Sunday, October 30, 2011

Signode Industries- Harvard Business School Case Study

Key Pointers- Case was Published on 15 April, 1990

Core Problem:- Company has done a leveraged buyout using a loan and not by its own money and therefore a continuous supply of cash flow is required to serve loan but company is passing through hard times and the onus is on marketing to generate sufficient funds to serve the loan

Situation at hand
1. Signode deals with steel strappings which is used in packaging.
2. The raw material which is used in the strapping consists of cold steel and US companies has increased the cold steel prices by 6.8%.
3.Major competitor Alpha is trying to gain market share by keeping the price constant to selective group of customers.
4. Signode is a market leader for 25 years but share has been decling for last 25 years
5. Solution suggested by regional manager is Price flex of 7% at the hands of sales person
6.There is an extra pressure on Packaging Division to generate revenues because of leverage buyout and extra money that is required for aggressive acquisitions

Organisation of Signode Industries
Profit Centres:- Packaging, International and Fastner and Industrial Products
Cost Centres:- Finance and R&D
Packaging:-                                         $286M ->    Steel->59%                 Plastics->41%
International:-                                      $283M
Fastner and Industrial Products:-          $138M

Steel->59%-----> 79% Steel Strappings
                              5% Machines
                              7% Hand Tools
                              9% Sales from Goods
Three kind of steel grades-->Apex, BBM ,HDM

** Leverage buyout happens when you buyback your own shares using a loan.In this case, Singod has taken a loan of 300 million
*** Steel is a commodity and prices shifts randomly and therefore they can only go for balanced procurement by buying from international markets so that at the same time they dont upset their customers..

Grade                          % Sales            In million
1. Apex                         33.3                 94.8M
2.BBM                          26.8                 74.6M
3.HDM                         33.4                  94.38M
4.Custom Orders           6.5                    18.59M

Product portfolio should be optimized in size. We should always look at the distribution curve between standardisation and optimization.

Mass production reduces cost of manufacturing, reduces working capital and better inventory mgmt.
--> Activity based costing - Make the services lean and mean.

The goal is to have an optimum mixture of standardisation and customization by following a proper mix of standardisation and customization in the product what we offered to our clients
Packaging Division Organisation
Gray Reed was president and steel strapping is a mature product and trend is that the product is moving towards commoditization.
-Measuring and Segmenting the steel market

****Marketing Imagination By Theodore Leviitt****

Sales force compensation involves base salaivry and volume bonus. Average salary for salesperson 35000$ of which 70% salary and 30% bonus.
A major flaw with this kind of approach is that incentives are linked to revenues while in ideal scenario the incentives of salesperson should be linked to the gross margins
Other info
Power Equipment specialists help salesperson to provide technology to sell the product.
National Account Manager handles 250 national accounts
Local relationships are handled by district managers.
Signode is working towards producing low cost steel strappings-> but high value of raw materials is prohibiting them
Signode had never been able to make profits out of custom products

Steel Strapping Market

The steel strapping industry is dependent on the overall health of economy. and market is segmented according according to annual dollar Volume and shipping Volume.
Segment Annual $ Volume Shipping Quantity

National Over $23,000 Carload (20 tons)
Large $8,000–23,000 Carload or truckload (13 tons)
Midrange $3,500–8,000 Less than truckload
Small Under $3,500 Skid (0.6 ton)

Signode also marketed its market according to industry- Primary metals and Forest products accounts for the highest market share of all the industries.
Exhibit 6 clearly shows us that we can make use of Signode products specific to the industry in which consumption is largest.

Exhibit 7 we have scattergraph for national accounts- A very powerful tool to evaluate marketing performance

According to scattergraph we can assign high premium low services to national account manager while low- pay and low- service can be assigned to distributors or charge premium for value added services to the consumers.

The strategy for fourth quadrant in scatter diagram is to offer bundlings

Total Price = Base Price1+ Base Price2+ Base Price3+ Base Price4

where base price are different for different services.( Customized services and ordinary services)
Case in favor of using base price is that switching costs is usually high to go for competitors

An effort to measure the trend towards price sensitivity, Signode tried to differentiate the market based on services and price paid for it services.- Price paid and Service consumed

An analysis of scattergram indicates that no of companies that are not paying premium and cost of services are high falls in that category are large.

There are six major competitors to the Signode Industry

1.Alpha 2. Sanford 3.Bentley 4.American Metal 5.Jersey Steel 6.Plymouth
There is great movement of small accounts towards competitors because they are price sensitive and competitors are offering great price as compared to Signode.For a market leader Signode should be in all the segments and there can make use of distributors and channels to kill smaller accounts
Another way is that they can promote plastic strapping by encouraging salesforce to sell more plastic strapping and hence reduce the dependence on steel raw material.


300 distributors with more reliable independent products.Distribution network can be enhanced to penetrate into smaller accounts and avoid using salesforce which contributes to fixed expense while using channel patners for sale of products there is only variable component attached to it.

Pricing in the Steel Strapping Market

Cost of materials =70% of total price
We can procure part of raw materials from foreign markets for servicing smaller accounts.

Organisational Structure

There is flaw in organisational structure as there is no intersection between sales and marketing team. Marketing team should be spilt into two teams- one is responsible for the growth of sales and other responsible for working with salesforce.

One more suggestion is that we can have procurement head at the top to take care of procurement at the higher level and have better negotiating power overall.

You can diversify your resources according the needs of a segment in the industry.

What are the objectives?

1. Maintain Profitability
2. Halt Market share Erosion
3.Provide cash to the corporation
4.Bolster Sales Force Morale

In actual, Signode filed for bankruptcy in 1991

The  most important metric which we can used to  forecast the future of business is churn rate:-

Bench mark your own prior performance and not with your competitors.
Use Competitor's performance only as reference.

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