Case –

Computron

To arrive at an appropriate bid price for König, let's analyse the key factors and
considerations:

1. Competitive landscape:
- A competitor (likely Ruhr) is planning to bid around $872,000
- König indicated Computron would have a chance if its bid was no more than
20% higher than the lowest bid
- This suggests a maximum competitive bid of $1,046,400 (872,000 * 1.20)

2. Computron's normal pricing:

- Standard price would be $1,244,800
- This is 43% higher than the expected lowest bid, which is too high to be
competitive

3. Value proposition and customer relationship:

- Computron is known for high quality, precision, dependability, and flexibility
- König is Computron's largest German customer, representing 80% of their
2005–2006 German sales
- König has purchased 3 Computron systems before and seems pleased with
them
- There's potential for $4 million more business from König in the next 1-2 years

4. This specific project is:

- It's for a training system, not requiring the full flexibility and precision of
Computron's usual offerings
König stated they're primarily interested in dependability and reasonable price
for this project

5. Computron's pricing policy and financial situation:

- Management strongly prefers not to cut the 33.33% markup
- Company profit has declined, and there's pressure to maintain or increase
margins
- However, there have been rare instances of markup reduction to 25% or even
20% for important orders

6. Future considerations:
- Computron is opening a new plant in Frankfurt in September
- Winning this contract could provide work for the new plant
- Losing the bid might mean the plant sits idle after initial setup

7. Market position:
- Computron holds 30% market share in Germany
- The overall market is growing at 25% annually

Considering these factors, I recommend the following bid strategy:

Bid Price: $1,046,400 (20% above the expected lowest bid)

Justification:
1. This price makes Computron competitive while maximising revenue within
König's stated 20% threshold.
2. It represents a markup reduction to about 26.5%, which is within the range of
previous exceptions made for important orders.
3. While this reduces the profit margin, it:
a) Maintains the relationship with König, a crucial customer
b) Secures work for the new Frankfurt plant
c) Positions Computron for future business with König
d) Prevents competitors from gaining a foothold with this key account

4. The reduced markup is justifiable given that this project doesn't require
Computron's full range of premium features.
5. By winning this contract, Computron can demonstrate flexibility in meeting
customer needs while still maintaining its overall premium positioning in the
market.

This strategy balances the need to win the contract with Computron's desire to
maintain its premium image and financial health. It's a calculated risk that
prioritises long-term strategic positioning over short-term profit maximization. To
arrive at an appropriate bid price for König, let's analyse the key factors and
considerations:

1. Competitive landscape:
- A competitor (likely Ruhr) is planning to bid around $872,000
- König indicated Computron would have a chance if its bid was no more than
20% higher than the lowest bid
- This suggests a maximum competitive bid of $1,046,400 (872,000 * 1.20)

2. Computron's normal pricing:

- Standard price would be $1,244,800
- This is 43% higher than the expected lowest bid, which is too high to be
competitive

3. Value proposition and customer relationship:

- Computron is known for high quality, precision, dependability, and flexibility
- König is Computron's largest German customer, representing 80% of their
2005–2006 German sales
- König has purchased 3 Computron systems before and seems pleased with
them
- There's potential for $4 million more business from König in the next 1-2 years

4. This specific project is:

- It's for a training system, not requiring the full flexibility and precision of
Computron's usual offerings
- König stated they're primarily interested in dependability and reasonable price
for this project

5. Computron's pricing policy and financial situation:

- Management strongly prefers not to cut the 33.33% markup
- Company profit has declined, and there's pressure to maintain or increase
margins
- However, there have been rare instances of markup reduction to 25% or even
20% for important orders

6. Future considerations:
- Computron is opening a new plant in Frankfurt in September
- Winning this contract could provide work for the new plant
- Losing the bid might mean the plant sits idle after initial setup

7. Market position:
- Computron holds 30% market share in Germany
- The overall market is growing at 25% annually

Considering these factors, I recommend the following bid strategy:

