Case-11 Jim fox, an executive for Rental Truck, could not believe it. He had hired one of the town’s best law
firms, Folly, smith, and Christensen. Their fee for drawing up the legal contracts was over $50,000. Folly, Smith, and Christensen had made one important omission from the contracts, and this blunder would more than likely cost Rental Trucks millions of dollars. For the hundredth times, Jim carefully reconstructed reconstructed the situation and pondered the inevitable. Rental Truck was started by Robert (Bob) Renton more than 10 years ago. It specialized in renting trucks to business and private individuals. The company prospered, and Bob increased his net worth by millions of dollars. Bob was a legend in the rental business and was known all over the world for his business abilities. Only a year and a half ago some of the executives of Rental and some additional outside investor offered to buy Rental from Bob. Bob was close to retirement, and the offer was unbelievable. His children and their children would be able to live in high style off the proceeds of the sale. Folley, Smith, and Christensen developed the contracts for the executives of Rental and other investors, and the sale was made. Being a perfectionist, perfectionist, it was only a matter of time until Bob was marching down to the Rental headquarters, telling everyone the mistakes that Rental was making and how to solve some of their problems. Pete Rosen, president of Rental, become extremely angry about Bob’s constant interference, and in a brief 10 -minutes meeting,
Pete told Bob never to enter the Rental office again. It was at this time that Bob decided to reread the contracts, and it was also at this time that Bob and his lawyer discovered that there was no clause in the contracts that prevented Bob from competing directly with Rental. The brief 10-minute meeting with Pete Rosen was the beginning of Rentran. In less than six months, Bob Renton had lured some of the key executives away from Rental and into his new business, Rentran, which would compete directly with Rental Trucks in every way. After a few months of operation, Bob estimated that Rentran had about 5% of the total national market for truck rentals. Rental had about 80% of the market, and another company, National Rentals, had the remaining 15% of the market. Rental’s Jim Fox was in total shock. In a few months, Rentran had already captured 5% of the total market. At this rate, Rentran might completely dominate the market in a few short years. Pete Rosen even wondered if Rental could maintain 50% of the market in the long run. As a result of these concerns, Pete hired a marketing research firm that analyzed a random sample of truck rental customers. The sample consisted of 1,000 existing potential customers. The marketing research firm was very careful to make sure that the sample represented the true market conditions. The sample, taken in August, consisted of 800 customers of Rental, 60 customers of Rentran, and the remainder National customers. The same sample was then analyzed the next month concerning the cus tomers’ propensity to switch companies. Of the original Rental customers, 200 switched to Rentran, and 80 switched to National. Rentran was able to retain 51 of their original customers. Three customers switch to Rental, and 6 customers switched to National. Finally 14 customers switched from National to Rental and 35 customers switched from National to Rentran. The board of directors meeting was only two weeks away, and there would be some difficult questions to answer – what happened, and what can be don e about Rentran? In Jim Fox’s opinion, nothing could
be done about the costly omission made by Folley, Smith, and Christensen. The only solution was to take immediate corrective action that would curb Rentran’s ability to lure customers away from Rental.
After a careful analysis of Rentran, Rental, and the truck rental business in general, Jim conclude that immediate change would be needed in three areas: rental policy, advertising, and product line. Regarding rental policy, a number of changes were needed to make truck rental both easier and faster. Rental could implement many of the techniques used by Herz and other car rental agencies. In addition, changes in the product line were needed. Rental’s smaller trucks had to be more comfortable and easier
to drive. Automatic transmission, comfortable bucket seats, air conditioners, quality radio, cruise control should be included. Although expensive and difficult to maintain, these items could make a significant difference in market shares. Finally, Jim knew that additional advertising was needed. The advertising had to be immediate and aggressive. Television and journal advertising had to be increased, and a good advertising company was needed. If these new changes were implemented now, there would be a good chance that Rental would be able to maintain close to its 80% of the market. To confirm Jim’s perceptions, the same marketing research firm was employed to analyze the effect of these changes, using the same sample of 1,000 customers. The marketing research firm, Meyers Marketing Research, Inc., performed a pilot test on the sample of 1,000 customers. The results of the analysis revealed that Rental would only lose 100 of its original customers to Rentran and 20 to National if the new policies were implemented. In addition, Rental would pick up customers from both Rentran and National. It was estimated that Rental would now get 9 customers from Rentran and 28 customers from National. Discussion Questions (10 points each) 1. a) What will the market shares are in one month (September) if no changes are made b) What will the market shares are in one month (September) if these changes are made in August? 2. What will the market shares are in three months (October) if these changes are made in September? 3. a) If market conditions remain the same (no changes made), what market share would Rental have in the long run? b) What market share would Rental have in the long run if the changes were made in August?
NOTE: For proper understanding of the solutions, you need to read Quantitative Analysis for Management (pages 574 to 579). I have attached the book.
The calculated probabilities will form the matrix as shown below.
Questions 3
a) If market conditions remain the same (no changes made), what market share would Rental have in the long run? b) What market share would Rental have in the long run if the changes were made in August? Solution
At the long run, the market shares will reach equilibrium conditions in both changed and unchanged conditions.
