New Surge-Controlling Machine Naum Staroselsky emigrated to the U.S. in 1974 from the Soviet Union after 16 years as a Soviet expert on turbine controls. Staroselsky's specialty is the technology of gas compressors--big-ticket, industrial strength machines used to pressurize and move gas though pipelines and within refineries and steel mills. Fortunately for Mr. Staroselsky, compressors are finicky. Any number of conditions a change in gas mix, a fluctuation in power, a change in temperature--can result in "compressor surge." In milliseconds, the flow of gas can reverse itself. At minimum, the surge will bring a gas pipeline to a screeching halt, requiring hours to restart. Worst case, the surge will mangle a compressor so badly that it takes days to replace at a cost that can reach six figures. Naum Staroselsky realized that what goes on in the guts of a compressor can be mathematically modeled. It's all physics. The variables are many, and the interactions complex, but ultimately the conditions leading to a surge can be described by a handful of equations. That was an important discovery. Soon after Staroselsky arrived in the U.S., he started Compressor Controls Corp. in Des Moines, Iowa. By 1978, Staroselsky and his colleagues had perfected their first surge-controlling machine. Initially, their mathematically-controlled version was little better than the mechanically-controlled versions, still available on the market today. These mechanically-controlled machines eliminate only about half of all surges on a pipeline and cost $5,000 each. As Staroselsky gained experience, however, the product improved to where the current version eliminates 95% of surges. Customers who have tried the product report being very satisfied with everything but the price. The cost of making each surge-controlling machine is minimal. The machine consists of off-the-shelf temperature and pressure sensors, a microprocessor, and a tiny chunk of software that fits into a mere 25 kilobytes of memory--less than you would find in a hand-held electronic organizer. Consequently, the manufacturing cost of the Compressor Control's equipment is no more than $1000. No one else can manufacture it, however, since no one else knows the equations that enable it to work so effectively. The following information regarding the expense of major and minor surges is shown below. Minor Surge Major Surge Labor $6,000 Labor $12.000 Materials $4.000 Materials $8,000 Lost Production $20,000 Lost Production $80,000 Total cost per minor Total cost per surge $30.000 major surge $100.000 Avg. Freg/yr1 0.5 Avg. Freq/yr2 0.1 1 In other words, a minor surge happens, on average, once every two years if no surge-controlling machine is being used (either the competitive machine or the new machine developed by Compressor Controls) 2 In other words, a major surge happens, on average, once every ten years if no surge controlling machine is being used (either the competitive machine or the new machine developed by Compressor Controls) 1. Identify the customer's next best alternative to the new product described in this example (1 point] 2. Complete a Customer Value Proposition by doing the following: 19 points] a. State the points of points of parity, if any, that the new technology has as compared to the next best alternative. If you believe there are no points of parity you can just write "None." If you believe there are points of parity explain why neither the new technology nor the next best alternative has an advantage. b. State the points of points of advantage, if any, that the new technology has as compared to the next best alternative. If you believe there are no points of advantage you can just write "None. If you believe there are points of advantage explain why the new technology has an advantage c. State the points of disadvantage, if any, that the new technology has as compared to the next best alternative. If you believe there are no points of disadvantage you can just write "None." If you believe there are points of advantage explain why the next best alternative has an advantage. d. Write a customer value proposition statement that incorporates the points of advantage. 3. As compared to the next best alternative, how do you recommend the new technology be positioned? 14 points 4. Considering the seven types of risks associated with purchases (functional, financial, temporal, physical, psychological, social, and sensory) explain how two of the risks could be associated with the new machine and how the company could mitigate those risks. [6 points) 5. Write a three question customer satisfaction survey that includes questions that would allow the company to monitor how well it is doing in mitigating the risks you described in the previous question. Include the range of answers for the questions. 16 points] 6. What is the reference price for the current product developed by Compressor Controls? (1 point] 7. Quantitatively describe any positive or negative differentiation value that exists for Compressor Controls and their new surge-controlling machine. Make sure to incorporate information from the scenario and the information about the expense of surges that are found in the table. [20 points) 8. State the total economic value for a customer for this new surge-controlling machine based on your answers to the Reference value + Positive Differentiation Value - Negative Differentiation Value. These numbers should simply be a recap from the numbers you have in question #7 above. (2 points) 9. What price do you think Compressor Controls should set for the new machine? Why? (5 points) Note: The price you choose does not have to be the total economic value you computed if you do not believe customers will pay that much. But you should be able to clearly state why you have chosen your specified price