On May 15, 1984, Joan Macey, Rohm and Haas market manager for Metalworking Fluid Biocides, was reviewing distributor purchases of Kathon MWX, a new biocide that killed microorganisms in metalworking fluids. She found that total sales to distributors for the first five months were 74 boxes against a first-year target of 1,350 boxes. “I have a super product but I can’t sell it,” she said. “I am in the process of reviewing our approach of taking this product to market, but at this point I am not convinced we have a better alternative.” Macey was also responsible for the marketing of Kathon 886 MW, a liquid biocide used in large metalworking fluid tanks (above 1,000-gallon capacity). Kathon 886 MW was a powerful biocide, and very small quantities were sufficient to treat large tanks.
Because of its low-use level, Kathon 886 MW was not suitable for smaller-capacity tanks, and Kathon MWX was developed specifically for use in tanks with less than 1,000-gallon capacity. Kathon 886 MW had a sales volume of $5.4 million in 1983; sales for the first five months of 1984 were at the budgeted level of $2.1 million. Kathon MWX had been launched in December 1983, with a targeted sales volume of $0.2 million in 1984; sales in the first five months were about $12,000. Macey estimated the market potential for Kathon 886 MW to be $18 million and Kathon MWX to be $20 million. Explaining the poor sales of Kathon MWX, she said: The total usage of Kathon MWX and its substitutes is nowhere near the $20 million potential for this market. Many small users are either unaware or don’t see the need for biocides in their metalworking fluid treatment. We do poorly because we do not have enough competition to build primary demand.
In 1906, Otto Rohm and Otto Haas founded the company in Germany to sell chemicals to that country’s leather tanning industry. The U.S. branch opened in Philadelphia in 1909. At the end of World War I, Otto Haas incorporated the American branch as an independent company. Over the years it became a leader in chemical technology, especially in acrylic emulsion polymers.1 In 1983, the American company reported worldwide sales of $2 billion derived from four business segments:
1The technology involves dispersing, or emulsifying, certain monomers in a fluid such as water. Then the monomers are “polymerized”—linked together through a chemical reaction. The resulting emulsion polymer retains the viscosity of water. When exposed to air, the water evaporates and a continuous, tough film remains.
Professor V. Kasturi Rangan and Susan Lasley, MBA ‘85, prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. All quantitative data not publicly available have been disguised. Copyright © 1986 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
Polymers, resins, and monomers—for applications in paints, industrial finishes, decorative coatings, and construction products Plastics—for applications in signs, skylights, containers, and automotive products Agricultural chemicals—herbicides and fungicides for crop diseases. Industrial chemicals—for lubricants and fuels, water treatment, and the formulation of a wide variety of industrial and consumer products
The company’s product lines consisted of over 500 different products. Exhibit 1 gives the trend of sales and profits by business segments. The Industrial Chemicals business segment consisted of three product groups: Fluid Process Chemicals, Petroleum Chemicals, and Specialty Chemicals. The Kathon microbiocide products with 1983 sales of $25 million were part of the Specialty Chemicals Group. Surface active chemicals (called surfactants) and water-soluble polymers were the other products marketed by the Specialty Chemicals Group (see Exhibit 2 for an organization chart). Joan Macey was market manager for microbiocide applications in the metalworking fluid and latex/adhesives markets. Latex/adhesives biocides (1983 sales of $2 million) were sold directly by the Specialty Chemicals sales force to about 50 compounders for use in emulsions, paints, sealants, and adhesives. The metalworking fluid biocides—Kathon 886 MW and Kathon MWX—were sold through a network of formulator/ distributors.
All of them manufactured and sold metalworking fluids as well as any auxiliary products such as biocides and corrosion inhibitors. As market manager, Macey was responsible for formulating the marketing strategies for the three products under her charge, all of which were sold by the Specialty Chemicals sales force. Fourteen of the 40 salespeople employed by the Industrial Chemicals business unit worked for the Specialty Chemicals Group and were responsible for selling all the products of the group (surfactants, biocides, and polymers) to various markets. Salespeople were assigned to exclusive territories and were supervised by three district managers who reported to a national field sales manager based at the Philadelphia headquarters. All members of the sales force had college degrees in chemistry, chemical engineering, or related fields.
