5 The directors of Blaina Packaging Co (BPC), a well-established manufacturer of cardboard
5 The directors of Blaina Packaging Co (BPC), a well-established manufacturer of cardboard boxes, are currently
considering whether to enter the cardboard tube market. Cardboard tubes are purchased by customers whose
products are wound around tubes of various sizes ranging from large tubes on which carpets are wound, to small
tubes around which films and paper products are wound. The cardboard tubes are usually purchased in very large
quantities by customers. On average, the cardboard tubes comprise between 1% and 2% of the total cost of the
customers’ finished product.
The directors have gathered the following information:
(1) The cardboard tubes are manufactured on machines which vary in size and speed. The lowest cost machine is
priced at $30,000 and requires only one operative for its operation. A one-day training course is required in order
that an unskilled person can then operate such a machine in an efficient and effective manner.
(2) The cardboard tubes are made from specially formulated paper which, at times during recent years, has been in
short supply.
(3) At present, four major manufacturers of cardboard tubes have an aggregate market share of 80%. The current
market leader has a 26% market share. The market shares of the other three major manufacturers, one of which
is JOL Co, are equal in size. The product ranges offered by the four major manufacturers are similar in terms of
size and quality. The market has grown by 2% per annum during recent years.
(4) A recent report on the activities of a foreign-based multinational company revealed that consideration was being
given to expanding operations in their packaging division overseas. The division possesses large-scale automated
machinery for the manufacture of cardboard tubes of any size.
(5) Another company, Plastic Tubes Co (PTC) produces a narrow, but increasing, range of plastic tubes which are
capable of housing small products such as film and paper-based products. At present, these tubes are on average
30% more expensive than the equivalent sized cardboard tubes sold in the marketplace.
Required:
(a) Using Porter’s five forces model, assess the attractiveness of the option to enter the market for cardboard
tubes as a performance improvement strategy for BPC. (10 marks)
(a) In order to assess the attractiveness of the option to enter the market for spirally-wound paper tubes, the directors of BPC
could make use of Michael Porter’s ‘five forces model’.
In applying this model to the given scenario one might conclude that the relatively low cost of the machine together with the
fact that an unskilled person would only require one day’s training in order to be able to operate a machine, constitute
relatively low costs of entry to the market. Therefore one might reasonably conclude that the threat of new entrants might be
high. This is especially the case where the market is highly fragmented.
The fact that products are usually purchased in very large quantities by customers together with the fact that there is little real
difference between the products of alternative suppliers suggests that customer (buyer) power might well be very high. The
fact that the paper tubes on average only comprise between 1% and 2% of the total cost of the purchaser’s finished product
also suggests that buyer power may well be very high.
The threat from suppliers could be high due to the fact that the specially formulated paper from which the tubes are made is
sometimes in short supply. Hence suppliers might increase their prices with consequential diminution in gross margin of the
firms in the marketplace.
The threat from competitive rivals will be strong as the four major players in the market are of similar size and that the market
is a slow growing market. The market leader currently has 26% of the market and the three nearest competitors hold
approximately 18% of the market.
The fact that Plastic Tubes Co (PTC) produces a narrow range of plastic tubes constitutes a threat from a substitute product.
This threat will increase if the product range of PTC is extended and the price of plastic tubes is reduced.
The fact that a foreign-based multinational company is considering entering this market represents a significant threat from a
potential new entrant as it would appear that the multinational company might well be able to derive economies of scale from
large scale automated machinery and has manufacturing flexibility.
Low capital barriers to entry might appeal to BPC but they would also appeal to other potential entrants. The low growth
market, the ease of entry, the existence of established competitors, a credible threat of backward vertical integration by
suppliers, the imminent entry by a multi-national, a struggling established competitor and the difficulty of differentiating an
industrial commodity should call into question the potential of BPC to achieve any sort of competitive advantage. If BPC can
achieve the position of lowest cost producer within the industry then entry into the market might be a good move. In order
to assess whether this is possible BPC must consider any potential synergies that would exist between its cardboard business
and that of the tubes operation.
From the information available, the option to enter the market for cardboard tubes appears to be unattractive. The directors
of BPC should seek alternative performance improvement strategies.
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