Columbia Plastics is a leading producer and seller of skylights and a variety of plastic fabricated building materials. The company is a subsidiary of Fraser Company. Since its inception, the company managed to retain its position as the leading producer of skylights in Seattle, Washington for fifteen years. However, new entrants in the market led to increased competition in the skylight industry.
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The dominant firms in the industry, Columbia Plastics, and Vancouver Light are competing based on the prices of their products. The essence of competing based on price is that the company with the cheapest product will be able to gain market share and to improve its profitability in the long-term. However, this strategy threatens the long-term competitiveness of Columbia Plastics in two ways.
First, significant price reductions are reducing the company’s profits, which in turn negatively affects its long-term competitiveness. Second, Columbia Plastics is likely to lose a significant portion of its market share if it is not able to retain its customers through price reductions.
This paper evaluates the alternatives that Columbia Plastics has to respond to the increased threat of competitive rivalry in the skylight industry. Based on the evaluation, recommendations will be suggested to help the company to improve its competitiveness. Moreover, a strategy for implementing the recommended alternative will be proposed.
Columbia Plastics is facing difficulties in responding to Vancouver Light’s decision to reduce its prices to gain market share in Seattle, Washington. The alternatives available to the company include undercutting Vancouver Light’s prices, maintaining its current pricing policy, and matching Vancouver Light’s prices. However, adopting any of these strategies is likely to affect Columbia Plastic’s profits or market share or both negatively.
Analysis of Alternatives
Matching Vancouver Light’s Prices
In a market that is characterized by high competitive rivalry, customers tend to have low switching costs. To elucidate, competition increases customers’ choices in terms of the products or brands to purchase. Customers make their purchase decisions by considering factors such as the products’ qualities and prices.
When customers have low switching costs, they can easily switch from one brand to another to purchase the product with the preferred qualities or price. In the skylight industry, customers are price sensitive since they can easily switch from one supplier to another in response to a price reduction. Thus, Columbia Plastics can avoid losing its major customers to Vancouver Light by adopting a price-matching strategy.
Price matching is a strategy in which a company sets prices that are equal to those of its main competitor. Thus, Columbia Plastics will have to set prices that are equal to those set by Vancouver Lights. The price matching strategy is likely to work because the two companies are producing skylights with comparable features such as size.
The rationale of this perspective is that customers expect products with similar features to have equal or comparable prices. Moreover, Columbia Plastics has adequate information concerning Vancouver Light’s prices and sales volume. Thus, it will not be difficult to set comparable prices. In this regard, a price matching strategy will be beneficial to Columbia Plastics in the following ways.
First, setting equal prices will eliminate Vancouver Light’s use of low selling prices to create a competitive advantage. Once Vancouver realizes that it cannot undercut its competitor’s prices, the two companies will have to compete based on only three elements of the marketing mix. These include product, place, and promotion.
This will enable Columbia Plastics to defend its market share by leveraging the aforementioned elements of the marketing mix. For instance, the company can use promotional activities such as advertising to inform the market about its products’ prices and qualities. This will prevent the loss of customers to Vancouver. Also, the company can enhance the quality of its products to improve its customer loyalty level.
Second, matching Vancouver Light’s prices will enable Columbia Plastics to improve its profitability in the long-run. Currently, Columbia Plastics still has the largest market share, which is likely to improve its profitability. Besides, matching Vancouver Light’s prices will enable it to increase its sales through alternative strategies such as product differentiation. In this regard, increased sales will enable the company to remain profitable.
Third, Columbia Plastics will be able to prevent a price war in the industry. A price war is a situation in which competitors continuously undercut each other’s prices to gain market share. However, price reductions reduce profit margins and can lead to huge losses in a market where prices are already very low.
Consequently, Vancouver is likely to change its pricing strategy if undercutting cannot help it to achieve any competitive advantage. In particular, the company is likely to increase its prices in the long-run to make profits or breakeven. Similarly, Columbia Plastics will benefit by raising its prices to make profits.
