Zedd Technologies

In June 1991, four senior engineering students at Memorial University of Newfoundland formed ZEDD Technologies, a fictitious company, as part of the requirements of their senior mechanical design course. The four students, Zafar Bhatti, Emad Rizkalla, Dave Newbury, and Derrick Moss, developed a stabilizer for use with a satellite antenna in marine environments. In April 1992, the group graduated to a very dismal job market and were faced with a difficult decision: should they abandon their home province in order to find employment elsewhere or should they create ZEDD as a real company and pursue success as a new business venture in Newfoundland? If they opted for this entrepreneurial option, the engineering students wondered how they could possibly hope to succeed in the globally-competitive marine technology sector.

Background

In the final year of their mechanical engineering program, Zafar, Emad, Derrick and Dave formed a study group for a two-term design project course. The course revolved around the development of a project proposal and progressed to a fully designed


This Case was prepared by David Newbury and Emad Rizkalla, under the supervision of Professor Robert Greenwood 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 reproductions must acknowledge the copyright. This permission does not include publication.


product, by the end of the final semester. The design objective was to develop a stabilization system for a ship's satellite antenna which was being developed by Matrix Technologies Inc - a small local technology-based company. Early in the final semester, the group had generated several potential solutions and upon careful evaluation and analysis, one optimal idea was identified.

During February 1992, as this design was being developed, the group decided to present it at the Atlantic Engineering Design Competition to be held in Fredericton, New Brunswick, at the beginning of March 1992. At the competition, the design proved to be successful, winning first place honours in the Corporate Design category Three weeks later, the design was taken to the Canadian Engineering Competition in Kingston, Ontario, where it placed fourth. A preliminary patent search at this time showed that the concept was unique and could merit patent protection.

For the requirements of both the mechanical design course and the engineering competitions, a preliminary study of the product market was carried out by the group. Although the stabilizer was intended for use with the satellite antenna developed by Matrix, several other potential markets were identified. In addition, the market size and potential market consumer profile were also determined.

The group members began to take the idea of manufacturing the stabilization system more seriously as time and effort progressed. Many engineering programs in Canada lacked significant entrepreneurial development or training courses for budding engineers. This was also the am at Memorial University However, the founding members of ZEDD were fortunate to have come under the guidance of Dr Robert Dempster, the Mechanical Discipline Chair He encouraged innovation and entrepreneurship and made special arrangements to have offered as an option to engineering students, a small-business development and management course. Three of ZEDDs founders were entrepreneurially driven and enthusiastically participated in the course. They discovered that there could be some unique opportunities for starting a small business in Newfoundland. In addition, the success enjoyed at the engineering competitions fuelled speculation among group members that the stabilizer may have commercial potential. The engineering job market of 1992 was also at its lowest point in recent history: only about 10 percent of the graduating class had secured jobs. Thus the idea of forming an independent company was born.

Personal Backgrounds

Emad Rizkalla was born in Egypt and moved to Canada when he was seven years old. His father obtained a Masters in Mechanical Engineering (environmental) at the University of Waterloo and subsequently moved to St John's to work as a meteorologist in 1979. Emad's father worked hard to make a living and eventually was able to establish enough savings to purchase a number of houses in St John's, which he rented, with the help of Emad. Emad adjusted easily to his new home in St John's, and he eventually established a large network of friends. Emad eventually entered the Engineering program at Memorial University and became involved in the student society, holding both Vice-President and the VP Academic positions at various times. Also during his academic career at university, he established a small company, Greentech, which marketed environmentally-friendly technology for the home.

David Newbury met Emad during the first term of the engineering program at Memorial University. He too, became involved in the student engineering society, eventually holding the positions of Vice-President and VP Social. These volunteer positions with the student society involved, among other things, organizing social events including a fundraiser that attracted 1000 people and raised $6000. The engineering program at Memorial University was co-operative, providing students with the opportunity to expand their education through four-month work-terms with various companies throughout Canada. Through these work-terms, David travelled to various parts of the country and even outside the country during one work period. Although most of these work terms were with large corporations, he always believed that he would be most content working for a small company once he graduated - preferably his own.

