Industry observers cited this pattern as one of the reasons for the industry’s conservative management and the inability of many machine tool firms to attract and retain the brightest engineering, managerial and technical talent. Employment fluctuations caused by market turbulence were seen as a factor that was detrimental to developing new machines. Also, most companies in the United Kingdom had been traditionally small and closely held with narrow product lines. Thus, this industry could not be characterized by firm concentration; it was rather fragmented.DEFINITION OF MACHINE TOOLA machine tool was defined as a power-driven machine, not portable by hand when in operation, which worked metal by cutting, forming, physio-chemical (or non-contact) machining, or a combination of these techniques. Metal-cutting machines included lathes, grinding machines, milling machines, and machining centres. Typical metal-forming machines were presses, forges, and punching, shearing, and bending machines. Modern machine tools were controlled by computers and were referred to as CNC machine tools. These machines conformed to the Standard Industrial Classification Codes 3541 (metal-cutting) and 3542 (metal-forming).COMPANY BACKGROUNDLathes for turning wood have been in use since 1650 but it was not till the end of the 19th century that lathes for turning metals were invented. Sat & Co. was one of the companies that set up a small factory to manufacture small machine tools. As time passed, the company progressed. In 1966, Sat & Co. set up a lathe machine tool division and manufactured basic manually-operated lathe machines. Ten years later, the company expanded and began manufacturing single and multi-spindle automatic lathes, copy and multi-tool lathes, grinding machines, transfer lines and broaching machineries. In the early 1990s, with the arrival of the electronic age, this company set up another division —CNC —responsible for manufacturing a range of CNC machines and selling them globally. Continuous development of the product range led to the addition of extra features, enhancing further the capabilities of these machines. Although it was a small company, it strived for improving its products continually, and for providing modern and better manufacturing technology throughout the world. All of the company’s products had been manufactured to International Standard Organization standards of quality to ensure that customers received consistently high quality products. In fact, all the products were guaranteed to be of premium build using the latest technology. The company employed personnel in design, production, sales and services to market a comprehensive range of machines. Additionally, it provided turnkey engineering solutions to suit specific customer requirements. The company had been supplying machine tools and providing support to customers for over 100 years in over 100 countries through a combination of owned and independent distributors worldwide.This company took pride in its ability to service machines and in its readiness to provide full customer support in the event of machine breakdown. To maintain the high level of customer support and service,the company held a significant number of spare parts in stock all the time, and dispatched over 90 per cent of orders received before noon of the same working day. Another aspect of customer support was taking care of potential customers’needs prior to sales. The sales personnel of the company would begin by evaluating the buyer’s needs and would continue with the offer of various financing packages, if needed. Overall, the company acquired a good reputation for its quality of machines and services and had customers from around the world. Certainly, the company was market-oriented as it had market-led skills necessary to meet customer needs.However, from 1996 onwards, the company saw a constant drop in sales in both the lathe and CNC divisions of the company. Cartland suspected that the company was focusing too much on technology to improve the productivity and efficiency of the CNC machines. The constant addition of extra features to the CNC machines was not only making these machines more expensive, but also more complicated to operate. Moreover, not all customers wanted those extra features. For example, it was unnecessary to offer a three-axis spindle as a standard attachment when customers wanted only one, or in some cases only a two-axis spindle. At the same time, no attention was paid to upgrading the lathe division. The lathes were still very basic and functional in nature, and thus had low efficiency. Even though these basic lathe machines were inexpensive and workers required no extensive training to operate them, there were few buyers. As a result of the company’s failure to focus on the market, sales from both divisions declined to a point where it was absolutely necessary to turn around the divisions.Being an international company, Sat & Co. had customers from the United States, the United Kingdom, the rest of Europe, and the rest of the world in the proportion of 35 per cent, 25 per cent, 25 per cent and 15 per cent, respectively. Although these numbers looked impressive, Cartland wanted to venture into the markets of developing countries such as India and China, where approximately 10 per cent growth rates in their GDPs were expected. Cartland thought that his company could compete with Indian machine tool manufacturers over quality even if Indian machines were cheaper than British machines. However, Cartland was also aware that Indians were catching up in terms of the technology and quality, and that now they had access to foreign investments capital that they could use to upgrade their production facilities and to distribute their machines globally.Cartland also knew that the global machine tool market was US$65 billion and that the demand for machine tools was to increase over five per