Case Study: Markov Analysis

Rentall Trucks

Jim Fox, an executive for Rentall Trucks, could not believe it. He had hired one of the town's best law firms, Folley, Smith, and Christensen. Their fee for drawing up the legal contracts was over $50,000. Folley, Smith, and Christensen had made one important omission from the contracts, and this blunder would more than likely cost Rentall Trucks millions of dollars. For the hundredth time, Jim carefully reconstructed the situation and pondered the inevitable.

Rentall Trucks was started by Robert (Bob) Renton more than 10 years ago. It specialized in renting trucks to businesses and private individuals. The company prospered, and Bob increased his net worth by millions of dollars. Bob was a legend in the rental business and was known all over the world for his keen business abilities.

Only a year and a half ago, some of the executives of Rentall and some additional outside investors offered to buy Rentall from Bob. Bob was close to retirement, and the offer was unbelievable. His children and their children would be able to live in high style off the proceeds of the sale. Folley, Smith, and Christensen developed the contracts for the executives of Rentall and other investors, and the sale was made.
Being a perfectionist, it was only a matter of time until Bob was marching down to the Rentall headquarters, telling everyone the mistakes that Rentall was making and how to solve some of their problems. Pete Rosen, president of Rentall, became extremely angry about Bob's constant interference, and in a brief 10-minute meeting, Pete told Bob never to enter the Rentall offices again. It was at this time that Bob and his lawyer discovered that there was no clause in the contracts that prevented Bob from competing directly with Rentall.

The brief 10-minute meeting with Pete Rosen was the beginning of Rentran. In less than six months, Bob Renton had lured some of the key executives away from Rentall and into his new business, Rentran, which would compete directly with Rentall Trucks in every way. After a few months of operation, Bob estimated that Rentran had about 5% of the total national market for truck rentals. Rentall had about 80% of the market, and another company, National Rentals, had the remaining 15% of the market.

Rentall's Jim Fox was in total shock. In a few months, Rentran had already captured 5% of the total market in a few short years. Pete Rosen even wondered if Rentall could maintain 50% of the market in the long run. As a result of these concerns, Pete hired a marketing research firm that analyzed a random sample of truck rental customers. The sample consisted of 1,000 existing or potential customers. The marketing research firm was very careful to make sure that the sample represented the true market conditions. The sample, taken in August, consisted of 800 customers or Rentall, 60 customers of Rentran, and the remainder National customers. The same sample was then analyzed the next month concerning the customers' propensity to switch companies. Of the original Rentall customers, 200 switched to Rentran, and 80 switched to National. Rentran was able to retain 51 of their original customers. Three customers switched to Rentall, and 6 customers switched to National. Finally, 14 customers switched from National to Rentall, and 35 customers switched from National to Rentran.

The Board of directors meeting was only two weeks away, and there would be some difficult questions to answer---what happened, and what can be done about Rentran? In Jim Fox's opinion, nothing could be done about the costly omission made by Folley, Smith, and Christensen. The only solution was to take immediate corrective action that would curb Rentran's ability to lure customers away from Rentall.

After a careful analysis of Rentran, Rentall, and the truck rental business in general, Jim concluded that immediate changes would be needed in three areas: rental policy, advertising, and product line. Regarding rental policy, a number of changes were needed to make truck rental both easier and faster. Rentall could implement many of the techniques used by Hertz and other car rental agencies. In addition, changes in the product line were needed. Rentall's smaller trucks had to be more comfortable and easier to drive. Automatic transmission, comfortable bucket seats, air conditioners, quality radio and tape stereo systems, and cruise control should be included. Although expensive and difficult to maintain, these items could make a significant difference in market shares. Finally, Jim knew that additional advertising was needed. The advertising had to be immediate and aggressive. Television and journal advertising had to be increased, and a good advertising company was needed. If these new changes were implemented now, there would be a good chance that Rentall would be able to maintain close to its 80% of the market. To confirm Jim's perceptions, the same marketing research firm was employed to analyze the effect of these changes, using the same sample of 1,000 customers.

The marketing research firm, Meyers Marketing Research, Inc., performed a pilot test on the sample of 1,000 customers. The results of the analysis revealed that Rentall would only lose 100 of its original customers to Rentran and 20 to national if the new policies were implemented. In addition, Rentall would pick up customers from both Rentran and National. It was estimated that Rentall would now get 9 customers from Rentran and 28 customers National.

Complete the Rental Trucks Case using Markov Analysis.

Excel Spread Sheet

Executive Summary

Tree Diagram of Work

You will use the attached template as a starting point and do the following:
- Using the case information, develop the vector of initial state probabilities reflecting current market shares.

o This will be entered as your starting values in time period 0 in the cells outlined in red
- Develop two transition matrices -- one for business as usual and one for the new policies

o These will be entered in the transition matrix cells outlined in red
- The formulas in cells B6:D20 will populate once you enter the inital states and transition probabilities.

Prepare an Executive Summary with recommendations. Be sure to address the following questions (which differ slightly from those at the end of the case).

4. What will the market shares be in one month if these changes are made? If no changes are made?

5. What will the market shares be in 3 months with the changes? Without the changes?

6. If market conditions remain the same, what market share would Rentall have in the long run? How does this compare with the market share that would result if the changes were not made? How many periods does it take to reach long-run equilibrium?

7. Generally, though no cost or benefit dollar estimates are given, based on market share changes does it appear that the changes in business policy could potentially be financially defensible?

Attachment:- Assignment.xlsx