The Erie Sensor Company, LLC
Stockholders Report 2010-2018
EMBA 230: Management of Technology and Innovation
Professor Richard G. Donnelly, Ph.D.
ROBERT PAUL ELLENTUCK
December 17, 2010
Stockholders Report 2010-2018
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Stockholders Report 2010-2018
The Erie Sensor Company’s Mission Statement
The Mission of The Erie Sensor Company is to provide premium products for distribution to all
segment markets where there is demand. The Erie Sensor Company will produce a variety of
sensors in the Traditional, High, Low, Performance and Size segments, using cutting edge,
market-specific R&D methods and by pricing them competitively. The Erie Sensor Company is
committed to producing products that are of high quality and that not only meets, but
exceeds, customer expectations.
Original Strategy
Upon incorporation, The Erie Sensor Company’s management decided to adopt a
“Broad Differentiation” strategy by maintaining a competitive presence in every market
segment. Through this strategy, we sought to gain a sustainable advantage over
competitors by distinguishing our products with excellent design, high customer awareness,
and easy product accessibility. Pursuant to this goal, we developed Research &
Development (R&D) competencies to create fresh and exciting product designs. We
implemented a marketing strategy which focused on limited promotional budgets and
pricing our designs above market average. We crafted optimistic production forecasts, ever
mindful of the need to increase industrial capacity as we generated increasing consumer
demand. We decided to measure our performance in terms of Return on Equity (ROE),
Return on Assets (ROA), and Asset Turnover.
Market Analysis
A sensor is a device that will sense a change, such as in atmospheric pressure, and which will
then change voltage and transmit the information to another device, such as a
thermometer. Electronic sensors are used in a wide variety of industries and applications,
which demands constant modification and improvement to meet customer demand. In the
Traditional segment, customers prefer modern, well-priced sensors. In the Low End
segment, more affordable sensors are the customer’s choice. In the High End segment,
faster and smaller sensors are in the highest demand. In the Performance segment, sensor
reliability trumps all other attributes. In the Size segment, performance and size dictate
customer preference. After considerable research, The Erie Sensor Company decided to
enter this market and with the use of specialized software, Capsim ® Simulation, make
critical decisions about R&D, Marketing, Production, and Finance.
At the close of 2010, each of the companies in the electronic sensor industry was evenly
positioned with 20% market share. Competing against The Erie Sensor Company were four
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Stockholders Report 2010-2018
other identically situated companies – Andrews, Baldwin, Chester and Digby. Each of the
five companies produced one sensor in the Traditional, Low End, High End, Performance,
and Size segments. Over the past eight years, these market competitors began to
differentiate their sensors in the areas of price, age, reliability and positioning (size and
performance).
Customers within each segment had specific buying criteria for the sensors demanded. Their
criteria, listed from greatest to least importance, follows:

Traditional – Age, Price, Ideal Position (Performance and Size), Reliability

Low End – Price, Age, Ideal Position (Performance and Size), Reliability

High End – Ideal Position (Performance and Size), Age, Reliability, Price

Performance – Reliability, Ideal Position (Performance and Size), Price, Age

Size – Ideal Position (Performance and Size), Age, Reliability, Price
The Erie Sensor Company competed against the four other companies over an eight year
period. During this time, the Low End segment created more product demand than did all
other segments within the market. In 2010, Low End captured 39.2% of the overall market,
followed closely by Traditional with 32.4%, High End with 11.2%, Size with 8.7%, and
Performance with 8.4%. At the close of 2018, Low End Customers still led consumer demand
with 36.9% of the market share, again followed by Traditional with 26.9%, High End with
13.2%, Performance with 11.7% and Size with 11.7%. Growth rates fluctuated from year to
year, with the percent of segment capture of overall market share, listed below.
Round 0
Round 1
Round 2
Round 3
Round 4
Round 5
Round 6
Round 7
Round 8
TRADITIONAL
32.4%
31.4%
30.7%
29.4%
28.4%
28.4%
28.9%
27.9%
26.9%
LOW END
39.2%
39.0%
38.0%
38.2%
37.8%
37.6%
38.1%
37.3%
36.9%
HIGH END
11.2%
11.5%
12.0%
12.3%
12.6%
12.6%
12.8%
12.8%
13.2%
PERFORMANCE
8.4%
8.9%
9.6%
10.1%
10.7%
10.7%
9.3%
11.0%
11.7%
SIZE
8.7%
9.1%
9.7%
10.0%
10.5%
10.7%
10.8%
10.9%
11.4%
TOTAL
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Of particular note from the graph above are several conclusions:
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Stockholders Report 2010-2018