cent per year through 2009 to more than $84 billion. Much of the projected growth was expected to come from within the developed countries, as many existing production facilities needed modernization and upgrades following several years of under investment. Growth was also expected from developing countries such as India, China, Malaysia and Thailand. These countries were expected to experience above-average growth rates along with both South Korea and Taiwan, which had become major producers and consumers of machine tools in the last five years or so. Further, due to the expansion of the European Community and thus the inflow of capital for investments, Eastern European countries were also expected to fuel demands for machine tools because the modernization of their existing plants was needed. Further Japanese investments in Brazil could also give rise to demand for machine tools. Contrarily, in the United Kingdom, where machine tool markets were highly mature and very cyclical, at best only economic recovery was expected.McGuire had been hired with excellent references for his proven skills in turning around such companies. He was asked to diagnose problems with the divisions, and come up with his recommendations. Cartland said to McGuire, “John, clearly the sky is the limit. We must be market-oriented. Perhaps we were not able to satisfy both sets of customers because we were offering superfluous functions in the CNC lathes and not enough in the basic lathe machines. What do you think?”EXTERNAL INFORMATION GENERATION PERTAINING TO CUSTOMERSTo diagnose problems with the company, McGuire wanted to conduct market research in order to reveal the needs of the company’s customers. While going through previous sales records of the company’s customers, McGuire learnt that more than 65 per cent of all engineering shops in the United Kingdom had at least a lathe machine manufactured by the company. So, he wanted to survey the end-users of these machines. The objectives were to discover if the end-users (1) experienced any technical difficulties with the functioning of the machines; (2) would try new efficient machines; and (3) would like the existing machine to be modified.Motivated by his idea of exploring the end-users’ needs, more than 3,500 questionnaires were mailed to these customers to establish specifications and factual details of machines such as size, accuracy, and the number of hours worked on a machine in a week. This was followed by 300 telephone interviews to establish potential users’preferences relating to details such as colour, country of origin, after-sales requirements, preferred methods of programming, and preferred sources of CNC controllers. Respondents were also asked if they would like to recommend any modifications to the existing machines to the R&D department. Two hundred senior level managers were also interviewed to ascertain the price they would be willing to pay for a machine with a particular specification. The focus of the interview was to measure the extent to which Sat & Co. was able to meet the expectations of its customers. Although face-to-face interviews confirmed that the company’s good brand name was not associated with the performance of basic lathe machines, it did confirm that the market was willing to try something new. Awareness testing results showed (1) that the company was regarded as a superior lathe supplier in the United Kingdom and abroad; (2) that the company had a reputation for good quality and value-for-money; and (3) that the company’s lathes were also considered to offer good resale value in general. Further, the forecasting suggested a demand for at least 1,000 machines on an annual basis. But the difficulty was that this company had a production capacity of only 300 machines annually.INTERNAL INFORMATION DISSEMINATION PERTAINING TO CUSTOMERSMcGuire took the market research findings seriously, and communicated the customer-related information to all the departments as quickly as possible. To make the information flow freely from the marketing department to the shop floor, he even relocated the marketing department inside the manufacturing plant, and made his office on the same floor of the building as the commercial manager of the sales and service department. This strategy enabled McGuire to conduct internal audits on a regular basis to identify if the key attributes of a machine were being utilized effectively. If they were not, the reasons were discovered and corrective actions were put in place immediately. The unwanted attributes were considered for removal in the development of the next batch of machines and prices were adjusted accordingly. McGuire was determined to achieve market orientation by developing low-cost simple machines with fewer frills. The in-house research team of the company conducted an audit by interviewing end-users of the machines and discovered that the company should also consider manufacturing a Flexible Manufacturing System (FMS) as there was a significant demand for it.THE PRODUCT SPECIFICATION AND PRICINGAnalysis of the data revealed that customers did not find all the functionalities of the CNC machines useful. Eighty-two per cent of the respondents said that they needed only two-axis spindles instead of three-axis spindles in the machines. It was also learned from the R&D department that it was possible toreduce the size of the machine by 15 per cent to achieve the most sought-after specifications in the machines. The data also established precise machine specifications and exact corresponding selling prices. Now it was McGuire’s responsibility to develop the product with the technical specifications and the specified price for the market. Because of the competition and the loss of sales for the last few years, there was absolutely no room to deviate either from the established technical specifications or selling prices. It was confirmed that the potential