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Case-11(2)-1

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    Case-11

    Jim fox, an executive for Rental Truck, could not believe it. He had hired one of the towns 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 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,

    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 Bobs 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.

    Rentals 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 customers 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 6customers 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 done about Rentran? In Jim Foxs opinion, nothing could

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    be done about the costly omission made by Folley, Smith, and Christensen. The only solution was to take

    immediate corrective action that would curb Rentrans 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. Rentals 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 Jims

    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 madeb) 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 inSeptember?

    3. a) If market conditions remain the same (no changes made), what market share would Rentalhave 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 haveattached the book.

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    The calculated probabilities will form the matrix as shown below.

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    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.


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