Lamination Film Producer D&K Group to Match Competitor Price

Case Type: business competition, competitive response.
Consulting Firm: Huron Consulting Group second round full time job interview.
Industry Coverage: materials.

Case Interview Question #00650: Our client D&K Group is a leading manufacturer of thin laminating films based in Elk Grove Village, Illinois, United States. For over 30 years, the company has produced top quality laminating solutions for many industries. Their products include various kinds of thermal, pressure sensitive, heat activated, and specialty laminating films.

The majority of D&K Group’s lamination films are used to make advertisements and signs (think ads on the side of the city buses, buildings or billboards). They are sold in all manners of colors and finishes (matte, gloss, shiny, etc). The client currently sells its material in the USA at 10 cents per square feet.

Recently, a European competitor has just finished building a lamination factory in Los Angeles. The European competitor is starting to approach our client D&K’s customers and offering to sell them lamination film product at 9 cents per square feet. The President and CEO of D&K Group has hired us to help them figure out if they should match the competitor’s price. What would you tell him? Should the client match the competitor’s price or not?

Possible Solution:

Interviewer: So, how would you go about this case?

Candidate: (Establishing the case and asking for more information) So, our client is facing competition in the US from a European manufacturer. Our task is to evaluate this threat and advise our client on a strategy to match or not match the competitor’s price.

Interviewer: That’s right.

Candidate: Before delving into the case, I need some more information on what are the products our client sells and who are the customers of our client.

Interviewer: OK, our client D&K Group’s products are all kinds of thin laminating films. This plastic film is manufactured in giant rolls and cannot be economically transported by air and cannot survive the harsh conditions of shipment by sea.

Currently the majority of sales are to independent regional suppliers. The reminder of sales is shipped directly to major accounts like major advertising companies, Home Depot, etc.

Candidate: (Establishing a framework/structure. A good structure should include the following)

Basically, there are two options for our client: (1) matching the competitor’s price, or (2) not matching.

To assess the feasibility of each of the two options, I want to investigate the following areas:

• the profits in both cases and the long term implications of either approach
  • In order to do that, we need to look at the revenues and costs. We need to analyze the type of products our customer sells and at what price. Then we need to assess the variable costs along with the fixed costs.
• the market
  • market size
  • the market share of our client and how much of it would be threatened by the European competitor

Interviewer: Sounds like a plan. Here is the information I have.

Additional Information given only when requested

Market size (USA) = 1 billion sq. ft.
Current market share of client = 100% – The candidate should immediately realize that it is a Monopoly!

This lamination film is essentially a commodity – The candidate should immediately know that it means that the customers are sensitive to price and would switch to a cheaper version.

The new competing plant of the European competitor has only capacity to produce 250 million sq. ft. per year – The candidate should calculate that it represents only 25% of the US market.

75% of D&K Group’s products can be manufactured by the competitor with no discernable difference – The candidate should realize that 25% of the products are differentiated products because it uses high tech coating process that prevents colors from fading.

Additional Insights:

Because it is a Monopoly, our client should attempt to price as high as possible to consume all customer’s willingness to pay.

Our client should concentrate on the 25% of the product that cannot be copied by the competitor:

• Increase the price of these specialty items
• Without substitutes, higher margins here can offset the lost revenue on the other 75% of the products

Candidate: Do we have any information about the profit margins, so we can estimate the profits?

Interviewer: (Show the following exhibit)

Profit Margin for existing plastic film manufacturing operations (per 1,000 square feet)

• Revenue: $100
• COGS (sost of goods sold): $65
• Profit: $35

Candidate: (Do the following calculations)

If the client does not match price:

• Market share lost: 25%
• Profit loss = $0.035/sq. ft. * 250M sq. ft. = $8.75M
• We made the assumption of 100% conversion to the competition

Long term implications: This situation leaves D&K Group open to further market erosion if competitor increases its capacity. Margins can also be eroded due to loss of scale (not a good long term solution)

If the client matches competitor’s price:

• Profit loss: 1c / sq. ft. on every sale -> 1,000M sq. ft * $0.01/sq. ft. = $10M
• We made the assumption that no market share will be lost (which is not necessarily true)

Long term implications: it is more expensive in the short run but defends the client’s market position.

Interviewer: Good. Based on your calculations, how much market share would need to be lost before it would cost more (in the short term) to match the 9c / sq ft. price?

Candidate: Let the lost market share be x.

(1,000M * x) * $0.035 = $10M, x = 28.57%

Interviewer: Great. So, what is your recommendation to the client?

Candidate: The client D&K Group must match competitor’s price to stave off possible market share decline of 25% in the first year and potentially more if competition expands its existing plant. The remaining 25% of products should retain their high prices and perhaps even raise the prices to maximize producer surplus. There are some risks though as even with the price match, they can lose some market share.