Financial Holding Company Business Plan

Domino Comptech Holdings’ computer division, Kettle-Moraine Computers, has focused on institutional clients, such as the government of the state of Gulfstate, law enforcement, and educational institutions. With the implementation of the S.E.A.T. Management program, we are now able to expand our target market to all state governments, law enforcement agencies (municipal, county, and federal), all educational institutions, and small, medium and large private and public companies across the United States.

In our market analysis, the figures for target market size and growth rates come from:

1. The United States Census website
2. The SBA business research website
3. Individual state business censuses, retrieved from individual state websites
4. The United States Business Census

4.1 Market Segmentation

The target markets Kettle-Moraine Computers has penetrated include education, law enforcement, government, and small business. Domino Comptech plans to utilize KMCI’s strong brand recognition among the large state institutions to broaden national coverage. Products and services are promoted through standard channels: print, radio, television, and direct mail; as well as seminars, product fairs, industry conferences, etc.

KMCI’s major advantages in the market include:

• KMCI is a value added reseller (VAR).  KMCI’s product line includes Perpetual Systems, IBM, Compaq, Hewlett-Packard, Lexmark, Cisco, and others. This broad range of products allows KMCI to satisfy virtually any customers’ hardware needs.
• KMCI has hardware, software, wiring, backbone infrastructure, maintenance, and consulting capability. This eliminates the customers’ feelings of frustration in dealing with multiple vendors.
• KMCI has numerous Blue Chip contracts in place, providing name recognition and credibility when bidding for contracts.
• KMCI has had evident success developing strong strategic relationships. Some of the company’s key relationships include IBM, Microsoft, Intel, Cisco, World Wide Technology, Inc., Structure Wise, Inc., North American System Builders Association, Value Added Reseller Partners, and many others.

KMCI uses internal and external sales representatives who are offered competitive compensation packages. ISO approved marketing and sales procedures guarantee efficiency and customer satisfaction throughout the purchase process.

4.2 Target Market Segment Strategy

Our choice of target markets is strategic, and reflects our strengths and weaknesses. Quality is our primary focus. Currently we are operating on a 100% on-time delivery, with an equipment failure rate equal to or less than five percent. The industry standard for equipment failure is close to fifty percent. In addition we provide additional added value by providing the best installation and service of any company. As a result, we are picking up service contracts from companies who didn’t even purchase their hardware from KMCI, but have had such a high equipment failure rate, combined with poor service, that it has opened the doors for KMCI to penetrate that market, and secure the service contract, which in turn will lead to new equipment sales.

We don’t want to compete at the low end, because we realize that all except the high-end home buyer is going to look at computers as boxed prices and buy based mainly on price. This market belongs to the chain stores and office stores.

In the small business target market segment, we are looking for the types of small businesses that need at least five networked units. We will offer them network servers, network installation, maintenance, and software support. Many of our target market customers already have their own in-house IT department; however, we can offer them additional support. For those in our target market that do not have an IT staff, we provide that service on a contractual basis.   

We are listed on the preferred provider list with all members of our primary target market, and we have expanded our marketing efforts to include all of the companies that have been on the fringe of our established target market. In addition, our new program, called S.E.A.T. Management, will allow companies to shift the purchase of new hardware and software from the traditional capital expense, to a line item expense via a lease feature. Now the company can lease the needed equipment, and pay for it monthly. KMCI will maintain the equipment and software, and then in three years, will replace the old equipment with new technology and update all software, thus generating a new sale.

4.2.1 Market Growth

At the time it was acquired by Domino Comptech Holdings, Kettle-Moraine Computers was experiencing three years of declining profits. While several factors contributed to this decline, the most important was the general economy of the United States. Businesses in general, and state governments and educational institutions, in particular, simply stopped purchasing computer hardware and software unless it was absolutely critical to their operations; then they would try to simply do a basic upgrade of their existing equipment. Every target market KMCI had established was cutting back spending at the exact same time. KMCI had to work harder, and submit bids with a much lower profit margin, to secure contracts.

Since the acquisition by DCH, KMCI has broadened its specific target market. We are still very active in the state of Gulfstate, working with state government offices and law enforcement, but KMCI has expanded this target market to the surrounding states as well. In addition, we have refocused our in-house sales organization to begin an aggressive campaign to penetrate further into the Small, Medium, and Large, public, and privately held corporations. 

In a 1999 profile by the Small Business Administration, the Office of Advocacy ( http://www.sba.gov/gopher/Local-Information/99Pro/99us.txt ), states that, “the number of small businesses with employees increased by 2.6 percent.” The report further stated that, “37.1 percent of the total self-employment nationwide” was “Women-Owned businesses.” In addition, the SBA reported cited that 52% of all businesses in the United States were “small business with less (sic) than 500 employees,” and that the ethnic make up of these companies was varied. This is a huge untapped market, and KMCI has begun to aggressively market to these new potential market segments, while maintaining our established relationships with state and local governments and law enforcement.

