CASE STUDY ANALYSISVERSHIRE Company Case I

PROCESS OF PREPARING BUDGETSy BUDGET FORMULATION STEP BY STEP PROCESS y WHO IS INVOLVED IN EACH STEP? y WHAT FUNCTION DOES THE STEP SERVE? y COULD IT BE ELIMINATED ?

Structural analysis of the metal container industryy Industry profitability is a function of the collective strength

of the 5 competitive forces .Bargaining power of suppliersy The threat of substitutes y The entry of new competitors y And the rivalry among the existing competitors . y

BARGAINING POWER OF SUPPLIERSy There are only four suppliers of y y y y

aluminium(ALCOA,ALCAN,REYNOLDS,&Kaiser) These companies are much more concentrated than the metal container industry. These firms have vast resources and pose credible threat of forward integration Can manufacturers do not pose any threat of backward integration. Hence Aluminium companies can exert considerable bargaining power over metal can manufacturers in negotiating raw material prices.

Bargaining power of buyersy Buyers of can are very large and powerful y The cost of the can is a significant part of the buyers costs . y Consumers buy in large quantity. y Customers buy an essentially undifferentiated product and face no

switching costs y Customers typically keep two sources of supply y Can manufacturers typically locate a plant to serve a single customer so that the loss of a large order from that customer can cut into the profits.

Bargaining power of buyersy There is low customer loyalty. y Buyers pose a credible threat of backward integration. y Can manufacturers have no ability to get on with forward

integration into the food and beverage industry. y Hence Buyers can exert a great deal of power over the metal can producers.

Pressure from substitutesy Its lighter weight could help in transportation costs y Aluminum is easier to lithograph, producing a better reproduction at

lower costs y Aluminum is favoured over steel as a recycling material, because the lighter aluminum can be transported to recycling sites more easily, and recycled aluminum is far more valuable. y Aluminium is known to reduce the problem of flavouring a major concerns of both the brewing and soft drinks industries. y Hence aluminium is a great threat to the traditional tin plated steel,despite being 20%more expensive.

Plasticy It is lighter y It is resistant to breakage y It has design,versatility, thereby lowering shelf space

requirements. y Hence plastics pose a significant threat to the tin plated steel in the user segments.

Fiber foily It is 20%lighter than steel cans y It is 15% cheaper than steel cans . y Hence in certain user segments e.g. motor oil, frozen juices

)fiber foil is a significant threat to the tin plated steel y Therefore with the exception of food cans ,steel faces a significant threat from substitute material such as aluminum, plastics , and fiber foil.

Threat of entryy Economies of scale in the industry are quite low and as such cannot

y y y

y y

be used as an entry barrier ,for eg,the minimum efficient plant size for 2 piece cans is two to three lines . Capital investments are certainly not an entry barrier(especially for suppliers and buyers)eg For the 2 piece can lines the per line cost is about $10 to $15 million Technology is not an entry barrier for three piece containers ,however the canning technology for the 2 piece lines is not available with buyers. Brand loyalty is absent and is not available as an entry barrier Hence metal containers industry has low entry barriers , has large number of small players .

Intensity of rivalry among existing firmsy This is a slow growth mature Industry-3%growth rate p.a. y Metal container is largely an undifferentiated product ,forcing the

customers to choose on the basis of price, if service is comparable. y Presence of close substitutes keeps the lid on prices . y Presence of very large powerful buyers and very powerful suppliers keep the container prices down y Price competition is quite intense

y Given the very high supplier power, and buyer power, low

Conclusion

barriers to entry, availability of close substitutes , and intense price competition among existing players ,the profit potential in the metal container industry is expected to be low. y Competitive strategy: Given the commodity nature of the product ,it is imperative that to be successful ,a firm in this industry must gain competitive advantage in relative costs. This is to say high performers must have least cost in the industry.

Learningsy How can a firm cut costs in a commodity product? y It can be done if cost analysis and strategic thinking are brought

closer together . y The average cost structure in the metal industry is estimated as follows:y Raw material

64 Transportation -8 y Labour 15 Research &D - 2 y Depreciation 2 General Admn 9 y Total 100% y Should manufacturing be cost center /profit center????

Thank you