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Despite its advantages, matching Vancouver Light’s prices has the following disadvantages. First, Columbia Plastics might not be able to match Vancouver Light’s prices if its operating costs are significantly high. Currently, Vancouver Light can sell at low prices because its efficient production facility enables it to reduce production costs by 25%. Similarly, Columbia Plastics will have to reduce its production costs to sell at low prices.
However, this might not be possible if the company is not able to invest in an efficient production plant to reduce its variable costs. In this case, the company will have to internalize part of the production costs if its selling price is less than the cost per unit. This can lead to huge losses or even the collapse of the company.
Second, matching Vancouver Light’s prices do not guarantee Columbia Plastics a chance to defend or increase its market share. Once the price is no longer a source of competitive advantage, the companies will adopt alternative strategies such as product differentiation, sales promotion, and improved customer services. However, having the resources to implement these strategies do not guarantee the achievement of competitive advantage.
According to the resource-based view of the firm, a company can achieve a competitive advantage only if its resources are valuable, rare, imitable, and non-substitutable. Valuable resources enable a company to formulate strategies that led to improved competitive advantages.
The company can prevent its competitors from imitating its strategy only if its resources are rare, imitable, and non-substitutable. In this regard, Colombia Plastics will not be able to outperform Vancouver as long as the later can imitate its resources and strategies.
Third, Columbia Plastics will become a price taker if it decides to match Vancouver Light’s prices. The disadvantage of being a price taker is that Colombia Plastics will not be able to control its prices since its pricing decisions will depend on the changes in the prices of Vancouver Light’s products. Vancouver Light can use this weakness to drive Columbia Plastics out of business.
For instance, Vancouver Light can set prices that hardly cover production costs. As a price taker, Columbia Plastics will have to adopt the low prices to sell its products, albeit at a loss. If Vancouver Light maintains the low prices for a very long time, Columbia Plastics’ loses will accumulate, and it will run out of business in the long-run.
Undercutting Vancouver Light’s Prices
Undercutting is a strategy in which a company sets its prices below those of its main competitor. Thus, Columbia Plastics will have to set prices that are less than Vancouver Light’s are. The main objective of this strategy is to increase sales volume by charging lower prices than the competitor’s charge. Undercutting a competitor’s price is likely to work in a market that is characterized by a large number of price-sensitive customers.
To elucidate, price-sensitive customers often switch to the supplier or seller who charges the lowest price in the market. The demand for a product will be price elastic if a large proportion of the market consists of price-sensitive customers.
A price-elastic demand is a situation in which the demand for a product changes significantly in response to a change in its price. Maintaining low prices is often achieved through cost reduction strategies. For instance, Columbia Plastics can reduce its production overheads to sell at the lowest price.
The advantages of undercutting Vancouver Light’s prices include the following. First, Colombia Plastics is likely to retain or increase its market share if it decides to sell its skylights at 130 dollars. The rationale of this strategy is that Columbia Plastics’ price will be 14 dollars (10%) less than the price of Vancouver Light’s products.
Since customers in the skylight industry are price elastic, a ten percent reduction in selling price is likely to increase demand for the cheapest product. The resulting increase in sales will improve Columbia Plastics’ profits. Also, the low prices will enable the company to improve its brand loyalty, which in turn will enable it to defend its market share.
Second, charging lower prices than Vancouver is likely to ensure improved efficiency at Columbia Plastics. In a highly competitive market, a company has to adopt a cost leadership strategy to set the lowest price. A cost leadership strategy involves reducing production costs by enhancing efficiency in production.
Thus, charging the lowest price in the market will motivate the managers of Columbia Plastics to improve their production efficiency to reduce production costs. Improved production efficiency will bolster Columbia Plastics’ financial performance in the long-run, especially if its main competitors exit the market, thereby enabling it to increase its prices.
Although the preceding paragraphs provide a strong case for undercutting Vancouver Light’s prices, Columbia Plastics’ financial performance is likely to be compromised because of the following reasons. To begin with, undercutting Vancouver Light’s prices is likely to lead to a vicious price war. This perspective is based on the fact that Vancouver Light is also interested in gaining market share.