4.2.2 Market Trends

The most obvious and important trend in the market is declining prices. This has been true for years, but the trend seems to be accelerating. We see the major brand-name manufacturers putting systems together with amazing specs — more power, more speed, more memory, more disk storage — at amazing prices. In the past, major companies have always filled their hardware needs on a bid basis. The larger companies, such as Dell, Gateway, and IBM, have had the advantage, because they could reduce the cost of the hardware, and make up the reduction in the service area. This trend has started to take a new direction. The market is demanding a more reliable piece of equipment with a failure rate of less than twenty-five percent. The major chain shops and many of the small computer manufacturers have targeted the home, student, and home office user. This target market is very sensitive to price and really does not show the brand loyalty that they once showed. In addition, this specific target market is comprised of consumers that are more of the do-it-yourself mindset, and will upgrade or replace computer components themselves, rather than to pay someone to do it for them. 

This may be related to a second trend, which is the computer as throw-away appliance. By the time a system needs upgrading, it is cheaper to buy completely new. The increasing power and storage of a sub-$1,000 system means buyers are asking for less service.

A third trend is ever greater connectivity. Everybody wants onto the Internet, and every small office wants a LAN. A lot of small offices want their LAN connected to the Internet.

With the implementation of the S.E.A.T. program, we have successfully circumvented the existing trend to purchase items on bid, or to purchase inexpensive computers and upgrade or repair them in house. Within our specific target market namely state government, K–12 elementary schools, high schools, colleges, and universities, and  law enforcement, S.E.A.T. has completely rewritten how equipment has been purchased. S.E.A.T. Management allows the capital expense that must have budgetary approval to move to a line item expense that does not require the bid process or special budgetary approval. S.E.A.T. simply requires a small monthly expense that will combine all hardware, software, service and installation into one small easy payment. This allows our target market to always have the latest technology and the best service with an affordable solution.

S.E.A.T. has eliminated the need to purchase cheaper equipment and then throw it away in a couple of years, by building into the contract a three year term. In other words, our client is effectively leasing the equipment, returning it at the end of the lease term (three years) and then replacing the old leased equipment with new equipment.

4.2.3 Market Needs

Since our target market is the service seeker, the most important market needs are support, service, training, and installation, in that order. One of the key points of our strategy is the focus on target segments that know and understand these needs and are willing to pay to have them filled.

All personal computer users need support and service. The self-reliant ones have supplied those needs themselves; however, this is changing. In an effort to become more competitive in the face of economic decline, many companies are downsizing their in-house IT departments, and have started using consultants. Within the state sector of our target market, budgets have been sliced, and for the past three years all capital expenditures with the exception of the most critical have been terminated. This means that this specific target market is using old equipment that is requiring more and more service. The critical service areas are hardware and software upgrades.

The market needs more than just the physical hardware and the service to support it: Our customers depend on their systems. They need the assurance that they can find help when they need it. KMCI has successfully captured a sizable position within all of our target markets, and we are increasing that position.

4.3 Service Business Analysis

We are part of the computer manufacturing and reselling business, which includes several kinds of businesses:

1. Large manufacturers such as IBM, Dell, Compaq, and Gateway. These are our direct competitors, and it is interesting to note that three of these companies have a fairly high product failure rate, and they have all reduced their computer service to help desk, and telephone tech support. 
2. Computer dealers: storefront computer resellers, usually less than 5,000 square feet, often focused on a few main brands of hardware, usually offering only a minimum of software, and variable amounts of service and support. These are usually old-fashioned (1980s-style) computer stores and they usually offer relatively few reasons for buyers to shop with them. Their service and support is not usually very good and their prices are usually higher than the larger stores.
3. Chain stores and computer superstores: these include major chains such as CompUSA, Computer City, Future Shop, etc. They are almost always more than 10,000 square feet of space, usually offer decent walk-in service, and are often warehouse-like locations where people go to find products in boxes with very aggressive pricing and little support.
4. Mail order/Online: the market is served increasingly by mail order businesses that offer aggressive pricing of boxed product. For the purely price-driven buyer, who buys boxes and expects no service, these are very good options.
5. Others: there are many other channels through which people buy their computers, usually variations of the main three types above.

4.3.1 Distribution Patterns

Our existing target market buyers are accustomed to buying from vendors who visit their offices. They expect the copy machine vendors, office products vendors, and office furniture vendors to visit their office to make their sales. We are accustomed to this type of selling, and our sales force has been assigned exclusive selling areas. Within this selling area, the individual representative is responsible for the continued sales and service, in addition to the cold calling, and sales prospecting for new business.

Unfortunately, our Home Office target buyers may not expect to buy from us. Many of them turn immediately to the superstores (office equipment, office supplies, and electronics) and mail order to look for the best price, without realizing that there is a better option for them for only a little bit more.

