Cash Computer Supplies

It was March of 1993 and Brian Whiteway, owner/manager of Cash Computer Supplies of St John's, Newfoundland, was reviewing the results of a recent telephone market survey he had conducted as well as some demographic data he had collected. He hoped this information would allow him to determine the potential for his one-year old business and to decide on a future strategic direction for the company

Having achieved moderate sales growth after six months of operations, Brian decided to gather some statistical data to gain some insights into the nature of the market in which he operated. This consisted of a small market survey, as well as demographic information on several of the larger cities and towns in the province. Brian hoped that this information would provide insight into the potential of Cash Computer Supplies, and hence determine the fate of the company. Brian's original objective was to operate the company on a part-time basis only, and to pursue other career objectives full-time. However, if the results of the analysis demonstrated a significant market demand, he was willing to devote his full attention to this potential opportunity.


This case was prepared by Brian Whiteway, BComm (93) under the supervision of Professor G Pynn of Memorial University of Newfoundland for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.

Copyright © 1993, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include publication.


Personal Background

Brian was in the final year of completing a Commerce Degree at Memorial University of Newfoundland, majoring in finance. Previously, he had successfully co-owned and operated a commercial sound system business while attending university, but had sold his interest in the company in order to pursue the development of Cash Computer Supplies.

In addition, he was the President of ACE Memorial, a university affiliate of ACE Canada (Association of Collegiate Entrepreneurs - Canada), an organization dedicated to the promotion of entrepreneurial pursuits in Canada. This association had ties throughout Canada, the United States, Mexico and many other countries in the world. Brian believed this organization had been of substantial benefit to him in terms of developing contacts, generating ideas, providing inspiration and gaining valuable insight into new emerging trends across the country.

In keeping with his strong belief regarding the importance of business development, Brian had become involved with Junior Achievement of Canada as a volunteer lecturer in late 1991. This had afforded him the opportunity to network with many members of the business community, while at the same time sharpen his communication skills.

Finally, Brian had summer work experience with the Government of Newfoundland as well as with a local office products firm. The former served to sharpen his financial management skills, while the latter allowed him to get a better handle on marketing in the office products industry.

The Company

Brian Whiteway had always been interested in computers, and was keenly interested in the industry in general. In an effort to meet the rising cost of his education, Brian decided to turn his personal interest in the computer field into a part-time going concern, and in August 1991, Cash Computer Supplies was born.

Established as a small mail-order computer supply company, Cash Computer Supplies initially concentrated its efforts on Memorial University of Newfoundland, with its student population of approximately 16 000 students.

The company sold a wide variety of computer supply and peripheral hardware products, and had enjoyed moderate success during the first year of operations. The financial statements for Cash Computer Supplies' first year of operations can be found in Exhibits 1 and 2. Contributing to its success was the fact that the company carried a minimal amount of inventory, thereby greatly reducing carrying costs. In addition, given the fact that this was a mail-order business, overhead was substantially reduced because the high cost of maintaining a store front was not necessary. The only investment required was a computer and printer at a cost of $3800 (including required business software).

All orders to suppliers were received within 48 hours, thus reducing the chance of stock-outs. Because the company operated as a mail-order business, it was able to serve not only the St John's/Mount Pearl region (the major urban area in Newfoundland), but also the rest of the province.

The Products

Cash Computer Supplies sold a wide variety of products (see Exhibit 3). Brian was proud of the fact that the company did not pressure customers into buying more expensive (and higher margin) goods. Instead, it offered fair and honest advice regarding the customer's needs - and then tried its best to meet them. Brian believed that this approach would be much more beneficial to the company in the long-run, given the obvious goodwill created by such a practice. The average sales transaction was $29.87, of which $9.86 were variable costs.

In addition, the company insisted on selling only high quality, brand name merchandise at a price that was 30% to 50% below that of the local competition. The rationale for this was two-fold. First, a high quality product translated into a very low defective product ratio, which in turn enhanced the reputation of the company. Second, the combination of high quality and low prices provided a competitive advantage for Cash Computer Supplies. This was accomplished due to the small amount of overhead with which the company had to contend. As a result, the savings could be passed along to the customer. Thus, Cash Computer Supplies found it relatively easy to distinguish itself from many of the competitors because of its ability to provide brand name products at affordable prices.

The Customers

The vast majority of the company's customers were university students in the 18 to 25 age group. This segment's purchasing patterns were largely dictated by the prices set by local competitors. Many were therefore drawn to Cash Computer Supplies because of its lower prices. Brian felt that he had captured approximately 10% of the university student market, but wanted to test the level of demand for his products in the greater St John's metro area, as well as throughout Newfoundland. One of his major concerns with the current market was its high degree of consumer turnover caused by students who graduated, transferred or dropped out. It was thus a constant challenge to keep the company name well known in the target market. Brian hoped that there would be widespread demand outside the university community for what Cash Computer Supplies had to offer. To confirm his belief, Brian formulated a telephone survey and obtained responses from 500 companies throughout the St John's metro area, with each company being randomly selected from the local telephone book.

