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competitive.
" Substitutes are anything that could be used for closures instead of our aluminium
alloy. I would assume from my knowledge of bottles (those I ve seen in the
supermarket) that the main substitutes would be closures made from plastic.
" You haven t given me any information about the buyers, so I would also like to
ask you who the buyers are, how concentrated they are, whether they have
significant power in relation to us and whether they are under price pressure
from their customers.
Tip: A really good answer would drive through to all of these points since you already
have enough information to make these conclusions. Candidates cannot make
assumptions about customers/buyers as no information has been given, so they should
ensure that they the interviewer for this information.
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" AluCo Closure s customers make bottle tops, which they sell to drinks
companies like Diageo and Nestle. The closure industry is fragmented and
highly competitive. Companies within the industry face significant price
pressure from their own customers.
" You are right about the substitutes. The key substitutes are things like PET
plastics. These are a threat because PET is lighter, and easier to handle and
transport.
To understand the company s position within its industry, I d like to get a better
understanding of its sources of competitive advantage. Since aluminium alloys are
essentially a commodity product, they are very difficult to differentiate. It is likely
therefore that the company has a cost advantage, which will stem from economies of
scale. The more volume the company produces, the lower its total average costs. Since
the company has such a high market share, it probably has a lower cost position than its
rivals, which will act as a source of competitive advantage. Furthermore, its high market
share gives AluCo Closures the ability to set prices, something that is further reinforced
by its high product quality.
So given the existence of barriers to entry, low threats from suppliers and buyers,
a small threat from rivals, the company s advantaged cost position and ability to charge
a premium, I believe that for AluCo Closures this is a really good business.
Question 2: That s very good, I agree. Now having said all of this, revenue at the
company has been falling and the CEO wants you to investigate what is going on.
What sort of things would you want to look at to make your recommendations?
I d want to first examine the price and volume at AluCo Closures to identify the reason
for the decline in revenue. If prices are stable then the problem is with volumes, which
could be falling because of a decline in market share or a contraction in the overall
market. Since we know that the market is growing at 3%, I d say the problem lies with a
decline in market share.
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Question 3: That s a good hypothesis, and you are right. What might cause a decline
in market share?
To understand why this is happening I d want to see if there have been any problems
within our client in terms of production quality and delivery reliability. I d also want to
look at the competition; have they done anything recently to try to take customers from
our client, an aggressive marketing campaign for example? I d also want to see if there
have been any changes in our customer base, in their needs, or willingness to pay and
which might cause them to take their business elsewhere.
Question 4: That s a good way to start. I can tell you that there have been no
production problems at our client. However, it appears that over the past few years,
our rivals have spent more on R&D than our client. There has also been some
consolidation among our customers. Why might that have happened and what is its
significance?
Our customers are in a very competitive industry. They have no pricing power over their
customers, which are the large multinational drinks companies. They also have to deal
with AluCo Closures, which can use its market power to demand price premiums. Our
customers have probably been forced to consolidate to protect their margins. The
significance of this consolidation is that it increases our customers bargaining power
over us. Since we have kept prices constant and our rivals higher R&D spending has
improved their product quality, these larger customers have probably defected to our
rivals. The other point about consolidation is that it divides our customers into two
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