Northam Packaging Company produced 2,06,000 tons of coated paper board in 1989. This paper board was sold

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Northam Packaging Company produced 2,06,000 tons of coated paper board in 1989. This paper board was sold to consumer product firms ( processors) who formed the paper board into cartons, then filled and sealed them for shipment to retail outlets. Northam served two market segments. In 1989. 146,000 tons of the company's output went to commodity product firms from whom the carton was just a box. For these firms, price was the major purchase characteristic assuming normal quality and services. The company had 40% market share in this segment. These processors products were considered commodities becausethey did not have an ability to achieve a price premium for the brand name. These processors were typically smaller in size. Northam sold to over 300 customers in this segment. Overall sales in this segment has declined 3% per yearover the last five years, but were believed to have stabilized in 1989.

The second customer segment to whom Northam sold 60,000 tons of paper board in 1989 was high quality differentiated processors for whom the carton was an important element of the marketing strategy. Northamhad a 15% market share in this segment. These processors wheretypically larger in size .Northam sold to only six customers in this segment. This segment was growing at approximately 14% per yearand was projected to grow even faster in the future. The qualityof the packaging material (strength, durability and printability)was particularly important for this segment because the carton was a point of scale merchandisingad for the differentiated products. Northam's market share in this segment had declined over time. Customers attributed the decline to Northam'sinabilityto consistently produce the high quality board this segment demanded.

Northam wasone of four major competitors in the costal paperboard industry. Because of the scale technology and integrationeconomics of these firms, new entrants were effectively shut out.

Substitutes

Plastic was the major substitution threat to the manufacturer of coated paper board. Shell chemical and Hoover international (now Johnson Controls) had changed the consumer packaging industry overnight in 1965 when they combined to introduce the plasticresin pellet and the blow molding machine to manufacture plastic cartons. At first , the polyethylenepellets supplied by shell chemicalwere quite expensive . But the blow modelingmachine was so easy to use that plastic made steady inroads into the consumer packaging industry . However, coated paperboard continued to be used.

Cost Structure

Process flow is from the basic raw material sources through the end - use product delivered into the final customers hand. Paper mill, extrusion and conversion stages of the chain relate to Northam .Thetimber, logging, chipping and pulp mills stages aredeemphasized. The full value chain would consider these stages as well.

Step 1 Paperboard Manufacturing The Mill

Northam's primary manufacturing facility bought pulp on the open market for $319 per ton and converted the pulp into uncoated paper - boardat an additional cost $ 105 per ton . The company sold some of the uncoated board to outside customer to an average price of $ 483 per ton plus freight to the customer . But the major customer for the uncoated board was Northam's own plastic extruding plant.

Step 2 Adding The Plastic Coating Extrusion

The uncoated board was then trucked to a nearby coatingplant at an average cost of $3 per ton. Polyethylene coating was applied to both sides of the board by two extruders at an average full cost of $91 per ton. Coated board was currently sold in market for an average price of $605 plus freight. On these shipments, the extruding plant earned a profit of $ 28 per ton.

Step 3 Carton Conversion

After extrusion the coated board was shipped to Northam's carton converting plant at an average freight cost of $35 per ton. In the first stage o f the converting operation, rolls of coatedpaperboard are spliced together to form a long continuous web. Next each particular processor'sname, logo and design are printed on one side. Then the carton (container) blanks are stamped out and stacked on shipping pallets for loading. The total cost of the conversion operation averaged $ 234 per ton . The converting plant also paid an average of $10 per ton for freight to the end- use customers. Industry statistics showed that one ton of board yield an average of 14,400 cartons.

Step 4, The Filling Plants- Processors Of consumer Product

The blank cartons were set up , filled and then sealed in the processor's factory. The processors delivered their products to convenience stores andsupermarkets. Without recycling, the cycle was complete when consumers purchased the products and eventually threw away the disposable cartons. The processors who produced an undifferentiated product usually paid $.08 per carton. The other costs of such processors were on average:

Product cost $ 0.75 per carton

Converting , distribution and shrinkage cost $0.12 per carton.

They sold a carton of the commodity product for an average of $1.04 to supermarkets.

The differentiated processors. on other hand, had a very different cost structure. Theircost structure was as follows.

Average container cost $0.07

Production container cost $0.64 per carton

Convertingdistribution. and shrinkage cost 25% of the $1.42 per carton which is the whole sale price to supermarkets or $0.36 per carton.

Step 5 TheRetailerThe supermarket

A typical supermarket sells the undifferentiatedproduct for $1.16 and the branded product for $1.89.

The assets investedat each stage of the process were estimated using current replacement cost assuming full utilization of the were as follow.

Paperboard mill$2,800

Extruding Plant$190

Carton Converter$830

Commodity Processor$ 5,400

DifferentiatedProcessor (lower investment

per ton because of scale economics)$2,890

Supermarket$1,800

Strategic Options

Northam Packaging has some major decision to make . Specifically, the company had to decide the following:

a. Which market segment should they emphasize?

b. Where should they invest capital dollars?

The strategicpositioning and capital spendingdecisions facing Northam in 1989 would shape its future for many reasons.

On the choice of market segments Northam considered two specific alternatives.

a. The company would continue to emphasize the commodity processors whose total market had been declining 3% a yearbut who had always been their main customer.

b. Northam could aggressively try to build market share with differentiated processors whose market was growing at 14% or more and who would pay top dollars for board (holding quality discounts constant) but who demanded a consistent high quality.

In analyzing these questions Northam recognized its weakness vis-a -vis the differentiated segment. Its primary manufacturing was technologically obsolescent because most of the plant and equipment had been bought in the 1960s. The company experienced nagging problems with the quality of its paperboard because of the lack of up-to -datemachinery. Similarly Northam Packaging lacked high-quality printing which would have beenvery expensiveto acquire in the conversation plant . Thecompany also had limited extrusioncapacity Northam's 15% market share in the differentiated segment reflected the status as largely a backup supplier. Major capital investment ( a total of 6105 million) hadto be made. If Northam seriously wantedto rebuild market share in this fast growing segment. Three specific new investment would be.

1.About $43 million to upgrade its primary manufacturing facility to improve board strength, printability and smoothness.

2.About $17 million to add a new extruder to complete in multilayered polymer coating applications. Differentiated processors required multiplecoatingto extendthe shelf life of products and to hold difficult products ( liquids for example).

3.About$1.5 million to purchase a rotogravure printing press. At that timeNorthamprintedthe cartons with flexography presses that used rubber printing rolls. This method is inexpensive butproduces low quality images. After the initial capital investment, the rubber plates cost about $ 150 each , with six needed for a standard six colorprocess. Although the quality was not good as rotogravure printing , high- quality printing had never been required by the commodity processors. Rotogravure printing used etched , metal printing rolls, and give an extremely precise and high- quality finish, but it is expensive. Afterthe initial capital expense , each etched metal printing plate costs $ 2.500. With a six-color process, (2500x6) $ 15.000 must be spent for only one run. Once that run is complete, those etched cylinders probably will never be used again . Assumean additional cost of $ 1 per ton.

Analyze the strategic options if Northam assumes 10% increase in price and a share of 25% in the old and new market.