The salesperson’s role was to offer help and advice to the user in formulation or process design, for example, recommending appropriate chemical levels for cooling tower treatment or detergent formulations. Starting salaries for trainees ranged from $20,000 to $27,000 annually, and the experienced salesperson could earn $50,000 to $70,000. Salespeople were evaluated on several objectives, including new account activity, market penetration, and quantity sold in pounds. Six of the fourteen salespeople had most of the biocide customers in their respective territories. On average, they spent about 20% to 30% of their time on all biocide customers; approximately one-third of this time was spent on metalworking fluid formulators (the primary customers for Kathon 886 MW and Kathon MWX). The rest of the time was spent visiting users. Many of these calls were made jointly with the formulators’ salespeople.
Metalworking Fluid Biocides
Metalworking fluid, as the name implies, is used in operations such as turning, milling, grinding, honing, and drilling. The fluid is directed onto the surface of the metal being machined to lubricate and cool the work piece and the machine tool and to remove chips and debris from the work area. In 1983 about 60 million gallons of metalworking fluid concentrate were produced in the United States. Nearly all of it had to be diluted with water by the user. Water was typically 90% to 95% of the mixture after dilution. The diluted fluid was then placed in a reservoir and pumped to a nozzle that directed the fluid to the machined piece (see Exhibit 3). A tray built into the workstation caught chips, and the used fluid was filtered and returned to the reservoir for reuse.
Microorganisms such as bacteria, fungi, and yeast flourish in the warm aqueous environment of metal machining, and their growth increases with poor shop maintenance. They break down the metalworking fluids, and as the microorganisms develop, they multiply in long chains to clog filters, flow lines, and drains. Their foul-smelling, metabolic by-products stain and corrode work pieces and pollute the work environment. Biocides are chemicals that kill the microorganisms in water-based metalworking fluids without affecting fluid performance. They have many applications in manufacturing products such as cosmetics, paper detergents, and latex paints. They are used, as well, in water treatment and oilfield drilling. Chemical companies formulate metalworking-fluid concentrates by mixing emulsified oils and special additives.
Formulators often add biocides to the metalworking fluid concentrate to provide some initial protection against contamination. The concentrate is then sent to users who dilute it for their machining operations. Metalworking fluids are depleted by water evaporation and fluid loss and must be replenished each day. As the fluid ages, the concentrate biocide no longer adequately protects it, and a maintenance biocide must be added to extend fluid life. A metalworking system kept free of bacteria, yeast, or fungi uses fluid for a much longer period of time—one or two weeks longer than the three to four weeks for a less well-maintained system.
Regular treatment with maintenance biocides and make-up metalworking fluid (every one or two weeks) extends fluid life almost indefinitely and does not require a complete flushing of the fluid tank. The concentrate biocide market was estimated to be $30 million in 1983. Industry sources predicted a downward sales trend, however, because of the growing use of maintenance biocides. The maintenance biocide market was estimated to be about $38 million in 1983, but if industry predictions were right, it would replace nearly all of the concentrate biocide market in 10 years.
Kathon Metalworking Fluid Biocides
Kathon 886 MW, a liquid, was the primary maintenance biocide on the market. Too reactive to be used in the metalworking fluid concentrate, it extended the life of diluted fluids in central system reservoirs. Kathon 886 MW was a broad-spectrum biocide generally 10 times more effective than competitive biocides. One gallon of Kathon 886 MW protected 8,000 to 10,000 gallons of metalworking fluid in a central reservoir initially for three weeks. About 10-15 gallons of a competitive product would be required to do the same job. In 1983, Kathon 886 MW had a 30% share of the $18 million maintenance biocide market for large systems. It was distributed by 12 major metalworking fluid formulators, who sold it as part of a fluid maintenance package to their customers.
From a practical standpoint, because of its low use level and toxic properties, it could not be used in metalworking fluid reservoirs smaller than 1,000 gallons without creating misuse problems and safety risks. Customers who were satisfied with the performance of Kathon 886 MW had asked for a convenient, safe-to-use version for their smaller (50- to 100-gallon) reservoirs. A market survey revealed that this was the most common reservoir size for small machines. Rohm and Haas technicians responded with an intense product development effort that led to the development of Kathon MWX. After attempts to formulate a water-soluble solid product had failed, a unique packaging design to deliver liquid biocide was developed (Exhibit 4).
