Introduction:

Signode Industries Inc., a privately owned company, is the market leader in the steel strapping

industry. In the early 1900’s, Signode started out as a producer and marketer of patented steel

strap joints and application tools. In the 1950’s, Signode vertically integrated its business and

started to purchase and process rolled steel. Signode has since become a low-cost processor of

cold rolled steel. Three grades of steel strapping are manufactured: Apex, Box Band Magnus

(BBM) and Heavy Duty Magnus (HDM). Today, Signode produces plastic strapping in addition

to the steel strapping products and is the only producer of customized steel strapping and steel

strapping machines.

Signode sells its strapping products through its geographic ally organized sales force that

traditionally had developed markets by specializing, by industry, some of its sales representatives.

Signode’s sales force is the largest, most powerful and respected in the steel strapping industry.

Signode's competitors can not provide the level of service that Signode provides.

There are presently six major competitors in the steel strapping industry that account for 92% of

steel strapping shipments. In 1983 Signode had a 40% market share in the steel strapping

industry, however that share dropped from 50% in 1973. The biggest reason for the loss of

market share is price discounting by the competition.

Problem:

In November of 1983 the major U.S. steel companies announced that they would increase the

price of cold rolled steel by 6.8%. Cold rolled steel is the raw material used in the manufacture of

steel strapping, Signode’s primary product. Traditionally, such an increase would be passed on to

the consumer directly. However, the traditional approach has met opposition from Signode’s

sales force, who feel that the sales force is already at a disadvantage in the market due to price-

cutting by competitors. It is now January 1984 and Gary Reed, president of Signode Industries’

Packaging Division, has to decide what pricing policy would the best response to the increase in

raw material cost. At the end of January, Reed must present his pricing policy at the national

1
sales meeting. Reed’s presentation will detail his implementation plan for the packaging

division’s pricing policy.

Reed believes he has three possible pricing policy choices:

1. Pricing Policy #1 - Continue what Signode has done in the past and pass on the raw material
increase to the consumer.
2. Pricing Policy #2 - Implement the “no increase option” that would simply maintain its current
book prices.
3. Pricing Policy #3 - Implement the “price-flex” policy proposed by Jack Davis, one of the
regional sales managers. The price-flex proposal would allow the sales force to continue its
premium pricing policy for service-oriented customers and selectively discount pricing for
those customers who wanted to purchase on a commodity basis.

It is Reed’s responsibility to choose a pricing policy that will maintain profitability, halt market

share erosion, provide cash flow to the company in order to meet its financial needs and bolster

sagging sales-force morale. Reed’s decision could have a major impact on Signode’s market

share and on the steel strapping market.

2
Critical Issues:

1. What are the existing customers’ needs in the steel strapping industry? In what

direction will the steel strapping industry move due to the rise in raw material prices?

A clearer understanding of where the steel strapping industry is headed and changing customer

needs will help Signode better understand what customers it wants to serve.

2. How will Signode's competitors react to the raw steel price increase?

Consideration of what actions the competition may take in response to the raw materials price

increase will aid Signode in evaluating the effectiveness of its own pricing policy options.

3. What distribution channel would be most effective and efficient in serving the market?

An analysis of the market and customers needs will determine if Signode's distribution methods

are the most effective for its product?

4. What is the impact of Signode's value -added service on profitability?

Understanding the impact the existing level of service offered has on profitability will help to

determine the level of service that is optimal in Signode’s overall strategy.5. How do changes in

pricing policy affect Signode’s profitability and market share objectives?

Understanding the impact of each possible pricing policy change on profitability and on the firm

itself will help management determine which pricing alternative best fits with the objectives of

Signode. After analyzing the market and customer needs, a clear comprehension of each

alternative's profit impact will allow management to determine which pricing policy to implement

and the appropriate actions to take.

Analysis:

1. What are the existing customers’ needs in the steel strapping industry? In what direction will

the steel strapping industry move due to the rise in raw material prices?

3
After the recession of 1982, Reed realized the steel strapping market had changed. Steel

strapping was a mature market where the main product was becoming a commodity. The

total market for steel strapping was declining, competition was increasing, and

customerneeds were changing.

