Signode Case Study

1. Signode Case Study Maria Lopez Jai Thattil Tim Earnshaw

2. Contents • Assumptions • Analysis of factors influencing pricing decisions • Conclusions • Recommendations

3. Assumptions • We are in 1984 • We are a marketing consulting team, employed by Gary Reed to help him determine his course of action

4. Factors affecting pricing decisions Internal Factors Internal Factors External Factors Pricing decisions Marketing objectives Marketing mix strategy Costs Organisational considerations Nature of the market and demand Competition Other environmental factors

5. Nature of Market • Oligopolistic market • Steel strapping market is diminishing • 2% of market per annum is being lost to plastic strapping through substitution • Plastic market growing at 4% per annum in total • Increasing raw material prices • Over-capacity in the domestic industry

6. Nature of demand • Many buyers in the marketplace • Signode alone has > 25,000 accounts • Purchasing power not greatly focussed in few hands • Buyer-behaviour has become more sophisticated • More professional procurement approach amongst customers • Placing fewer, smaller orders and using a closed-bid process • Varying levels of price –sensitivity • Account numbers are roughly net zero with new accounts offsetting lost accounts in each account size segment • Successfully growing accounts from small to medium, and from medium to large • Spend with Signode represents a very small proportion of overall costs for their customers

7. Competition • Market share in steel strapping has reduced from 50% to 40% from 1977 to 1983 • They have 53% market share in plastic strapping systems • Increasing levels of foreign imports further threaten market share in the low-price segment • Competitors have a lower cost-base • None offer the same range of products/services • None offer the same quality of service as Signode

8. Costs • Raw materials costs represent 70% of the cost of steel systems for Signode • This is higher than their competitors • In addition Signode have higher overheads which worsen their cost-competitiveness • A proposed 6.8% increase in the cost of raw steel actually results in a 4% increase in the costs of steel systems production

9. Organisational considerations • Signode under new, cash-strapped ownership • Low sales force morale, incentivized on volume • Want deeper price-cuts • Don’t understand profit implications • Traditionally focused on providing unparalleled customer service

10. Marketing Objectives and Strategy • Stated marketing objectives of the new owners are : • Maintain profitability • Halt market share erosion • Provide cash to the corporation • Bolster sales force morale • Current marketing strategy is a leadership strategy • Differentiate not by price but by value-add • High levels of customer service • Constant innovation • Customized products and machinery • Protect market share • Competitors take Signode price as reference

11. Conclusions • Evidence suggests Signode is trying to be ‘all things to all people’ • Offer a full range of services and higher levels of customer service than their competitors… • …but they also seek to serve customers who are price-sensitive and purchase on a commodity basis • Yet they do not differentiate their product offering to each segment, so price-sensitive customers get a value-based product for a commodity-price • And these customers also benefit from Signode’s loss-leading marketing activities whilst maybe never being profitable to serve

12. Signode’s Top National Accounts High X XXX X X X XX X X X X X X X XX X XX X X XX X XXX X XXX X XX X X XX XX XXX X X XXX XX XX Price paid X XX XXXX XXX X XX XX X XXX X XX XX X XXX X XXX X XX X X X XX X XX X X XX X X X X X XX XX XX X XXX X XXX XX X XX XX X X XX XXX XX XX X X X X XXX X X X X XX X XXX X X X Low X X X XX X X Low High Cost to serve

13. Conclusions • Blanket price competition damages Signode • Price war is damaging to all market participants • Their cost base does not allow them to be the lowest-cost provider of steel strapping • Increasing competition from imports in the price-sensitive segment – can’t compete with their cost profile • Signode is not well positioned to survive a price war given their current financial position and cash demands of new owners • Loss in profits through price reduction is not offset by increase in profits from expected gains in market share • Huge over-capacity in the industry, so competitors can also chase volumes

14. Conclusions • They don’t need to compete on price with every customer group they serve • Signode’s value-based proposition is not losing customers(net) in any customer segment • Low-price segment is most price-sensitive but still recognize the value of using Signode • They are the historic price leader • Most rivals will likely follow their lead if they do pass on the 6.8% cost increase • Marketing objectives require them to maintain market share, so they need to be more price-competitive in some segments Need focussed price-competitiveness