Traditional and Low End segments comprised 71.6% of total market share in 2010
and finished 2018 with a total of 63.8%. While both of those segments experienced
contraction relative to overall market share, segment capture of Traditional and Low
End products as critical for Erie’s success.
The Performance segment experienced the greatest amount of growth over eight
years – as determined by overall market percentage – but still occupies a relatively
small number of market sales.
Certain segments were less susceptible to the recession in Round 6 – notably,
Traditional, Low End and High End. This indicates more steady demand even in
unfavorable economic conditions.
Strategic Goal Pursuit
The Erie Sensor Company’s Research & Development department, led by R&D Chief Noemi
C. Arthur, has been successful at retaining the marketability our original product line,
maintaining a presence in every segment, and offering customers products consistent with
their ideal criteria for positioning, age, and reliability. In addition, R&D has developed new
products, in response to opportunities for market capture and to build upon the success of
our existing product line.
The Erie Sensor Company’s Marketing department, led by Marketing Chief Moo Hackett, has
judiciously allocated the scarce promotional and sales budgets of our fledgling company
based on each product’s market position. The department’s motto is “We want every
customer to know about our superb designs and we want to make our products easy for
customers to find.” We have priced our products competitively within their segments.
The Erie Sensor Company’s Production department, led by Production Chief Amir Moore, has
grown our capacity to meet increasing customer demand. The department has relied
heavily on cost-benefit analysis when determining whether to implement second shift
and/or overtime capabilities. Additionally, Chief Moore has invested heavily in increased
automation levels to improve product margins. Such decisions have been made regardless
of their impact on our ability to reposition products and keep up with segments as they
move across the perceptual map.
The Erie Sensor Company’s Finance department, led by CFO Robert Ellentuck, has
maintained a policy of financing investments primarily through cash from operations and the
issuance of long-term debt. In instances of shortfall, other financing alternatives were
implemented – namely, stock issues and current loans on an ad hoc basis. When cash
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Stockholders Report 2010-2018
position allowed, Erie paid stockholders a dividend, but was never able to retire stock.
Despite corporate preference to reinvest excess cash back into Erie’s products, a special
dividend was paid to stockholders in 2018, as a token of appreciation for their support of a
struggling company. As a closely held company, Erie adopted an adverse position to any
stock issues threatening dilution of the owners’ interest, except when an issue was
necessary to meet funding goals. Erie was never adverse to allowing assets/equity
(leverage) to grow as needed to build the future of the company. In measuring corporate
success in terms of ROE, ROA, and Asset Turnover, Erie elected to ignore short-term,
arbitrary metrics - such as stock price - since the owners have established a long-term
perspective (the 100-year Plan) to build corporate value.
Strategy Migration – Gradual but Deadly
The Board did not modify our corporate strategy as the game evolved, much to Erie’s
detriment. Often, Board decisions were more reactive than proactive – reactions to the
company’s initial success, to competitor actions and to the market decline during the
recession. These misguided reactions to a changing economic climate caused Erie to deviate
from initial corporate strategy. For instance, the Board slashed prices on products in an
effort to recapture market share, yet failed to adequately promote those reduced-cost
products with a targeted marketing campaign. In another instance, the Board all but ceased
production, in an effort to reduce the accumulated inventory of lost sales during the
recession. Had the Board correctly anticipated the declining demand of an economic
downturn, Erie would have gradually reduced production in the year prior to avoid excess
inventory costs. As Erie’s competitive position within the industry deteriorated, the
company adopted an increasingly reactive stance – with the goal of mimicking the successful
actions of competitors - without truly understanding the ramifications of certain decisions
on overall market position.
The Board did gradually move away from parts of our strategy, in order to focus scarce
resources on products that were performing above expectation, and by moving resources
away from products that were performing below expectation. While this strategy was
correct in certain respects, the Board failed to fully appreciate the dominance of the
Traditional and Low End segments with respect to overall market share – instead developing
new products for entry into the High End segment. Additionally, the Board focused R&D
