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CORPORATE GLADIATORS 2016

Intra-NSU Qualification Case - CILKRAY GRAPHICS

The following case has been provided for the Intra-NSU Qualifications of Corporate Gladiators 2016.
Unauthorized distribution of this content is strictly prohibited

FRAN K V. CE SPEDE S
AL ISA ZAL OSH

Cilkray Graphics
In late November 2013, Marcus Crosby, president of Cilkray Graphics, convened an emergency
meeting with the firms senior managers in order to respond to an unexpected development. Cilkray
sold three lines of specialized graphics processing units (GPUs). Each line targeted a segment of the
professional1 market for Hosted Virtual Desktops (HVDs).2 Grovex, Cilkrays key competitor, had just
announced the competitive products, including Cilkrays most advanced product line, the CP3000.
Industry rumors suggested that the GSpeeds price would be 20% to 30% below that of the CP3000.
Crosby and his team saw two options: Cilkray could drop the CP3000s price immediately. It could
also delay its planned release of its new CK300, scheduled for December 2013, in order to make its
products more competitive. Crosby and his team had to decide what Cilkray should do next.

CPUs, GPUs, and HVDs


A computers central processing unit (CPU) managed the computers memory and supported user
tasks such as mathematical calculations and visual display. A faster CPU offered better performance.
Performance was assessed by how many millions of instructions per second (MIPS) the processor could
handle.3 By 2013, most personal computers had processors with rates in excess of 100,000 MIPS because
of advances in the materials, manufacturing processes, and applications used to create circuits and
chips. Nonetheless, processing requirements often exceeded processing capability, especially in
industries with complex graphics requirements. To meet this challenge, dedicated graphics processing
units (GPUs) were introduced in the early 2000s.

1 The GPU professional market generally demanded greater software and hardware capabilities to support engineering while

the consumer market was comprised mostly of video gaming.


2 This case focuses on GPUs for the virtual desktop industry. All mentions of GPU in the case refer only to units that support

virtual (as opposed to local) desktops, unless otherwise indicated.


3 For example, a processor with a speed of 20 MIPS could handle 20 million instructions per second.

Cilkray Graphics

GPUs were parallel processors that operated in tandem with CPUs and executed most graphics
processing demands. They freed CPU memory and increased a computers overall performance. GPUs
were widely used in graphics-intensive industries, including entertainment (e.g., for animation and
special effects), life sciences (e.g., for simulations), industrial design (e.g., for 3D modeling in the
automotive, air, and space industries), and video gaming.

Hosted Virtual Desktops (HVDs)


Within organizations, most computing functions, including processing and storage, were once
managed locally at a desktop workstation or on a nearby server. Gradually, software manufacturers
migrated to a software as a service model, enabling client access to software via the Internet. This
change shifted the responsibility for upgrades, maintenance, and security from multiple local sites to
external providers and promoted significant cost and labor efficiencies.
Over time, companies managed an increasing number of computer functions virtually or in the
cloud.4 By 2013, desktop computing itself had become available as a cloud service; users could access
hosted virtual desktops (HVDs) anytime from anywhere, through laptops, smartphones, and other
mobile devices. GPUs designed to support virtual desktops liberated workers from dedicated stations
and enabled collaboration from multiple remote locations.
The HVD marketa was $13.4 billion by 2013.b Hosted virtual desktops were projected to account for
15% of all professional desktop PCs worldwide, or 66 million connected devices, by the end of 2014. c
Forecasts predicted compound annual growth rate (CAGR) estimates through 2018 ranging from 30%d
to 64%,e suggesting a market of $50 billion to more than $150 billion by 2018.
Sophia Scanlon, Cilkrays vice president of marketing and research, projected that the GPU market
for the class of products within which Cilkray competed was equivalent to 2% of the HVD market, or
$268 million in 2013.f She expected this figure to climb to 3% by 2015 (see Exhibit 1 for GPU unit
shipments 20102013).

Customer Segments and Performance Criteria


Industry analysts usually segmented Cilkrays market into three groups (Exhibit 2 defines each
segment, its estimated size in 2013, and projected annual segment growth between 2013 and 2018.) All
three segments evaluated product performance using two main criteria:

Memory, as measured in gigabytes (GB). The more gigabytes, the more computing commands
the processor could receive and store simultaneously.
Processing Speed, as influenced by the number of cores within a processor. A processing core
was responsible for reading commands given to a computer, and for translating them into
computing actions. More cores within a processor increased performance.

