Cumberland Metal Industries (A): Model Year 1978 Negotiations with Beta Motors Harvard Case Solution & Analysis

SITUATION ANALYSIS OF CUMBERLAND

Cumberland Metal Industries has been in the curled metal products industry for many years. The company has achieved significant growth since its inception. The sales revenue of the company has increased from $2.5 million to $18.5 million in less than 20 years. The main breakthrough for the company was when the company had introduced ERG valves in the US automobile industry. Later, some problems were identified in the ERG valves, but Cumberland then fixed all those issues and trademarked it as ‘Slip-seal’. This created a good reputation of Cumberland in the market and increased its market share. The sales of the company had grown at an average rate of 43% each year. On the other hand, the earnings of the company had grown at a rate of 77% each year.

cumberland metal industries case solution

cumberland metal industries case solution

Cumberland has been divided into three main divisions. These are the Slip sole, metal products and filter systems. The slip seal division of the company had contributed in the growth of the business significantly. Slip seal was designed by Cumberland to provide a resilient seal to the EGR systems. This would overcome the problems of impacting the automobiles fuel consumption level. With the slip-seal technology, the company gained about 80 percent of the market share. There were three main competitors of Cumberland, Anvil products Inc., Fabricated Metals Corporation and Wireworks Corporation. However, none of them was in the position to prove to be a strong competitor for Cumberland in the slip-seal business. Anvil Products, Inc. had no interest in the automotive industry, while Wireworks also failed to complete the proposal and failed to follow up. Apart from that the third direct competitor, FMC, also could not win this proposal because the terms of the agreement were not accepted by the management of Cumberland.

At the end of 1977 the three year contract between Cumberland and Beta motors for supplying the slip-seal requirements was about to end. Cumberland was looking to renew the contract or renegotiate it on new terms. Cumberland’s relations with Beta motors were initially worsening in 1976, however, it was on October 15, 1976 that Beta motors sent a proposal to Cumberland for the supply of slip-seals for their EGR seal business and also to provide 100% supply protection.

PROBLEM

John Bach, who is the president of Cumberland Metal Industries is looking to set a price for its 1978 model year slip-seal business. The company wants to quote a competitive price to Beta motors. The previous deal which was based on a time period of three years was to expire at the end of 1977. The competition was also one of the threats being faced out by the company at that time and one of the competitors was also looking forward to gain some of the slip-seal business portion of Beta motors and was also planning campaigns. Also the sales of slip-seals might decline as a result of tougher emission standards that would be enacted by the new government in January, 1978. Therefore, the company needed to quote a competitive price to Beta motors. Beta motors had sent a proposal to the management of Cumberland to cut about 50%, 75% and 100% of the seal business of the 1978 model year EGR. One of the problems that emerged later was that one of the competitors of Cumberland approached Beta motors to submit them a proposal regarding the slip seal business. They had stated the terms of this agreement, under which they had cut the product price of 60 cents for Part A. They had placed this proposal for 50% of the seal business of Beta motors. However, apart from FMC, there were no other competitors that could prove to be a threat to Cumberland.

RECOMMENDED PRICING STRATEGY

The initial prices charged to Alpha and Beta motors for the 1975 model have been presented on Page 7 of the case. However, the company now needs to quote a price to Beta motors for 50% of the business. The industry conditions are now more competitive. The company’s surrounding environment might also pose problems and hinder the sales of the company from increasing. The main reason for this is that the new government is going to come into action from January 1978 and they are going to impose strict regulations related to the Clean Air Act. On the other hand, the company was also facing competition from one of its competitors, FMC. They were looking forward to negotiate a deal with Beta motors and were placing a proposal before the management of Beta motors for their 50% of the seal-slip business. Therefore, Cumberland had to set a price that was competitive looking at the conditions of the market and the prevailing competition. The company wanted to maintain current level of sales and also to quote such a price at which they could prove the best quality products..............................

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