Rachel Myers was in the process of finalization her plans for the upcoming year. As general manager of the Plasticizer Division, she needed to establish the marketing strategy for each of the four main product groups. Three of the product lines were reasonably straight forward since the Division was the major player with only a few small competitors. The fourth product line, the alkyds, posed a rather more difficult problem.
“The product line consistent of three grades and is sold in 44 gallon drums. Last year, grade A material (the top grade) sold for $385 per drum and cost us about $276 to produce. Since then, raw material costs have gone up sustainlly and I estimate that it will cost closer to $305 to produce on the coming year….an increase of $29. So my initial thought was to increase the price to $404 per drum.
Then Pinkney-Ross our largest domestic competitor, announced that they were reducing their price from $390 to $320. Within days, one of the smaller domestic firms, Pikken, announced that they would also be offering alkyds at $320 per drum as did the Japanese firm, Hashakawa, which recently entered the US market with the purchase of a small local company.
When I spoke to our second largest customer today, they are enthusiastic about the lower prices since they felt it would make them much more competitive at a time they were losing market share. And here in the trade magazine is the announcement that Vestey Chemicals is introducing a super grade product priced at $400 per drum.
The market has been static for the past couple of years and now, all of a sudden, we are seeing a flurry activity. All of which leaves me to the question of how to price our Grade A product for the coming year.
Question 1: how would you analyze this industry in term of Michael Porter’s Five Forces model?
Question 2: Why might (a) Pinkney-Ross have decided to reduce its selling price (given that it costs will also have increased0, (b) Pekken have decided to match Pinkney-Ross’ price, and (c) Hashakawa have adopted the lower price?
Question 3: what impact might Vestey Chemical’s introduction of a super grade product have on the market for Grade A alkyds?