In April 2013, after an intense meeting with his management team, Favio Deleo had mixed feelings about the developments in recent months –he was torn between his enthusiasm over the progress made and his concern about delayed outcomes. Favio and his company had introduced several changes into its business model1 to adjust to dropping trend in compressor sales that had started back in 2011. The target segment had been changed; a number of organizational adjustments had been made, and service prices had been reformulated, among other things. However, Favio mostly wondered if the company should stick to the adopted business model or go for a more radical shift, choosing a new course for its future. This case was prepared by Professor pedro Frías, from the universidad de san andrés school of management. Teaching cases are developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data, or illustrations of Copyright © 2015 universidad de san andrés - school of management. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means --electronic, mechanical, photocopying, recording, or otherwise-- without the permission of the copyright holder. Case dmd Compresores Issn: 2451 - 6651 1 Adjusting the Business Model 25/03/2015 Case: version: us0003 AUTHORSHIP CREDITS This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 2 Case: US0003 IndustrIal Compressed aIr An air compressor is a device that turns gas or electric power into kinetic energy in order to produce a desired movement. While it is less accurate for mechanism positioning and does not allow pressed air, several types of compressors were used, and rotary screw compressors had become the most common for industrial applications. In Argentina, on account of its application and usefulness, 90% of industrial companies used compressed air in their production operations, turning it into a key raw material for their pro 2 dmd Compresores viding solutions that involved compressed air. Ever since its inception until the 1990s, the com The company was founded by Domingo Deleo, and his son Favio managed it since 1998. Looking back, Favio recalled, operations relied heavily on him. I had some technical knowledge and ran the factory, the crisis would not last forever, and, at a time when many companies were dismissing our true asset. Starting in 2003, a number of initiatives and achievements turned DMD into an industry ben ≈ compressors and production processes. ≈ that involved industrial compressed air. ≈ It started manufacturing proprietary-design rotary screw compressors in a leased plant. Juan Caminos. 2 Based on company data. This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 3 Case: US0003 ≈ The company expanded its reach across the country, with sales and service representatives. ≈ It also increased its number of service vehicles to eight. ≈ at Lanús, a town in the Greater Buenos Aires area, where the company moved a year later. ≈ In 2006, the company emphasized its presence in industry fairs and exhibitions, streng ≈ Starting in 2008, DMD concentrated on variable power compressors, foregoing the prosors adjust to air demands, yielding electric energy savings. ≈ exhibit 1 exhibit 2 compressor manufacture and sale business. both located in Buenos Aires Province. Organizational Structure and Features Deleo, who was also in charge of marketing, served as general manager. Juan Caminos headed the technical department, while Ana Marando served as administrative manager. 1. duction, inventory and availability for sales. 2. logistic and production management. 3. trics and discussing company performance vis-à-vis its goals. exhibit 3 shows some management metrics established by top management,3 while exhibit 4 3 not all indicators were measured as established. Exhibit 3 does not include all scoreboard metrics. This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 4 Case: US0003 the same time, Favio managed to establish a corporate culture based on un-dissenting alignment, securing team support for this management style. often coexisted and clashed with the need to streamline routine, foreseeable operations. Quality issues were monitored and handled with key metrics like “Compressor Quality”, “Compresexhibit 3 manager at the time left the company as a result of strong discrepancies with Favio on account of his management style. Juan Caminos took over in early 2011 and found organizational shortcomings that drove him to restructure the entire area. ning administrative procedures, enabled seamless management of operations as well as the collec and its daily operations threatened the automatic validity of systems and controls. For example, and dedication expected from every company employee. He had a kind, considerate personality, combined with a rigorous eye for detail and a keen sense to spot mistakes. His management were the most important things.” exhibit 5 produCts y servICes This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 5 Case: US0003 support, which operated as a hotline for emergencies. exhibit 6 shows a summarized income claimed that service costs were high. When a technical