Exercise # 2 : Zeus Laser Technologies, Inc.

(Adapted from case prepared by Prof. Jim Anderson and Prof. Jim Narus)
Zeus Laser Technologies, Inc., is preparing to introduce a revolutionary new product, the Precision
2000 Laser Drill. Manufacturing firms can use the laser drill in machining operations to create holes
in materials such as steel, aluminum, and iron. Precision 2000 is particularly effective in metal-
working job-shop applications. Ideally, the typical job shop might purchase anywhere from 5 to 25
units. Zeus engineers designed the Precision 2000 to replace conventional, mechanical drills. Grand
Lakes Manufacturing (GLM) currently produces the top selling mechanical drill for these
applications, the GLM 7Z84. Zeus managers must decide how to price and promote the Precision
2000. Zeus industrial engineers have conducted a series of rigorous, field value-in-use assessments at
several commercial automobile manufacturers. The assessments featured side-by-side tests of the
Precision 2000 and the GLM 7Z84. Concurrently, Zeus marketing research analysts have gathered
information on competitive prices and customer preferences. Here are their key findings.
The GLM 7Z84 is currently priced at Rs. 50,000 per unit. Among mechanical drill manufacturers, the
typical profit margin before taxes for this type of drill is approximately 10%. Historical records show
that the GLM 7Z84 has a useful life of about 5 years. After 5 years of usage, owners commonly
receive Rs. 7,500 in salvage value from tool ‘re-builders.’ It takes a full day for maintenance
personnel to tear down an old unit, haul it out of the plant, install a new unit, program the new unit’s
control device, and test its accuracy and reliability. The process of replacing an old unit not only costs
the customer-firm Rs. 5,000 in maintenance personnel costs but also causes a Rs. 10,000 loss due to
production down time. Preventive maintenance on the GLM 7Z84 averages Rs. 3,000 per year.
Because the GLM 7Z84 punctures and scars metal, customers frequently incur ‘re-working’ or scrap
charges. These typically come to Rs. 5,000 per year. Customer firms consider these reworking costs
to be low relative to other mechanical drills currently on the market. Based on activity-based costing
studies, Zeus analysts believe that the GLM 7Z84 contributes around Rs. 50,000 in net profits before
taxes per year to job-shops from metal-working business. It does so by enabling firms to expand their
lines and services.
Based on beta-test results, Zeus engineers are confident that the Precision 2000 will have a useful life
of 10 years. Salvage value at the end of the ten-year period is projected to be around Rs. 5,000. At
that time, managers expect that customer firms will incur replacement costs of Rs. 5,000 for
maintenance personnel and Rs. 10,000 in lost production. Because the Precision 2000 is a complex
device, engineers estimate that preventive maintenance costs will average Rs. 5,000 per year.
However, because of the accuracy of the laser, no reworking is anticipated. Perhaps most importantly,
field value-in-use tests demonstrate that job shops employing the Precision 2000 can complete 10%
more work in the same time period resulting in Rs. 10,000 of additional net profit before taxes per
year (that is, in addition to the Rs. 50,000 in profits from normal work) due to additional business. Of
course, a firm’s ability to capitalize on benefits will be a function of market demand and its own
capacity utilization limits. Engineers believe that energy and overhead costs associated with the
Precision 2000 and GLM 7Z84 will be roughly identical.
Research and Development engineers expect that the total cost of producing and marketing the
Precision 2000 will be approximately Rs. 90,000. Marketing research studies have shown that few
job-shop owners are familiar with the laser technology and its application benefits. Analysts
anticipate strong resistance to switching technology. Survey results suggest that the perceived value
for the GLM 7Z84 is around Rs. 1,30,000. Moreover, respondents stated that no one would ever
spend more than Rs. 1,50,000 on a mechanical drill in this category.
 How much value do the GLM 7Z84 and the Precision 2000 deliver to
customer firms?
 How would you price the Precision 2000?

How does the superior value of the Precision 2000 and your suggested price influence the integrated
marketing communications programs that Zeus will use to introduce the product?