Industry shipments of steel strapping consumables declined 25% from 479K tons in 1973

to 360K tons in 1983. Within this same time frame Signode’s market share for steel

strapping decreased 10% from 50% in 1973 to 40% in 1983. However, as steel strapping

consumables declined, the market for plastic strapping was growing at 4% per year. The

growth in plastic strapping substituted lower grade steel strapping at a rate of 2% of the

steel strapping market per year.

Signode’s value added services of custom machines, tools and service were a hard sell in

this tightening market. The price for steel strapping was decreasing because of increased

competition and cost-cutting pressures from buyers. Customer purchasing departments

became more sophisticated. Many customers knew the fair prices of products and

services they received. The cost of steel strapping was approximately 70% for raw

materials, 16% for variable costs, and 14% fixed costs. A fair price for consumables

without any value added service would be about 84% of Signode list price. Although

Signode’s book prices were competitive, distributor discounting posed a major problem

as this made Signode’s prices 10% - 20% higher. Customers began to buy in a

commodity type basis, shopping for the lowest price, increasing orders but decreasing the

size of shipments. Shipments greater than 36K pounds declined 5% from 52.9% in 1980

to 47.9% in 1982.

4
The growing trend seemed to be toward a commodity-based market where less value was

placed on value added services. An executive from a large steel company comments, “…

Our market is shrinking. We don’t need new tools or machines. We need steel strapping

at cheaper prices to run through our existing tools and machines.”

As the steel strapping industry moves towards a commodity market Signode will lose

further market share as their cost structure prevents them from truly being the lowest cost

provider for steel strapping. Customers will either go with the lowest cost provider of

steel strapping or with a plastic strapping solution if the customer application allows for

it.

2. How will Signode's competitors react to the raw steel price increase?

In order to assess Signode's current market position, a competitor analysis must be completed.

Currently, six (6) major competitors and some 300 individual distributors provide

Signode's main competition in the steel strapping industry. These six competitors are

Alpha, Sanford, Bentley, American Metal, Jersey Steel and Plymouth. They, combined

with Signode, account for 92% of steel strapping shipments in 1983, down from 95% in

1977 (See Appendix A for competitor information).

Distributors offer a special challenge to Signode. Distributors carry a broad line of

competitor products. Although they had increased sales volume to small accounts, they

did so by reducing profit margins for the producer. This poses a threat in the mid-sized

market as well.

Cost cutting among competitors started in the 70's with Alpha. During this time period

they also ceased offering custom machinery. Signode followed by reducing pricing to

select customers, which was countered by their competitors to keep the standard pricing

5
difference of between 5-10%. There are indications that these price differentials will

only increase as the competition attempts to gain market share.

Signode's competitors are not bounded by producing custom machinery or by offering the

level of service provided by Signode. Until the mid 1970s custom machinery was sold at

a discount. Producers then made up the difference by pricing the strapping commodity at

a premium. However, due to increased competition and pressure from buyers these

products were unbundled. Customers now purchased their machinery at a discount and

their strapping in a closed bid process. Signode's competitors can afford to cut prices,

even though the cost of raw steel is increasing, because they are not saddled with the high

overhead costs assigned to engineering and producing machinery, which is then sold at a

discount.

Another contributing factor is that Alpha, Sanford and Bentley source their steel from

their parent company. These three competitors can offer discounts in order to gain share.

The lose in steel transferring costs and strapping discounts can be offset by increased

sales volume, thus increasing the consolidated profit of the parent company.

In analyzing the competitive environment, it appears that Signode's competitors will

continue to under price them. Even though Alpha has announced a price increase in steel

strapping book prices for a select group of customers, there is fear that their actual prices

will remain constant. Market research has also shown that the remaining competitors will

either maintain or increase their discounts to Signode's book prices. It seems that

whatever action is taken; Signode's competitors will react to maintain their price

differentials.