As the use of virtual networks expanded, organizations needed to purchase more computer
hardware, thus introducing other criteria for evaluating products. For example, hardware components
generated heat and had to be stored in a climate-controlled environment. As the costs for storing and
cooling hardware increased, IT managers began to value hardware that lowered size and heat output.

4 Cloud computing refers to shared computer resources stored on remote servers and the software networks that allow multiple

users to centralize data storage and capacity.

Cilkray Graphics

Ancillary performance criteria included:

Concurrent user capability: the number of workers simultaneously supported by a single GPU
Physical unit size: smaller units reduced storage costs
Heat dissipation: embedded self-cooling capabilities reduced cooling costs
Server compatibility: the ability for products to work seamlessly with a clients servers

Power efficiency: reduced power consumption lowered operating and heating costs

Cilkray: Company Background


Crosby had founded Cilkray in 2006 to produce graphics cards for specialized applications. His
experience in the hardware industry led him to believe that virtual computing would become
ubiquitous within organizations. He recognized, however, that virtual networks lacked the processing
power needed to support many professional graphics programs. Cilkray launched its first product in
early 2010. Positive feedback and successful marketing prompted growth and soon positioned the
company as a technological leader. In 2013, it expected to ship nearly 16,200 units worldwide (see
Exhibit 3 for Cilkrays financials in 2012 and 2013).

Product Evolution
In analyzing market segments, the Cilkray team had learned that processing requirements varied
between industries and job functions. A marketing manager for a financial services firm, for example,
needed only one-third of the processing power required by an auto design engineer. Crosby explained:
We could have produced one, flexible product line to serve all industries and job functions, but
only clients with the most sophisticated graphic programs would be able to afford it. We divided
the prospective market into three professional segments and imposed a memory/speed ceiling
on each segment, with improvements in new releases at a rate reflecting Moores Law. 5 In turn,
we configured our R&D to focus on each segment and our manufacturing in small-batch
processes geared to each segment. Our competitors have upheld our vision of the market.
In early 2011, the Cilkray team predicted that the market for lower-end products, those targeted at
Task workers (see Exhibit 4 for definitions of Task, Knowledge, and Power) segments, would plateau
and decline as GPUs became standard in low-end laptops and desktops. By late 2011, Cilkray therefore
shifted its focus away from Task products to the more complexand more profitableKnowledge
and Power markets. While it still sold Task products in 2013, the company predicted sales in this
segment would plummet by more than 60% by 2014. Crosby noted, We believe the low-end Task
segment will commoditize, and as a tech leader we want to devote our resources to the higher-end and
higher-margin segments (Exhibit 5 shows Cilkrays 2013 revenue and profitability by segment).

Product Development
A single product upgrade for a customer segment took engineering from three to six months,
depending on its complexity. Such upgrades accounted for most of Cilkrays R&D expenditures. At a
company meeting in June 2013, Crosby said:

5 Moores Law refers to a prediction made by Gordon Moore, cofounder of Intel, that processing speed would double roughly

every two years; the estimate is an accepted industry standard.

Cilkray Graphics

We believe in the growth opportunity in the Power segment, as 3D modeling advances and as
remote access becomes widespread across industries and functions. Fortunately, our Power
product is best-in-class, as evidenced by the GPU Industry Associations coveted Industrys Best
award granted to us earlier this year for CP3000.
Our sales focus through years end will be to leverage the CP3000 to increase our market share
in Power. Our engineering team will upgrade the performance of our Knowledge product,
CK200, in anticipation of upcoming improvements to Knowledge products. We plan to launch
the improved CK300 in early December, 2013, so we have three months to deploy and distribute
it before the industry conference in March 2014. In addition to boosting memory and speed, it
will slightly reduce heat output and push compatibility from 60% to 75%. We will incorporate
those advances into the CK300 release in December.
The companys vice president of engineering, Lawrence Barrett, commented: Our improvements to
cooling and compatibility for the CK300 came too late. They should have come in 2012, before our
competitors were able to do so. Our focus on memory and speed contributed to our success, but led us
to be reactive in other important metrics.