Option 1: Lower Markup by Reducing R&D and Sales Expenses to Win

the Bid
Advantages:
1. Winning the Contract: Lowering the markup allows Computron to offer a
more competitive price, increasing the chances of securing the contract.
2. Utilizing the New Plant: The new Frankfurt plant will have work right
away, reducing the risk of it sitting idle and generating costs without
revenue.
3. Higher Profits Before Taxes: Even with a lower markup, winning the
contract will boost sales volume, potentially improving overall profit
margins.
4. Expanding Market Share: Winning this contract can help Computron
grow its presence in the European market, especially in Germany.
Disadvantages:
1. Loss of Premium Reputation: Reducing the markup might affect
Computron’s image as a high-quality, premium brand.
2. Perceived Quality Reduction: Cutting R&D and sales expenses might
be seen as compromising on quality, which could harm the brand’s
reputation.
 To make the bid competitive while maintaining some level of profitability, we
consider reducing the markup. Here’s the calculation for a 20% markup:

Factory Cost: $768,000

20% Markup: $768,000 * 0.20 = $153,600
Quoted U.S. Price: $768,000 + $153,600 = $921,600
Import Duty (15%): $921,600 * 0.15 = $138,240
Transportation and Installation: $67,200
Total Price:

$921,600 + $138,240 + $67,200 = $1,127,040

Option 2: Develop a New General-Use Computer to Meet Konig's

Proposal
Advantages:
1. Maintaining Quality Image: Creating a new product can help keep
Computron’s reputation for high quality and innovation intact.
2. Production Expansion: A new product line can diversify Computron’s
offerings, potentially attracting more customers in the future.
3. Attracting New Clients: A general-use computer could meet a broader
range of needs, appealing to new market segments.
Disadvantages:
1. High Manufacturing Costs: Developing and producing a new computer
would require significant investment in R&D, tooling, and production.
2. Missing the Deadline: The time needed to develop and manufacture a
new product might exceed the deadline for Konig's bid.
3. Reduced Plant Productivity: Focusing on a new product might detract
from the goal of utilizing the new Frankfurt plant for 1000X assembly.
Given the high costs and time constraints associated with developing a new
product, it is difficult to provide a precise bidding price without detailed R&D and
production cost data. However, we can estimate that the costs would be
significantly higher due to the new development, tooling, and production setup,
and the bid would likely not meet the deadline.

Option 3: Manufacture the 1000X in Frankfurt, Eliminating Import Duty

and Reducing Transportation and Installation Costs to Set a Price 20%
Higher than the Lowest Bid
Advantages:
1. Maintaining Quality Image: Continuing to produce the high-quality
1000X helps maintain Computron’s reputation for superior products.
2. Winning the Contract: This approach makes the bid more competitive
while maintaining the company's quality standards.
3. Expanding Market Share: Securing the contract strengthens
Computron’s position in the European market.
4. Building Customer Loyalty: Winning the contract reinforces the
relationship with Konig, Computron’s largest customer in Germany.
Disadvantages:
1. No Explicit Disadvantages: This option aligns well with Computron’s
strategic goals without apparent drawbacks.
Option 3: Manufacture 1000X in Frankfurt
By eliminating the import duty and reducing transportation and installation costs,
we can make the bid more competitive. Here’s the calculation:

Factory Cost: $768,000

33% Markup: $768,000 * 0.33 = $253,440
Quoted U.S. Price: $768,000 + $253,440 = $1,021,440
Import Duty (0%): $0 (eliminated)
Reduced Transportation and Installation: $67,200 (assumed to remain the same)
Total Price:

$1,021,440 + $0 + $67,200 = $1,088,640

To ensure competitiveness within the 20% higher limit: Adjusted Markup for
Competitiveness: Reduce markup to 20%

1. 20% Markup - $768,000 \times 0.20 = \$153,600

2. Quoted U.S. Price - $768,000 + \$153,600 = \$921,600
3. Import Duty 0% - $0 (eliminated)
4. Transportation and Installation -$67,200
Total Price:
$921,600+$0+$67,200=$988,800
Final Bid Price: $988,800
Recommendation: Option 3
Option 3 is the best choice as it ensures competitiveness, maintains
Computron’s quality image, and maximizes the utilization of the new Frankfurt
plant. The final bid price of $988,800 is competitive and strategically sound,
helping to secure the contract while preserving Computron’s reputation and
market position.