assistance service was provided, the company analyzed whether the client was active4 or not in order to determine if the service would be provided on a prioritized 24-hour order or within 48 hours, on a regular order schedule. In 2012, 151 new clients were signed on, while 5 compressors, while the remaining 20% owned compressors ranging from 30 HP through 125 HP. As to product sales, DMD sold air compressors with varying power, divided into four segments included used devices and imported DMD-branded compressors. exhibit 7 in every product category over recent years. cost –including energy costs- proved lower. tegies. In 2013, Favio said in this regard, “The most convenient clients for DMD need 30 to 50 hips are forged. These are owner-to-owner ties.” However, starting in 2008, Favio sought to fo exhibit 8 for a summarized description exhibit 9 4 be a regular spare part buyer. 5 HP stands for “horse power”. This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 6 Case: US0003 primarily concentrated on target segments for 30- and 50-HP compressors, the company tried to example, metrics 1.1 and 1.3 in exhibit 3 market and CompetItors exhibit 10 for company competed with CETEC and other vendors. preventive and corrective maintenance services. It also manufactured, distributed and rented a wide range of devices for industrial, construction, service and entertainment applications. For compressors. The company also provided power generation services in several South American markets. As its trademark trait and key success factor, Sullair clients appreciated the ties forged Atlas Copco, an international company based in Stockholm, Sweden, operated in over 160 mar catered to the mining and food industries. a cornerstone of its success. It marketed compressors of more than 50 HP. DMD characterized its target client segment as consisting of medium-sized industrial compa This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 7 Case: US0003 food and beverages, chemical products, metals and alloys, rubber and plastic, machinery, textiles, and automobiles. dmd’s BusIness model In 2010 6 is summarized on Table Favio realized that some of these outcomes were inconsistent with each other or had dubious choices made in regard to culture and personnel brought some execution issues for the established client and product focus. 6 This approach to a business model is based on the notion that the strategy pursued by a business may be expressed by the hined, must allow for sound feedback and synergy to support a viable strategic path. A business model thus expressed may refer to both executed and planned strategies. table 3. dmd’s Business model in 2010 –strategic Choices and their Consequences Strategic Choice Overall industrial compressed air solution offering Innovating, customized product development and design Focus on high-power compressor sales Specialized VE (variable energy) compressors Avoiding sales of compressors below 30 HP On-demand technical assistance to clients Third-party compressor repairs Scheduled compressor maintenance Culture based on ownership and commitment Culture of uncontrolled personal contributions Personnel with basic management training Consequences Extended product and service menu Distinctive technical capabilities Competition with multinational companies (MNCs) Focus on clients that value energy savings (medium-sized and large firms) Neglecting SMEs Logistic stress as a result of unpredictability Expertise and access to spare parts Resource allocation planning Low dissent tolerance High reprocessing incidence and guarantee coverage An organization with a weakness in procedures and economic rationale This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 8 Case: US0003 power devices and the support of an organization characterized by technical capabilities and responsiveness to client needs. Ever since it launched its variable power compressors, DMD had performed well, managing to which meant that DMD remained somewhat dependent upon its traditional SME client segment. the 2011 CrIsIs By mid-2011, it became clear that DMD compressor sales growth had slowed down. Rising do InItIatIves launChed sInCe the CrIsIs In 2011 a. Client segmentation. Clients were categorized as active or non-active. Upon an urgent to categorize clients as target or not, this initiative was lagging behind. b. Sustainable service prices. All service hourly fees were recalculated in order to enhan later sales or services, but this often meant foregoing payment altogether as time went lity issues –categorization was delayed in these orders. c. 15-HP and 30-HP compressor offerings. A new line of lower-power screw compressors was imported, and DMD-manufactured, variable energy 15-HP and 30-HP compressors ted compressors by 2013. This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 9 Case: US0003 d. Increased productivity and quality. Productivity became a critical management factor across areas, featured in all internal communications and management reports. All work tomer satisfaction surveys in their discussion agendas. Preventive maintenance