resources on salvaging the dismal performance of certain products within the High End
segment, instead of allowing them to drift into a more advantageous position within the
Traditional or Low End segments, as evidenced by product migration on the perceptual map.
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Stockholders Report 2010-2018
Market Segments Emphasized
The Board mistakenly emphasized the High End segment through development of multiple
new products (Emu, EllenT, and Exige) to take advantage of the segment’s high contribution
margins. Emu eventually eclipsed the existing High End product – Echo – due to its improved
size and performance characteristics. The two other products – EllenT and Exige – failed to
substantially penetrate the market.
The Board elected not to develop a new product for the Size or Traditional segments, on
account of the competitive segment capture of existing products – Egg and Eat, respectively
– consistently across rounds. Instead, strong support was given to the product/segment in
terms of R&D, Marketing, Production, and Financing.
Market Segments Management
As emphasized in the preceding section, the Board adopted a misguided strategy when
managing existing products – false sense of security – and introducing new ones – false
perception of segment dominance. Further exacerbating Erie’s performance over the past
eight years was the role of forecasting – with respect to both sales and production.
Forecasts were mistakenly based upon segment capture rates as opposed to anticipated
growth rates. Often, forecasts reflected a far too optimistic stance given Erie’s market
position and overall economic conditions.
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Stockholders Report 2010-2018
Sales Forecast
EAT
Round 1
Forecast
Units Sold
Round 2
Round 3
Round 4
Round 5
Round 6
Round 7
Round 8
EBB
ECHO
EDGE
EGG
1000
1200
700
800
700
EMU
ELLENT
EXIGE
TOTAL
0
0
0
4400
851
1523
416
373
401
0
0
0
3564
Forecast
1500
700
500
800
900
600
0
0
5000
Units Sold
1466
744
462
590
671
515
0
0
4448
Forecast
2400
1000
600
700
1000
1500
1000
0
8200
Units Sold
1785
854
445
188
802
1049
0
0
5123
Forecast
1995
665
532
266
997
1330
333
0
6118
Units Sold
1229
648
499
93
798
616
1
0
3884
Forecast
1740
750
500
900
1300
950
300
300
6740
Units Sold
1212
822
161
751
794
525
70
0
4335
Forecast
207
91
36
247
223
135
23
0
962
Units Sold
946
116
221
32
351
716
88
0
2470
Forecast
990
123
239
35
383
774
93
100
2737
Units Sold
1212
149
314
6
491
956
305
0
3433
Forecast
1326
300
366
7
582
1134
311
0
4026
Units Sold
1542
265
333
38
695
685
343
0
3901
Sales Forecasts
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Stockholders Report 2010-2018
Sales forecasts routinely exceeded actual sales, except for the years of the recession in
Rounds 6 and 7, where the Board reacted to consistently optimistic forecasts by retreating
into a more pessimistic stance. In early rounds, the Board gave far too much credence to
computer predictions about anticipated sales. In later rounds, price-slashing behavior also
convinced the Board to overestimate future sales. Fortunately, the Board’s forecasting
performance in the last round clearly demonstrates a solid grasp of the situation and future
estimates will closely resemble actual sales.
Production Forecasts
Round 1
Round 2
Round 3
Round 4
Round 5
Round 6
Round 7
Round 8
Forecast
Units Sold
Forecast
Units Sold
Forecast
Units Sold
Forecast
Units Sold
Forecast
Units Sold
Forecast
Units Sold
Forecast
Units Sold
Forecast
Units Sold
EAT
1200
851
950
1466
2150
1785
1651
1229
1740
1212
247
946
1316
1212
2100
1542
EBB
1500
1523
750
744
1000
854
529
648
750
822
120
116
162
149
361
265
ECHO
810
416
150
462
700
445
170
499
500
161
48
221
47
314
549
333
EDGE
840
373
400
590
500
188
0
93
900
751
33
32
47
6
0
38
EGG
780
401
550
671
500
802
1000
798
1300
794
300
351
228
491
1000
695
EMU
0
0
750
515
1400
1049
765
616
950
525
180
716
924
956
1776
685
ELLENT
0
0
0
0
0
350
1
300
70
30
88
0
305
467
343
EXIGE
0
0
0
0
0
0
0
0
1300
0
0
0
0
0
0
0
TOTAL
5130
3564
3550
4448
6250
5123
4465
3884
7740
4335
958
2470
2724
3433
6253
3901
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Stockholders Report 2010-2018
Production Forecasts
Production forecasts routinely exceeded actual sales, except for the years of the recession in
Rounds 6 and 7, where the Board reacted to consistently optimistic forecasts by retreating
into a more pessimistic stance. Excess inventory following Round 5 prompted the Board to
severely curtail all production, only gradually increasing product generation in Round 7.
While production far exceeded sales in Round 8, the Board is positioning Erie for sharp
increases in demand during the next few years.
Competitor Analysis
The Erie Sensor Company’s strongest overall competitor was the Baldwin Sensor Company
(especially after Round 5), given the upward trajectory of their stock price and their strong
net income. In early rounds, the strongest competitor was not readily apparent with the
market witnessing surges and declines in each round.