Besides, it has always employed a penetration pricing strategy to increase its market share. A penetration pricing strategy involves setting prices below industry average prices to gain market share. In this context, it is important to assess Columbia Plastics’ ability to survive a price war. Initially, Columbia Plastics’ factory price was 200 dollars, whereas Vancouver Light’s retail price was 144 dollars.
Currently, Columbia Plastics’ unit cost is 135 dollars. However, this figure does not include the cost of maintaining the company’s sales force or its profits. Selling the skylights for 130 dollars will lead to losses. Thus, undercutting Vancouver Light’s prices is not a solution to Columbia Plastics’ problems.
Another disadvantage of undercutting Vancouver Light’s price is that Columbia Plastics might have to compromise the quality of its products. Since the company is likely to make little or no profits by selling at the lowest price, it will have very little financial resources for product development. Undoubtedly, the lack of adequate financial resources is one of the major causes of failure in the implementation of marketing plans.
For instance, the company might be forced to lower the quality of its skylights to reduce production costs. Also, the lack of adequate funds might force the company to reduce its expenditure on marketing communication and its sales team. This will severely affect the competitiveness of its skylights. For instance, the sales executives are likely to lose motivation in their work if they are forced to work with an inadequate budget.
Similarly, less expenditure on marketing communication might negatively affect the company’s brand awareness, whereas compromising product quality will lead to low customer satisfaction and brand loyalty. These scenarios or examples suggest that undercutting Vancouver Light’s prices is likely to reduce rather than to improve Columbia Plastics’ competitiveness.
Maintaining Current Pricing Policy
Currently, Columbia Plastics’ prices are higher than Vancouver Light’s prices are by at least 20%. The implication of this difference is that customers will believe that Colombia Plastics is charging a premium price for its products. In this regard, the company will have to provide a convincing reason for its decision to sell at a premium price.
In particular, the customers must understand the value that they will obtain by spending more to buy Columbia Plastics’ products. One of the strategies for justifying a premium price is to differentiate the product. This involves developing a product whose qualities are superior to that of the competitor. In this case, producing a product with superior qualities justifies the producer’s decision to charge a premium price.
Product differentiation must be supported by an effective market positioning strategy. Market positioning refers to the process of creating a perception among customers that a particular brand is superior to its substitutes. Thus, Columbia Plastics should differentiate its products and position them appropriately to maintain current prices.
Maintaining the current pricing strategy will benefit the company in the following ways. First, charging a premium price will enable the company to improve its financial performance. The high price will offset the loss in revenue attributed to the reduction in sales as customers switch to Vancouver Light to take advantage of lower prices.
Second, Colombia Plastics is likely to be successful in pursuing a differentiation strategy because of its vast experience in the market. Having served the market longer than Vancouver Light has, Columbia Plastics is likely to have a better understanding of customer needs.
Also, it is likely to have established strong customer loyalty in the last fifteen years. Generally, a clear understanding of market needs coupled with high customer loyalty, will enable the company to develop a high-quality product and to convince customers to purchase it at a premium price.
Finally, maintaining the current price strategy will enable the company to concentrate on serving a niche market. In particular, the company will be able to utilize its scare resources to serve customers who are interested in high service quality and immediate delivery. This is likely to enhance the company’s customer satisfaction rate.
Despite its potential to boost Columbia Plastics’ financial performance, maintaining the current pricing strategy has the following disadvantages. First, Columbia Plastics is likely to lose most of its major customers (homebuilders) by maintaining the current pricing strategy. This will happen if the major customers are more interested in low prices rather than improved service or product quality.
Columbia Plastics is likely to make huge loses if it loses its key customers or homebuilders who account for over half of its sales revenue. Second, the company might face difficulties in convincing customers to buy its skylights at a premium price. For instance, differentiating the skylights by improving their qualities might require a huge financial capital, which the company might not afford.
