Prepare an industry analysis using Porter’s 5 Forces model. What are the key determinants of Vershire’s aluminium can profitability? Explain. (20%) * Barriers to entry I would suggest that the barriers to entry are relatively high in this industry. Although there would not be huge capital requirement to enter into the aluminum cans producing business and customer-switching costs are considered to be low, the fact is that the competition in this industry is very intense. There are already many aluminium cans manufacturers exist in the market, with some large packaging manufacturers dominating the market shares.
Some large beverage processors even manufacture cans themselves (one large beverage company produced one-third of its own container requirement and ranked one of the top five beverage producers in the industry).
Also, three of the global aluminum supplier companies also themselves manufacture aluminum containers. Although there would be high demand in the industry (from both small and large breweries and soft drink bottlers), there are too many competitors that could keep new entrants out of the market. * Power of suppliers There are four global companies supplied aluminum to can producers: UC Rusal, Alcoa, Alcan, Chalco (as shown below).
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There are many buyers (can producers) in the market while there are only few major suppliers. In addition, aluminum is a highly differentiated product. Resources of bauxites, the raw material for aluminum, are not widespread throughout the world. The main deposit of high-quality bauxites are already dived by those main players. Therefore, whoever owns the resources ‘wins the game’. Today the ‘Big Ten’ aluminium manufacturers are: Although it can be argued that steel is one of the substitutes, aluminum has many advantages over steel: it is easier to shape and allowing more attractive packaging; it reduces the problems of flavouring and it educes the transportation costs because of its lighter weight. Therefore, there would be constant demand for aluminum because of its beneficial nature. According to the above, I would say that the power of supplier is extremely high in the aluminum can manufacture industry. * Buyer (customer) power Buyer power is relatively high in the aluminum can manufacturing industry. Their buyers are primarily the soft drink bottlers, which are small independent franchisees of Coca-Cola and Pepsi Cola. Most of these customers maintained at least two or more suppliers and spread purchases among those suppliers.
Thus, in order to retain customers, division must meet customer’s cost and quality specification or its standards for delivery and service, otherwise customer would turn to another supplier. * Threat of substitutes As I have mentioned above, one of the substitutes of aluminum can is steel can. Yet there are a lot of advantages of aluminum over steel. A ton of scrap aluminum has almost three times the value of a ton of scrap steel. Other substitutes for breweries and soft drink bottlers would be plastic or glass bottle.
An study conducted by the metal can industry leader, Silgan Containers, revealed that 81 percent of shoppers prefer metal cans compared to 9 percent for plastic and 6 percent for glass. In addition, Aluminum is a more attractive recycling material compare to steel, plastic or glass. A US record also showed that 56 billion aluminum cans were recycled in 2010. Aluminum never wear out, it can be recycled forever. Therefore, aluminum is still considered to be the most attractive material for the can manufacturing business. * Rivalry amongst competitors
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Competition is high in this industry in term of supplier power, customer power and number of competitors as mentioned above. Conclusion As Vershire is one of the largest manufacturers of aluminum cans in the industry, it is assumed that it has access to sufficient raw material to produce aluminum cans. They would also have large number of loyal customers but just the matters of maintaining their high level of products and on-time delivery. I would argue that the key determinants of Vershire’s aluminium can profitability would be the costs of the production. A lower costs while maintaining its quality can attract new customers.
Thus, the relationship with suppliers could become critical. Vershire could renegotiate prices and develop long-term relationship with one or two suppliers. Cutting costs in purchasing can be a big saving for the company. Vershire could also improve its production efficiency to eliminate unnecessary production costs. 2. Which of Porter’s generic strategies is Vershire following? (10%) Porter claims that there are two ways of responding to the opportunities in the external environment and developing a competitive advantage, there are: cost leadership and differentiator.
Veshire would most likely be a cost leader. Aluminum can itself is not a highly differentiated product. Every metal can manufacturer produces the same kind of product. In addition, most of the customers maintain two or more suppliers. In other word, if a manufacturer failed to meet the customer’s cost and quality specification, it is very likely that the manufacturer would lose the customers. Therefore, being a cost leader is essential in this industry and it is the strategy adopted in Vershire.
