MetalCo is a dominant player in the metals industry. It is the biggest regional player in steel in its territory. The company is contemplating investing in technology that will allow them to sell specialty steel products that have higher levels of tensile strength that allow them to be used for sophisticated manufacturing processes for the defense industry. The company wants to find out if this is a good investment. MetalCo needs to come up with a pricing strategy as well as a production/marketing strategy.

Research has yielded the following information:

There are significant cost savings that MetalCo will generate from entering a new market owing to its existing capabilities in a related segment of the industry.

There is one other dominant player in the specialty steel industry (SteelCorp). This competitor currently services 90% of the demand in the industry with the rest of unmet demand being filled mostly with imports. This company has conducted its business virtually in a monopolistic manner setting its pricing with little regard for market forces.

The current price they are charging for their product is $2,200 per metric ton. SteelCorp's revenues last year was $3.8 billion.

This company has long-standing relationships with its clients so it will be difficult to convince its current customers to switch to a different supplier.

SteelCorp is aware of your company's plans to enter the market and has signaled its intent to vigorously defend its market share by cutting prices.

There is available information that leads MetalCo to believe that SteelCorp has grown complacent due to its dominance. This leads it to believe that it does not have the most efficient cost structure owing to its outdated equipment.

Based on its calculations, MetalCo believes its variable costs are around 20% lower than SteelCorp. MetalCo's fixed costs are slightly higher due to startup costs and more advanced equipment.

MetalCo estimates that it is able to get 20% market share in the industry if it can execute its strategy correctly. There is a 75% chance of meeting with success.

In order to start up the company MetalCo plans to hire experienced managers who are former employees of SteelCorp. They are currently well paid by their current employer as the company is very profitable. Most of them receive a fixed salary plus a bonus that is completely discretionary. MetalCo needs to put in place a compensation package that will convince the managers to move.

This industry is not heavily regulated so there is very little government interference in the market. Recently there has been some rumblings regarding SteelCorp's monopoly power and local politicians have started asking around and some are pushing for an investigation. MetalCo has maintained good relations with a list of political players who have established open lines of communication.

Based on the preliminary information above, MetalCo has come to an initial hypothesis that it will be a good decision to invest in the new technology. Analysts now dive into the details and look for supporting data.

Further research yields the observations below. Data is hard to come by but by using existing data in the market as well as extrapolated data from similar markets MetalCo was able to come up with the following information:

An estimate of MetalCo's total cost function is

5,000 K + 1,000 L + 75,000,000 and you use a Cobb-Douglas form of the production function: Q = 100 K ^0.5 L^0.5

Since the industry has been characterized as a monopoly, there is very little data to support how price affects quantity demanded. You have very few price points with which to work. Estimates show that if price was lowered by 7.5% from its current point, quantity demanded will go up by 10%.

Estimates show that SteelCorp has fixed costs of $15,000,000.

SteelCorp has threatened to cut price by 25% if MetalCo enters the market.

If MetalCo is not successful in its entry into the market, it will decrease how much liquid assets will be available its main line of business. Liquid assets are expected to decrease by 40% as cash is diverted into the new venture.

There is a 30% chance that SteelCorp will try to enter the commodity steel market that MetalCo is currently in to compromise MetalCo's financial position and negatively affect its ability to enter the specialty steel market.

Due to the lower profit margins, SteelCorp is projected to incur marginal losses if it enters the commodity steel market.

There are currently four other players in the commodity steel market. MetalCo holds a 55% market share in this market.

Because of its dominant market position, there is a 60% probability that SteelCorp will be a first mover in the specialty steel market.

There is a 25% probability that the government will come in and enact price controls. Estimates shows that they could peg the price ceiling at $1,200.

There is a 5% chance that after price controls are enacted in the specialty steel market, regulators may come in and try to push price controls on the commodity steel market as well.

You will take the point of view of SteelCorp

Students are required to put together a plan for SteelCorp given all the information contained above. The plan must contain ideas of what to do for pricing, marketing, staffing, and other aspects of the business that will help SteelCorp maximize profits in both short and long term.