The Industry

Prior to 1980, it was not critical for the average person to own a personal computer The competition was often very expensive and certainly not user friendly. However, largely due to rapid advances in technology, as well as a tremendous influx of large computer manufacturers, personal computer prices had plummeted while technological sophistication had grown at exponential rates. As a result, the computer sales industry enjoyed rapid growth, and was a significant contributor to the Canadian economy (see Exhibit 4).

As the computer industry continued to expand, marketers looked to new ways to reach consumers, while keeping prices competitive. The result was the birth of large mail-order houses that specialized in selling their own brand name computer systems.

Several years after the first large mail-order houses, the new emerging trend of 'home-based businesses" began to have an impact in the Canadian economy. Spurred on largely by high levels of unemployment and the lack of job security, many "homepreneurs" began setting up fun and part-time direct marketing companies from their residences. This had resulted in a home-based business explosion, with participation of over 2 million households and sales of some $2.2 billion, representing approximately 25% of all businesses in Canada. A substantial portion of this was represented by mail-order firms (see Exhibit 5). By the year 2000,40% of Canada's workers may be working from their homes. In an effort to catch hold of this trend, Cash Computer Supplies hoped to combine the interest in personal computers, with the expansion in home-based mail-order organizations. Given the fact that home-based businesses were increasing in popularity and credibility, Brian believed that people would have little reluctance in purchasing goods through this medium. As such, he felt that there was tremendous growth potential in the marriage of these two emerging trends. He hoped that his company could ride this wave of future consumer retailing.

The Competition

In addition to Cash Computer Supplies, there were other computer competitors in the metropolitan area. However, most of these did not specialize solely in the sale of computer supplies and peripherals.

Dicks and Company Limited was one of the largest of these competitors. This was a long standing, reputable organization that served eastern and central Newfoundland. Established in 1840, Dicks and Company Limited had very strong ties with the business community, and had built a reputation of excellent service as well as high quality merchandise. In addition to its regular office supply inventory, the company also sold computer supplies and accessories at a premium price. However, because of a lack of in-house expertise, it did not sell computer hardware, systems or software.

Paragon Information Systems was one of the largest computer hardware retailers in the area. This company concentrated its efforts on business and government agencies, providing small and large computer systems, printers and network devices. However, the company did not market computer supplies or accessories.

H F Fanning and Sons Ltd was a well-established office supply company that operated in the St John's area. The company was the lowest priced retail competitor in the area, but because of the significant expense involved in maintaining a large distribution warehouse and head office, its prices were still approximately 30% higher than Cash Computer Supplies. In addition, the company focused its efforts on selling office products rather than computer hardware.

Radio Shack was the largest of the competitors. This was a large consumer electronics retail organization that operated throughout North America. The company marketed both computer addon hardware, systems and accessories, as well as both audio and video products through choice locations in upscale malls. However, because it was such a large organization, overhead costs resulted in the company having an average price that was 30% to 50% higher than that of Cash Computer Supplies.

Brian felt that the computer system retailers would pose a threat only to the hardware sales of Cash Computer Supplies, while the office supply companies would be the primary competition for computer supplies and accessories. However, given its unique product mix, Radio Shack appeared to be the largest direct competitor to Cash Computer Supplies.

In addition, while there were no known mail-order organizations; operating in the area, office and computer supply catalogues distributed by mainland companies could be found occasionally.

Current Marketing Techniques

Given the fact that the company operated on a relatively modest scale, Cash Computer Supplies' total promotional budget was very small. As a result, most of the company's marketing efforts were concentrated on posters, direct mail, and classified advertisements. More specifically, posters were placed on bulletin boards across the university and checked every month to ensure continual coverage of the campus (see Exhibit 6). In addition, 300 direct mail advertisements were sent to many professors and lecturers. The brochure had stressed the variety of products offered by the company. In addition, the quality and low prices of the products were also emphasized. Exhibit 7 provides a condensed version of the company's price list.

In Brian's judgement, the direct mail campaign had yielded very poor results, with under 1% of the recipients requesting a price list and product order form. This level was far too low to meet even the costs of the direct mail campaign itself, much less generate profits for the company. Given this, the campaign was discontinued shortly after its implementation. The cost of the program was $500.00 and generated only an estimated $ 55.00 in sales.

