The case pertains to Interscience B. V, Netherlands-based, 25 year-old, scientific equipment reseller company. Interscience is an exclusive marketer of gas chromatographs manufactured by US firm Thermo Finnigan.
Gas chromatographs are used for testing chemical contamination by the contract laboratories. The equipment has other high end usage in the R&D laboratories particularly for new product development. The contract laboratories perform various tests such as water, soil and air for companies, institutions and government. Recent environmental legislations across Europe have propelled the demand for such testing and in effect the contract laboratories are growing very fast. However, when it comes to purchasing gas chromatographs, contract labs are extremely price sensitive.
Business Model of Agilent and Varian
Business Model of Thermo-Finnigan VAS provided by Interscience
Interscience is planning to enter the contract laboratory market in the Belgium-Netherlands-Luxembourg (Benelux) region for growth in the sales of gas chromatographs.
Q1. What are the tradeoffs for Interscience in using geography versus application as a basis for market segmentation? There is intense competition in the contract laboratory market. The product has been reduced to commodity. Price is the main determinant of sealing a deal with the customers
As per fact given in the case the different geographical locations targeted were: a) Belgium – Netherlands- Luxembourg (Benelux) region of Europe for Contact Lab b) Ruhr-Rhine Region in Germany for R&D In Benelux region Gas Chromatographs was more treated as Commodity products thus selling in this market will require Interscience to craft a persuasive value proposition. This region was dominated by two North American firms i. e. Agilent (a spin-0ff of Hewlett Packard) and Varian which used to sell no frills equipment at low prices and thrived on customer preferences.
The current price of Gas chromatographs was € 40000 ( + 3%) whereas the lowest price model of Interscience was € 45000 which is 10% more than the available gas chromatographs. Though Interscience Chromatographs had lot many VAS but were of least importance for the customers in Benelux region. In Ruhr-Rhine Region of Germany there is great opportunity and potential in R&D for interscience. Some of the major benefits derived are
- Sales and profit potential is roughly equivalent to Contract Market of benelux. The Ruhr–Rhine region was in close geographical proximity to Interscience’s area of operations.
- R&D leveraged highly on core competencies of Interscience where it had successfully proven. Challenges in Ruhr Rhine region * Selling in the R&D market will require reinventing the selling approach
- The market has potential, but with given resources, Interscience cannot pursue both the markets
- There are already 15 local players fighting out in this segment for the last 30 years Market characteristic: nationalistic and loyal German marketplace.
Q2: Which Market should Interscience target and what should its positioning of the Trace GC be? What, specifically, is the value proposition for the Trace GC in the selected market?
Answer: As per the discussion above and the facts presented and analyzed in answer 1 and 2, we would recommend Trace GC for Contracts Laboratory Market after removing few of the value added services like Customization, Education and training, consulting which are not required in the Contracts lab markets. Though as per the calculations given above we can see that Net Earning per Gas Chromatograph per annum is €116,835 which is 100% more than Varian 3800 (€ 56,635). If we calculate Cycle Time (Per Job) it takes 4 minutes less than Varian 3800 and Trace GC additionally performs 22000 job per annum which adds up to additional revenue of € 66000.
Further, to add up we can see productivity efficiency of Trace GC is 4 minutes higher than Varian 3800 which will decrease the cost of ownership by 4 min / 60 X € 45 = € 3 per hour (technical person’s wage per hr). Trace GC could be positioned as Highly Efficient Gas Chromatographs for contract laboratories and one day emergency response guarantee and urgent repair services could be provided on additional charges. For Germany, R&D market there challenges are already specified in answer 1 but at the same time we see high product efficiency and value price proposition in contract laboratory market so it is recommended that Trace GC should be positioned in Benelux market.