Similarly, informing the public or potential customers about the superior qualities of the skylights might lead to increased expenditure on marketing communication initiatives. The resulting increase in the company’s operating costs will negatively affect its profits.
Finally, Vancouver Light can imitate the strategies employed by Columbia Plastics to sell skylights at a premium price. For instance, Vancouver Light can also adopt a differentiation strategy by improving the quality of its products and customer services. The imitation will enable Vancouver to eliminate the competitive advantage that Columbia Plastics will achieve through product differentiation.
If Vancouver Light can differentiate its products without increasing its prices, Columbia Plastics will lose a significant share of its market share. To elucidate, Vancouver Light will be the best supplier by being able to offer high-quality products at the lowest price. Thus, the majority of the customers will have the incentive to buy from Vancouver Light rather than Columbia Plastics.
The discussions in the preceding paragraphs indicate that undercutting Vancouver Light’s prices is not a viable option. This strategy solves the problem by enabling Columbia Plastics to expand or defend its market share through low prices. However, it is not sustainable since it can lead to a price war that will ultimately drive the company out of business.
Matching Vancouver Light’s prices will enable Columbia Plastics to end the price-based competition. Consequently, it might be able to improve its competitiveness by leveraging the elements of the marketing mix, such as promotion, place, and product. However, this strategy is very risky because it will fail if Columbia Plastics is not able to maintain prices that are equal to those of Vancouver Light. Consequently, matching Vancouver Light’s prices is also not viable.
Maintaining the current pricing strategy will enable the company to set prices that cover its costs and allow it to make a profit. However, Columbia Plastics’ price will be significantly higher than that for Vancouver.
Thus, Columbia Plastics is likely to lose most of its major customers if it is not able to convince them to buy at a higher price. Moreover, Vancouver Light can gain a dominant position in the market if it can offer high-quality skylights at a low price.
Despite its weaknesses, maintaining the current pricing policy is the best option because of the following reasons. First, the current pricing policy is the only option that can enable the company to make profits in the short-run. Second, not all customers consider price as the major determinant of their purchase decisions.
Thus, Columbia Plastics can respond to the exit of its major customers by focusing on serving clients who are interested in quality aspects such as immediate delivery of orders. Third, Columbia Plastics can progressively improve its production efficiency to reduce its prices in the medium-term or the long-run. This will help in avoiding the risk of making huge losses through sudden or unplanned price reductions.
Given the dynamics of the competitive environment, the current pricing strategy should be implemented as follows. In the first step, Columbia Plastics should conduct market research to identify the non-price factors that determine customers’ purchase decisions. Additionally, the research should enable the company to estimate the size of the market that is likely to continue buying its products at the current prices.
In the second step, the company should use the information collected through market research to differentiate its products. This can involve modifying the products by adding extra features to them.
Alternatively, the company can focus on providing excellent customer services such as user manuals to enable the unskilled customers (do-it-yourselfers) to install the skylights on their own. Generally, the company’s new value proposition should focus on encouraging customers to purchase based on non-price factors.
The third stage should focus on repositioning the skylights as superior products in the market. This will create the perception that Columbia Plastics’ products have a superior value that is worth paying for at a high price. To achieve this objective, the company should focus on effective market communication to create awareness about its products or brands. For instance, the company can advertise its skylights through print and electronic media.
Moreover, the company can engage in relationship marketing to improve the loyalty of its customers. Relationship marketing focuses on winning the trust and loyalty of major customers through continuous provision of specialized services that satisfies their needs.
Finally, the company should focus on reducing its production costs to reduce its prices in the long-run. Reducing prices in the long-run will enable the company to remain competitive, even if Vancouver also manages to differentiate its products.
Columbia Plastics can build a specialized production plant to reduce its production costs. Additionally, it can supply directly to customers who purchase in bulk to prevent an increase in its retail prices. For instance, the company’s distributors add a markup of up to 50% on its factory price. Thus, eliminating distributors will significantly reduce the company’s retail prices.