Market Research

Brian believed that two potentially lucrative markets existed for the company's products:

  • Businesses; and
  • Occasional home computer users.

In order to help determine the future strategic direction of Cash Computer Supplies, several types of demographic information were gathered (see Exhibits 8, 9, 10 and 11).

In addition, Brian had, from the results of his telephone survey, compiled the data included in Exhibit 12. He hoped that all of this information would enable him to develop marketing strategies for the short and long-term.

Of the 1137 randomly selected businesses in the St John's metro area, 500 had chosen to participate in the survey, resulting in a response rate of about 44%. The various questions were designed to determine demand potential and company awareness as well as important influences on, and determinants of, the buying decision.

Brian's Predicament

As he examined the information in front of him, Brian was very concerned with insuring that he interpreted the data correctly. This interpretation would determine what strategic direction the company would take. In addition, he was very anxious to have a resolution to this situation. As a result, Brian established a self-imposed deadline of May 1993 by which to analyze the information and to formulate a solution.

Based on his information, Brian identified several choices that required further examination. More importantly, he wondered how his company should develop in the future. Furthermore, given the financial constraints on the organization, he wondered what steps he should take to ensure that the company developed in the way that was intended. Brian felt that there were several alternatives available to him:

  • Do nothing
  • Expand mail-order business
  • Expand by way of a retail store
  • Close out business altogether

If he decided to do nothing and be content with his business as it was, what could he do to ensure that Cash Computer Supplies would not lose its market share? If business expansion was decided upon, what form should it take? What strategies could Brian implement to increase the chance of success of this expansion? He also wondered if there were any other options available to him. Brian sat down at his computer and typed "Alternatives," "Pros" and "Cons" at the top of the page. He knew that he needed to decide on the future of Cash Computer Supplies and determine how to get there.


Exhibit I

Cash Computer Supplies
Income Statement
For the Year Ended July 31, 1992

REVENUES:
Sales $16,763
Less: Cost of Goods Sold 5,532
Gross Margin $11,231
EXPENSES:
Advertising 1,400
Shipping 300
Salary 6,000
Interest 250
Depreciation 380
Total Expenses $ 8,330
NET INCOME $ 2,901
Source: Company records

Exhibit 2

Cash Computer Supplies
Balance Sheet
At July 31, 1992

ASSETS:
Cash $4,279
Inventory 519
Equipment $ 3,800
Less: Accum Depreciation 380 3,420
Total Assets $ 8,218
LIABILITIES:
Note Payable $ 1,412
Total Liabilities $ 1,412
SHAREHOLDER'S EQUITY:
Capital Stock (100 shares
@ $46.67 per share) $ 4,667
Retained Earnings 2,139
Total Shareholder's Equity $ 6,806
Total Liabilities and Shareholder's Equity $ 8,218
Source: Company records

Exhibit 3

 Product List

Diskettes Tape Drives CPU Stands
Disk Storage Trays Monitor Arms Repair Kits
Computer Paper Printer Buffers Anti-Static Mat
Mouse Pads Copy Holders Laser Cartridges
Disk Mailers Monitor Filters Power Supplies
Computer Cables Dug Coven Hard Drives
Drive Cleaners Printer Stands Graphics Cards
Surge Protectors Keyboard Drawers Floppy Drives
Source: Company records

Exhibit 4

Computer Market Growth

Source: Statistics Canada

Exhibit 5

Mail-order Market Growth

Source: Statistics Canada

Exhibit 6

Mail-order Advertisement

Source: Company records

Exhibit 7

Condensed Price List

exh701.jpg (54421 bytes)

Looking for a something not listed here? just let us know what it is, and we will be happy to give you a great price!

How to order. Send Address and day time phone number, along with a fist of the items you wish to purchase to:

Cash Computer Supplies
P 0 Box *****
St John's, NF
A1N 3JO

Do not send any payment with your order. We will call you to arrange delivery and provide total applicable costs.

Terms and Conditions: No Credit Cards Please! (please allow 2 weeks for personal checks)***Do Not send any payment with your order !! All computer hardware carries a I year manufacturer's warranty. 30 day money back guarantee on all orders, must be in "like new" condition with complete documentation and packaging. Any applicable shipping and handling charges are not refundable. Prices, specifications and availability subject to change without notice. Ali company/product names am trademarks of their respective holders.