15. Recommendations • Adopt a differential pricing strategy, not price-flex • They need to sell a differentiated product to price-sensitive and service-oriented customers, to rectify situation of having so many low-price high cost-to-serve customers • This will allow them to be more cost-competitive in the price-sensitive segment whilst continuing to maximise profit from their service-oriented customers • This increased cost-competitiveness provides the room for targetted price-discounting vs current across-the-board price cuts Represents continuation of leadership strategy with a revised pricing strategy

16. Recommendations • Marketing efforts need to focus on the ‘value-add’ of doing business with Signode • Being the lowest cost provider is not just about selling the product at the lowest price (consider cost to customer of a late, inaccurate, or poor quality delivery) • They are a ‘systems’ seller not a ‘commodity’ seller, and should seek out further new markets e.g. other packaging needs • Need a sales-force remuneration approach which is aligned with marketing objectives • Rewards need to be based not on volume but on achieving marketing objectives • Need to understand the profitability of their decisions if they are to be given latitude on pricing • Loss-making activities should not be part of strategy for customer acquisition but customer-retention

17. Recommendations • Signode need to manage profitability more closely • No agreement around the numbers • Consider using distributers for small accounts • Profit-margin on small orders is high, so they can sacrifice margin • Reduces cost to serve this large number of customers • Sales force can then concentrate on improving retention amongst medium and large accounts • Signode can be smarter at procurement themselves • Consider buying steel abroad • At a minimum, pass on cost increase back to the steel companies • Use position of market leadership to create effective industry body • i.e. forum for ‘better understanding’ between producers • Could also drive consolidation in domestic industry

18. Responses to recommendations • Sales-force should respond positively : • remuneration scheme more aligned to marketing objectives than current policy • change gives them the requested latitude for discounting, within the constraint of understanding the profit impact of these decisions • Investors should respond positively : • Changes make them more able to compete • They avoid escalation of a price war which would be damaging in the long-run • We expect competitors to respond : • Typically by following the price increase, and retaining level of price differential from Signode • Continuing to target price-sensitive customers away from Signode • Anticipated customer responses : • Marketing efforts should convince them that Signode represents lowest total cost, not necessarily lowest purchase cost • No substitute for Signode’s customised products and level of services

19. Q & A

20. Appendix

21. Price-flex Analysis • Assume that the sales force will effectively discount the price to the maximum (7%) • Average prices fall by 7% • Since there was also an increase of 6.8% in the price of steel, their costs will increase, leading to a higher decrease in margins • Their current gross margin for the packaging division of $101,598 would decrease from 36% to 25% • Sales would have to increase more than 30% • Need of market share increase of 28% to keep their current gross margin • Sales force promised only a 5% to 10% increase in market share Price-flex does not seem to be the pricing strategy to follow

22. Price-flex Analysis Assumptions: • Consider steel strapping consumables • Consider same sales as in 1983 for analysis purposes • % of strapping steel in sales = % of strapping steel in costs of sales • Fixed cost are already covered • R&D remains constant Real increase in price is 6.8% (price increase) * 86.1% (variable costs) * 72.2% (raw materials) = 4.23% New gross margin is 36% (old margin) – 7% (discount) – 4.23% (increase) = 24.77% 25/36 = 0.69 Sales which means that they need increase of market share by 27.6% (0.69*40% of actual market share) Analysis of Costs Total Sales 285,950 Strapping Systems Sales 168,710.5 (59%) Strapping Steel Consumables Sales 133,281 (79%) Cost of Sales 181,473 Cost of Sales of Systems 107,069 (59%) Cost of Sales of Consumables 84,585 (79%) Actual Raw Materials 61,070 (72.2%) + Others 11,757 (13.9%) + Fixed 11,757 (13.9%) with increase of 6.8% (4,153) New Raw Materials 65,223 + 11,757 = 76,980 Total Variable Costs + 11,757 (Fixed Costs) New Cost of Sales of Steel Strapping Consumables = 88,737