It was a 5.5 x 7.5-inch water-permeable plastic packet containing two ounces of diatomaceous earth2 soaked with Kathon 886 MW. The packet was designed to hang into the metalworking fluid reservoir by a strap suspended on a plastic hook and could treat 25-75 gallons of metalworking fluid for 2-4 weeks. The customer simply placed the packet in the metalworking fluid; water then flowed through the packet and gradually transferred the biocide from the diatomaceous earth to the fluid. The used packet could be removed from the reservoir for disposal at the first sign of failure (odor) or in one month. No maintenance was required, and the packet was safe to handle and dispense.
In expanding the fluid maintenance market to include small machine applications, it was estimated that the potential existed for $20 million in added sales volume. Although Kathon 886 MW and MWX were maintenance biocides, they could be used in only 70% of the metalworking fluids. Incompatibility with the concentrate biocide in the original formulation rendered them ineffective with the other 30%. By comparison, however, competitive maintenance biocides were compatible in only about 45% of commercial metalworking fluids.
In 1983, there were about 325 potential customers for Kathon 886 MW or equivalent products, and an estimated 150,000 potential customers for Kathon MWX. Table A breaks down the metalworking industry by machine size. Biocide users worked with either nonferrous metals such as aluminum, copper, tungsten, and titanium or ferrous metals such as iron and steel. Nonferrous metals In the domestic market, nonferrous metals were used primarily to make aluminum sheet, foil, and cans in large-scale, fully automated, high-speed manufacturing facilities. Central systems used metalworking fluid in reservoirs as large as 150,000 gallons. Nonferrous operations required the metalworking fluid to be kept completely free of bacteria because of the sensitivity of the metal to staining, and microbiologists and chemists were often employed to develop biocide treatments and monitor systems closely.
Kathon 886 MW was the favored biocide of many of these companies and held about 70%-80% of a $3 million-$5 million market. Ferrous metals The ferrous metal industries ranged broadly from the large-scale automated manufacture of products such as automotive and farm equipment to the smaller-scale production of pumps, instruments, aircraft parts, and nuts and bolts. Customers with large scale manufacturing facilities had central systems similar to those in the nonferrous industries, but bacteria levels in the metalworking fluid were not as critical to ferrous metals as they were to nonferrous metals.3 Though Kathon 886 MW was adopted by many for its cost effectiveness, its overall share of the $12 million$16 million ferrous market (only central systems) was only 15%-20%.
Table A Metalworking Industry Fluid Systems
Metalworking Fluid System Central system Central system Individual system Reservoir Capacity (gallons) 50,000 to 250,000 8,000 to 30,000 50 to 1,000
Number of Metalworking Machines 170 1,530 1,701,000 Number of Plants 25 300 150,000
Table B lists the major competitors in the biocide market. In 1983 Rohm and Haas, Lehn and Fink, Dow Chemical, and Angus Chemical each had approximately a 15%-20% share of the maintenance biocide market. It was assumed that Lehn and Fink and Angus Chemical each employed three salespersons for metalworking biocides. Lehn and Fink sold directly to distributors and end-users, and distributors were supplied at 10% off list price. Angus Chemical sold to distributors and end-users at the same price. Olin Corporation’s Triadine-10, introduced in 1983, was well-received by the market. Two other major chemical companies were planning entries into the maintenance biocide market: Union Carbide with Gluteraldehyde and ICI with Proxel, both for central systems. Rohm and Haas chemists conducted comparative tests (see Exhibit 5) to demonstrate that Kathon 886 MW was still the most cost-effective biocide for central systems.
The most widely known product for individual systems was Tris Nitro “Sump Saver” tablets, an Angus product. One two-ounce tablet treated 25 gallons of metalworking fluid. Macey estimated that distributors paid $4.00/pound (eight tablets) and sold them to customers for $7.75/pound. Unlike Kathon MWX, these tablets dissolved in the metalworking fluid. They were generally considered less effective against bacteria and ineffective against fungi, and they worked for only about three days. Another product, Dowicil 75, came in water-soluble packages that were dropped into the reservoir. Each 2.5-pound package treated 500 gallons of fluid. Macey estimated the cost to distributors at $2.34/pound and a resale price of $10/pound.
