Spectrum

Color

Systems,

Inc.

Anthony Cordera, executive vice president of Spectrum Color Systems, sighed as he hung up the phone. The conversation still raced through his mind as he surveyed the fall foliage outside his office window. Cordera went over every nuance of the telephone conversation he had just completed with Roberto Cortez, vice president of European operations at BASF International. BASF had been a good customer for Spectrum, but today Cortez spoke with disdain, accusing Spectrum of questionable practices in its dealings with BASF. Cordera hated to see such a profitable relationship sour, but he saw no solution. As he turned back toward his desk, he wondered whether Spectrum might soon face similar sentiment from other large multinational clients. At the same time, he wondered how to address this issue at the upcoming board meeting without alarming the company president and the board of directors.

History

Spectrum Color Systems is a medium-sized industrial firm with headquarters in the eastern United States. The firm was founded in 1952 when Daniel Clark, a government scientist working on techniques to measure aspects of color and appearance, was approached by Procter & Gamble (P&G).

Procter & Gamble recognized that customers held a perception of quality related to the color of its products. In order to offer consistency to its customers, and as part of its quality control program, P&G sought a process to help it standardize the color and appearance of the products it manufactured. Clark balked at the request to work for P&G, building a machine that could quantify aspects of color, but as he recognized widespread commercial applications of such a machine, Clark went into business for himself. Spectrum Color Systems started with the simple philosophy of providing solutions to customers’ problems relating to measurement and control of color and appearance attributes. The first machines were developed under contract with P&G. As the quality control movement developed throughout the industrialized world, the demand for Spectrum’s products grew.

Spectrum Color Systems remains privately held; majority ownership and controlling voting rights remain in the Clark family. In 1990, Daniel Clark passed away. His son, Paul, is CEO and president; he runs domestic sales, finance, and human resources. Anthony Cordera joined Spectrum in 1985. As executive vice president, he is responsible for manufacturing, engineering, international sales, shipping, and receiving. He reports directly to Paul Clark.

The Clark family retains approximately 55 percent of company stock, including all voting stock. The executive and associate staff participate in an employee stock ownership plan and together own the remaining 45 percent of shares.

Product Line

Spectrum Color Systems manufactures and sells an extensive array of colorimeters and spectrophotometers. These machines quantify aspects of color and appearance. Such measurements are important, but taking
them is no easy task. A colorimeter is the most basic instrument, with some models starting at $2,000. Most large manufacturers choose spectrophotometers, which are more exacting in their measurement ability, providing better performance and more options. These are generally integrated systems that can cost as much as $150,000.

Spectrum offers both on-line products and lab products. On-line products are designed for use on a production line, where products run under the instrument, which continuously monitors the product’s appearance. These systems are manufactured in batch operations and customized to meet customer specifications. Typically, custom features are oriented to specific user applications and include hardware components such as moving optical scanners that measure lateral color variance as well as software components designed to meet the needs of specific industries. The first instruments built in the 1950s provided users with numerical values via a primitive screen and tape printer system with a 15- to 30-second lag between measurement and numerical output. Today, all of Spectrum’s products are driven by user-friendly software that monitors color trends throughout a production run with real-time output. Lab products are used when a customer takes a sample from a production line and brings it to the instrument for measurement.

Spectrum instruments are used in a wide variety of industries. Large food product companies measure the color of their products as well as packaging to ensure consistency. Paint companies purchase instruments to match colors and lease the machinery to paint stores. Automobile companies use Spectrum products to ensure that the color of interior cloth material, plastic molding, and exterior paint match. Some companies have forced suppliers to provide color-variance data sheets with all shipments. Spectrum recently supplied several instruments to a large bakery that produces buns for McDonald’s. McDonald’s had stipulated in its contract that buns be produced not only on time, but within certain color specifications. The bakery approached Spectrum to help meet these color standards.

