BASIC MARKETING 18th Edition by Jerome McCarthy William Perreault, Joseph Cannon

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A Cut Above, Inc. (ACA)
Arturo Santana, president and marketing manager of A Cut Above, Inc., is deciding what strategy, or strategies, to pursue.
A Cut Above (ACA) is a manufacturer of industrial cutting tools. These tools include such items as lathe blades, drill press bits, and various other cutting edges used in the operation of large metal cutting, boring, or stamping machines. Arturo takes great pride in the fact that his company-whose $5.7 million sales in 2010 is small by industry standards-is recognized as a producer of a top-quality line of cutting tools.
Competition in the cutting-tool industry is intense. ACA competes not only with the original machine manufacturers, but also with many other larger domestic and foreign manufacturers offering cutting tools as one of their many different product lines. This has had the effect, over the years, of standardizing the price, specifications, and, in turn, the quality of the competing products of all manufacturers. It has also led to fairly low prices on standard items.
About a year ago, Arturo was tiring of the financial pressure of competing with larger companies enjoying economies of scale. At the same time, he noted that more and more potential cutting-tool customers were turning to small tool-and-die shops that used computer-controlled equipment to meet specialized needs that could not be met by the mass production firms. Arturo thought perhaps he should consider some basic strategy changes. Although he was unwilling to become strictly a custom producer, he thought that the recent trend toward buying customized cutting edges suggested new markets might be developing-markets too small for the large, multiproductline companies to serve profitably but large enough to earn a good profit for a flexible company of ACA's size.
Arturo hired a marketing research company, MResearchPro, to study the feasibility of serving these markets. The initial results were encouraging. It was estimated that ACA might increase sales by 65 percent and profits by 90 percent by serving the emerging markets. The research showed that there are many large users of standard cutting tools who buy directly from large cutting-tool manufacturers (domestic or foreign) or wholesalers who represent these manufacturers. This is the bulk of the cutting-tool business (in terms of units sold and sales dollars). But there are also many smaller users all over the United States who buy in small but regular quantities. And some of these needs are becoming more specialized. That is, a special cutting tool may make a machine and/or worker much more productive, perhaps eliminating several steps with timeconsuming setups. This is the area that the research company sees as potentially attractive.
Next, Arturo had the sales manager hire two technically oriented market researchers (at a total cost of $85,000 each per year, including travel expenses) to maintain continuous contact with potential cutting-tool customers. The researchers were supposed to identify any present or future needs that might exist in enough cases to make it possible to profitably produce a specialized product. The researchers were not to take orders or sell ACA's products to the potential customers. Arturo felt that only through this policy could these researchers talk to the right people.
The initial feedback from the market researchers was most encouraging. Many firms (large and small) had special needs- although it often was necessary to talk to the shop foreman or individual machine operators to find these needs. Most operators were making do with the tools available. Either they didn't know customizing was possible or doubted that their supervisors would do anything about it if they suggested that a more specialized tool could increase productivity. But these operators were encouraging because they said that it would be easier to persuade supervisors to order specialized tools if the tools were already produced and in stock than if they had to be custom made. So Arturo decided to continually add high-quality products to meet the ever-changing, specialized needs of users of cutting tools and edges.
ACA's potential customers for specialized tools are located all over the United States. The average sale per customer is likely to be less than $500, but the sale will be repeated several times within a year. Because of the widespread market and the small order size, Arturo doesn't think that selling direct-as is done by small custom shops-is practical. At the present time, ACA sells 90 percent of its regular output through a large industrial wholesaler-Superior Mill Supply-which serves the area east of the Mississippi River and carries a very complete line of industrial supplies (to "meet every industrial need"). Superior carries over 10,000 items. Some sales come from customers who know exactly what they want and just place orders directly by fax or at the firm's Web site. But most of the selling is by Superior's sales reps, who work from an electronic catalog on a laptop computer. Superior, although very large and well known, is having trouble moving cutting tools. It's losing sales of cutting tools in some cities to newer wholesalers specializing in the cuttingtool industry. The new wholesalers are able to give more technical help to potential customers and therefore better service. Superior's president is convinced that the newer, less- experienced concerns will either realize that a substantial profit margin can't be maintained along with their aggressive strategies, or they will eventually go broke trying to overspecialize.
From Arturo's standpoint, the present wholesaler has a good reputation and has served ACA well in the past. Superior has been of great help in holding down Arturo's inventory costs-by increasing the inventory in Superior's 35 branch locations. Although Arturo has received several complaints about the lack of technical assistance given by Superior's sales reps-as well as their lack of knowledge about ACA's new special products-he feels that the present wholesaler is providing the best service it can. All its sales reps have been told about the new products at a special training session, and new pages have been added to the electronic catalog on their laptops. So regarding the complaints, Arturo says, "The usual things you hear when you're in business."
Arturo thinks there are more urgent problems than a few complaints. Profits are declining, and sales of the new cutting tools are not nearly as high as forecast-even though all research reports indicate that the company's new products meet the intended markets' needs perfectly. The high costs involved in producing small quantities of special products and in adding the market research team-together with lowerthan- expected sales-have significantly reduced ACA's profits. Arturo is wondering whether it is wise to continue to try to cater to the needs of many specific target markets when the results are this discouraging. He also is considering increasing advertising expenditures including some search engine advertising in the hope that customers will pull the new products through the channel.
Evaluate ACA's situation and Arturo Santana's present strategy. What should he do now?