Akzo Nobel Deals with Competitve Threat of New Substitute

Case Type: business competition, competitive threat.
Consulting Firm: Mars & Co 2nd round job interview.
Industry Coverage: chemical; foods; oil & gas.

Case Interview Question #00415: The client Akzo Nobel N.V. (Euronext: AKZA) is a multinational chemical company active in the fields of decorative paints, performance coatings and specialty chemicals. Headquartered in Amsterdam, Netherlands, the company has activities in more than 80 countries with revenue of euro €14.6 billion in fiscal year 2010.

One division of Akzo Nobel makes a specialty chemical, used as thickening agent (a.k.a. thickeners, substances which increase the viscosity of a solution or liquid/solid mixture) in foods and oil wells. The firm holds a patent on the substance but suspects that a substitute will be invented by a competitor in approximately one year. Is this new substitute a threat to the client’s thickening agent product?

Additional Information: (to be provided to you if asked)

1. Product

The thickening agent is used in foods like gelatin, gummy bears, etc. In oil wells it is used to keep the head on. All of the inputs to the product are commodities.

2. Market

The food market uses 200,000 lbs/year and the oil market uses 50,000 lbs/year. The industry is mature with relatively little growth. The client Akzo Nobel has many customers, especially in the food segment.

In the oil well segment, the product represents a very small percentage of the total cost of production, but the product’s failure has large downside risk implications. If the thickening agent fails, causing the head to pop off, it can create large losses for the oil company. Hence, the oil company purchasing decision is primarily based on quality and reliability.

In the food segment, the thickening agent represents about 50 percent of the total costs.

3. Company

Due to the monopoly the client currently enjoys, margins for the product are very high. The firm currently charges the same price in both food and oil well segments. The client Akzo Nobel has a strong reputation for both quality and reliability.

Possible Answer:

At first glance this case is about analyzing a potential competitive threat from a new substitute, but the key is market segment. At a minimum, the candidate should discuss the following issues:

Segmenting the market is critical. If there is a way to avoid arbitrage the client firm may want to consider price-discriminating in some way between the two segments.

In the oil segment the company enjoys a much more stable position. The focus on quality and reliability combined with already insignificant cost will make it difficult for any competitor to gain market share.

In the food segment, however, the client is more threatened by the substitute.

In both segments the client should try to build a strong brand image, after the pattern of NutraSweet (a brand name for the artificial sweetener), for example.

In both segments, the client might pursue long-term contracts with some customers to preclude entry by a manufacturer of the substitute, but this strategy might prove difficult, give the large number of buyers.