Harper Chemical Company Case Study

Harper Chemical Company Case Study

Executive Summary

The Harper Chemical Company (HCC) has recently been given an offer to purchase its Dominite business. Dominite is a mineral mined in Pennsylvania and ground into various grades of powder form. HCC marketed the product to various paint and ceramic tile manufacturers, as a replacement for traditional materials used in those products. Initial research showed very promising technological and cost advantages of Dominite over the traditional materials; however to date those advantages have not come to full fruition, and the business has been consistently unprofitable for five years ($3.6M total net loss). HCC executives are now faced with the decision of whether to cut losses and sell, or to continue pursuing the business with a different business strategy in hopes of a profitable turnaround.

Upon review of the history of the business and observations from current market data, it is recommended that HCC reject the offer, and continue to pursue the Dominite business with a strategic repositioning of the product. By focusing on small- and medium-sized producers that whose priorities more closely align with Dominite's capabilities, and by segmenting its offerings based on price / quality, HCC should be able to better align to current customer needs to drive demand, and increase profit margins by branding a separate "premium" product with higher prices, reflecting the total value Dominite can offer to the customer.

Current Business Position

HCC's Business: HCC is a large industrial chemical company with annual sales of $945M. Its primary products are chemicals used in paper, ink, paint and plastics. It acquired the Dominite business in an effort to diversify its holdings. In the process, it acquired control of the only active Dominite mining source in the United States, through a lease with 3% royalty on net sales to be paid to the owner. It invested $4.5M into new Dominite production facilities. It also assembled a top-tier research and development (R&D) team and research facility to investigate potential markets for the product, and to test formulations for those products. The R&D team quickly gained credibility in the industry, and their findings lent much credence to the new product. This, along with its control of the U.S. mining operation, gave Harper a strategic competitive advantage with this technology.

Initial R&D results were very promising. They indicated that Dominite-based ceramic tiles were significantly stronger and exhibited less warping than tiles based on the incumbent material, talc. Furthermore, tiles could be processed much faster and at lower kiln temperature, reducing manufacturing and energy costs. Dominite was originally introduced at matching price points to talc, but the price for talc increased over time and Dominite eventually enjoyed a $10-per-ton cost advantage. For paint applications, R&D suggested that Dominite exhibited superior brightness and durability, while lowering manufacturing costs 12-18¢ per gallon. All of these technological and cost advantages, identified in research experiments, represented further strategic competitive advantage for HCC.

HCC projected sales of 55,000 tons of Dominite per year by 1983, with 55% of sales going to ceramic applications, 35% to paint applications, and the remaining 10% to a variety of smaller markets. The projections were based on market surveys involving miscellaneous sources, including sales agents for the mining company, four university market studies, and mailings to potential customers.

Despite the several apparent strategic advantages, the Dominite business far underperformed its expectations. Sales grew to only 8,700 tons by 1985. The technical advantages promised by R&D were not realized when translated by customers to the manufacturing line. This, in combination with costs of up to $1.5M required to retool tile factories to use Dominite instead of talc, deterred customers. In the meantime, HCC developed another new technology, Superfine, which became a rapid and profitable success, and drew some of the company's attention away from Dominite development. See Exhibit 1 for a summary of Dominite business performance to date.

HCC's Competitors: Though no companies were specifically named in the case study, Harper will compete in these markets with other large industrial chemical supply companies. Talc (ceramic tiles) and calcium carbonate (paint) are the market-leading, incumbent technologies. Dominite will have to show clear advantages / product differentiation to gain market share. Because of the size and operational efficiency of some of these large companies, and because of the availability of other mineral deposits within the U.S., these companies would likely be able to quickly adapt and launch a competitive product to Dominite. It is clearly in HCC's best interest to establish market leadership quickly if it hopes to maintain a strategic advantage.

HCC's Customers: HCC marketed Dominite primarily towards the ceramic tile and paint industries. In the ceramic tile industry, it encountered a very wide variety of customer interests. The Dover Tile Company represented its most coveted market segment - a large-scale company with high volumes that was a market driver. Dover was known for producing high-quality tiles, and as such valued provable, consistent product performance, possibly more than cost savings. It wanted to have a good, steady supply of material, and balked at the idea that HCC would be their sole source. They encountered ongoing production problems with Dominite, and to date had not found the perfect recipe that made a producible product worth the $1.5M retooling cost.

By contrast, the smaller Lancaster Artware Company had good success with Dominite, and was expanding its production. It moved into the ceramic tile market as part of its own diversification effort, and sold its product to a different market segment; Lancaster tolerated lower tile strength "because it [the product] sells". Lancaster realized some of the operational efficiencies (low firing times, etc.) promised by the initial research.

The unnamed tile company proposing to buy the Dominite business was a medium-sized producer. Its interests were in substantially lowering costs to become a major market player. It had successfully demonstrated a Dominite-based tile that was ready for production. To guarantee a cost advantage for its product, it wanted to control the Dominite supply to the tile industry.

In the paint industry, one of HCC's most sought-after customers was the Saunders Paint Company. Saunders was one of the largest, most profitable manufacturers. Like Dover,