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

COPYRIGHT 2010 ALL RIGHTS RESERVED ROBERT PAUL ELLENTUCK
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Stockholders Report 2010-2018

The Erie Sensor Companys 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 Companys 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 customers 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.
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%

Round 0 Round 1 Round 2 Round 3 Round 4 Round 5 Round 6 Round 7 Round 8

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 Eries 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 Companys 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 Companys Marketing department, led by Marketing Chief Moo Hackett, has judiciously allocated the scarce promotional and sales budgets of our fledgling company based on each products market position. The departments 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 Companys 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 Companys 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 Eries 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 Eries detriment. Often, Board decisions were more reactive than proactive reactions to the companys 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 Eries 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 segments 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 Eries 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 Eries market position and overall economic conditions.

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Stockholders Report 2010-2018

Sales Forecast
EAT
Round 1 Forecast Units Sold Round 2 Forecast Units Sold Round 3 Forecast Units Sold Round 4 Forecast Units Sold Round 5 Forecast Units Sold Round 6 Forecast Units Sold Round 7 Forecast Units Sold Round 8 Forecast Units Sold 1000 851 1500 1466 2400 1785 1995 1229 1740 1212 207 946 990 1212 1326 1542

EBB
1200 1523 700 744 1000 854 665 648 750 822 91 116 123 149 300 265

ECHO
700 416 500 462 600 445 532 499 500 161 36 221 239 314 366 333

EDGE
800 373 800 590 700 188 266 93 900 751 247 32 35 6 7 38

EGG
700 401 900 671 1000 802 997 798 1300 794 223 351 383 491 582 695

EMU
0 0 600 515 1500 1049 1330 616 950 525 135 716 774 956 1134 685

ELLENT
0 0 0 0 1000 0 333 1 300 70 23 88 93 305 311 343

EXIGE
0 0 0 0 0 0 0 0 300 0 0 0 100 0 0 0

TOTAL
4400 3564 5000 4448 8200 5123 6118 3884 6740 4335 962 2470 2737 3433 4026 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 Boards forecasting performance in the last round clearly demonstrates a solid grasp of the situation and future estimates will closely resemble actual sales.

Production Forecasts
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

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

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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 Companys 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 Eries 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 wasnt 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 Eries 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 Eries 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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Stockholders Report 2010-2018

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, Eries 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, Eries 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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