Introduction: Signode Industries Inc., a privately owned company, is the market leader in the steel strapping industry.

In the early 1900s, Signode started out as a producer and marketer of patented steel strap joints and application tools. In the 1950s, Signode vertically integrated its business and started to purchase and process rolled steel. Signode has since become a low-cost processor of cold rolled steel. Three grades of steel strapping are manufactured: Apex, Box Band Magnus (BBM) and Heavy Duty Magnus (HDM). Today, Signode produces plastic strapping in addition to the steel strapping products and is the only producer of customized steel strapping and steel strapping machines. Signode sells its strapping products through its geographic ally organized sales force that traditionally had developed markets by specializing, by industry, some of its sales representatives. Signodes sales force is the largest, most powerful and respected in the steel strapping industry. Signode's competitors can not provide the level of service that Signode provides. There are presently six major competitors in the steel strapping industry that account for 92% of steel strapping shipments. In 1983 Signode had a 40% market share in the steel strapping industry, however that share dropped from 50% in 1973. The biggest reason for the loss of market share is price discounting by the competition. Problem: In November of 1983 the major U.S. steel companies announced that they would increase the price of cold rolled steel by 6.8%. Cold rolled steel is the raw material used in the manufacture of steel strapping, Signodes primary product. Traditionally, such an increase would be passed on to the consumer directly. However, the traditional approach has met opposition from Signodes sales force, who feel that the sales force is already at a disadvantage in the market due to pricecutting by competitors. It is now January 1984 and Gary Reed, president of Signode Industries Packaging Division, has to decide what pricing policy would the best response to the increase in raw material cost. At the end of January, Reed must present his pricing policy at the national

sales meeting. Reeds presentation will detail his implementation plan for the packaging divisions pricing policy. Reed believes he has three possible pricing policy choices: 1. Pricing Policy #1 - Continue what Signode has done in the past and pass on the raw material increase to the consumer. 2. Pricing Policy #2 - Implement the no increase option that would simply maintain its current book prices. 3. Pricing Policy #3 - Implement the price-flex policy proposed by Jack Davis, one of the regional sales managers. The price-flex proposal would allow the sales force to continue its premium pricing policy for service-oriented customers and selectively discount pricing for those customers who wanted to purchase on a commodity basis. It is Reeds responsibility to choose a pricing policy that will maintain profitability, halt market share erosion, provide cash flow to the company in order to meet its financial needs and bolster sagging sales-force morale. Reeds decision could have a major impact on Signodes market share and on the steel strapping market.

Critical Issues: 1. What are the existing customers needs in the steel strapping industry? In what direction will the steel strapping industry move due to the rise in raw material prices? A clearer understanding of where the steel strapping industry is headed and changing customer needs will help Signode better understand what customers it wants to serve.

2. How will Signode's competitors react to the raw steel price increase? Consideration of what actions the competition may take in response to the raw materials price increase will aid Signode in evaluating the effectiveness of its own pricing policy options.

3. What distribution channel would be most effective and efficient in serving the market? An analysis of the market and customers needs will determine if Signode's distribution methods are the most effective for its product?

4. What is the impact of Signode's value -added service on profitability? Understanding the impact the existing level of service offered has on profitability will help to determine the level of service that is optimal in Signodes overall strategy. 5. How do changes in pricing policy affect Signodes profitability and market share objectives? Understanding the impact of each possible pricing policy change on profitability and on the firm itself will help management determine which pricing alternative best fits with the objectives of Signode. After analyzing the market and customer needs, a clear comprehension of each alternative's profit impact will allow management to determine which pricing policy to implement and the appropriate actions to take. Analysis: 1. What are the existing customers needs in the steel strapping industry? In what direction will the steel strapping industry move due to the rise in raw material prices?

After the recession of 1982, Reed realized the steel strapping market had changed. Steel strapping was a mature market where the main product was becoming a commodity. The total market for steel strapping was declining, competition was increasing, and customerneeds were changing. Industry shipments of steel strapping consumables declined 25% from 479K tons in 1973 to 360K tons in 1983. Within this same time frame Signodes market share for steel strapping decreased 10% from 50% in 1973 to 40% in 1983. However, as steel strapping consumables declined, the market for plastic strapping was growing at 4% per year. The growth in plastic strapping substituted lower grade steel strapping at a rate of 2% of the steel strapping market per year. Signodes value added services of custom machines, tools and service were a hard sell in this tightening market. The price for steel strapping was decreasing because of increased competition and cost-cutting pressures from buyers. Customer purchasing departments became more sophisticated. Many customers knew the fair prices of products and services they received. The cost of steel strapping was approximately 70% for raw materials, 16% for variable costs, and 14% fixed costs. A fair price for consumables without any value added service would be about 84% of Signode list price. Although Signodes book prices were competitive, distributor discounting posed a major problem as this made Signodes prices 10% - 20% higher. Customers began to buy in a commodity type basis, shopping for the lowest price, increasing orders but decreasing the size of shipments. Shipments greater than 36K pounds declined 5% from 52.9% in 1980 to 47.9% in 1982.