Derrick Moss was born and raised in the industrial northern outback of Labrador City, Newfoundland. His parents moved to the isolated mining town in the early 1960's, where they started a family and lived until 1981. The family then moved to rural eastern Newfoundland where Derrick attended high school. Always a person interested in new technologies, he went to university in 1986 with the intentions of entering the engineering program. An influential stage of his development as an engineer was a period spent working with an entrepreneur driven equipment manufacturer focused on bringing state-of-the-art equipment to the marine industry. Thus the seed had been planted; Derrick would like to be an entrepreneur himself.

Zafar Bhatti was the son of immigrants from Pakistan. Zafar's father moved to Newfoundland when he obtained a teaching position at Memorial University. Zafar's father died while Zafar was very young. Zafar was an only child and always felt compelled to assist his mother in whatever way he could to pay the family bills and keep the household running. As a result, War developed a feeling of commitment and responsibility at an earlier age than most. This background was reflected in Zafar's academic pursuits, whereby he avoided risk-taking in favour of the "straight and narrow". War did not even wish to become involved in the engineering competition - he was content to just concentrate on his school studies. It was probably a desire to attain stability that prompted Zafar to avoid risk-taking ventures. Zafar was not Inclined to pursue an entrepreneurial career, and left the commercial realization of ZEDD's achievements to Emad, Derrick and Dave. Zafar eventually decided that an entrepreneurial endeavour was not for him, and pulled out of ZEDD as it approached reality as a commercial entity.

Newfoundland's Marine and Communications Environment

Newfoundland was distinctively situated within Northwest Atlantic waters. Newfoundland was blessed with a prolific fishery in its coastal waters and although it had suffered from a decline in recent years, it continued to be an important component in Newfoundland's economy. The waters adjacent to Newfoundland were characterized by a tremendous volume of commercial shipping. This nearby passageway was vital to two of the world's largest trading economies: North America and Western Europe.

Newfoundland was an island with a small population, and its only major export was fish. Thus, the region developed only a minor role in the shipping industry occasionally acting as a stop-over point for ships to re-fuel or to re-stock provisions. As vessel technology improved, this business declined and virtually all ships following the nearby trans-Atlantic routes avoided Newfoundland except when forced to make port because of operational problems or harsh weather conditions. The large shipping destinations in the Great Lakes and the American seaboard (particularly the New England coast) became the major ports of call. At these ports, firms developed to meet all the needs for goods and services to satisfy the operational requirements of the shipping industry. This included not only shipbuilding, repairs and provisions, but also firms involved in producing specialized equipment capable of making a ship's operation more efficient and flexible. The most rapidly developing of these specializations was electronics, particularly communications.

The post World War II period saw rapid growth in the state of technology in communications: practical uses of satellite technology were developed from the 1960's onward. Many industries, including the marine shipping industry, recognized the need for expedient and effective communications systems. The demand for better communications technology drove the industry as a whole to become one of the fastest growing sectors in the economy (globally as well as nationally) and it has become an important engine of Canada's economy

In view of the growth of the communications industry, Newfoundland was re-emerging as a viable site for development in the shipping industry. This was due to three factors:

  1. Location. Despite the lack of marine traffic frequenting the island, Newfoundland was an ideal site. One of the world's major shipping routes passed near Newfoundland. This immediate area was also by arguably the world's most consistently harsh environment. A product developed to withstand the demands of this environment would be well suited for use anywhere else in the world.
  2. Absence of economies of scale. The marine communications was relatively small compared to the more mass-market orientations of the major corporations, therefore, the need could be filled by smaller enterprises. This scale was compatible with the logistics of Newfoundland firms.
  3. Institutional and business infrastructure. Several of Newfoundland's educational facilities had valuable links to the local marine environment, including the Marine Institute and Memorial University's Faculty of Engineering. Other relevant local organizations included the National Research Councils Institute for Marine Dynamics and the Canadian Centre for Marine Communications. Private businesses had also developed, and were producing electronics and communications equipment with international success, including Ultimateast Data Communications, Matrix Technologies, Canpolar Ltd, and Instrumar Ltd.

