Tennessee controls 2

TENNESSEE CONTROLS

Nathan Croswell, Hady Youssef, Hector Ruiz Rebellon, Du Xinying

OUTLINE

• Tennessee Controls Corporation objective for the

Process Controls Division had been to develop

another major business.

• Judy Starnes had the decision to make from:

• 3 Proposals: 1) Develop New Products for High Volume Market Segment

2) Develop High Technology Control Systems

3) Acquire MDA

- Each Proposal is Ranked by the Strategic Ranking Index.

- Anything greater than 10 on the SRI index will be

considered.

PROPOSAL 1:DEVELOP NEW PRODUCTS FOR HIGH

VOLUME MARKET SEGMENT

Steve Gregg: 40, Electrical Engineer (MBA)

• - Focus on low price, high volume

• Outstanding salesman with deep customer and

product knowledge

3 6 9

2 4 6

1 2 3

Lacks Strong Champion and/or Team

Average Team/Champion

Proven Champion and Team

Strong Strategy,

Segmentation, Product

definition and Competitive

Assess

Strategic Marketing Content

Champion Commitment

Some Strategic analysis: Inadequate on Market Environmental and or Ignores Significant Strategic Factors

Little/Poor Strategic Analysis: Only Product Plan or “Hipshot” Strategy

SRI Credibility Index

CREDIBILITY = 9

• Proven Champion and Team Member

• Strong Strategy, Segmentation, Product Definition and

Competitive Assess.

• Entire Career at Tennessee Controls, started at

Process Control Division in 1978

• Deep customer and product knowledge

• Had persuaded corporate management on a dual

strategy using independent distributors and

commissioned salesmen in the past.

5 3 1

7 5 3

10 7 5

Me too or copy able Product, No Unique Technology or

Distribution Channel

Volatile Product and/or Distribution Hook (6-12 Month Lead)

Strong Technical and/or Distribution Hook

(Defendable for 2+ Years

Leadership Product,

Expected to be Industry

Market Share Leader

Timeliness/Market Share

Product Uniqueness

“Neck and Neck” Product; Expected Relative Market Share to be 50-100% of Market Leader

Trailing Product, Expected Relative Market Share Below 50% of Market Leader

SRI Risk Factor

RISK = 3

• Strong Technical and Distribution Hook (Defendable

2+ Years)

• “Neck and Neck” Product; Expected Relative Market Share

to be 50-100% of Market Leader

• Priced at 1/3 of 005 Line, while delivering roughly

equivalent capability.

• Large market potential

• Included scenarios if competition enters the market.

As competitors did with the previous product: 005.

Year 1 Year 2 Year 3 Year 4 Year 5

TCC

Share

40% 50% 55% 60% 65%

Sales

$M

28.1 40.2 50.9 64.5 82.0

Gross

Profit

11.2 16.1 20.4 25.8 32.8

Year 1 Year 2 Year 3 Year 4 Year 5

TCC

Share

40% 50% 50% 45% 40%

Sales

$M

28.1 40.2 46.3 48.4 50.4

Gross

Profit

11.2 16.1 18.5 19.4 20.2

Assuming Not Followed:

Assuming Followed:

STRATEGIC RANKING INDEX

SRI = Credibility X Financial Return / Risk

Financial Return Factor =

(Original Profit Over Product Life / Maximum Negative Cash Flow) X (Life Cycle / Years to Maximum Negative Cash Flow

(39.8m / 17) X (15/2) = 17.5588 Financial Return Factor


(9 x 17.55888) / 3

= 52.65 Proposal 1

PROPOSAL 2:DEVELOP HIGH TECHNOLOGY

CONTROL SYSTEMS

• Steve Mowry (PH.D Electrical Engineering) – Division

Engineering and Development Manager.

• Played a large role in every product development

effort of the Division.

SUPERVISORY CONTROL AND DATA ACQUISITION STRATEGY (SCADA)

• Market Potential is huge

• Large demand

• Recommendation of hiring four individuals from the

industries that are initially targeted

• Plan to add one industry every year.

• Key is to be First in this business. Must start

Immediately

SCADA FORECAST MARKET DETAIL BUILDUP

1991 1992 1993 1994 1995

Industries 3 4 5 6 7

Sales 30,000 40,000 73,300 99,925 129.376

Custom

Cost

4,950 5,610 6,267 7,034 7,337

Total Cost 13,950 20,610 28,257 37,011 46,150

Gross

Profit

16,050 29,390 45,043 62,914 83,227

3 6 9

2 4 6

1 2 3




Strong Strategy,



Assess


Champion Commitment




CREDIBILITY: 6

• Proven Champion and Team member

• Some Strategic Analysis: Inadequate on Market

Environmental and Ignores Significant Strategic Factors.