A major manufacturer and supplier of denim uses Spectrum’s “Color-Probe” spectrophotometer in its dye house to measure and grade the color of every strand of denim it produces. Color determines the value of the denim; it has tremendous impact when millions of yards of denim are produced and the price fluctuates significantly depending on color.

The Competition

The color- and appearance-measurement market is considered a niche market with approximately $130 million to $140 million in annual sales worldwide. Spectrum has averaged $20 million annually in both retail and wholesale sales revenue over the last three years, placing it second in terms of market share. The industry became concentrated in 1990 when Color Value, a Swiss company with $5 million to $10 million in annual sales revenue, decided to dominate the color business. Color Value International, owned by a large Swiss brewery, purchased two competitors: Color Systems (CS), based in the United States and representing $35 million in annual sales, and International Color, based in the United Kingdom and representing $20 million in annual sales. Two smaller companies occupy third and fourth market share position; Speare accounts for approximately $12 million a year in sales, and Scientific Color generates about $9 million a year in sales (see Figure 1).

Although Color Value International holds almost 50 percent of world market share, Cordera believes that Spectrum now has a unique window of opportunity. The confusion associated with integrating three companies and the loss of goodwill caused by changing CS’s company name, a well-established and respected brand, to Color Value International gave Spectrum a sales advantage. In addition, Spectrum entered the color matching and formulation market, one of Color Value’s most profitable product lines. To gain market share in the United States, Spectrum’s management decided to become the low-cost vendor and offered its new machines and color-matching software at prices of about one-half of the competition. Whereas the typical color-matching spectrophotometer by Color Value International was priced at $50,000, Spectrum offered a simpler $25,000 machine. In order to compete, Color Value International was forced to drastically reduce its prices to meet those of Spectrum, thus cutting deeply into profits.

International Expansion

In the 1950s and 1960s, Spectrum’s management spent most of its time building the instruments and getting them out the door to meet the demand rather than developing a strategy to expand the company domestically and internationally. Spectrum’s expansion into international markets succeeded despite its lack of strategic
planning.

In the early days, Spectrum simply responded to requests from large companies such as Procter & Gamble to provide instruments to overseas subsidiaries. As the Clarks became more comfortable with this process, they decided to begin selling actively in Europe. By 1984 international sales comprised about one-fourth of total corporate sales. By 1992, the share had grown to more than one-third.

Sales Force

Spectrum Color Systems utilized independent sales agents domestically from its inception until 1986, when it developed an internal sales force. Cordera, drawing on his experience in marketing, set up the domestic sales force to provide more direct control over the marketing and sales strategies. After touring a number of agent offices, Cordera began to calculate the real cost of such a sales relationship. Working closely with Bob Holland, Spectrum’s chief financial officer, Cordera tried to quantify some of the intangible and hidden costs of the agent relationship. Spectrum spent significant resources lobbying for agents’ time and attention to sales of Spectrum products and provided all the technical support since few of the agents had technical expertise. Additionally, although Spectrum was responsible for billing customers and paid 15 percent of the sales price to the agent as commission, it had no access to lists of end users and decision makers within the client’s organization. Spectrum is an application-oriented company; thus access to decision makers and end users within client organizations provides valuable information for product development and sales of transferable applications to current and future clients. A detailed financial analysis compared the true cost of using sales agents to the anticipated cost of an internal sales force. The analysis indicated that Spectrum could increase sales, reduce cost, and increase its control by developing its own sales force.

Internationally, Spectrum still relied mainly on independent distributors for its sales. Spectrum sold instruments outright to distributors at wholesale price. Spectrum billed the distributors on 30-day net terms. Spectrum provided
its distributors sales brochures and manuals in English. Distributors then translated these brochures as needed.

In the early days, distributors were selected largely through happenstance. Distributors of other products would hear about Spectrum and write a letter to the Clarks expressing interest in the distribution of their instruments. The Clarks would invite the distributor to the United States to see the products and get trained in their operation and thus become a Spectrum distributor. Spectrum now has distributors all over the world with extensive market penetration in Europe and the Far East. Although the company has encountered a steady international demand for its products, it continues to encounter problems with international distributors.