Product Distribution
Cilkray employed both direct and channel sales efforts to distribute its products globally. Its inhouse GPU sales teams sold directly to customers. Yet, given the fragmented nature of the end market,
the range of capabilities required, and capacity constraints, it also relied on channel partners. These
included small independent shops, leading global IT consultants such as Accenture and IBM, and
various hardware and software providers. The larger players offered distribution, pre-sale, and aftersale support capabilities. In general, manufacturers with less complex products relied more heavily on
channel partners than they did on direct sales channels to sell their products. Typically, the sales cycle
lasted between three and six months and included installation and post-installation support.
Cilkray also authorized distributors to sell its products; these partners sold the companys products
as part of their own product and service portfolios. Both types of channel partners, IT firms and
authorized distributors, managed the installation of new computer hardware and educated their clients
on how to run and maintain these systems. Cilkray required its channel partners to keep current on
new product releases and to participate in quarterly conference calls that announced updates and
product developments. It also discounted products sold to channel partners by 35%.
By 2013, all of Cilkrays GPUs earned high industry and customer ratings for post-installation
performance and reliability. However, a third-party survey of IT managers and partners revealed that
many customers, especially within the Power segment, believed that Cilkrays products were
unnecessarily complex and time consuming to install. Numerous partners contended that they would
be more inclined to recommend Cilkrays products if they were more user-friendly, especially in terms
of installation. Cilkrays engineers disagreed with these criticisms. Barrett explained, Im sure these
complaints come from clients and channel partners who fail to leverage our great training.

Competitive Landscape: Knowledge and Power Markets


Cilkray, Grovex, and XLRush sold Knowledge and Power products to the global market in 2013.
These companies dominated the GPU market (see Table 1 for a list of products by company and
Exhibit 6 for estimated market share by company).

Cilkray Graphics

Table 1

Products by Company, 2013

Manufacturer
Cilkray

Grovex
XLRush

Product Name

Memory
Limit
(GB)

CT30
CK300 (planned)
CP3000
GK250
GSpeed3000
XLK450
XLP1000

8
16
32
16
32
16
32

Processing
Speed
(Cores)
400
700
1,120
600
1,450
800
1,000

Heat Output
(Watts)
400
500
600
400
500
550
500

Size
(Inches)
16
14
16
13
12
15
16

Price
$2,000
$4,000
$8,000
$3,400
$5,600-$6,400a
$4,600
$8,000

a Rumored price range

Source: Case writer estimate

Grovex
Grovex, a manufacturer of computer processors, based in Raleigh, North Carolina, was the leading
vendor of processors for manufacturers of low- to mid-range desktops and laptops. Its CPUs provided
average reliability at a reasonable price. With pricing typically 10% to 15% lower than that of its
competitors, the company had a wide distribution network made up of hundreds of IT consultants and
third-party resellers.
The manufacturer produced its first standalone GPU in 2009, to add basic graphic and video
support for low-end computers in the Task segment. It introduced its first GPU in the Knowledge
segment in 2010; and its stated goal for the Knowledge segment was to enhance virtual processing for
small businesses through remote collaboration and graphics processing. Grovexs products were
simple for end users to install, and were compatible with most server infrastructures. By 2013, the firm
held 65% of the global Task market. Its manufacturing process was configured for mass production,
and its share in this segment supported the scale required for its production approach.

XLRush
In 2013, XLRush was Cilkrays main competitor in the Power market, with 43 percent of global
market share. Headquartered in South Korea, XLRush had focused mainly on supplying Asian
technology firms. In 2012, the company launched a Knowledge product, the XLK450, to supplement its
Power product. XLRushs products were compatible with 25% of server infrastructures. Its effort to
expand geographically in 2012, however, had failed. Prior to the GSpeed announcement by Grovex,
Cilkray had focused on preventing XLRushs penetration of new industries and geographic markets.

The Grovex GSpeed Introduction


On November 18, 2013, at the Graphics Development Conference (GDC) in San Jose, California,
Grovex announced its newest GPU, the GSpeed. The companys marketers called it a KnowledgePlus
GPU. Its memory and processing capabilities exceeded every other GPU on the market, including the
CP3000. In addition, the product reduced heat output and size beyond competitors products,
including Cilkrays products. Crosby explained:
I figured Grovexs next release would incrementally improve upon its Knowledge products
memory size and computing speed to match those of our CK200. We expected Grovex would
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Cilkray Graphics

eventually trade up to higher-performance segments, but did not expect it to have anything
significant now. Wed thus planned our next Knowledge releasethe CK300for December,
with the price unchanged. I did not think Grovex could develop a Power product until at least
2015, and not for less than $7,000. The GSpeed will likely be closer in price to our CK300 than it
is to the CP3000. Product cycles in this industry are relatively short, but engineers at Grovex
made technology breakthroughs in materials and circuitry in an extremely short time.