While Dowicil 75 performed well against both bacteria and fungi, it had a heavy ammonia odor, released formaldehyde, and could not be safely used in reservoirs with capacities less than 500 gallons. Some metalworking operators in small shops, in a makeshift effort to control the odor released by bacteria, poured household bleaches, disinfectants, deodorants, and similar materials into their smaller reservoirs. The odors of these materials usually combined with the bacterial odor to make the working environment even worse for the workers. These substitute materials also interfered with the cooling and lubricating performance of the metalworking fluid.
Table B Competitors’ Products
Maintenance Biocide Company 1. Lehn and Fink 2. Dow Chemical 3. Angus Chemical 4. Olin Corporation 5. Millmaster Onyx 6. RT Vanderbilt 7. Merck Onyxide 200 Vancide TH Tektamer 38 A.D. Concentrate Biocide Grotan Bioban P-1487 Triadine-10 Central Systems Grotan Dowicil 75 DBNPA Tris Nitro Triadine-10 Dowicil 75 Tris Nitro Stand-Alone Systems
The first level of distributors in this industry were the metalworking fluid formulators. They purchased biocides, both concentrate and maintenance, directly from the manufacturers. The concentrate biocide was incorporated into the metalworking fluid at the time of its formulation. The formulators then sold the metalworking fluid directly to large companies and to other dealers who resold it to smaller accounts. Metalworking fluid generally accounted for more than 90% of a formulator’s business. As a service to customers with large central reservoir systems, distributors provided a maintenance package that usually included delivery, fluid preparation, weekly monitoring for microorganisms, and maintenance biocide treatments. Other special-purpose chemicals such as pH adjusters and corrosion inhibitors were provided as needed. Many of these products were sold under the formulators’ private brand names. Most formulators engaged in R&D, acceptance testing of manufacturers’ additives, and systems monitoring. In 1983 the total sales of 10 large national formulators were roughly $200 million.
Another 20-30 formulators had a combined sales volume of some $100 million. Several hundred small formulators had sales of $0.5 to $1 million each. Because of the number and fragmentation of the ferrous metalworking industries, large formulators distributed their products through a secondary distribution network, consisting primarily of industrial supply houses and machine tool shops. Industrial supply houses ranged from small, family-managed companies in rural areas to large, professionally managed companies in urban areas. Some specialized in serving particular industry sectors. They were “supermarkets” for their customers. A supply house servicing a ferrous metalworking industry, for example, might carry several brands of biocides, safety accessories, uniforms, small general-purpose tools, shop cleaning and maintenance supplies, worktables, hand trucks, concrete blocks, spill absorbents, and hand soaps.
The 1982 Census of Wholesale Trade listed 14,327 industrial supply houses in the United States. A major metropolitan area might have over 100 supply houses serving a variety of industries. Industrial supply house sales in 1982 amounted to approximately $40 billion. Inside salespeople took telephone orders from regular customers and over-the-counter orders from walk-in customers. Outside salespeople generated new accounts and called on regular customers. Machine tool shops specialized in distributing and servicing machine tools and items used with them like spare parts, tool bits, metalworking fluids, and biocides. Some also served as sources of metals. There were 3,654 such companies in the United States, and in 1982 their sales were $8.7 billion.
Typically, large industrial companies (e.g., General Motors, Caterpillar Tractor) purchased biocides directly from manufacturers or from their distributors (formulators). They used the secondary network of industrial supply houses and machine tool shops for miscellaneous items (such as safety equipment or paper towels) that were not critical to their line of business. Small companies, however, often relied exclusively on industrial supply houses and machine tool shops for all their needs.
Marketing Strategy for Kathon MWX
Ten of Rohm and Haas’s 12 distributors (formulators of metalworking fluid) agreed to distribute Kathon MWX in addition to Kathon 886 MW. The company offered private branding on Kathon 886 MW, but not on Kathon MWX. Though many formulators asked for private branding, only one distributor declined to carry Kathon MWX when turned down on a request for its ownbrand product. Explaining the rationale for this policy, a company manager said: Kathon MWX is the industrial equivalent of a consumer packaged good; it is a “baggie” product packaged at the factory. We need some uniformity in package design.