3. What distribution channel would be most effective and efficient in serving the market?

6
Signode currently distributes nearly 100% of its steel strapping through its direct sales force. Of

its competitors, only Jersey Steel (85%) and Plymouth (75%) distribute as high of a percentage of

their volume directly (see Appendix A). The sales team has been Signode’s primary distribution

channel since its inception. This method of distribution is usually employed when the target

market is composed of a limited number of buyers who are easily identified and who are

geographically concentrated. Other contributing factors to using this channel are when

intermediaries can not reach the target market or do not possess the capacity of service required

by the market. Signode is the only full service provider in their industry. Their highly respected

sales force is essential in contributing to Signode’s reputation. Providing value added services to

the buyer are a contributing factor to this. This is evidenced by Signode’s share of their National

Accounts segment, which has remained relatively stable from 1977 to 1983, a period in which

Signode’s overall market share has fallen from 50% to 40% (see Appendix A).

However, Signode has been losing significant market share in the Small and Mid-Range sectors.

These markets, especially the Small segment, are effectively being served by independent

distributors. These distributors have increased their overall market share from 5% in 1977 to 8%

in 1983, primarily by focusing on the Small sector of the strapping market and by reducing prices

to serve the needs of this market.

As noted above, a producer should elect to distribute directly when there is a limited number of

firms in the market and when intermediaries do not possess the capacity for service required by

the market. Small market firms account for over 21,000 of Signode’s accounts (see Appendix B).

This customer base has gravitated towards non-service oriented, commodity focused producers

and distributors (see Appendix A). This dictates that a direct sales force is not the most effective

way to reach this market as evidenced by Signode’s share erosion. However, before undergoing a

channel modification decision, a few questions must be answered:

7
A. Will the change improve the effective coverage of the target market sought? How?

The change will improve the coverage of the target market by distributing the strapping product

through a channel that has increased market share.

B. Will the change improve the satisfaction of buyer needs? How?

The change will improve the satisfaction of buyers by offering them products at a lower price

than if it were bough directly from Signode.

C. What marketing functions if any must be absorbed in order to make the change?

No additional marketing functions would need to be absorbed.

D. Does the organization have the resources to perform the new functions?

Since no new functions will be undertaken, this question is irrelevant.

E. What effect will the change have on other channel participants?

This change may increase sales force morale. Only 12% of the sales force’s time is spent on

accounts in the Small segment. By freeing them of the responsibility of selling and servicing this

market, they can concentrate more on the larger and mid-range accounts, where Signode

generates 89% of its sales and accounts for 88% of sales time.

F. What will be the effect of the change on the achievement of long-range organizational

objectives?

This change will allow the sales team to concentrate on growing the more lucrative larger markets

while allowing distributors to sell to the smaller market and possibly grow market share in that

segment as well. The packaging division must generate as much cash flow as possible to back

expansion while maintaining its market share. By integrating a new channel, Signode may be

able to offset a discount in price with increased volume in one sector and by retaining and

growing the customer base in the larger segments.

Signode’s sales force is very powerful and very well respected. However, Signode should

realistically consider the option of integrating distributors into their channel strategiy.

8
4. What is the impact of Signode's value -added service on profitability?

The market for steel strapping has changed. Some of Signode's key customers have said that they

are more interested in cheaper strapping than paying for past innovations. This questions the

value certain customers' place on the unique services Signode provides. The marketing research,

conducted by Hamilton on the top 164 accounts, yielded the following grid.

Pay high Price 24% 21%

Pay Low Price 24% 30%

Low Cost To Serve High Cost to Serve

30% of Signode's national accounts have a high 'cost to serve' with respect to application review,

unbilled service and engineering time, free parts and tool repair. In addition, they take up a

significant amount of a salesperson's time. This level of service is being provided at a discounted

price. Overall, 51% of these customers enjoy this level of service.

The operating margin, that increased from 15% to 19.9% with flat sales, 1982-1983, will start to

decline unless Signode immediately starts to differentiate between large customers that want

additional service at an increased price and those that are only interested in cheap strapping.