The Management Meeting Monday, November 25


Crosby called an emergency meeting with Sophia Scanlon, VP of marketing and research; Lawrence
Barrett, VP of engineering; and Nina Collins, VP of sales, to debate viable options.
Scanlon commented, Grovexs assumption that one product could serve every market segment
surprised us. They challenged and no longer accepted our vision of the professional market with
specialized Task, Knowledge, and Power user segments.
Grovex announced that the GSpeed would be available for purchase in early 2014. The company
had not disclosed the price, but the product was making Cilkrays employees, customers, and channel
partners anxious. Cilkrays sales people supported an immediate price adjustment, and its partners
many restricted by contracts that prevented them from selling competitive productsprojected
significant losses and threatened to abandon contracts unless Cilkray immediately reduced the
CP3000s price.
As midnight approached, the fatigued team had not agreed on a response. Crosby said, Lets
review the handouts from Sophie and Lawrence, sleep on our options, and reconvene at 9:00 a.m. By
tomorrow night, we must have a pricing and product development plan, so be prepared to share your
recommendations.
Barrett added, Our engineers have been working overtime and on weekends to keep the December
CK300 launch on schedule. Consider how our decisions may affect their morale and productivity in
the long run.

Handout #1 (Distributed by Sophia Scanlon, VP Marketing and Research)


Projected Cilkray revenues under two pricing scenarios if the price of CP3000 remains unchanged:

Scenario 1
Scenario 2

CP3000
Price

GSpeed
Price

Estimated
Cilkray
Market
Share
Loss

$8,000
$8,000

$6,400
$5,600

30%
60%

Considerations and Questions:

Should we lower the price of one or both products (for Knowledge and Professional markets)
and, if so, by how much?
Should adjustments to price be made in advance of, or after, the GSpeed release?

Cilkray Graphics

Should any reductions in price be made globally or only in selected markets? Historically, some
channel partners report different reactions to price in different markets. For example, in Europe
and some other non-U.S. markets, they say that sales support and customer service are often
more important than price.

What other steps might we take besides (or in addition to?) price adjustments in order to reduce
any potential losses in market share?

Handout #2 (Distributed by Lawrence Barrett, VP of Engineering)


Product Development Options

Option 1: Stay the CourseContinue with the planned releases of the CK300 and the new improved
CK200 for Knowledge in December. Nina Collins (Cilkrays VP of sales) reported $5.6 million in
advance orders from the internal sales force and through resellers. Based on advance order
rates, Nina projects CK300 sales will increase revenues by 25% in 2014.

Option 2: Platform Up Launch improved and more competitive CK300 in March 2014. We can
postpone the launch of the CK300 in order to reduce heat further and improve compatibility so
that those metrics match those of the GSpeed. Im 75% confident that this approach will add
only three months to the CK300 launch schedule, although it will delay delivery to pre-order
clients. This platform will still not match GSpeeds memory, speed, and simultaneous users. We
should enhance sales support and customer service efforts if this approach is employed.

Option 3: To the Wall Beat Grovex by June 2014. We can accelerate development to compete
directly against the GSpeed, but doing so will require at least six months of engineering support,
valued at roughly $10 million. The team can advance heat reduction and cooling solutions, but
Im less confident in our ability to reduce unit size, which is important because smaller units
reduce storage costs. And, Im only 60% confident that we can achieve memory and speed
performance that equals that of the GSpeed. Again, this path will require 100% of engineering
resources for the next six months. All engineering work on the CK300 and other projects, like
support for custom product applications for direct and channel accounts, will cease. We would
not launch the CK300 in December, and the new product might not be ready by June 2014.

