(Various) Karen Krackle, CEO of Kar Komponents, sat dejected in her chair after reviewing the 2006 first-quarter financial reports on one of the com¬ pany’s core products: a standard, five-speed transmission (product number 2122) used in the heavy equipment industry in the manufacture of earth- moving equipment. Some of the information in the report follows.

Kar Komponents’ strategy for this transmission is to compete on the basis of price. The transmission offers no features that allow it to be differentiated from those of major competitors. Kar Komponents' level of quality is similar to the average of the industry.
Also on Krackle’s desk was a report from her business intelligence unit, on which she underlined the following key pieces of information.
• Commodity transmission components (nuts, bolts, etc.), which all major transmission producers acquire from specialty vendors, decreased in price by approximately 5 percent from January 2005 to January 2006.
• Two major competitors moved their main assembly operations from the United States to China in early 2005. These competitors are believed to have the lowest unit production cost in the industry.
• A third major competitor ceased manufacturing of major gear compo¬ nents and began outsourcing these parts from a Mexican firm in mid- 2005. This firm increased its market share in 2005 from 10 to 14 percent following a major decrease in sales price.
• Kar Komponents’ production operations did not change in any material respect from 2005 to 2006.
• Kar Komponents manufactures approximately 83 percent of the compo¬ nents used in the heavy industrial transmission. The industry norm is to make 57 percent of the components.
• For the balance of 2006, industry experts agree that quarterly demand for the heavy industrial transmission will be even higher than the levels posted for the first quarter of 2006.

a. Examine the information Krackle has gathered. Analyze the data to iden¬ tify as specifically as possible the problems that have led to Kar Kompo¬ nents’ loss of profit and market share in the heavy industrial transmission market.

b. Based on your analysis in part

(a) and the information given to Krackle, suggest specific alternatives that she should consider to make her firm more competitive in its market. Use concepts presented in the chapter as the basis of your recommendations.

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MARKET REPORT, PRODUCT NUMBER 2122, QUARTER 1, 2006 Sales Data Total sales (dollars), Quarter 1, 2006 Total sales (dollars). Quarter 1, 2005 Total sales (units), Quarter 1, 2006 Total sales (units), Quarter 1, 2005 $4,657,500 $6,405,000 3,450 4,200 Market Data Industry unit sales, Quarter 1, 2006 Industry unit sales, Quarter 1, 2005 40,000 32,000 Industry average sales price, Quarter 1, 2006 Industry average sales price, Quarter 1, 2005 $1,310 $1,640