While the cost of sales as a percent of revenue fell 4.5% last year, a 7-14% selective decrease in

price will eliminate some of that benefit. National accounts contribute dollar for dollar only half

as much towards profit as compared to small and midrange accounts. It is important to note that

23% of mid-range accounts became large or national accounts last year. This means that the

contribution margin for this portion of the customer base will fall 8-14% this year. Obviously,

the level of service that Signode offers places tremendous pressure on the profit margin.

Signode has to evaluate the economic value of these services. What is the actual cost and what is

the actual value to the customer? Then the sales force will have the information they need to

consult with a large customer, evaluate that client's needs and recommend the level of service

9
they believe the client should have. If the client agrees, then an appropriate pricing structure can

be established. This will maintain Signode's status as the market leader who can provide the level

of service certain accounts want, but will also ensure the company can do so at a profit. The

immediate challenge is to overcome a sales culture that offers these services without knowing the

impact on profit. Reed has to educate the sales force about the economic value Signode's value-

add service offers clients. The sales force then needs to ensure the customer who wants that

service, pays for it.

A risk with this approach is that certain customers will still demand the level of service but will

not want to pay higher prices. Signode has to decide which customers are important enough to

keep, even at a reduced margin and which customers they are willing to let go because they are

not profitable. The key issue is that Signode's sales force should understand the impact on

profitability when offering the 'value-add' level of service. This is critical when implementing

the 'flex-price' proposal. The sales force will need to know which clients they can offer the

discounted prices and who needs to agree to a reduced level of service if they want lower prices.

What may very well happen is that certain customers, who realize the actual economic value of

the service being offered, will elect to continue to pay a higher price.

In the longer term, Signode has to continue to evaluate the total cost of providing customized

machines, engineering support and the other market leading levels of service. Steel strapping is a

declining industry. There may quickly come a time where any level of extra service, for a

product that is increasingly a commodity, will be unprofitable. Additional R&D may become a

very poor investment. This needs to be carefully monitored. For now the sales forces should feel

proud that they, as market leaders, are in the position to charge higher prices for their value-add

service.

5. How do changes in pricing policy affect Signode ’s profitability and market share

objectives? ( maybe we should put major assumptions here. for example, assumed total

10
market growth of steel strapping at 3% per year. Signode will maintain same profit margin

of 34% per year. Steve it is up to you, it is your call!)

Pricing Policy #1 - Taking the same approach to pricing as Signode has always done would

concede further market share. Customer demand would decrease due to Signode’s higher prices

as the steel strapping industry prices continue shifting towards a commodity basis, hence lower

prices. A negative effect on profitability would occur even if the contribution margin stays the

same. At the end of 1988, revenues would decrease to $104,759 from $134,112 in 1983 and the

contribution would decrease to $36,603 in 1988 from $46,859 in 1983. The sales force has

voiced their concerns to management stating that they do not wish to see any price increases. The

sales force, which is lacking morale, would agree that this pricing option lacks the competitive

pricing necessary to position Signode products against the competition. This policy will lead to

market share erosion and the inability to maintain a generous cash flow. (Appendix C, page 2)

Pricing Policy #2 - Signode can choose not to increase prices and in doing so would be in effect

giving a 6.8% discount. The implied discount would satisfy the wishes of Clay Hamilton, the

Vice President of Sales, who believes that the Packaging Division would lose market share if

there were any kind of pric e increase. No increase in prices will certainly satisfy the wishes of its

sales force as it would enable them to be more competitive and bolster their lagging morale. Yet,

discounting would not seem to work because the competition has demonstrated that they will

continue to hold an average of 5-10% off Signode’s price. The “no-increase” option would

protect against a loss of market share, however simply maintaining market share would not

suffice. Hamilton has argued that the Packaging Division would need increased market share to

satisfy the corporation’s cash flow requirements. (Appendix C, page 3)

Pricing Policy #3 - The price-flex proposal would positively increase market share back to the

1973 level of 50.64% by 1998 (assuming 2% Signode market share growth each year for the next

five years). Maintaining profitability and cash flow requirements would be met easily with the

contribution dollars increasing from $46,859 in 1983 to $66,673 $66,470 by 1988. The price-flex

11
proposal takes an aggressive price position and puts more decision making in the hands of the

sales force. The sales force would certainly respond favorably to this policy as it gives them the

greatest power to compete. Jack Davis, a regional sales manager, and the sales force have

promised a 5% to 10% increase in Signode's market share if the price-flex proposal is chosen.