Once KMCI implemented the S.E.A.T. Management program, the response from our existing and newly identified target markets was so strong that Minerva Astarte, the VP of Sales, decided to contract the smaller computer dealerships, large, and medium sized IT consulting firms, and small individual IT consultants, to sell S.E.A.T. Management to their customers. Each and every product will pay the contracted individual or company a commission. The acceptance within this targeted group has been a 50% close and sign rate, on the first call. This means that KMCI is effectively increasing its sales force, while not having the burden of paying salaries, and employee benefits.

4.3.2 Competition and Buying Patterns

DCH is a holding company, and as such really doesn’t have a “target market,” “competitors,” or channels of distribution; however, KMCI, as the computer manufacturing division of DCH, does.

The target markets of KMCI usually work on a “personal relationship” basis with the sales representative, but the bottom line is still the bid process. KMCI has found that if two bids are very close, sometimes the buying decision may be swayed based on the relationship the winning company has with the clients, or the reputation for fulfilling the contract, on time, with excellent service, and a minimum of downtime for the installation. KMCI has an outstanding reputation within the state of Gulfstate, and that reputation is expanding into the neighboring states as well. 

KMCI enjoys the advantage of building each workstation, server and network to the clients’ specifications. That means that the clients get exactly what they want, the way they want it, each and every time without exception. In addition, we are ISO Certified, which means the absolute highest quality of product. All of our products have less than a 5% failure rate. None of our competition can make such a claim. 

Service is another area where the industry is pulling back, and KMCI is moving forward. In an interview with Tom Meredith the CFO of Dell Computer, on August 21, 1999 on The Motley Fool Radio Show, the co-founder Tom Gardner asked Mr. Meredith, “what stands out for you as a few of the highlights for Dell this quarter that might not pop up immediately on someone’s radar?” The response was, “I think perhaps the most compelling is the consistent performance, frankly, over the entire decade on our topline growth, on our market share gains, and our continuous focus on the low-cost provider and therefore the best value proposition while growing profitability.” Dell at the time of the interview was selling $30 million dollars in sales per day on the Internet. Mr. Meredith predicted that would increase, because “In fact, as part of that you have to understand we’re the ones passing the declining component cost through faster than any other single competitor, and that is what the Internet does…allow us to continue to enhance our customer touch, and at the same time bring our suppliers into contact more directly with our customers so they feel the pulse of real demand.”  In addition, Mr. Meredith stated that 40% of all services issues are handled over the Internet, 70% of all order status, and 95% of Dell’s bill of materials hooked through their top 50 supplies are now online.

Dell Computer has reduced the amount of face-to-face contact, and service, exchanged it for a call center, “Help Desk” type of of service, and will send replacement parts to the end user, and then walk them through the proper repair or installation. This is great from a corporate bottom line situation; however, it is contrary to everything that KMCI clients, and many other IT consultants are saying that business clients want. Corporate and institutional clients want service after the sale, and they don’t want to have to pay extremely high prices for that service.

4.3.3 Main Competitors

IBM, Compaq, Lexmark, Hewlett-Packard, Dell, and Gateway:

• Strengths: national image, high volume, strong brand name, large advertising budgets, and economies of scale.
• Weaknesses: lack of company representation: IBM, for example, has their “contracted service providers” that will service IBM equipment for a price, and if it is an emergency they traditionally charge a “RUSH” fee on top of the regular service fee. Compaq, Lexmark, Hewlett-Packard, Dell, and Gateway, will either send the customer the replacement part, and have them install it with telephonic help desk support, or they will often request that the client send the item back. Only as a last resort will these companies seek out a contracted service provider to go to the site, and correct the problem. 

Other local computer stores: 

• We have lots of smaller computer stores that are in direct competition with our “store front.” In reality, these companies are not our competitors. Many of them carry our private labeled products, or have contracted with KMCI to build systems under their label. We maintain the service contracts for most of these companies. 

4.3.4 Industry Participants

The national chains are a growing presence.
CompUSA, Computer City, Incredible Universe, Circuit City, and Sears, to name a few, benefit from national advertising, economies of scale, volume buying, and a general trend toward name-brand loyalty for buying in the channels as well as for products. National chains suffer from a huge weakness: to achieve good prices, they must purchase in huge quantities from manufacturers such as KMCI, and once the computer is built, and delivered to the chain, the hardware becomes a ticking bomb. The chain is forced to sell that product as quickly as possible, because technology is advancing so quickly, that in reality by the time they receive their shipment, and distribute it to the stores, the hardware is already out of date.

Local computer stores are threatened.
These tend to be small businesses, owned by people who started them because they liked computers. They are under-capitalized and under-managed. Margins are squeezed as they compete against the chains, in a competition based on price more than on service and support. The local computer store is also under the same time restraints as the national chain, unless they custom build the computer for the consumer. Due to their size, and the fact that most are under-capitalized, they cannot afford to purchase the individual components as inexpensively as KMCI can.