Case: Replacement Decisions

Falconville Pump Company, Inc.

Brandon Joiner, president and chief executive officer of Falconville Pump Company, Inc., has a

potentially serious problem on his hands. The earnings of the firm were essentially flat in $2022$ in

spite of a general upturn in the industry. Now, well into the third quarter of $2023,$ the picture is

even gloomier. FPC$$s performance has continued to deteriorate and, for the first time since $2005,$

a loss was incurred in the third quarter. Unless things improve quickly, it is possible that the

company will show a loss for $2023$ as a whole. This problem is particularly frustrating to Joiner

because it comes on the heels of a report in one of the leading trade journals that rated FPCs

products as superior to those of all competitors in the industry in terms of durability and customer

service.

Falconville Pump Company is a major producer of deep$-$well submersible pumps for

commercial applications, irrigation equipment, and liquid distribution systems. Originally the

company specialized in agricultural systems requiring large pumping volumes and high lift $($wells

over $500$ feet deep$),$ but that segment of the business represents less than $10$ percent of total

sales today. Most of the sales volume for the past five years has been in the areas of sanitation

control systems, chemical and petroleum production, industrial process cooling systems, and

pipeline transportation systems. Although most of the systems are specifically designed for

individual customers, they tend to be constructed from standard modules that can be produced in

volume to realize substantial economies of scale. These systems generally sell in the price range

$$50,000-$$$300,000,$ although it is not unusual to find contracts for several million dollars in pipeline

transportation systems. Historically, most of FPCs sales have been to companies who were

expanding their operations and therefore needed additional capacity. Recently, though, economic

uncertainties have caused the firms to be more cautious in increasing their capacity, and, although

interest rates have fallen substantially, there is a reluctance to assume greater levels of debt for

risky expansion projects. Because of these trends, FPCs major sales target has shifted to

retrofitting and upgrading existing plant and equipment.

Although the original agricultural product line of the company was based on technology

that was substantially more advanced than usually encountered in the industry, the selling skills

required to tailor the equipment to the job were no greater than for other manufacturers. Over the

years, though, the degree of technological sophistication of the various products increased

markedly so that today a high degree of technical expertise is required to match the appropriate

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equipment modules with a particular application. Consequently, the FPC sales force tends to be

dominated by engineers or persons with at least some engineering background. The sales force

works closely with potential customers to demonstrate the advantages of using Falconville Pump

Company equipment. Since most sales involve a number of separate components or complete

systems, the total dollar volume that can be generated from a single order makes it well worthwhile

for the salespersons to devote considerable time and effort to closing each sale.

The immediate cause of Joiner's preoccupation was a report he had received that

afternoon from Janet Avery, the recently appointed vice$-$president for marketing. In an attempt to

discover the causes of the firm's sagging sales and to identify ways to turn them around, Avery

had prepared an in$-$depth analysis of business conditions in the industry and changes in the

competitive positions of the leading firms$-$including Falconville Pump Company. Industry sales

had been growing slowly for the past four years. In $2018$ and $2019,$ FPC experienced a growth

rate that was slightly higher than average, but since that time, they have not kept pace with the

leaders. Hence, several firms were found to be increasing their share of the market at the expense

of FPC$.$ On the basis of her analysis, Avery concluded that the primary cause of the market share

erosion the firm is now experiencing is the change in profile characteristics of the target market,

along with FPC$\text{'}$s failure to adapt its marketing strategy to reflect new environmental conditions.

Up to now, Falconville Pump Company's marketing strategy has focused only on the

engineering aspects of the products, and the firm's promotional literature reflects this orientation.

Such an emphasis is considered to be appropriate for two reasons. First, engineering excellence

has always been the hallmark of FPC$.$ The rating of the company's products as most durable in

the industry reflects this attention to technical details. Second, the primary customer contacts are

the design engineers who must integrate the FPC equipment into larger