Cilkray Graphics

Exhibit 1

GPU Industry Unit Shipments

Year

Units Shipped

2010
2011
2012
2013 (Projected)

2,600
7,200
25,200
102,845

Source: Case writer

Exhibit 2

GPU for HVD Industry: Target Markets and Growth Rates


2013
Revenue
Share

2013
Unit
Share

Forecasted
Growth
Rate 1318

Product
Prices
(2013)

Characteristics

Sample Industries
and/or Functions

Task

Standard graphics and


intermittent graphics and
video programs

Financial, basic
technology, education,
government, health care

59%

76%

0.8%

$1,500
$2,500

Knowledge

Consistent use of graphics


programs (Photoshop,
CAD, and Solidworks)

Graphic design,
marketing personnel,
engineers, and architects

33%

21%

12.3%

$3,500
$4,500

Power Users

Supercomputing and
scientific research

Game developers, 3D
modeling, scientific
modeling, animation

8%

3%

50.2%

$6,000
$8,000

Segment

Source: Case writer

Exhibit 3

Cilkrays Key Financial Data


2012

2013

Revenues
Manufacturing Costs
Marketing
R&D
Depreciation

$ 32,701,892
$ 17,967,098
$ 1,981,057
$ 6,867,397
$
981,057

$ 46,763,706
$ 25,122,949
$ 3,402,911
$ 9,820,378
$ 1,402,911

Earnings Before Tax

$ 4,905,284

$ 7,014,556

Source: Derived from company financials

Cilkray Graphics

Exhibit 4

Cilkrays Products and Target Markets (2013)

Product Name

Target Market

Performance

Price

CT30

Task supports those who consistently use


standard graphics applications and sometimes need
to run graphics intensive programs. Most line-ofbusiness employees are in education and finance,
for example.

Memory: 8GB
Speed: 400 Cores
Simultaneous users: 610

$2,000

CK300

Knowledge people who require GPU for efficient


processing of heavy computing tasks on their
regular desktops. These users may require remote
access to advanced computing and graphics
programs. For example, marketing executives,
graphic designers, and users of Computer Aided
Design (CAD) software.

Memory: 16 GB
Speed: 700 Cores
Simultaneous users: 816

$4,000

CP3000

Power serves businesses that need to support


employees who typically are only able to perform
their job function at a dedicated GPU-supported
graphics or computing workstation. For example,
air and space engineers, Hollywood animators, or
genetic researchers who use 3D modeling
programs.

Memory: 32 GB
Speed: 1,120 Cores
Simultaneous users: 48

$8,000

Source: Case writer estimates derived from comparable software company financials

Exhibit 5

Cilkrays Sales by Segment (2013)


2013 Units
Shipped

Segment
Task
Knowledge
Power

% Units

8,682
5,822
1,688

Total

% Revenues

54%
36%
10%

Gross Margins

23%
54%
23%

32%
43%
44%

Market
Share
11%
26%
56%

Projected
Annual Unit
Growth Rate
0.8%
12.3%
50.2%

16,192

Source: Case writer estimates

Exhibit 6

Estimated Market Share by Company (2013)

Market Share

Total Units

Task
Knowledge
Power
Total

77,720
22,110
3,015
102,845

Cilkray
11%
26%
56%
16%

Grovex

XLRush

Othera

65%
50%
0%
60%

8%
43%
3%

24%
16%
1%
21%

Source: Case writer


a Other: Includes in-house company applications and/or infant small-batch manufacturers

Cilkray Graphics

Questions
1.
2.
3.
4.
5.
6.

What is Cilkrays product line strategy?


Why, and when, did Grovex decide to reject Cilkrays vision of the market in 2013?
Why is Grovex marketing the GSpeed as a KnowledgePlus product?
How serious a threat is the GSpeed?
Did Cilkray make a mistake somewhere along the way, or do things like this just happen?
What should Cilkray do now with respect to:
a. Price
b. Current and future product development plans
c. Marketing, and/or customer support

Rules

This case has been provided to the students of North South University as their qualification for Corporate
Gladiators 2016 to be held in United International University. Please read the instructions carefully.

(1) 3 Members per team


(2) Members of team must be from same university (North South University)
(3) Registration fee for each team is BDT 1000 (will have to be paid to UIU authority after having qualified)
(4) Teams must be present at the time of competition with all (3) members.
(5) Maximum 4 teams will qualify
(6) This competition is only for under-graduate students

Solve this case and email your solution in a PowerPoint Presentation of Maximum 15 slides attached
with the email
Email address: nsuyesofficial@gmail.com
Deadline: 11:59 P.M. Friday, June 17, 2016
Late submissions will be penalized
Please provide the following information in the first slide
o
Team Name
o
Each of the team members name, NSU ID, contact number, and email address in a table with the
team leader on top
The file name has to be the Team Name
The subject of the email has to be UIUCG - Team Name

The Results would be published soon.

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