customers were only prepared to pay the prices determined by the market research.END-USERS’ PERCEPTIONS OF THE COMPANYAfter settling down with the technical specifications and prices for the new machines, McGuire was curious to know the extent to which his company was currently successful in meeting the market orientation expectations of the company’s end-users. As a result, 500 customers who used the machines manufactured by the company in the past three years were randomly selected. These customers were asked to give their impressions of the market orientation of Sat & Co. by circling a number on the 7-point Likert scale (1=strongly disagree and 7=strongly agree) corresponding to the items listed in the questionnaire (see Exhibit 4). On the scale, 1 was equivalent to zero per cent whereas 7 represented 100 per cent agreement with the item. For clarity, responses to the questions were converted into percentage points (Exhibit 5). McGuire also completed the same questionnaire independently to determine the extent to which he thought his company was practising those market-oriented activities. Comparison of the evaluations between McGuire and his customers confirmed that Sat & Co. had failed to meet its customers’ expectations on more than half of the items presented in the questionnaire. Clearly, a gap between the customers’expectations and the company’s delivery was detected.Also, McGuire was wondering if it was the right time to enter in the FMS segment of the machine tool industry. He knew that FMS represented a new application for machine tools in which groups of machine tools were integrated and controlled by a central computer, which in turn controlled robots that moved work pieces from machine to machine and positioned a work piece at each machine. A greater degree of automation than conventional machines could be commercially attractive to his company, given the pressure to reduce the production costs and increase the profit margin. In fact, the prospects for automated factories in the metalworking industry were quite high, as most companies wished to purchase an FMS, which could take care of inventory management, scheduling details and the production process itself. In-house research revealed that the FMS enabled Coma Diesel Engine Company to cut production time by half, reduce annual warranty expenses by an estimated £200,000 and slash the selling price by more than 25 per cent. McGuire was convinced that the specifications of the parts to produce an FMS were not a problem, as he could use the existing in-house computer-aided design (CAD) technology to design an FMS and to connect it to a computer-aided manufacturing (CAM) system. So his task would be to develop a new system that would be based on the integration of information, and electronic and mechanical technologies. Although the design and installation of an FMS were expensive, its efficiency was worth extra costs to customers. But that also meant that McGuire needed extra money to invest in his plant to equip it for the production of FMSs.Now, McGuire needed to determine reasons as to why this company, once known for high quality machines, was being perceived as a non-market-oriented company. These findings forced him to rethink his strategy for the company and develop a set of recommendations. Time was running out.Exhibit 1LEVEL OF MECHANIZATIONSource: James Bright, Automation and Management, Harvard Business School Publishing, Boston, 1958.Exhibit 2PRIVATE SECTOR MANUFACTURING BUSINESS INVESTMENT IN CAPITAL EQUIPMENT1995-2005 (in £ billion)Source: The Manufacturing Technologies Association, “Basic Facts,” 2007, United Kingdom.Exhibit 3TRENDS FOR MACHINE TOOLS IN THE UK(in £ million at current prices, 2007)Source: The Manufacturing Technologies Association, “Basic Facts,” 2007, United Kingdom.Exhibit 4QUESTIONNAIREWith regards to the following items (on the 7-point scale where 1 represents “strongly disagree” and 7 being “strongly agree), how would you score the following measure of market orientation of Sat & Co., which is the supplier of the machine you have been using for production for the last three years or more?Items relating to MARKET ORIENTATION Scale: Strongly disagree Strongly agreeQ1. Sat & Co. reveals our needs through customers’ 1 2 3 4 5 6 7 research.Q2. Sat & Co. produces and offers products that are 1 2 3 4 5 6 7 truly satisfying our needs.Q3. Sat & Co. commits resources in research and 1 2 3 4 5 6 7 development to ensure the quality of the productsto suit our needs.Q4. In practice, Sat & Co. avoids conflicts between 1 2 3 4 5 6 7 market orientation and profit orientation.Q5. We are aware of how the entire business of Sat 1 2 3 4 5 6 7 & Co. can contribute towards creating value for us.Q6. Sat & Co. keeps its promises on services after 1 2 3 4 5 6 7 sales, and delivery on time.Q7. Sat & Co. is prepared to disagree with us in order 1 2 3 4 5 6 7 to achieve a better decision for us.Q8. Sat & Co. tries to influence us by information 1 2 3 4 5 6 7 rather than by pressure.Q9. A Sat & Co. representative normally meets us 1 2 3 4 5 6 7 once a year to assess our needs.Q10. Representatives from the manufacturing department 1 2 3 4 5 6 7 of Sat & Co. interact directly with us to assesshow best to serve us.Q11. Sat & Co. frequently polls our end-users to 1 2 3 4 5 6 7 assure the quality of its products and services.Q12. Sat & Co. is slow to detect fundamental shifts 1 2 3 4 5 6 7 in the British machine tool industry; e.g.,competition, technology regulations.Q13. Sat & Co. tends to ignore changes in the product 1 2 3 4 5 6 7 or services our organization needs.Q14. Sat & Co. reviews its product development efforts 1 2 3 4 5 6 7 to ensure that they are in line with ourorganizational needs.Q15. Sat & Co. normally takes corrective actions 1 2 3 4 5 6 7 immediately for any complaints.Q16. Sat & Co. is a market-oriented company. 1 2 3 4 5 6 7Exhibit 5MARKET ORIENTATION EXPECTATIONS。