Intersciencebv_case Analysis Final

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INTERSCIENCE, B.V.: SEEKING A NEW MARKET FOR GAS CHROMATOGRAPH

Contents

1. Introduction...............................................................................................................................3

2. Markets for gas chromatograph..................................................................................................3

3. Players in the contract laboratory market and the price war...........................................................4

4. Business Model of Agilent and Varian.........................................................................................4

5. Business Model of Thermo-Finnigan...........................................................................................5

6. Issues......................................................................................................................................5

Q1. What are the tradeoffs for Interscience in using geography versus application as a basis for market

segmentation?..................................................................................................................................6

Q2. What is the value of the TRACE GC versus the Varian 3800 for the contract laboratory market in Benelux?

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Q2B.What is the incremental value of the proposed One-Day Emergency Response Guarantee for the Trace GC?

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Question 3: Which Market should Interscience target and what should its positioning of the Trace GC be? What,

specifically, is the value proposition for the Trace GC in the selected market?......................................14

1. Introduction The case pertains to Interscience B.V, Netherlands-based, 25 year-old, scientific equipment reseller company. Interscience is an exclusive marketer of gas chromatographs manufactured by US firm Thermo Finnigan. Gas chromatographs are used for testing chemical contamination by the contract laboratories. The equipment has other high end usage in the R&D laboratories particularly for new product development. The contract laboratories perform various tests such as water, soil and air for companies, institutions and government. Recent environmental legislations across Europe have propelled the demand for such testing and in effect the contract laboratories are growing very fast. However, when it comes to purchasing gas chromatographs, contract labs are extremely price sensitive.

2. Markets for gas chromatographGas chromatograph is purchased by the following two kinds

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Market for Gas Chromatograph

(66%) by Contract Laboratory for

Soil Analysis

Water Analysis

Air Analysis

(34%) by R&D Laboratories for product development by

Major corporations

Universities

Government Bureaus

3. Players in the contract laboratory market and the price warS.No. Company Country of

originOperations in Europe

Strategy Average Selling Price

price bandwidth

1 Agilent North America

Company has an office

Produce and sell basic models to contract laboratories

Euro 40,000 (+_3%)

2 Varian North America

Company has an office

Produce and sell basic models to contract laboratories

Euro 40,000 (+_3%)

3 Thermo Finnigan

North America

Market through trading company eg Interscience

Euro 45,000

4. Business Model of Agilent and Varian

5. Business Model of Thermo-Finnigan

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VAS provided by Interscience

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Thermo-Finnigan

Produce State of the art Gas Chromatographs and sells to...

VASCustomized solutionsPreventive maintainenaceEmergence repairsAnalytical process consultingCustomer education through seminarsInfrastructure

6. IssuesInterscience is planning to enter the contract laboratory market in the Belgium-Netherlands-Luxembourg (Benelux) region for growth in the sales of gas chromatographs.

Q1. What are the tradeoffs for Interscience in using geography versus application as a basis for market segmentation?

There is intense competition in the contract laboratory market. The product has been reduced to commodity. Price is the main determinant of sealing a deal with the customers

As per fact given in the case the different geographical locations targeted were:a) Belgium – Netherlands- Luxembourg (Benelux) region of Europe for Contact Labb) Ruhr-Rhine Region in Germany for R&D

In Benelux region Gas Chromatographs was more treated as Commodity products thus selling in this market will require Interscience to craft a persuasive value proposition. This region was dominated by two North American firms i.e. Agilent (a spin-0ff of Hewlett Packard) and Varian which used to sell no frills equipment at low prices and thrived on customer preferences. The current price of Gas chromatographs was € 40000 ( + 3%) whereas the lowest price model of Interscience was € 45000 which is 10% more than the available gas chromatographs. Though Interscience Chromatographs had lot many VAS but were of least importance for the customers in Benelux region.

In Ruhr-Rhine Region of Germany there is great opportunity and potential in R&D for interscience. Some of the major benefits derived are

Sales and profit potential is roughly equivalent to Contract Market of benelux. The Ruhr–Rhine region was in close geographical proximity to Interscience’s area of operations. R&D leveraged highly on core competencies of Interscience where it had successfully proven.

Challenges in Ruhr Rhine region Selling in the R&D market will require reinventing the selling approach The market has potential, but with given resources, Interscience cannot pursue both the markets There are already 15 local players fighting out in this segment for the last 30 years Market characteristic: nationalistic and loyal German marketplace.

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Q2. What is the value of the TRACE GC versus the Varian 3800 for the contract laboratory market in Benelux?

VALUE ELEMENTS – Product and Service Advantages of TRACE GC

Patented Technology How does a contract laboratory customer look at these values

Remarks of contract laboratory customer

Cold-on-column injection systemX

Column injection system is not a

requirement as we are not into testing

pharmaceuticals. We are testing soil and

water samples.Maintaining sample

integrity is not a significant concern for

us.