This growing involvement (within the communications and marine industries) in the 1980's and into the 1990's had contributed to an atmosphere of optimism that Newfoundland firms could participate in an international market. This optimism was reinforced by a growing number of developments and contracts originating from this small but aggressive market.

The Market Local and Global

Although Newfoundland was not traditionally regarded as a hub of high technology, there was significant development and growth in the community of high technology firms. In fact, many such companies situated in the St John's area did well despite overall economic trends. Members of this technological community had roots in traditional industries or took advantage of Newfoundland's unique climate and geographical location. Companies could be found performing research and development in the areas of ocean science, fishing industry technology and marine communications. St John's also saw the emergence and growth of firms into areas that were not tied to Newfoundland's traditional economy, but were technologically driven and competitive on a global scale.

Due to the small size of the technology business community and the unique nature of each company's market, there was little or no competition between firms. This led to the potential of interfirm linkages where a small local technology-based company such as ZEDD could establish working relationships with other companies. ZEDD could develop a speciality to supply or service other local companies and could also utilize the expertise of other local companies.

ZEDD Technologies hoped to join the ranks of the few aggressive research and development corporations in St John's. ZEDD expected a substantial portion of its initial stabilizer sales to come from Matrix - the St John's company developing the mobile marine antenna. ZEDD also anticipated that it could eventually access other market niches for this product. ZEDD had consulted with the St John's based Canadian Centre for Marine Communications (CCMC) for assistance in identifying all potential markets for the product. The CCMC (a federally regulated body) had a mandate to provide its member companies with technical and marketing assistance in exploring possible linkages for them within the well-developed network of firms across Canada which were involved in the field of marine communications. The CCMC advised the group that their product could possibly have applications for other marine antennas as well as other sensitive ship-born equipment such as computer electronics. Consequently, ZEDD modified the stabilizer such that it would be flexible and adaptable to accommodate other antennas and other motion-sensitive marine equipment.

From preliminary information provided by the CCMC, it was established that a total primary world market of 55,000 ships existed. Approximately 11,000 of these used an older, hefty, and expensive type "A" linkup (for the Inmarsat "A" Satellites). These units cost in the range of $50,000 to $60,000 each. ZEDD's stabilizer would be part of a much more compact and less costly type "M" system. The type "M" system (for Inmarsat "M" Satellites), about to be launched at the time of ZEDD's design project, was capable of more advanced performance. It would be less costly to replace type "A" units with type "M" than to upgrade the "A". Although the development work on the type "M" was not complete, the cost of the "M" system was expected to run in the range of $5,000 to $10,000. The lower cost of type "M" would make it affordable to a large portion of the market which could not afford "A". Also, approximately 1000 ships per year would upgrade from the aging and outdated "A" to the more advanced "M" systems, due to the relative price advantage. An additional 2000 ships per year were expected to purchase a type "M" system. This would include many smaller ships that could not afford the more "pensive units in the past but were willing to pay the relatively cheaper price and take advantage of the newer technology. It was estimated by the founding members that ZEDD, with its early and aggressive jump on the market and with a revolutionary and inexpensive device, could capture at least one-tenth of the 3000 ship/year market resulting in 300 ship/year sales. The cost of production was expected to run $300 to $500 per item, and the market value was expected to run $800 to $1200 per item. Of course, the cost of development and overhead had to be considered. To complete development, additional engineering work was required and would take approximately one year.