• What if not First into the market? Competition Analysis?

5 3 1

7 5 3

10 7 5






Leadership Product,


Market Share Leader


Product Uniqueness



SRI Risk Factor

RISK = 3

• Volatile Product, Expected to be industry Market

Share Leader

• Volatile product and distribution hook (6-12 Month lead)

Biggest concern is that they will not be first in the market and

are not able to target and get into the industries that are planned to get into.





(44.5m / 16.4) X (15/3) = 13.567Financial Return Factor


(6 x 13.567) / 3

= 27.13 Proposal 2

PROPOSAL 3: ACQUIRE MDA

• Craig Neirman (MBA) 34, Division Controller

• Advocate of requiring new products and markets

• Purchase of small, high potential businesses

• MDA needed capital to finance continued growth, seemed to be good fit with Tennessee Controls

MDA

• Existing customer base (200)

• Start making profit immediately

• Provide economies of scale

• Excellent reputation for meeting commitments and

solving problems

• Same quality philosophy as TCC

Highly aggressive and talented sales force

10 % commission

PROFIT PROJECTIONS MDA ACQUISITION

1991 1992 1993 1994 1995

Sales 55.0 71.5 93.0 116.2 143.2

COGS 33.0 41.5 52.1 63.9 78.4

PBIT 3.9 7.3 12.3 17.3 23.9

Project Projections of MDA ($ Million)

1991 1992 1993 1994 1995

Sales 60.5 82.2 111.6 143.3 188.9

PBIT 7.1 13.7 23.4 34.8 50.0

Total Impact of Acquisition of MDA ($ Million)

3 6 9

2 4 6

1 2 3




Strong Strategy,



Assess


Champion Commitment




CREDIBILITY = 4

• Average team Champion

• Some Strategic Analysis: Inadequate on Market

Environmental and Ignores Significant Strategic Factors

• No competition analysis

• Did not adjust R&D costs and other G&A based on the acquisition.

5 3 1

7 5 3

10 7 5






Leadership Product,


Market Share Leader


Product Uniqueness



SRI Risk Factor

RISK = 3

• Strong technical and Distribution (Defendable for 2+

years)

• “Neck and Neck” Product, expected Relative market share

to be 50-100% of market leader





(108.5m / 25) X (25/6) = 18.083 Financial Return Factor


(4 x 18.083) / 3

= 12.06 Proposal 3

COMPARING SRI

• Proposal 1: 52.65 Develop New Products for High Volume Market Segment

•

• Proposal 2: 27.13 Develop High Technology Control Systems

• Proposal 3: 12.06 Acquire MDA

Proposal: High Volume Scada Tech MDA Acquisition

First Sales (Yrs) 1 1.5 Immediately

Peak Sales (Yrs) 10 5 15

Half-Peak Sales (Yrs) 15 15 25

Lifetime Profit ($) 39.8 44.5 108.5

Max Cum Negative Cash Flow - ($) 17 16.4 25

Max Cum Negative Cash Flow -(Yrs) 2 3 6

RECOMMENDATIONS

• We felt that Proposal 1 was the best decision based

off of:

• Steve Gregg was able to provide a competition analysis

• Even if followed, would still be making substantial profit

• Provided the least “lifetime profit” however it had the lowest Maximum Cumulative negative cash flow years (2)

• Open up two new markets:

• Low priced small I/O market and the drum timer replacement

market

ADVANTAGES / DISADVANTAGES TO SRI

• SRI Risk Factors only take into consideration the

“uniqueness” and “Timeliness/Market share”• Very Linear, does not take into account many important factors

• Should be focusing on the Financial risk and profit

associated with project

• Such as Maximum Cumulative Negative Cash Flows and net

profit.

- Does not take into consideration initial implementation cost

ADVANTAGES / DISADVANTAGES TO SRI

• SRI Credibility Index focuses on:

• “Commitment” to the company and “Strategic/Marketing

Content”

• Past performance is not necessarily a good indictor of future

performance.

• Difficult to consider all factors

SRI Financial Return Factor

- Very subjective in nature

What is criteria for each column?

- Difficult to put one number on so many factors

CONCLUSION

• We believe that Judy Starnes should go with the first

proposal based off of the information given.• Steve Gregg provided the best competition analysis and the proposal had low risk

There needs to be more consideration of which

project to pick other than the SRI index.

SRI index very linear, does not take into account all factors

Tennessee controls 2

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