The growing trend seemed to be toward a commodity-based market where less value was placed on value added services. An executive from a large steel company comments, Our market is shrinking. We dont need new tools or machines. We need steel strapping at cheaper prices to run through our existing tools and machines. As the steel strapping industry moves towards a commodity market Signode will lose further market share as their cost structure prevents them from truly being the lowest cost provider for steel strapping. Customers will either go with the lowest cost provider of steel strapping or with a plastic strapping solution if the customer application allows for it.

2. How will Signode's competitors react to the raw steel price increase? In order to assess Signode's current market position, a competitor analysis must be completed.

Currently, six (6) major competitors and some 300 individual distributors provide Signode's main competition in the steel strapping industry. These six competitors are Alpha, Sanford, Bentley, American Metal, Jersey Steel and Plymouth. They, combined with Signode, account for 92% of steel strapping shipments in 1983, down from 95% in 1977 (See Appendix A for competitor information). Distributors offer a special challenge to Signode. Distributors carry a broad line of competitor products. Although they had increased sales volume to small accounts, they did so by reducing profit margins for the producer. This poses a threat in the mid-sized market as well. Cost cutting among competitors started in the 70's with Alpha. During this time period they also ceased offering custom machinery. Signode followed by reducing pricing to select customers, which was countered by their competitors to keep the standard pricing

difference of between 5-10%. There are indications that these price differentials will only increase as the competition attempts to gain market share. Signode's competitors are not bounded by producing custom machinery or by offering the level of service provided by Signode. Until the mid 1970s custom machinery was sold at a discount. Producers then made up the difference by pricing the strapping commodity at a premium. However, due to increased competition and pressure from buyers these products were unbundled. Customers now purchased their machinery at a discount and their strapping in a closed bid process. Signode's competitors can afford to cut prices, even though the cost of raw steel is increasing, because they are not saddled with the high overhead costs assigned to engineering and producing machinery, which is then sold at a discount. Another contributing factor is that Alpha, Sanford and Bentley source their steel from their parent company. These three competitors can offer discounts in order to gain share. The lose in steel transferring costs and strapping discounts can be offset by increased sales volume, thus increasing the consolidated profit of the parent company. In analyzing the competitive environment, it appears that Signode's competitors will continue to under price them. Even though Alpha has announced a price increase in steel strapping book prices for a select group of customers, there is fear that their actual prices will remain constant. Market research has also shown that the remaining competitors will either maintain or increase their discounts to Signode's book prices. It seems that whatever action is taken; Signode's competitors will react to maintain their price differentials.

3. What distribution channel would be most effective and efficient in serving the market?

Signode currently distributes nearly 100% of its steel strapping through its direct sales force. Of its competitors, only Jersey Steel (85%) and Plymouth (75%) distribute as high of a percentage of their volume directly (see Appendix A). The sales team has been Signodes primary distribution channel since its inception. This method of distribution is usually employed when the target market is composed of a limited number of buyers who are easily identified and who are geographically concentrated. Other contributing factors to using this channel are when intermediaries can not reach the target market or do not possess the capacity of service required by the market. Signode is the only full service provider in their industry. Their highly respected sales force is essential in contributing to Signodes reputation. Providing value added services to the buyer are a contributing factor to this. This is evidenced by Signodes share of their National Accounts segment, which has remained relatively stable from 1977 to 1983, a period in which Signodes overall market share has fallen from 50% to 40% (see Appendix A). However, Signode has been losing significant market share in the Small and Mid-Range sectors. These markets, especially the Small segment, are effectively being served by independent distributors. These distributors have increased their overall market share from 5% in 1977 to 8% in 1983, primarily by focusing on the Small sector of the strapping market and by reducing prices to serve the needs of this market. As noted above, a producer should elect to distribute directly when there is a limited number of firms in the market and when intermediaries do not possess the capacity for service required by the market. Small market firms account for over 21,000 of Signodes accounts (see Appendix B). This customer base has gravitated towards non-service oriented, commodity focused producers and distributors (see Appendix A). This dictates that a direct sales force is not the most effective way to reach this market as evidenced by Signodes share erosion. However, before undergoing a channel modification decision, a few questions must be answered:

A. Will the change improve the effective coverage of the target market sought? How? The change will improve the coverage of the target market by distributing the strapping product through a channel that has increased market share. B. Will the change improve the satisfaction of buyer needs? How? The change will improve the satisfaction of buyers by offering them products at a lower price than if it were bough directly from Signode. C. What marketing functions if any must be absorbed in order to make the change? No additional marketing functions would need to be absorbed. D. Does the organization have the resources to perform the new functions? Since no new functions will be undertaken, this question is irrelevant. E. What effect will the change have on other channel participants? This change may increase sales force morale. Only 12% of the sales forces time is spent on accounts in the Small segment. By freeing them of the responsibility of selling and servicing this market, they can concentrate more on the larger and mid-range accounts, where Signode generates 89% of its sales and accounts for 88% of sales time. F. What will be the effect of the change on the achievement of long-range organizational objectives? This change will allow the sales team to concentrate on growing the more lucrative larger markets while allowing distributors to sell to the smaller market and possibly grow market share in that segment as well. The packaging division must generate as much cash flow as possible to back expansion while maintaining its market share. By integrating a new channel, Signode may be able to offset a discount in price with increased volume in one sector and by retaining and growing the customer base in the larger segments. Signodes sales force is very powerful and very well respected. However, Signode should realistically consider the option of integrating distributors into their channel strategiy.

4. What is the impact of Signode's value -added service on profitability? The market for steel strapping has changed. Some of Signode's key customers have said that they are more interested in cheaper strapping than paying for past innovations. This questions the value certain customers' place on the unique services Signode provides. The marketing research, conducted by Hamilton on the top 164 accounts, yielded the following grid. Pay high Price Pay Low Price 24% 24% Low Cost To Serve 21% 30% High Cost to Serve

30% of Signode's national accounts have a high 'cost to serve' with respect to application review, unbilled service and engineering time, free parts and tool repair. In addition, they take up a significant amount of a salesperson's time. This level of service is being provided at a discounted price. Overall, 51% of these customers enjoy this level of service. The operating margin, that increased from 15% to 19.9% with flat sales, 1982-1983, will start to decline unless Signode immediately starts to differentiate between large customers that want additional service at an increased price and those that are only interested in cheap strapping. While the cost of sales as a percent of revenue fell 4.5% last year, a 7-14% selective decrease in price will eliminate some of that benefit. National accounts contribute dollar for dollar only half as much towards profit as compared to small and midrange accounts. It is important to note that 23% of mid-range accounts became large or national accounts last year. This means that the contribution margin for this portion of the customer base will fall 8-14% this year. Obviously, the level of service that Signode offers places tremendous pressure on the profit margin. Signode has to evaluate the economic value of these services. What is the actual cost and what is the actual value to the customer? Then the sales force will have the information they need to consult with a large customer, evaluate that client's needs and recommend the level of service

they believe the client should have. If the client agrees, then an appropriate pricing structure can be established. This will maintain Signode's status as the market leader who can provide the level of service certain accounts want, but will also ensure the company can do so at a profit. The immediate challenge is to overcome a sales culture that offers these services without knowing the impact on profit. Reed has to educate the sales force about the economic value Signode's valueadd service offers clients. The sales force then needs to ensure the customer who wants that service, pays for it. A risk with this approach is that certain customers will still demand the level of service but will not want to pay higher prices. Signode has to decide which customers are important enough to keep, even at a reduced margin and which customers they are willing to let go because they are not profitable. The key issue is that Signode's sales force should understand the impact on profitability when offering the 'value-add' level of service. This is critical when implementing the 'flex-price' proposal. The sales force will need to know which clients they can offer the discounted prices and who needs to agree to a reduced level of service if they want lower prices. What may very well happen is that certain customers, who realize the actual economic value of the service being offered, will elect to continue to pay a higher price. In the longer term, Signode has to continue to evaluate the total cost of providing customized machines, engineering support and the other market leading levels of service. Steel strapping is a declining industry. There may quickly come a time where any level of extra service, for a product that is increasingly a commodity, will be unprofitable. Additional R&D may become a very poor investment. This needs to be carefully monitored. For now the sales forces should feel proud that they, as market leaders, are in the position to charge higher prices for their value-add service.