Two engineers each costing $35,000 were required to complete this work. Material costs and sub-contracting for prototype development and testing were expected to be roughly $50,000. Office space and other operating expenses were expected to cost roughly $30,000, resulting in a total development cost of approximately $150,000. Table 1 summarizes the information, necessary to assess the economic potential of the stabilizer.

Company Set-up and Financing

ZEDD's three remaining Directors believed that they had enough potential and opportunity on which to base a new technologically-driven company In order to develop their stabilizer into a marketable product, approximately $150,000 of investment was required and neither Emad, Derrick nor Dave had a significant amount of money to invest up-front.

Due to Newfoundland's traditionally poor economic performance and high unemployment rate, the governments, both federal and provincial, had long been involved in attempts to stimulate the local economy. This had been effected through the development of several government agencies and programs that local firms could take advantage of where possible. These included the National Research Council (NRC - federal), the Atlantic Canada Opportunities Agency (ACOA - Federal), Industry Science and Technology Canada (ISTC - Federal), the Department of Industry Trade and Technology (DITT - Provincial), and Enterprise Newfoundland and Labrador (ENL Provincial). These agencies had been established not only to encourage the development of local businesses, but also to encourage innovation and technological development.

The NRC was eager to provide assistance in developing technology-related projects, but aside from technical advice were only capable of funding salaries for technology development (at a maximum of 75 percent). ACOA had a much broader focus in terms of the types of pro" it provided assistance for, and was generally more inclined to become involved in projects that were already further along in their development. ACOA did, on occasion, work in conjunction with the NRC to assist in the purchase of non-reusable assets (i.e. could only be used for the assisted project) as part of an NRC assisted project. ISTC could provide assistance in terms of advice in starting a new technology-based company, but did not have any funds that could be provided for the development of ZEDD's product. The Provincial Department of Industry Trade and Technology (DITT) was available for consultation assistance regarding industry developments and also had a small fund from which some marketing and travel/promotion costs could be reimbursed. ENL could provide a loan to assist ZEDD with its cash flow - ENL was willing to assist new business ventures and offered low interest rates. Essentially, ZEDD was in a position to receive financial assistance for product development from the NRC, and technical assistance from the NRC, ISTC and DITT A summary of the available assistance infrastructure is shown in Table 2.

To establish a corporate entity in the eyes of the law was relatively simple and inexpensive - approximately $300 for incorporation. To get a company up and running, however, was a rather different story - especially when credibility was so crucial for an engineering company. Business start-up costs could be expensive. For instance, a business phone with the 'essential bells and whistles" would cost approximately $100 to install and $150 each month to maintain. Business cards of professional quality would cost approximately $200 per person Stationary costs would run up similar expensive price tags. There was also the office space problem. Retail office space for three people would cost in the range of $500 to $1000 (and up) per month, not including furniture and supplies.

ZEDD had estimated that it would take approximately one year of development time to adequately design and test the stabilizer Funding from the NRC for Technology Enhancement (TE) would pay for initial development at 75 percent of project cost (salary cost only), up to $15,000, and funding assistance for Research Development and Adaptation (NRC and ACOA) would cover 75 percent of salaries for a more in-depth analysis and prototype testing. It was expected that around $50,000 in funding could be received under this program. This would provide ZEDD with $65,000 and would require ZEDD's investment of the other 25 percent - $17,000.

The partners were concerned that although there was potential for profit from the stabilizer, the market was not very predictable and development of the stabilizer would not take place for approximately four to eight months. It was also recognized that it would not be wise to base a new company on just one product or perhaps not even one specialization (such as consulting, design or product development) but to become involved in more than one area. This would cushion ZEDD from unexpected changes in any particular market as well as expand the opportunity for a successful endeavour. One big question remained for the partners: were such aspirations realistic for a group of engineering graduates trying to establish a small technology-based firm in this internationally competitive marine communications sector?

Table 1: Stabilizer Potential

Source: Company records

Table 2: Available Assistance Infrastructure

Source: Information provided by company records