CASE STUDY ANALYSIS

VERSHIRE Company
Case I

PROCESS OF PREPARING BUDGETS

BUDGET FORMULATION STEP BY STEP

PROCESS
WHO IS INVOLVED IN EACH STEP?
WHAT FUNCTION DOES THE STEP SERVE?
COULD IT BE ELIMINATED ?

Structural analysis of the metal

container industry
Industry profitability is a function of the

collective strength of the 5 competitive

forces .Bargaining power of suppliers
The threat of substitutes
The entry of new competitors
And the rivalry among the existing

competitors .

BARGAINING POWER OF SUPPLIERS

There are only four suppliers of

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 buyers

Buyers of can are very large and powerful
The cost of the can is a significant part of the

buyers costs .
Consumers buy in large quantity.
Customers buy an essentially undifferentiated
product and face no switching costs
Customers typically keep two sources of supply
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 buyers

There is low customer loyalty.
Buyers pose a credible threat of backward

integration.
Can manufacturers have no ability to get
on with forward integration into the food
and beverage industry.
Hence Buyers can exert a great deal of
power over the metal can producers.

Pressure from substitutes

Its lighter weight could help in transportation costs

Aluminum is easier to lithograph, producing a

better reproduction at lower costs

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.
Aluminium is known to reduce the problem of
flavouring a major concerns of both the brewing
and soft drinks industries.
Hence aluminium is a great threat to the traditional
tin plated steel,despite being 20%more expensive.

Plastic
It is lighter
It is resistant to breakage
It has design,versatility, thereby lowering

shelf space requirements.

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

Fiber foil
It is 20%lighter than steel cans
It is 15% cheaper than steel cans .
Hence in certain user segments e.g. motor

oil, frozen juices )fiber foil is a significant

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

Threat of entry
Economies of scale in the industry are quite low and as

such cannot 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

firms
This is a slow growth mature Industry-3%growth

rate p.a.
Metal container is largely an undifferentiated
product ,forcing the customers to choose on the
basis of price, if service is comparable.
Presence of close substitutes keeps the lid on
prices .
Presence of very large powerful buyers and very
powerful suppliers keep the container prices
down
Price competition is quite intense

Conclusion

Given the very high supplier power, and buyer power,

low 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.
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.

Learnings
How can a firm cut costs in a commodity

product?
It can be done if cost analysis and strategic
thinking are brought closer together .
The average cost structure in the metal industry
is estimated as follows:
Raw material
64 Transportation -8
Labour
15 Research &D - 2
Depreciation
2 General Admn 9
Total

100%
Should manufacturing be cost center /profit center????

Thank you