ABC is into the manufacture and sales of corrugated cardboards and has witnessed losses for 5 years in a row. The company is looking for a solution to increase its profits and make the business sustainable. Profitability is high in the direct sales but company makes losses in the sales through representatives due to high commissions and high transportation costs. The growth of the cardboard market is stagnated and the packaging industry is moving towards a substitute for cardboards. It is recommended that only direct sales should be continued along with diversifying into the manufacture of plastic products for packaging.
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The American Box Company (ABC), Boston, headed and inherited by Bob Hamilton, dealt with manufacturing and sales of corrugated cardboards and cardboard boxes and had witnessed a drop in its revenues for at least 5 years in a row. ABC’s market share in the corrugated cardboard segment of the cardboard market which also included the pressboards segment increased insignificantly from 7.28% in 1988 to 8.18% in 1992 (EXHIBIT 1). Concentration of the industry was also witnessed as one of the largest competitors increased its share from 8% in 1983 to 21% in 1991 via acquisitions. ABC’s distribution chain included direct forces for sales within Boston and independent representatives for sales outside Boston. The cardboard market as a whole showed stagnant sales revenues for the period from 1988 to 1992.
ABC’s revenues and profits are declining year after year and it will be difficult to sustain the profitability of the business. Within the cardboard industry, the pressboard is replacing corrugated boards where as the cardboard industry as a whole is being replaced by substitutive products in the packaging industry.
The decline is revenues are attributed to the falling size of the cardboard industry but the significant fall in profits are a result of the high commissions paid to the representatives for the sales of boards and boxes outside Boston. The stagnated growth in the industry is the outcome of usage of plastics and other products which are substitutes of cardboards in the packaging industry.
To provide a sustainable growth in profits for ABC and cut down in factors of expenses that reduces the profit without making a proportional contribution to the revenues (EXHIBIT 2).
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1. Reduce the commissions for marketing for representatives so as to make the product profitable. 2. Start a large and aggressive advertising campaign in Boston and its neighbouring states where there is a market presence for ABC’s products. 3. Suspend all sales made through representatives and focus only on direct sales in Boston. 4. Move to manufacture and sales of pressboards by completely changing the product segment within the packaging cardboard industry. 5. Operate only with direct sales and start research on manufacture and sales of plastic products in the packaging industry.
EVALUATION OF OPTIONS
1. The primary reason for the representatives’ sales not being profitable was the high commissions being paid to them. The commissions accounted for nearly 68% the revenue generated by the representatives for the boards and 16% for the boxes as compared to 11% and 8% in case of direct sales. Reducing the commission is likely to increase the profitability of the business. But this is likely to result in being out of favour with the representatives and would hit the revenues of the company in the long term. 2. Advertising aggressively is likely build good brand recognition for ABC. It is also likely to help the increase of sales and revenues with immediate effect. But this option is not feasible as it would incur an additional advertisement cost, reducing the already low profit margins of the company. 3. This option is likely to be highly profitable because the main factors of cost are being...