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DEC and Minicomputers
Teaching Commentary
OVERVIEW
This case is based on the experience of Digital Equipment Corporation (DEC) in responding to a competitive challenge
from Data General Corporation in the early 1980s. All the financial information is heavily disguised.
lower functionality and lower price computers. Exhibit 2 summarizes MMC’s response, based on LCC and EVC logic.
The decision shown in Exhibit 2 to price its three versions at 90% of EVC is more important for the concept of pricing at
some percent of EVC, than it is for the choice of 90 percent, per se. There is nothing particularly insightful in their
choice of 90%. Price must, of course, fall somewhere between cost and customer value. But exactly where in between is
much more a marketing than a cost issue.
TEACHING STRATEGY
In class, I start with an overview of the LCC/EVC concepts using the note, which is supplemental reading. I then draw
on class participation to make sure students are comfortable with the calculations in Exhibit 1. When I ask students for a
“better” management response, based on the ideas in Exhibit 1, I usually get answers similar to Exhibit 2.
Some students, but typically not many, will have thought about the problems raised in Exhibit 3. I make sure
these issues are raised if no one in the class sees them on their own.
Exhibit 1
MMC vs. GDS
(Digital vs. Data General in early “Minicomputers”)
Segmentation by computing speed (SOM%)
Hi Speed (20%) Medium Speed (20%) Lo Speed (20%)
MMC GDS MMC GDS MMC GDS
GDS LCC 8,050 6,560 5,650
Less MMC post-purchase -2,450
-2,050
-1,750
Features are important Features are at least considered Reprogramming
not an issue
EVC > Price by $1,400 EVC > Price by $310 EVC < Price by $300
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Exhibit 3
MMC – EVC
The “Dark Side”
Net Impact on Revenue
Segment Price Change Market Size Weighted. Impact
Cost Impact?
Volume Change?
Profit Impact
?
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Exhibit 4
EVC Pricing to Change the Value Chain
Hi-end With GDS, installation and reprogramming cost the customer $3,550.
MMC’s internal cost to do this work is only $1,500. (MMC will use its
experienced field service organization.)
Lo-end with GDS, installation and reprogramming cost the customer $1,550 for
work that would cost MMC only $750.