Carapace, Inc.

Carapace[1], Inc. is a firm in Tyler, Texas that specializes in plaster bandages used in making casts for broken bones. Jerry Eisle and his brother Steve purchased the firm two years ago from its founder, an orthopedic supplies dealer, and have been running it since then. The firm has always done fairly well in its local market in the West South Central area of the country and last year had retail sales of $500,000 with a pretax profit of $100,000. The product has a good reputation for being a high quality bandage, but there are few, if any, sales made outside the local market. Jerry and Steve were very interested in expanding the distribution of their product and had contacted two major distributors of orthopedic supplies about the possibility of representing them and selling the Carapace bandages in other areas of the country.

The Cast Material Market

Plaster has been used in medicine as an immoblizer since the sixteenth century. The process for creating a cast was relatively unchanged since then. Doctors would prepare a solution of plaster, dip gauze bandages into it, then wrap the affected limb and wait for the cast to harden. Eventually, a method was developed that allowed plaster to be impregnated onto gauze and then dried and rolled, thus making it possible for plaster bandages to be mass-produced and distributed.

Plaster’s Competition Recently, synthetic materials have emerged as contenders for a portion of the estimated $75 million cast material market. For example, Merck and Company has introduced a cast called Lightcast II, made of polypropylene, glass fiber, and resin, which can be as much as 50 percent lighter in weight and three times stronger than plaster. Also, because it can be immersed in water, Lightcast II permits bathing and hydrotherapy. This type of cast presents a formidable rival to the heavier plaster cast, which is still not completely waterproof.

Market Dominance In spite of plaster’s apparent drawbacks, 89.3% of the cast material market volume is still in plaster. The main reason for the popularity of plaster is its price. Synthetic casts are seven to ten times more expensive than plaster casts. Many doctors find it hard to pass this added expense on to their patients when other medical costs are rising. In addition, new additives are constantly improving the quality of plaster casts. Resins help strengthen plaster casts and improve their water resistance. Whiteners are added to improve the cosmetic appearance. Depending on the amount of potassium sulfate used in the original plaster mixture, setting times can be varied to meet the particular needs of the user. Finally, some types of casts require the use of plaster because of it superior conforming qualities. Because of these various attributes, plaster is expected to continue to dominate the cast material market in the foreseeable future.

Market Size About six thousand tons of plaster are used for medical purposes annually. Of the 6 million casts applied in the United States per year, 75 % were for setting fractures, and the remainder were used for the support of sprained limbs and for orthopedic immobilization. Although figures are not available for total cast material sales, hospitals account for an estimated 50% of market sales volume. The remaining sales are to medical schools, orthopedic clinics, doctors’ offices, veterinarians, and others. In general, a company’s share of the hospital cast material market is believed to be the same as its share in the other 50% of the market. Hospital sales are estimated to be about 29 million units. (A unit may be anything from a 5-inch by 30-inch splint to an 8-inch by 5-yard roll.) Total cast material sales in dollars have grown to an estimated $36.5 million in sales to the nation’s 7,451 hospitals. Exhibit 1 shows estimated average annual cast material dollar purchases for hospitals within the nation’s nine geographic regions.

	Exhibit 1
Average Annual Dollar Expenditures for Casts for Hospitals by Geographical Region
Region	No. of Hospitals in Region	Average Expenditure
New England	432	$6,435
Middle Atlantic	927	$7,615
East North Central	1,201	$6,145
West North Central	947	$3,075
South Atlantic	1,022	$4,930
East South Central	593	$4,785
West South Central	1,016	$2,525
Mountain	426	$3,845
Pacific	887	$5,405

Product Positioning

Jerry and Steve believed Carapace should emphasize quality, service, and its specialization in plaster bandages. The last point was especially important, since an estimated 90% of the market was controlled by Johnson & Johnson, Parke-Davis, and Kendall; also, all three market hundred of other medical supplies. The advantage of specialization was emphasized in Carapace’s advertising brochure:

Just as there are specialists in the medical profession, CARAPACE is a specialist in the making of a superior plaster bandage. Other competing manufacturers consider the plaster bandage as only one of a long line of products. At CARAPACE we make only one product and we are the best at what we do.

Pricing Carapace’s prices on its plaster products were established to reflect the high quality of its offerings. The average retail price for a bandage from Carapace was $2.903, while the average price for a plaster bandage from Johnson & Johnson was $1.12, Parke-Davis was $1.00 and Kendall was $1.165. Even though the prices for Carapace were significantly higher than its major competitors, Carapace had been moderately successful in getting into the hospital market in the West South Central region where Jerry and Steve distributed the product. They currently had about 11% of the market in their area, for both the hospitals and the rest of the market. Manufacturing and material costs are 20% of the retail price, with overhead costs running about $250,000.