services and repairs at the plant were the areas that embraced this initiative more rapidly. e. Management responsibility. With workshops, individual and group coaching sessions and scoreboards, all area heads with managerial responsibilities were challenged to rened this initiative and learned to let go and to listen more to others. f. Management competencies and goal scope. the scheme shown in Exhibit 4. With this adjustment, individual accountability and deting and management tasks was diagnosed. All areas were asked to formalize procedures and streamline recurrent operations –for example, the preventive maintenance area de advance. The repairs area was also developing a similar tool, while the production area factured at DMD. The production and sales teams had managed to build sound coor meet sales deadlines. aprIl 2013 help but fret about the lacking results. Particularly troublesome was the fact that the 2013 annua nomic sustainability. However, he still wondered how to actually secure that increase. He started ≈ ≈ ≈ ≈ ≈ This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 10 Exhibit 1: DMD’s Effi ciens VI Line Exhibit 2: Some of DMD’s Clients Section “These are some of the FIRMS that have trusted DMD.” This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 11 Exhibit 3: Top Management’s Key Performance Indicators Section ! 0.6 0.7 0.8 1.1 1.3 2.1 2.2 2.3 2.4 3.1 3.2 4.1 4.2 5.1 5.2 5.3 6.1 7.1 7.2 8.3 9.1 9.4 Metric High-power compressor market share (%) Presence in compressed air service market (%) DMD brand image Target client base % of target client retention Sales of high-power DMD compressors in HPs DMD compressor quality (on a score from 1 to 10) Compressor guarantee cost (in DMD units) DMD compressor users’ satisfaction Complete preventive maintenance services provided Clients with preventive maintenance subscriptions Useful assistance hours Assisted clients High-power compressor repairs in HPs Repair quality (on a score from 1 to 10) Deadline compliance (%) Key profile gaps Service capacity utilization (%) Plant capacity utilization (%) Inventory losses as % of sales Goal awareness Collaboration perception Description Number of DMD compressors installed and in use / number of existing high-power compressors, according to Marketing Department data Number of high-power compressors serviced over the past 12 months / / number of existing high-power compressors, according to Marketing Department data Brand awareness survey Number of target clients that purchased devices and/or services over the past 12 months Client base over the past 12 months existing in the client base over the previous 12 months / client base over the previous 12 months (-13 through -24) Total HPs from high-power DMD compressors sold Number of new DMD devices with guarantee and no incidents / number of new DMD devices with guarantee x 10 Internal revenues from new DMD devices’ guarantee coverage / regular DMD1200 price Survey score on a scale of 1 (poor) to 5 (excellent) Number of complete preventive maintenance services provided and invoiced in one period Base clients that hired us over the past 12 months for complete preventive maintenance service and rehired us at least one consecutive second time Number of billable assistance hours in one period Base clients that received technical assistance over the past 12 months Total HPs from repaired high-power compressors Number of repaired devices with guarantee and no incidents over the past 6 months / number of repaired devices with guarantee over the past 6 months x 10 Repair orders completed by promised deadline / (completed repair orders + pending repair orders) Attributes in place in key positions / total attributes for key positions (Billable hours [including scheduled services] + guarantee hours) / (work days x number of dedicated trucks x 9 hours) x 100 (Standard hours of manufactured devices + hours scheduled for repairs) / (work days x hired workers x 9 hours) x 100 (Recorded inventory shrinkage + differences in physical count + low turnover devaluation) / sales Assessment of knowledge of DMD goals and their interactions for managers, heads and supervisors Internal survey score on a scale of 1 (poor) through 5 (excellent) This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 12 Exhibit 4: DMD’s Simplified Organization Chart General Manager Favio Deleo Favio DeleoAna Marando Marketing Marcelo Martinez Technical ManagerMarketing ManagerAdministrative Manager Juan Caminos Production Planning Plant Head Marcelo Vargas MechanizedStorage RoomServices LogisticsPreventive Maintenance Marketing AssistantsTreasuru Accounting Management Repairs Thecnical Assistance Industrial Supplies Technical Asssitance Manufacture Repairs Purchasing Head Rodolfo Rodas Techinical Assistance Head Daniel López H.R. Juan Silva Service Marketing Head Dario Gularte Sales head Horacio Pinedo R&D Production & Sales Team Member Service Team Member Top Management Team Member Section This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 13 Exhibit 5: Top Management Team’s Key Members Juan Caminos leader. Respected for his