Sample integrity is maintained. Risk of thermal degradation of the sample is avoided. XTest discrimination is enhanced X

Use of volatile solvents is possible X

Contamination from external sources is checked X

Customization Capabilities

Specialized detectors which can detect leakages, thermal conductivity, electron capture, and photo ionization

X Product customization is desirable, not essential.

Thermal desorption system X

Variety of capillary column sizes X

Analytical software etc X

Education & TrainingFree On-site training X We conduct basic test

for which no further training required.Free Customer training at its own facility

X

Online and Printed literature, Newsletter etcX

Customer Care

24X7 telephone helpdesk Willing to pay extra, if

it can demonstrate

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that it can lower the operation costs or increase revenues and profits

Maintenance Services

Scheduled preventive maintenance (03 onsite calls per year and onsite emergency repairs guaranteed within 02 working days

Willing to pay extra, if it can demonstrate that it can lower the operation costs or increase revenues and profits

Consulting servicesAnalytical process designParts and consumables ordering and inventory management Cost managementGeneral business consulting advice

X

Brand awareness Low Brand awareness of Interscience is lower than that of Varian 3800

Aesthetics X Is not a concern amongst lab technicians

Points of parity

Parametres TRACE GC Varian 3800Variety of tests performed Equivalent EquivalentReliability Equivalent EquivalentPrecision Equivalent EquivalentAccuracy Equivalent EquivalentDurability Equivalent EquivalentResult reproducibility Equivalent EquivalentRate of system failure and breakdowns Equivalent EquivalentUseful life Equivalent (5 years) Equivalent (5 years)

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PRICE ELEMENTS – Points of difference

Parametres TRACE GC Cost Calculations

Varian 3800 Cost Calculations

Price € 45,000 (€ 45,000.00) € 40,000.00 (€ 40,000.00)

Maintenance cost € 3,600 per year (€ 3,600.00) € 2,800.00 per year (€ 2,800.00)

Maximum available working hours per day

23 hours 23 hours 10 minutes

Maximum available working hours per year

23 hrs X 240 average working days per year = 5,520 hours = 5,520 X 60 = 3,31,200 minutes

23 hrs 10 minutes X 240 average working days per year = 5,560 hours = 5560 X 60= 333,600 minutes

Cycle/ job time Job Time (in minutes)i) Analysis = 3.2 m ii) Cooling = 2.8 m

………………………………Total Time/job = 6.0 m

Job Time (in minutes)i) Analysis = 6.2 mii) Cooling = 3.8 m…………………………………Total Time/job = 10.0 m

Septum change time

Septum Change Time (in minutes)

i) Replacement = 3.0 m ii) Recalibration = 6.0 m

…………………… Total Time/ septum change = 9.0 m

Septum Change Time (in minutes)i) Replacement = 3.0 m ii) Recalibration = 10.0 m

……………………… Total Time/ septum change = 13.0 m

Septa change frequency

After every 1500 jobs After every 200 jobs

Minutes elapsed before first septum change

Minutes elapsed before first septum change = (Septum Change Frequency X Cycle time) + Septum Change Time = (1500X6) minutes + 9 minutes = (9000 minutes + 9 minutes) = 9009 minutes

Minutes elapsed before first septum change = (Septum Change Frequency X Cycle time) + Septum Change Time = (200X10) minutes + 13 minutes = (2000 minutes + 13 minutes) = 2013 minutes

No of jobs per annum

No of jobs per annum = 1500 X (No of minutes of

No of jobs per annum = 200 X (No of minutes of working hours

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working hours available) / Minutes elapsed before first septum change = (1500 X 331,200) /9009 minutes = 55,145 jobs

available) / Minutes elapsed before first septum change = (200 X 333,600) /2013 minutes = 33,145 jobs

Price of Septum € 1.5 € 2.0

Expenditure on septum change

Expenditure on septum change = No of times septum changed X Price per septum = (Total no of jobs performed/ septum change frequency)* Price of septum = (55,145 jobs / 1500 jobs)* € 1.5 = € (36.76*1.5) = € 55.145

Expenditure on septum change = No of times septum changed X Price per septum = (Total no of jobs performed/ septum change frequency)* Price of septum = (33,145 jobs / 200 jobs)* € 2.0 = € (165.725*2.0) = € 331.45

Average Revenue per annum

Average revenue per annum = No of jobs per annum X Average revenue per job = 55,145 X € 20 = € 1,102,900

€ 1,102,900 Average revenue per annum = No of jobs per annum X Average revenue per job = 33,145 X € 20 = € 662,900

€ 662,900

Average operating profit per annum

Average operating profit per annum= No of jobs per annum X Average operating profit per job = 55,145 X € 3 = € 165,435

€ 165,435 Average operating profit per annum= No of jobs per annum X Average operating profit per job = 33,145 X € 3 = € 99,435

€ 99,435

Net Earnings per Gas Chromatograph per annum

Earnings per gas chromatograph per annum = Average operating revenue – (Price of the machine + Maintenance Cost) = €165,435 – (€ 45,000 + € 3,600) = € 116,835

€ 116,835 Earnings per gas chromatograph per annum = Average operating revenue – (Price of the machine + Maintenance Cost) = € 99,435 – (€ 40,000 + € 2,800) = € 56,635

€ 56,635

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Q2 B.What is the incremental value of the proposed One-Day Emergency Response Guarantee for the Trace GC?

