Mercan Systems, Inc.

Pranjal Gupta
2019BLP067
BACKGROUND AND PROBLEM DEFINITION

Eugene Mercan established Mercan Systems, Inc. in 1980. By 2000 Mercan Systems revenue
had reach $400 with average annual growth in sales of 12%. Their product line includes de-
salinators, particle filters, ozonators, ion exchange resins and water purifiers. They launched a
new product for which they wanted to formulate an entry strategy for the same. They saw that
developing countries had a huge opportunity in water purifying business. They wanted to
enter the water purification for home purposes market in India. Thus, they wanted their
liaisons to recommend them the strategies, which will be compared and on basis of which the
decision will be made.

MARKET AND INDUSTRY ANALYSIS

Home water purifying business in India is fragmented, as there is no leading rival. The
industry in India is in its early growth stage. Indians are suffering from poor quality of water
and Mercan can use this as an opportunity. India has huge untapped potential. Its estimated
that 44 Million i.e. around 90% of household potential market who boils water or use candle
filters for purifying water. Around 50% of target market use boiling method to address this
problem and 40% uses devices such as candle filters. The major players in the market are
Eureka Forbes, Ion Exchange and Singer. The current purifier in India is priced at Rs.5500
and Rs.2000 respectively. The current competitors were targeting only 10% -15% of the
market which is majorly across urban part of India.

EVALUATION OF ALTERNATIVE COURSES OF ACTION

Alternative 1: Licensing
Mercan Systems will partner up with existing company and provide their technology to them.
The partnering company will manufacture and sell the product. The company will pay royalty
fees to Mercan on per unit basis. By opting this alternative there will be very less investment
(Exhibit 1) and thus is less risky and risk or profit both will be shared with partner but will
not have any control and may not be able to create a brand they want.

Alternative 2: Joint Venture

In this option Mercan would involve initial investment and fixed costs of Rs.30,000,000 and
partner up with an Indian company and profits will be split between companies as per
agreement. Mercan will have more control over the production, quality, marketing etc. They
will also have access to more knowledge about the market. The cons in this alternative are
high investment cost, profit splitting and higher breakeven sales to be achieved (Exhibit 2).
Here two strategies are used for pricing one is through direct sales force and other is through
either price skimming or price penetration strategy.

Alternative 3: Acquisition
Mercan will purchase and existing Indian company and expand their current operations. Here
Mercan will incur huge cost for investment but profits will be solely for Mercan. They will
have control over marketing, quality, pricing, positioning etc. The risk involved is huge and
cost incurred is high.

CONCLUSIONS AND RECOMMENDATIONS

In my recommendation Mercan systems should go with joint venture option although the
initial investment is huge and profit needs to be divided. As quality is major concern for
Mercan they can have hold on quality and other aspects with joint venture. In Joint venture
they should opt dealer channel (Exhibit 2) and use price skimming strategy as they will have
to achieve lowest breakeven among all joint venture options (Exhibit 2) of ~107692.
Mercan Systems, Inc. Pranjal Gupta
2019BLP067

Exhibit 1:

*Capital cost = $30000

*Other cost (office supplies…) = $5000
*These cost are not to be included as these will be completely offset by licensee’s payment
to Mercan for technology transfer and personnel training.

Fixed Cost = $40000

Fixed Cost = $15000 ----- (When Indian National is hired)
Total Fixed Cost = $40000 + $15000 = $55000
Total Fixed Cost in INR = $55000 * 50 = Rs.2750000
It is said that the average royalty of combined (export and domestic) per unit is Rs.300.
The estimated market potential (National)= 250000 ------ (According to Exhibit 1 of Case)
Breakeven Sales = Fixed Cost/contribution per unit
= 2750000/300
= 9166.67 or 9167
Thus, Market Share is = Break even/Market Potential
= 9167/250000
=0.0366 = 3.67%

Exhibit 2:

JOINT VENTURE:
Estimated National Market Potential = 430,000
Initial Investment for National Market = Rs.30000000
If using dealer channels = Rs.40000000
If using Direct Sales force = Rs.88000000
Thus, Total fixed cost for dealer = Rs.30000000 + Rs.40000000 = Rs.70000000
Thus, Total fixed cost for direct sales force = Rs.30000000 + Rs.88000000 = Rs.118000000
There are two pricing strategies involved: Skimming and Pricing

SKIMMING:
Skimming Strategy Price Per Unit For Dealer = Rs.5500
Contribution Per Unit = Rs.650
Thus, Breakeven Volume = Total Fixed Cost/Contribution Per Unit
=70000000/650
=~ 107692
Market Share = Breakeven/Potential Market
=107692/430000
=0.2504
Thus Market Share (%) = 25.04%

PENETRATION:
Penetration Strategy Price Per Unit For Dealer = Rs.4100
Contribution Per Unit = Rs.300
Thus, Breakeven Volume = Total Fixed Cost/Contribution Per Unit
=70000000/300
=~ 233334
Market Share = Breakeven/Potential Market
=233334/430000
=0.5426
Mercan Systems, Inc. Pranjal Gupta
2019BLP067
Thus Market Share (%) = 54.26%

Similarly for Direct Sales Force

Total Fixed Cost is Rs.118000000

SKIMMING:
Skimming Strategy Price Per Unit For Dealer = Rs.5900
Contribution Per Unit = Rs.500
Thus, Breakeven Volume = Total Fixed Cost/Contribution Per Unit
=118000000/500
=236000
Market Share = Breakeven/Potential Market
=236000/430000
=0.5488
Thus Market Share (%) =~ 55%

PENETRATION:
Penetration Strategy Price Per Unit For Dealer = Rs.4400
Contribution Per Unit = Rs.200
Thus, Breakeven Volume = Total Fixed Cost/Contribution Per Unit
=118000000/200
=590000
Market Share = Breakeven/Potential Market
=590000/430000
=1.3720
Thus Market Share (%) = 137.2%