The marketing department's report, which evaluated Signode's account base, shows that its

customers have widely diverse service needs and the prices paid for Signode goods also varies.

This customer base is ideal for the price-flex proposal because it would allow the sales force to

selectively discount to meet the competition's pricing. (Appendix C, page 4)

The price-flex proposal will no doubt invigorate Signode's sales force to compete with

competitors at their own game of discounting. However, in order to implement the price-flex

proposal the marketing department must educate the sales force. The sales force must have a

better knowledge of how the markets they serve are measured and segmented. As mentioned

earlier, the sales force will have to have a clear understanding of the bottom line when comparing

the cost to service an account versus the prices paid by an account. This basic knowledge base

will enable the sales force to better service and price their accounts. These service and pricing

improvements will aid Signode in gaining market share and higher profitability.

Arming the sales force with the power to discount must be done under controlled measures. The

price-flex proposal is not intended to discount every account. Initially executives of Signode,

Reed, Hamilton and Hernandez must keep close tabs on how discounting is used and for which

customer segments.Recommendations:

After careful analysis, Reed should present the following plan at the sales conference. The

preceding analysis will serve as a complete explanation of his reasoning.

• Recognize the changing market Signode is operating in, where steel strapping is becoming a

commodity item.

• Explain that Signode will always be undercut regarding price.

12
• Start the process of evaluating how Signode can serve the smaller customers through

distributors.

• Evaluate the economic value of the services offered and train the sales force on this concept.

• Implement the 'flex-pricing' plan, initially keeping a close eye on the level of

discounting.

13
 7/27/01

Appendix A
SIGNODE INDUSTRIES, INC. (A)
Competitor Analysis

American
Signode Alpha Sanford Bentley Jersey Steel Plymouth Total
Metal

Steel Strapping Sales (83) 133 70 30 33 17 13 10 306

1977 Market Share 50% 22% 10% 6% 3% 2% 2% 95%

1983 Market Share 40% 21% 9% 10% 5% 4% 3% 92%

Change in share (77 vs. 83) -20% -5% -10% 67% 67% 100% 50%

Volume through distributors < 1% 32% 55% 50% 0% 15% 25%

Price-to-book ratio1 100% 95% 93% 95% 90% 93% 90%

% of sales in Apex 50% 32% 25% 0% 39% 0%

% of sales in Magnus 50% 68% 75% 100% 61% 100%

1
To Signode's book price

Appendix A
Page 1 of 1
 7/27/01

Appendix B
Signode Strapping Sales by Account Size

Small Midrange Large1

(Skid: 0.6 ton) (Truckload:13 tons) (Carload: 20 tons)

1983 sales ($000) $14,000 $29,200 $89,800

% of strapping sold 11% 23% 66%

Tons shipped 13,412 31,875 103,307

Average price per ton $1,043 $916 $869

Number of customers 21,550 3,609 1,428

Appendix B
Page 1 of 1
 7/27/01

Appendix C
SIGNODE INDUSTRIES, INC. (A)
Profit Impact Analysis

1983 1984 1985 1986 1987 1988

Total Steel Strapping Market ($000s) 330,000 339,900 350,097 360,600 371,418 382,560
*Assume 3% growth per year

Scenario #1 - Raise Prices (lose 3% market share each year)

Signode Steel Strapping Market ($000s) 134,112 127,938 121,274 114,094 106,374 98,088
Signode Market Share 40.64% 37.64% 34.64% 31.64% 28.64% 25.64%

Scenario #2 - Raise Prices (maintain 40% market share each year)

Signode Steel Strapping Market ($000s) 134,112 138,135 142,279 146,548 150,944 155,473
Signode Market Share 40.64% 40.64% 40.64% 40.64% 40.64% 40.64%

Scenario #3 - Price Flex (gain 2% market share each year)