technical knowledge, he recognized his need to enhance his management capabilities, especially for delegation. Horacio Pinedo Head of sales since 2010, Pinedo joined DMD in 1998, when he was 40 years old. After serving at several administrative areas, he led a three-salesman team that also included a sales administrative clerk to manage sales in the Greater Buenos Aires area. He trusted Favio completely. Darío Gularte he was also in charge of service coordination and logistics. Gularte led the preventive maintenance and repairs streamlining and scheduling initiative, as well as the client base categoriza Ana Marando for a renowned alcoholic beverages company for 21 years. She headed the initiative to streamline reports and scoreboards. She upheld the need to streamline and rationalize operations. Favio trusted her and valued her contributions for company professionalization. Daniel López over prevention. He was in charge of supervising and solving the problems faced by technicians Section This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 14 Exhibit 6: Service Income Statement –First Quarter of 2013 (in Ar$ ‘000s)7 Exhibit 7: Yearly Equipment Sales, 2009 - 2012 The exchange rate in this period was US$ 1 = Ar$ 5.01. Plant repairs Preventive maintenance Technical assistance Supplies and spare parts Equipment rentals Direct expenses Service income DMD’s overhead Operating Income Sales 1.186,4 34 % 1.531,0 44 % 473,3 14 % 227,4 6 % 80,9 2 % 3.499,1 100 % Contribution Margin 386,1 33 % 1.136,8 74 % 400,7 85 % 140,3 62 % 60,5 75 % 2.124,4 61 % 1.385,4 40 % 739,0 21 % 688,0 20 % 51,0 1 % ! ! ! ! DMD-manufactured devices 15 HP 30 HP 50 HP 100-125 HP Subtotal Other and used devices 15 HP 30 HP Total devices sold 2009 26 25 19 3 74 25 9 107 2010 23 34 38 2 98 22 12 131 2011 25 33 32 3 93 25 12 130 2012 21 28 25 11 85 12 20 117 Section This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 15 Exhibit 8: Industrial Clients’ Characteristics per Power Segment Exhibit 9: Brand Image Survey Findings 15-HP Segment Spontaneous requirement Surfing the Web for products DMD seems expensive for services Often having specific needs Wanting compressed air Swift purchases Firms usually have an owner who makes decisions Informal Not valuing communications 30-HP Segment DMD supports these firms’ growth DMD provides good service Interested in energy savings Valuing domestic industry Firms usually have an owner who makes decisions Firms usually have a maintenance head Suppliers for large companies Relying on domestic market Loyal to good service and quality 50-HP Segment DMD-driven sales Brand awareness issues DMD brand image issues Firms typically have an engineering department Interested in energy efficiency Valuing communications and control Administrative bureaucracy Investment notion as part of culture Requiring quality Investments made when business grows Able to export Medium-term thinking 100/125-HP Segment Large companies Decisions are made abroad Every sale involves a project Brand awareness issues Brand-based investment policies Multinational companies Medium- and long-term thinking Having an engineering department Interested in energy efficiency Valuing communications and control l Number of respondents Aware of DMD (no image) Recognizes DMD’s image Thinks he/she has seen it Knows what it is about 2012 258 60 104 69 93 2011 263 56 128 108 63 2012 % 23,3 40,3 26,7 36,0 2011 % 21.3 48.7 41.0 24.0 Section This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 16 Exhibit 10: Competitors’ Compressor Sales ! ! ! ATLAS KAESER INGERSOLL CHINOS CECCATO FINI OTHER Total Imported Devices DMD SULLAIR CETEC CÓNDOR Total Domestic Devices GRAND TOTAL Power 100 HP 50 HP 100 HP 5 HP 30 HP 10 HP 5 HP 30 HP 50 HP 30 HP 10 HP Yearly Average 2007 & 2008 194 210 42 35 481 136 85 75 296 777 2009 & 2010 249 272 47 50 618 119 140 115 374 992 2011 349 494 129 87 69 103 38 1.269 130 118 124 104 476 1.745 2012 327 655 98 148 50 22 30 1.330 117 201 42 205 565 1.895 TOTAL 1.562 2.113 405 405 119 125 68 4.797 757 769 546 309 2.381 7.178 Source: Company elaborated data. Section This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017. p. 17 Exhibit 11: Projected Income Statement, 2011 (in Ar$ ‘000s)8 Exhibit 12: Projected Income Statement, 2013 (in Ar$ ‘000s)9 Sales Variable costs Contribution margin Direct fixed costs Income from sales and services Overhead expenses Net operating income Compressor Sales 11.362,7 7.070,5 4.292,2 2.102,5 2.189,7 2.306,8 -117,1 Services 9.699,1 3.419,7 6.279,4 4.175,2 2.104,2 2.306,8 -202,6 Total 21.061,8 10.490,2 10.571,6 6.277,7 4.293,9 4.613,6 -319,7 Sales Variable costs Contribution margin Direct fixed costs Income from sales and services Overhead expenses Net operating income Compressor Sales 16.454,0 10.948,9 5.505,1 3.226,5 2.278,6 3.454,5 -1.175,9 Services 18.144,0 7.031,8 11.112,2 6.321,0 4.791,3 3.454,5 1.336,7 Total 34.598,0 17.980,7 16.617,3 9.547,5 7.069,8 6.909,0 160,8 8 9 Section This document is authorized for use only by Daniel Rukare in ENT200 - Principles of Entrepreneurship - LON1 at Hult International Business School, 2017.