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As energy costs increased, there was also an increasing demand for more complex control
systems which could minimize power use in large buildings by integrating thermostats,
vents, and heat pumps. These complex control systems would cost around £12,000 for a
large building but would pay back costs within the year. The future trend in the industry
suggested that large sophisticated companies would invest in combined heat and power
systems to reduce the ever rising cost of energy. Companies were prepared to pay a high
premium for systems that worked and could provide the required savings.
For the majority of customers, price was all important. There were many companies
producing low cost diesel engines and alternators, and second- hand systems were also
available in very large numbers. For example it was estimated that there were over
150,000 broken down generator systems in Nigeria alone, which could be re-furbished and
brought back into the market. In this market sector, margins were low as the analysis of
the source of profit indicate, but order sizes were relatively large with an average £25,000
per order. Another problem with this sector was control over payment. There had been a
high level of bad debts for Herbert Engineering and other companies in the sector, which
was reflected in the profit and loss account for the previous 4 years. Poor controls over
payment had been responsible for the loss of around £110,000 over the past 5 years.
Many of the customers in this market sector also had a record of slow or delayed payment,
which meant increasing pressure on working capital requirements.
For other customers, especially those in Europe, reliability and sophistication were more
relevant. Herbert Engineering had developed an automatically controlled generator
system. The customer could specify how frequently the machine would self-test. The
standard package was to start on a weekly basis, top up the batteries and carry out a
range of self testing functions and advise the customer in a liquid display panel if there
were particular problems, and the company or its local representative could be called to
resolve the issue before the equipment was needed in earnest. In this sector, the company
could achieve substantially better margins as the analysis of the source of profit indicates.
One drawback of this sector was that individual order sizes tended to be small at around
£10,000 per sale.
Direct business between supplier and customer made up the greatest percentage of the
market, though there were a number of intermediaries both in developed and developing
economies. In the developed world, electrical contractors were the most important
intermediary for the more powerful equipment. They were involved in the specification and
installation of systems as part of an overall solution to an end user problem. The package
normally involved the complete re-wiring of a particular establishment. These contractors
provided a complete service - including repair - for all their installations. Most provided an
annual inspection service for all the equipment, and an emergency call out. The average
cost of such services was £150. Herbert Engineering used a number of contractors
throughout the UK market to provide the 24 hour service cover that many of the customers
demanded. Overseas, agents provided the same level of service in many markets.
Competition
Most of the competitors were local companies that provided low cost supply to the local
market. They also competed savagely for export business, providing the lowest price
possible for basic equipment. Such sales were also dependent on the US dollar/ pound
sterling ratio. When sterling fell against the dollar, sales to the developing world expanded
rapidly. The relationship between the two currencies and the size of this particular export
market are in Table 11C (increase in index figure indicates that sterling is weakening
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