G’s large quantity of steel rings are on hand and the substantial inventory of special steel for their manufacture. And this steel as inventory can’t be sold. I. G had manufactured industrial machines for sale in numerous countries for nearly 70 years. It means it has market to sale rings no matter whether it is steel or plastic ring. These rings could be supplied for their own machines too. In general the plants were allowed considerable leeway in administering their own affairs. Bridgeman has right to make market strategy in time.
During slack periods, company has a policy of employing excess labor on various make-work projects rather than laying the men off. At that time, the salary is at about 70% of regular wages. Low labor cost will decrease the cost of production. There are a lot of steel rings on hand and can’t be sold. The total book value of these inventories exceeded $93,000. Large inventory means less liquid cash. Maybe it influences operation in the future. Now I. G only has steel rings and these rings have higher cost than plastic rings.
Also the lives of steel rings are shorter than plastic rings. I. G’s competitor Henri Poulenc has already started selling plastic rings at the same price as steel rings. And if I. G makes plastic rings, it can start selling only after 4 months so by then Henri Poulenc will take over more market shares. The competitiveness of I. G is very weak now. The ring innovation is an opportunity for I. G, but also a kind of threat. When instead of steel rings, plastic ring I. G starts using it gives I. G a chance to reform.
It could cut down the cost and improve the quality of rings. If I. G switches from steel rings to plastic rings successfully, it could expand business and get more profits because of low cost, so it’s an opportunity. However, the competitor had plastic rings in advance than I. G, so it’s threaten for I. G. Competitor could use this advantage to get more business. It maybe threat to I. G’s operation and profits. In the early 1970, Japanese manufacturers had successfully entered the field with low priced spare parts.
Other companies also had appeared with low quality and lower price machines. The competition would become more intense. More competitors share one market, so each supplier needs to improve competitiveness. It’s a new challenge. After analyzing internal and external situation of I. G, we can say that I. G has strong operational capacity. However, the core problem is what to be done about the steel inventory. I. G should start developing plastic rings as soon as possible and start using those.
Because the core of competition is production, even though steel ring still has its value now, the plastic ring will substitute for it sooner or later. The strong competitor of I. G is Henri Poulenc. It has already introduced plastic rings. Only if I. G produces plastic ring in time it can compete with Henri Poulenc and stop them from grasping more market share. In addition, plastic ring has lower cost and longer life than steel ring. The Table A shows the cost of 100 plastic rings is $66. 60, but 100 steel rings cost $263. 88.
Obviously, if they sale at the same price, 100 plastic rings will get $197. 25 more profit than steel rings. However, Anders Ericsson, the development engineer, estimated that the plastic rings could be produced by mid-September, so before mid-September, I. G has to sell steel rings on hand. Fortunately, Henri Poulenc was said to be selling the plastic ring at about the same price as the I. G steel ring, so I. G wouldn’t get strong shock from Henri Poulenc. Of course, Henri Poulenc will get higher profit, but only analyzing from the price, I.
G and Henri Poulenc are in the same position, so it depends on demanders’ preference which kind of rings they like. And I. G could sell the steel rings in different markets, which are not covered, by plastic rings of Henri Poulenc. It avoids direct conflict. Steel inventory is a big weakness of I. G, so it’s a good time to consume a large amount of steel. Assuming the sales continued at the current rate of 690 rings per week before mid-September, it would consume 19400 steel rings. During the slack time, I.
G could ask labors to convert the steel inventory into rings to satisfy the supply amount before mid-September, because at that time, the labor cost will be about 70% of regular wages so that decreases the cost to produce steel rings. Those steel rings only need to satisfy the supply amounts for 4 months using, because after mid-September, plastic ring will be used instead of steel. If there are more steel rings converted than demanded, I. G will pay for labour cost from their pocket. It will waste resources, time and money. So nothing definite can be said about the steel inventory.