Promotion At this point, $5,000 has been spent to develop a brochure for Carapace. This brochure emphasized quality, service, product attributes, and the importance of remaining small:

As a statement of business philosophy, it is our desire never to mass produce our CARAPACE bandage – to remain small enough so that we can continue to produce the best and the most inexpensive bandage available and still offer personal, fast service to our customers. Sure, we’re small; but that is why we are so good.

Jerry and Steve felt there were a number of important selling points that could be selected for future promotional efforts:

· “Wetting out” is faster with Carapace Bandages – that is, they absorb water faster when preparing the bandages for wrapping.

· Plaster loss is low. The use of adhesives in Carapace plaster reduces the amount of plaster melting off the gauze during application.

· Carapace is the “Mercedes Benz of bandages” due to the high quality of chemicals used in the mixture.

· The initial setting time is faster – three to four minutes, as opposed to five to eight minutes.

· Eventual hardening time is faster than others.

· Its packaging is easier and quicker to open while still maintaining its sterility.

· Carapace has an indefinite shelf life.

· Carapace doesn’t delaminate in water.

· Carapace is “organic.” It doesn’t have formaldehyde which the lower cost bandages use so it smells better and is less likely to cause skin irritation.

· Delivery time is faster than Johnson & Johnson’s.

Distributors

Jerry and Steve had decided that they did not want to try to build their own sales force for Carapace, but they also knew that in order to grow they were going to have to get wider distribution of their product. To do this they contacted two orthopedic supply dealers to inquire about their sales force, where they distributed, and the costs for using them for distribution of Carapace bandages.

Miller Medical Associates (MMA) MMA has sixty-two salespersons located throughout the United States, except for the West South Central and East North Central regions (see Exhibit 2). In addition, MMA also has twenty-two established orthopedic dealers situated in major metropolitan areas in territories serviced by salespersons. MMA does not compete with its dealers for accounts.

For all its sales effort, MMA would receive a 5% commission on retail sales below $2.5 million, 4% on retail sales up to $5 million, and 3% on retail sales over $5 million. This commission is received for both sales made by MMA to final users (e.g., doctors, hospitals) and from sales made through its dealers. The dealer also receive a 20% commission for the sales that they make. According to MMA, sales volume of Carapace would probably be split 70% - 30% between dealers and salespersons, respectively.

During the previous three months, MMA had been selling a new synthetic cast called Hexalite. Since this cast could only be used for certain kind of injuries, MMA thought Carapace would be a good complement for this product. In addition to bandages, MMA is a distributor of hundreds of orthopedic and related products. Its product mix contains a wide variety of items ranging from medical equipment priced in five figures to much smaller items such as bandages.

Continental, Inc. Continental is a smaller distributor of orthopedic supplies than MMA. Continental has fifty salespersons operating in the United States (see Exhibit 2 for their locations) in addition to fifteen established dealers in territories serviced by salespersons. Continental, like MMA, does not compete with dealers for accounts or sales. Continental’s commission schedule is that it receives a 6% commission on sales less than $5 million and a 4% commission on all sales over $5 million. This commission is received on all sales, whether made through their salespersons or their dealers. Dealers receive an additional 20% on all sales that they make, which Continental feels would be about 40% of the total sales.

Continental, which does not currently handle a line of plaster bandages, would like to carry Carapace to fill the gap in its product assortment. Continental carries a more limited product assortment than MMA and does not represent manufacturers of medical equipment.

Exhibit 2
Region	MMA Sales Personnel by Region	Continental Sales Personnel by Region
New England	5	4
Middle Atlantic	9	6
East North Central	0	3
West North Central	11	9
South Atlantic	11	9
East South Central	7	3
West South Central	0	3
Mountain	8	4
Pacific	11	9

The Decision

Steve and Jerry were very pleased with having two proposals to consider for distributing Carapace bandages. Continental told Steve and Jerry that even though they have salespeople in the West South Central area, Carapace could continue distributing the bandages in that area itself. MMA is the older, more established distributor, but Steve felt that Continental may give more attention to Carapace’s products. Jerry encouraged Steve to remember that the sales force for Continental was spread a little thin across the nation. In either case, they both felt that it would be unrealistic to assume retail sales to go over $2.5 million dollars in the near future. Even at that level it would still be a five-fold increase in sales. They did believe that they could continue to hold the variable costs to the current 20% of retail price. But which distributor should they use to help them reach a larger market and higher sales level?

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[1] Carapace is French for shell