Scenario 1: Normal Maintenance Services (Interscience offers free of charge labour) and the response given within one day

Location: Contract Laboratory

Date: July 18, 2010

Time: 1400 hours

Machine breaks down: at 1400 hours

Response received: at 1400 hours on July 19, 2010

Machine Hour Lost: 10 hours on July 18 and 13 hours on July 19 (deducting 1 hour that the machine is out of service everyday on an average) = 23 hours

Opportunity Lost due to ONE day of breakdown = No of jobs performed in 1 day X Operating Profit per job = 230 X € 3 = € 690

Labour Hour Lost (assuming that the co. need to compensate the labour irrespective of machine breakdown) = 23 hours X € 45 per hour = € 1,035 Opportunity Lost due to repairing time = Repairing time X No of jobs lost due to repairing time

= 03 hours X 9.58 jobs = 28.75 jobs = 28.75 jobs X € 3 = € 86.25

Total Loss, less the cost of spare parts due to one day of breakdown =€ 690 + € 1,035 + € 86.25 = € 1,811.25

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Scenario 2: Normal Maintenance Services (Interscience offers free of charge labour) and the response given within two days


Date: July 18, 2010

Time: 1400 hours



Machine Hour Lost: 46 hours

Opportunity Lost due to TWO days of breakdown = No of jobs performed in 2 days X Operating Profit per job = 460 X € 3 = € 1,380

Labour Hour Lost (assuming that the co. need to compensate the labour irrespective of machine breakdown) = 46 hours X € 45 per hour = € 2,070

Opportunity Lost due to repairing time = Repairing time X No of jobs lost due to repairing time = 03 hours X 9.58 jobs = 28.75 jobs = 28.75 jobs X € 3 = € 86.25

Total Loss, less the cost of spare parts due to one day of breakdown = € 1,380 + € 2,070 + € 86.25 = € 3,536.25

Scenario 3: ONE-DAY EMERGENCY RESPONSE GUARANTEE (Interscience charges € 125 per hour for technical service engineer’s time and cost of the repair parts and material. If the engineer fails to turn up, both labour and parts will be provided for free)


Date: July 18, 2010

Time: 1400 hours



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Machine Hour Lost: 10 hours on July 18 and 13 hours on July 19 (deducting 1 hour that the machine is out of service everyday on an average) = 23 hours

Opportunity Lost due to ONE day of breakdown = No of jobs performed in 1 day X Operating Profit per job = 230 X € 3 = € 690

Labour Hour Lost (assuming that the co. need to compensate the labour irrespective of machine breakdown) = 23 hours X € 45 per hour = € 1,035 Opportunity Lost due to repairing time = Repairing time X No of jobs lost due to repairing time

= 03 hours X 9.58 jobs = 28.75 jobs = 28.75 jobs X € 3 = € 86.25Cost of Engineers Time = 03 hours X € 125 per hour = € 375 per call

Total Loss, less the cost of spare parts due to one day of breakdown =€ 690 + € 1,035 + € 86.25 + € 375 = € 2,186.25

Therefore the incremental value of the proposed One-Day Emergency Response Guarantee for the Trace GC is given as under

Scenarios 1 Vs 3 Cost (€ )

Scenario 1: Normal Maintenance Services (Interscience offers free of charge labour) and the response given within one day

1,811.25


2,186.25

Incremental Value -375.00

Scenarios 2 Vs 3 Cost (€ )

Scenario 2: Normal Maintenance Services (Interscience offers free of charge labour) and the response given within two days

3,536.25

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2,186.25

Incremental Value 1,350.00

Question 3: Which Market should Interscience target and what should its positioning of the Trace GC be? What, specifically, is the value proposition for the Trace GC in the selected market?

Answer 3: As per the discussion above and the facts presented and analyzed in answer 1 and 2, we would recommend Trace GC for Contracts Laboratory Market after removing few of the value added services like Customization, Education and training, consulting which are not required in the Contracts lab markets. Though as per the calculations given above we can see that Net Earning per Gas Chromatograph per annum is €116,835 which is 100% more than Varian 3800 (€ 56,635). If we calculate Cycle Time (Per Job) it takes 4 minutes less than Varian 3800 and Trace GC additionally performs 22000 job per annum which adds up to additional revenue of € 66000. Further, to add up we can see productivity efficiency of Trace GC is 4 minutes higher than Varian 3800 which will decrease the cost of ownership by 4 min / 60 X € 45 = € 3 per hour (technical person’s wage per hr). Trace GC could be positioned as Highly Efficient Gas Chromatographs for contract laboratories and one day emergency response guarantee and urgent repair services could be provided on additional charges.

For Germany, R&D market there challenges are already specified in answer 1 but at the same time we see high product efficiency and value price proposition in contract laboratory market so it is recommended that Trace GC should be positioned in Benelux market.

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Intersciencebv_case Analysis Final

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