Pricing Analysis: Based on our detailed competitor pricing analysis, promotion/sales
budget analysis, and segment share capture analysis, the Board was unsuccessful in
predicting our competitors’ movements with regard to pricing, R&D, and marketing.
Most decisions were reactionary – focused on mimicking successful products without fully appreciating why those products were so competitive.
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Stockholders Report 2010-2018

Product Analysis: During each round and within each segment, the Board identified
the product capturing greatest segment share – in nearly every instance, at least one
if not two Baldwin products performed more successfully than Erie’s comparable
offering. The only other team with competitive products was Chester. Baldwin
usually had a product that had the most accurate or second most accurate
performance coordinate, size coordinate, list price, MTBF, age, customer awareness,
customer accessibility, and customer survey. Erie, on the other hand, often wasted
resources by designing products that exceeded customer demands, thereby losing
any gains on the superior specifications that the customer appreciated, but wasn’t
paying for.

Emergency Loan Analysis: While Erie relied occasionally on Big Al (when needed to
meet our financial shortfalls), we did have competition in that area from Chester,
who also got received a visit from Big Al several times. Periodic bailout from Big Al
was not necessarily disastrous to overall performance, especially if no other
alternatives existed for funding future growth. Unfortunately, the impact of several
visits from Big Al had a less than desirable impact on Erie’s overall financial health –
due to the exorbitant interest rates on the shortfall funding.
Competitor Analysis - Promotion and Sales
With respect to promotion and sales budgets, the Board was often too stingy; this miserly
behavior was especially apparent when competitors were perceived to have spent less but
fared better. Under the reactionary posture adopted by the Board, decision-makers
ascribed too much weight to this characteristic and failed to accurately carry out the
required cost/benefit analysis. The Board mistakenly believed that if a competitor
performed well in one round with a low promotional or sales budget, then Erie could reduce
its own marketing levels to be more commensurate with segment leaders. The cumulative
effect of this behavior was the rapid deterioration of segment capture for Erie products –
both new and existing. The Board also failed to adequately invest in customer awareness
and customer accessibility of new products. The long-term result of this absence of
marketing was the failure for Erie’s last two products – EllenT and Exige – to capture even
the slightest market share, despite competitive segment characteristics.
Competitor Analysis - R&D
With respect to research and development for product design, the Board ascribed too much
weight to the “ideal preferences” depicted in the Capstone Courier. Instead of focusing on
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creating a superior product though performance and size attributes – as set forth in the Erie
mission statement - the company strived for mediocrity in creating products that fell into the
mid-range of the segment. The Company had difficulty in placing products in the sweet spot
for size and performance, instead relying on customer preferences. Unfortunately, this
strategy resulted in the positioning of all products in the center of the segment circle on the
perceptual map, rather than on the edges where some needed to be located. In certain
rounds, Erie products overlapped three different segments due to this poor placement.
At times, the Board focused on pricing strategies to promote growth, rather than improving
sensors to the “right” specifications to make the products more competitive. The Board
invested heavily in automation to improve contribution margins and therefore profits,
without fully analyzing the impact that automation would have on our ability to reposition
products in response to competitors’ behavior.
The Future for the Erie Sensor Company
While the current prospects for The Erie Sensor Company may appear somewhat strained,
most notably due to the recent recession and our failure to properly prepare for the
economic downturn, Erie’s Board firmly believes that the company is poised for the longterm growth that is envisioned by the owners. Erie has developed a diversified portfolio of
several strong existing products, as well as some new offerings that should grow
substantially in a well-positioned segment. One product Exige has finished development and
awaits production in a state-of-the-art manufacturing facility; End will debut in 2019 and
offers promising returns for Erie.
From a leadership standpoint, Erie’s team of seasoned executives, who are likely to remain
with the company in the long-term due to the dynamic personality and leadership style of
the CEO, are more prepared than ever to make the company a success. The entire C-level
suite is now far more experienced in the practical operations of a major industrial company,
as opposed to the purely theoretical knowledge that many of them possessed eight years
ago.
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