Alcoa Improves Manufacturing Process and Reduces Cost
Case Type: operations strategy; reduce costs.
Consulting Firm: Marakon Associates 1st round job interview.
Industry Coverage: Mining & Metals Production..
Case Interview Questions #00025: Your client is a subsidiary company of Alcoa Inc. (NYSE: AA, name from ALuminum Company Of America) that is mainly engaged in the business of manufacturing aluminum can used for foods and beverages. Alcoa is a world leader in the production and management of 
primary aluminum, fabricated aluminum, and alumina combined, through its active and growing participation in all major aspects of the industry: technology, mining, refining, smelting, fabricating, and recycling.
Recently, Alcoa’s research & development department has discovered a way to improve its aluminum manufacturing process. As a result, the client’s manufacturing cost of aluminum can has been reduced from $0.89 to $0.79 cents per unit. You have been hired to figure out how the company can best exploit this cost advantage. How would you go about the case? What recommendation would you give to the client?
Possible Answers:
1. Suggested Frameworks:
Remember basic economics. The company can either use a penetration strategy or price skimming strategy. Consider the impact of either strategy on the company and its competitors. Also, don’t forget to think about any substitutes for aluminum cans.
2. Possible Solution:
Clearly, the client should either drop price or reap additional profits.
It turns out that the client is the leader in its market with a 40% share and supplies directly to major beverage manufacturers like Coca-Cola, PepsiCo, etc. The number two player in the market has about 30% of the market and the rest is shared by many small competitors.
Aluminum cans have a lower priced substitute, steel cans, which have inferior printing and stamping characteristics. Steel cans are used by customers who do not want to pay the premium for aluminum cans.
If the client drops prices, other competitors will have to follow since this is a commodity market and not following would mean a quick demise. The lowering of prices might increase the client’s market share marginally, but some smaller competitors will have to start exiting the industry and larger competitors will have to start investing to discover the client’s cost advantage.
At the same time, steel can users will start switching to aluminum cans, thus hurting manufacturers in that market. The resulting growth in the aluminum can market will attract steel can manufacturers to enter it. Since some steel can manufacturers have deep pockets and a strong backing, these new entrants could pose a future threat to our client.
3. Conclusion:
In conclusion, it is best to retain prices and generate extra profits for now. The cost advantage may help another day during a price war.