Source: Company records

Exhibit 8

Population, Metro St John's

Mount Pearl 20,293
St John's 96,216
Goulds 4,688
Wedgewood Park 1,385
St Phillip's 1,604
St Thomas 648
Conception Bay South 15,531
TOTAL 140,365
Total Population of Newfoundland 568,349
Metro St John's as a percentage
of Total Provincial Population
25%
Source: Statistics Canada

Exhibit 9

Population
Other Major Areas Outside of Metro St John's

Bay Roberts 4,446
Carbonear 5,337
Comer Brook 22,719
Gander 10,207
Grand Falls - Windsor 14,666
TOTAL 57,375
Total Population of Newfoundland 568,349
Other major areas outside Metro
St John's as a percentage of
total provincial population
10%
Source: Statistics Canada

Exhibit 10

Average Family Household Income*
Metro St John's

Mount Pearl $36,808
St John's $38,132
Goulds $34,485
Wedgewood Park $56,626
St Phillips $37,197
St Thomas $30,081
Conception Bay South $31,063
* Note: 1986 Dollars

 Source: Statistics Canada

Exhibit 11

Average Family Household Income*
Other Major Areas Outside of Metro St John's

Bay Roberts $25,678
Carbonear $24,795
Comer Brook $32,277
Gander $37,034
Grand Falls - Windsor $33,302
* Note: 1986 Dollars

Source: Statistics Canada

Exhibit 12

Telephone Survey

Name of Business ____________________

Address ______________________

1. In total, how much would you estimate your company spent last year in computer supplies? (Record nearest whole dollar amount)

$200 - $ 499.99 46.0%
$500 - $ 999.99 20.0%
$1000 - $4999.99 18.0%
$5000+ 16.0%

 

2. From which company do you purchase the majority of the computer supplies for your organization? (One response only DO NOT provide responses).
Beothuk Data Systems 3.0%
Gilex Computer Centre Ltd 3.0%
Dicks and Company 28.0%
H F Fanning & Sons 22.0%
Computer Supplies Ltd 0.0%
Harvey's Computer Systems 3.0%
Computerland 0.0%
National Office Equipment 1.0%
Atlantic Computers Inc 2.0%
Paragon Information Systems 1.0%
Norcan Computers 0.0%
M A Parsons 17.0%
Radio Shack 20.0%

 

3. From what other companies do you purchase computer supplies on occasion? (DO NOT provide responses - Multiple responses are permitted).
Beothuk Data Systems 4.0%
Gilex Computer Centre Ltd 2.0%
Dicks and Company 26.0%
H F Fanning & Sons 24.0%
Computer Supplies Ltd 0.0%
Harvey's Computer Systems 0.0%
Computerland 0.0%
National Office Equipment 0.0%
Atlantic Computers Inc 0.0%
Paragon Information Systems 3.0%
Norcan. Computers 1.0%
M A Parsons 14.0%
Radio Shack 26.0%

 

4. Generally speaking, how satisfied are you with (Company in question #2)?
Are you:
Very Satisfied 01
Somewhat Satisfied 02
Neither 03
Somewhat Dissatisfied 04
Very Dissatisfied 05
No Opinion 06
Very Satisfied 25.0%
Somewhat Satisfied 30.0%
Not Satisfied 37.0%
No Opinion 8.0%

 

5. Can you tell me why you are dissatisfied? (Probe for any other reasons).
____________________________________________________________________
____________________________________________________________________
High Prices 45.0%
No Opinion 55.0%

 

6. What is the single most important factor your organization took into consideration when initially deciding to purchase computer supplies from this supplier? (DO NOT provide responses. One response only).
Price   51.0%
Reputation 2.0%
Convenience 5.0%
Quality of Customer Service 10.0%
Quality of Products 30.0%
Reliability of Delivery 2.0%

 

7. What other factors did your company take into consideration when deciding to purchase computer supplies from this company? (DO NOT provide responses).
Price 21.0%
Reputation 4.0%
Convenience 10.0%
Quality of Customer Service 25.0%
Quality of Products 35.0%
Reliability of Delivery 5.0%

 

8. On a scale of one to five, 1 being important and 5 being not important, how would you rate the following factors in choosing a computer supply company:
Speed of Delivery 01 02 03 04 05 No Opinion
Price 01 02 03 04 05 No Opinion
Sales Representatives 01 02 03 04 05 No Opinion
A Retail Store Front 01 02 03 04 05 No Opinion

 

Speed of Delivery:
01 66.0%
02 28.0%
04 6.0%

 

Price:
01 89.0%
02 9.0%
05 2.0%

 

Sales Representative:
02 13.0%
04 26.0%
05 61.0%

 

Retail Store:
01 42.0%
02 15.0%
04 20.0%
05 23.0%

 

9. How does your business normally place your order for computer products? (One response only).
Visit by sales representative 01
Phone 02
Mail 03
Retail Shopping Visit 04
Fax 05
Other ____________ 06
Phone 38.0%
Fax 5.0%
Mail 13.0%
Shop in Store 44.0%
Source: Company records