In 1984, Spectrum’s sole French distributor, Gerard Bieux, abruptly closed his operation for medical reasons. Bieux had kept his sales operation close to his vest and thus maintained no customer lists or sales records. There was no one who could fill the void Bieux left, and Spectrum’s management was forced to start over again building up its French distribution.

Cordera spent a great deal of time locating another French distributor and developing a profitable relationship. The relationship served Spectrum well until 1990, when a major competitor purchased the distributor. Again Cordera was left without a French representative for Spectrum instruments.

Cordera realized that the distributor selection process was critical to Spectrum’s international expansion and decided to become more proactive in selecting distributors. He worked closely with Holland to establish selection criteria for distributors based on financial stability, formal training programs, and financial goals. Additionally, Spectrum insisted that all distributors have service technicians trained at its U.S. facility. The distributor was responsible for paying the airfare for the technician, and Spectrum supplied food, lodging, and training. This strategy was not pursued so much for financial reasons, but to force the distributor to make both a financial and emotional investment in selling Spectrum products.

With the domestic direct sales force up and running, Cordera decided that if he was going to put the effort into forging an international presence, Spectrum should move toward an international direct sales force. In 1991, Spectrum opened its first European sales office in Paris. It opened an office in Germany in 1992.

Development of an International
Direct Sales Force

In spite of the detailed planning, financial budgeting, and strategy analysis that preceded the opening of both European offices, each showed a net loss in its first year of operation. Cordera consulted with large accounting firms in both France and Germany to gain insight into European business law and to develop first-year budget projections. In addition, Spectrum management solicited information from its state Department of Economic Development on issues of taxation, international shipping, work permits, and visa restrictions for U.S. nationals working abroad. Despite such efforts, the combination of operating costs, which exceeded Spectrum’s estimates, and slow sales associated with the European recession resulted in first-year losses in both France and Germany.

Cultural differences contributed to rising costs. Unlike the U.S. sales force, where the majority of a sales representative’s compensation consists of commission, European sales representatives are traditionally paid high salaries and relatively low commissions. In addition, employees are paid an annual salary bonus equivalent to one month’s salary regardless of performance. Terminated employees can receive up to one year of severance pay based on the longevity of their relationship and position with the company. Middle managers and above expect to be provided with company cars, which was particularly difficult for Spectrum management to swallow since neither Cordera nor Clark was provided with a company car. Despite his uneasiness, Cordera agreed to provide these benefits since he felt it important to attract high-quality employees for the new offices. All of these benefits were stipulated in the long-term employment contracts required in Europe.

Difficulties soon became apparent with Spectrum’s sales representative in Paris. In staffing the Paris office, Cordera, largely out of a desire to get someone out on the road in France, settled for an individual who, although the most qualified of the candidates, lacked the aggressiveness, sales orientation, and technical competence for the position. Cordera was disappointed by the sales representative’s performance but found the process of terminating the employee a long and arduous one. Spectrum began working with an attorney in Paris, providing the employee with written documentation detailing the reasons for dissatisfaction, as well as sales goals that were to be met in order to retain the position. In the end, Spectrum was forced to negotiate an expensive severance package.

But now, the international activities seemed to be on track. Spectrum had two international offices abroad. The Paris office consists of the international sales director, one sales representative, one service technician, and two secretaries. From that office, Spectrum conducts marketing activities, sales, installation, and service for France. The German office employs two sales representatives, one secretary, and one service technician covering the German market.

To avoid future hiring difficulties, Cordera instituted a program that brings key individuals from European operations to its headquarters facility. The mission of this program is to integrate those individuals into Spectrum’s corporate culture and create a team environment. On this point Cordera remarked, “The fax machine and telephone are great pieces of equipment, but nothing beats a face-to-face dinner or lunch where we can sit down and talk to each other.”