Moreover, we want the end-user to know it’s a Rohm and Haas product. Our end-users hardly see the Kathon 886 MW drum because our formulators include the product as a part of their maintenance service. But Kathon MWX is different; we expect the end-users to do the maintenance themselves. Kathon MWX was packed in boxes containing 144 packets, each packet weighing two ounces. Quantity prices to distributors per box of 144 packets were as follows: 1-2 boxes 3-4 boxes 5+ boxes $180.00 165.00 145.00
Joan Macey estimated the manufacturing cost per packet to be about 50 cents. The company did not specify a price to end-users, but most formulators charged end-users and other dealers $2/packet. Some formulators had a strong secondary distribution network consisting of 200-300 industrial supply houses, and in such instances, the secondary level of distribution was known to add a 10% margin. One of the company’s distributors with a sales force of 700 commissioned reps claimed that he could sell each packet for $6 to the end-users. The product launch (December 1983) was accompanied by a press release in 40 metalworking industry journals announcing the availability of Kathon MWX.
The announcement included information about characteristics of Kathon MWX and its benefits. Full-page advertisements costing $3,800 each were placed in five issues of American Machinist between February and June 1984. Interested readers could get further information and a two-packet sample by filling out a reader service coupon. Over 200 such inquiries were received from the February, March, and April advertisements. All inquiries were forwarded to distributors. Rohm and Haas responded directly with a copy of the very colorful ad, a material safety data sheet, a set of technical notes, and a “howto-use” booklet (see Exhibit 4). Distributors were expected to follow up on the leads and generate orders. In spite of all these efforts, the sales in the first five months of the launch period barely touched $12,000.
Joan Macey’s Dilemma
Disappointed with Kathon MWX’s sales performance, Macey began a review of her marketing plan to take any necessary corrective steps. She also sought opinions from two of her colleagues in the Specialty Chemicals division who had successfully launched and established new products. Her first colleague advised:
You are too hard on yourself, Joan. New products don’t succeed overnight. It takes years for the product to get market acceptance and longer still to get dealer support. If you feel comfortable about your original marketing plan, it’s worthwhile giving it a chance. We are in the business of specialty chemicals, we offer solutions to customers’ problems. We are not in the fashion business! Her second colleague felt differently; he agreed that Kathon MWX’s initial marketing approach was probably not best suited for the product. He encouraged Macey to review the marketing plan, saying, “The only good news on Kathon MWX is that you know there is a problem; therefore you can fix it.” Regardless of what she might ultimately do about her strategy for marketing the product, Macey thought it would be a good idea to contact the 200 prospects who had responded to the reader service coupons. Macey employed a summer trainee who was working toward an MBA to conduct a telephone survey.
Explaining her rationale for the survey, she said: I wish I could thoroughly research the market, but that’s not possible. Frankly, what else can I do with the limited budget I have for support activities? Kathon MWX has to show some initial movement before further resources are justified. It is imperative that I make a quick decision. After all, I have other products to manage and my boss has the entire biocide business to manage. One has to place Kathon MWX in its proper perspective. A quick survey should do that. The survey revealed several major facts: 1. On average, customers discarded used metalworking fluid after three weeks. Rancidity and dermatitis4 were the primary reasons for this, and most customers believed that bacteria, not metal particles or harsh chemicals, caused the dermatitis.
Although most survey participants had their used fluids hauled away, few knew how much this service cost. Those who did know gave figures of $0.29, $0.55, $1.80, and $2.00 per gallon of used fluid. Only about 20% of the participants remembered receiving the Kathon MWX information packet. When asked about the image of the product conveyed by the promotional literature, many said that the product was worth trying. Despite their inclination to use Kathon MWX, they expressed some apprehension about its safety. An explanation of the proper handling technique usually overcame these fears. Users obtained metalworking fluids from tool shops, oil companies, formulators, and industrial supply shops.
The majority sourced from two or more small, local tool or supply shops within 30 miles of their businesses, as well as one of the large national formulators. Users occasionally found it necessary to write to a large national distributor for supplies that were not locally available. About 50% of the users used products ranging from household disinfectants to metalworking fluid biocides to kill odor-causing bacteria in their machine sumps. The majority of these products did not seem to work, yet the end-user typically continued to use the product. Only half of the participants who had tried a biocide could remember its name. None had tried Kathon MWX.