Case 4: Lafarge – Aget Heracles
1. Argue the potential influence of competitive forces upon the cement industry.
The cement buyers influence competition by merging up and piling pressure on the suppliers, which in turn makes the suppliers to reduce prices in order to maintain or increase the market share. The decrease in prices in turn affects the company’s profit margin. Equally, with some of the customers, like governments and hospitals, in need of specific types of cements, the players in the industry are forced to use more input in order to create the desired quality of cement. However, they are not in a position to inflate the prices, given that the cement price is standardized. For …show more content…
This would likely lead to the downward pricing of cement as less utilization leads to decrease in cost efficiencies.
c. It is expected that the dry-process technology will help achieve an increase of 22% in production cost efficiencies, compared to current levels. How might such an increase affect price competitiveness?
Cost of Goods Sold: 281,405 × 43.9% (32.8% power & fuel; 8% employee; 3.1% repair & maintenance.) = 123,537 of the COGS is direct production-related. A 22% increase in production = 123,537 × 0.22 = 27,178
= 281,405 – 27,178 = 254,227
The result would reduce COGS from 281,405 to 254,227 254,227 + 4,842 = 259,069 COGS. Gross Profit Margin = Gross Profit / Sales × 100 Gross Profit Margin = 131,146 / 390215 × 100 = 33.6% Gross Profit Margin (without the new kilns) = (108,815) / (390,215) × 100 = 27.8% (2004) Gross Profit Margin differential = 33.6% - 27.8% = 5.8% Gross Profit = Sales × Gross Profit Margin = 390,215m € × 5.8% = 22,632m €
22,632m € is the net savings from a 22% increase in cost of production efficiencies 22,632m € / 8.5 mmt = 2.66 €/mt.
Aget is, therefore, in a position to lower its price by 2.66 €/mt. without affecting its profitability.
d. Assuming that Aget’s sales by 2008 will have grown at the forecasted global market rate increase of 22.6% over those of 2004, what will be its production and utilization rate?
Production after Investment: =