Precision Steel Tubes Ltd*

In 1986, the Chairman and Managing Director (CMD) of Precision Steel Tubes
Ltd (PST}-a medium sized (sales of Rs 400 million) engineering company
called a meeting of his senior executives to discuss an idea for a new product.
He stated that in order to maintain the leadership in the existing business of
manufacturing and marketing "precision steel tubes,,, there was a need to
manufacture a new product called "cold rolled cold annealed" (CRCA) steel
coils, which was a backward integration. CRCA steel coils were used as a raw
material for manufacturing precision steel tubes. Although the company had
been procuring the CRCA steel coils from Bokaro Steel Plant of Steel Authority
of India Ltd (SAIL), the quality of the raw material was not consistent and the
deliveries were uncertain. Besides, other major competitors such as Tube
Investment Ltd and Tata Steel (Tubes Division) had their own cold rolled (CR)
plants, which gave them a competitive edge in terms of the quality and delivery
,of precision steel tubes. The CMD formed a task force consisting of senior
executives from finance, marketing, R&D, production, and purchase
departments to carry out the initial screening. The major findings of the initial
screening presented by the task force were as follows:

INITIAL SCREENING

3.

1.

The raw material for CRCA coils were "hot rolled" steel coils, which
were available from steel plants of SAIL as well as from imports.

2.

There was a possibility to use CRCA coils not only as a raw material
for precision steel tubes manufacturing, but also for marketing to the
present customers like bicycle manufacturers and automobile
manufacturers (2-wheelers, 3-wheelers, and 4-wheelers), besides
other market segments.

The company could use the existing sales force and branch network.

4.

The project would cost about Rs 120 miUion, including building, plant,
and machinery, which was within the company's financial capability.

This case is prepared by Prof. Krishna K Havaldar for class-room discussion. It does

not indicate an effective or an ineffective handling of business situations.

Case Study 4

331

5.

The project did not need any foreign technical know-how and the
same could be implemented by the in-house team with the help of an
Indian technical consultant.

6.

Although the new product would help in improving the company 's
market share in precision steel tubes industry by use of better quality
and availability of the raw material, the cost of manufacturing of CRCA
coils would be higher as compared to the purchase price from the
SAIL.

The meeting of the senior executives chaired by the CMD, discussed the
report of the task force on the initial screening. A few senior executives felt that
as the cost of manufacturing CRCA coils in-house would be higher than the
purchase prices of the same from SAIL, the profitability of the existing business
would be reduced. The CMD, therefore , asked the task force to carry out
business analysis, considering 50 per cent of the production of CRCA coils to be
used for in-house consumption for precision steel tubes, and the balance 50 per
cent production to be marketed at higher prices as CRCA coils.

BUSINESS ANALYSIS
A detailed business analysis was done by the task force . The marketing
department carried out an in-house market survey (instead of assigning the
work to an outside market-research agency). The market survey included
(a) collecting and analysing information on market demand (past, present, and
future); (b) technical and application needs of the potential customers;
(c) competitors' information on prices, commercial terms, market share and
production; and (d) information on imports and exports of CRCA coils.
The finance and technical departments worked on the techno-economic
analysis. The requirement of investment in building, (land was already available
at the existing company location), plant and machinery, and working capital
were estimated. Based on the sales forecasts; product mix; cost of
manufacturing; cost of marketing; likely price levels; profitability analysis,
including return on investment and break-even volume were worked out for the
next five years.

DECISION ON THE NEW PRODUCT

The business analysis report was discussed by the CMD with senior executives.
It was decided to go ahead with the new project with the initial capacity
production of 24000 metric tons per annum in the first phase, considering 50 per
cent production to be consumed internally for precision steel tubes and the

balance 50 per cent of CRCA coils to be marketed to the customers. To improve

profitability, it was decided to add 12000 MT per annum in the second phase, so
that 65-70 per cent of the new product could be marketed at higher prices and
the balance

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Industrial Marketing

30 per cent-35 per cent to be used in-house after completion of the second
phase.
The company decided to go for a public issue with the new product
becoming a separate division of the existing profit making company.

IM PLEM ENTATI ON
The product development work started with the help of a technical consultant
who had experience in CRCA coils. Construction of building, purchase of the
plant and machinery, deciding manufacturing process and layout, and others
were completed in about 9 months, and the trial production commenced in the
middle of 1987.
The marketing department supplied the samples against trial orders from
the automobile and bicycle customers. There were certain suggestions from
the customers on the technical parameters of CRCA coils since samples
supplied were partly acceptable. The technical team from production and quality
control visited the customers along with the marketing team to understand the
problems faced by the customers and to take corrective actions for future
supplies.
In the meantime, the marketing department worked out the marketing plan
for the new product. The target market segments were initially identified as
bicycle manufacturers and two-wheeler automobile manufacturers. Product
catalogues were made, pricing and other commercial terms were decided, sales
engineers from branches were given training for the new product, and the new
product was launched in the marked in August 1987.

AFTER THE PRODUCT LAU NCH

The rejection levels at the factory and at the customers' end were about 9 per
cent to 1O per cent, which was considered as very high. The production
manager attributed this to the lack of experience in majority of the work force. As
the workers and supervisors gain more experience, he felt , the rejection levels
would be reduced substantially. However, the customers either held back the
repeat orders, or gave small quantities of orders till they experienced an
improvement in the performance of CR coils supplied by PST. The finance
manager reported a loss in the company's operations for the year 1987-88. The
CMD called a meeting of the senior executives to discuss the performance of
the company. He particularly wanted to know whether the company took the
right decision in going for the new CR coils, and what could be done to improve
the company's performance for the year 1988-89.

Questions
1.

Identify the salient differences between Business marketing and

Consumer Marketing with reference to PST.

2.

Identify the problems/issues faced by PST.

3.

Discuss the steps you would initiate to resolve these issues.