Signode Steel Strapping Market ($000s) 134,112 144,933 156,283 168,184 180,658 193,729
Signode Market Share 40.64% 42.64% 44.64% 46.64% 48.64% 50.64%

APPENDIX B
Page 1 of 4
 7/27/01

Appendix C
SIGNODE INDUSTRIES, INC. (A)
Profit Impact Analysis

SCENARIO #1 - Increase Prices

Assumptions
1. The Steel Strapping industry will realize 3% growth over the next 5 years.
2. Signode will erode 3% market share each year over the next 5 years.
3. Signode % of total cost - raw materials (78.7%), other variable costs (9.3%), fixed costs (12%).
4. Signode will remain at current contribution margin of 34.94%.
5. Signode will increase prices 6.8% for everyone.

1983 1984 1985 1986 1987 1988

Signode Steel Strapping ($000s)
Revenue 134,112 136,638 129,520 121,852 113,608 104,759
Raw Materials (68,668) (69,962) (66,317) (62,391) (58,170) (53,639)
Other Variable Costs (8,115) (8,267) (7,837) (7,373) (6,874) (6,339)
Fixed Costs (10,470) (10,668) (10,112) (9,513) (8,870) (8,179)
Total Cost (87,253) (88,897) (84,266) (79,277) (73,913) (68,156)
Contribution 46,859 47,741 45,254 42,575 39,694 36,603
Contribution % 34.94% 34.94% 34.94% 34.94% 34.94% 34.94%

APPENDIX B
Page 2 of 4
 7/27/01

Appendix C
SIGNODE INDUSTRIES, INC. (A)
Profit Impact Analysis

SCENARIO #2 - Keep prices the same

Assumptions
1. The Steel Strapping industry will realize 3% growth over the next 5 years.
2. Signode will be able to maintain current market share of 40.64% each year for the next 5 years.
3. Signode % of total cost - raw materials (78.7%), other variable costs (8.3%), fixed costs (13%).
4. Signode will remain at current contribution margin of 34.94%.

1983 1984 1985 1986 1987 1988

Signode Steel Strapping ($000s)
Revenue 134,112 138,135 142,279 146,548 150,944 155,473
Raw Materials (68,668) (70,728) (72,850) (75,036) (77,287) (79,605)
Other Variable Costs (7,242) (7,459) (7,683) (7,914) (8,151) (8,395)
Fixed Costs (11,343) (11,683) (12,034) (12,395) (12,767) (13,150)
Total Cost (87,253) (89,871) (92,567) (95,344) (98,204) (101,151)
Contribution 46,859 48,264 49,712 51,204 52,740 54,322
Contribution % 34.94% 34.94% 34.94% 34.94% 34.94% 34.94%

APPENDIX B
Page 3 of 4
 7/27/01

Appendix C
SIGNODE INDUSTRIES, INC. (A)
Profit Impact Analysis

SCENARIO #3 - Price Flex

Assumptions
1. The Steel Strapping industry will realize 3% growth over the next 5 years.
2. Signode will be able to gain 2% each year over the next five years.
3. Signode % of total cost - raw materials (78.7%), other variable costs (4.3%), fixed costs (17%).
4. Signode will remain at current contribution margin of 34.94%.
5. Price Flex on average will result in 12% off original list price (offered to 15% of customers)

1983 1984 1985 1986 1987 1988

Signode Steel Strapping ($000s)
Revenue 134,112 142,325 153,470 165,156 177,406 190,241
Raw Materials (68,668) (72,873) (72,850) (75,036) (77,287) (79,605)
Other Variable Costs (3,752) (3,982) (3,980) (4,100) (4,223) (4,349)
Fixed Costs (14,833) (15,741) (15,736) (16,208) (16,695) (17,196)
Total Cost (87,253) (92,596) (92,567) (95,344) (98,204) (101,151)
Contribution 46,859 49,728 53,622 57,706 61,986 66,470
Contribution % 34.94% 34.94% 34.94% 34.94% 34.94% 34.94%

APPENDIX B
Page 4 of 4