5 . How do changes in pricing policy affect Signode s profitability and market share objectives? ( maybe we should put major assumptions here. for example, assumed total

10

market growth of steel strapping at 3% per year. Signode will maintain same profit margin of 34% per year. Steve it is up to you, it is your call!) Pricing Policy #1 - Taking the same approach to pricing as Signode has always done would concede further market share. Customer demand would decrease due to Signodes higher prices as the steel strapping industry prices continue shifting towards a commodity basis, hence lower prices. A negative effect on profitability would occur even if the contribution margin stays the same. At the end of 1988, revenues would decrease to $104,759 from $134,112 in 1983 and the contribution would decrease to $36,603 in 1988 from $46,859 in 1983. The sales force has voiced their concerns to management stating that they do not wish to see any price increases. The sales force, which is lacking morale, would agree that this pricing option lacks the competitive pricing necessary to position Signode products against the competition. This policy will lead to market share erosion and the inability to maintain a generous cash flow. (Appendix C, page 2) Pricing Policy #2 - Signode can choose not to increase prices and in doing so would be in effect giving a 6.8% discount. The implied discount would satisfy the wishes of Clay Hamilton, the Vice President of Sales, who believes that the Packaging Division would lose market share if there were any kind of pric e increase. No increase in prices will certainly satisfy the wishes of its sales force as it would enable them to be more competitive and bolster their lagging morale. Yet, discounting would not seem to work because the competition has demonstrated that they will continue to hold an average of 5-10% off Signodes price. The no-increase option would protect against a loss of market share, however simply maintaining market share would not suffice. Hamilton has argued that the Packaging Division would need increased market share to satisfy the corporations cash flow requirements. (Appendix C, page 3) Pricing Policy #3 - The price-flex proposal would positively increase market share back to the 1973 level of 50.64% by 1998 (assuming 2% Signode market share growth each year for the next five years). Maintaining profitability and cash flow requirements would be met easily with the contribution dollars increasing from $46,859 in 1983 to $66,673 $66,470 by 1988. The price-flex

11

proposal takes an aggressive price position and puts more decision making in the hands of the sales force. The sales force would certainly respond favorably to this policy as it gives them the greatest power to compete. Jack Davis, a regional sales manager, and the sales force have promised a 5% to 10% increase in Signode's market share if the price-flex proposal is chosen. The marketing department's report, which evaluated Signode's account base, shows that its customers have widely diverse service needs and the prices paid for Signode goods also varies. This customer base is ideal for the price-flex proposal because it would allow the sales force to selectively discount to meet the competition's pricing. (Appendix C, page 4) The price-flex proposal will no doubt invigorate Signode's sales force to compete with competitors at their own game of discounting. However, in order to implement the price-flex proposal the marketing department must educate the sales force. The sales force must have a better knowledge of how the markets they serve are measured and segmented. As mentioned earlier, the sales force will have to have a clear understanding of the bottom line when comparing the cost to service an account versus the prices paid by an account. This basic knowledge base will enable the sales force to better service and price their accounts. These service and pricing improvements will aid Signode in gaining market share and higher profitability. Arming the sales force with the power to discount must be done under controlled measures. The price-flex proposal is not intended to discount every account. Initially executives of Signode, Reed, Hamilton and Hernandez must keep close tabs on how discounting is used and for which customer segments.Recommendations: After careful analysis, Reed should present the following plan at the sales conference. The preceding analysis will serve as a complete explanation of his reasoning. Recognize the changing market Signode is operating in, where steel strapping is becoming a commodity item. Explain that Signode will always be undercut regarding price.

12

Start the process of evaluating how Signode can serve the smaller customers through distributors.

Evaluate the economic value of the services offered and train the sales force on this concept.

Implement the 'flex-pricing' plan, initially keeping a close eye on the level of discounting.

13

7/27/01

Appendix A
SIGNODE INDUSTRIES, INC. (A) Competitor Analysis
Signode Steel Strapping Sales (83) 1977 Market Share 1983 Market Share Change in share (77 vs. 83) Volume through distributors Price-to-book ratio1 % of sales in Apex % of sales in Magnus 133 50% 40% -20% < 1% 100% Alpha 70 22% 21% -5% 32% 95% 50% 50% Sanford 30 10% 9% -10% 55% 93% 32% 68% Bentley 33 6% 10% 67% 50% 95% 25% 75% American Metal 17 3% 5% 67% 0% 90% 0% 100% Jersey Steel 13 2% 4% 100% 15% 93% 39% 61% Plymouth 10 2% 3% 50% 25% 90% 0% 100% Total 306 95% 92%

To Signode's book price

Appendix A Page 1 of 1

7/27/01

Appendix B
Signode Strapping Sales by Account Size Small (Skid: 0.6 ton) 1983 sales ($000) % of strapping sold Tons shipped Average price per ton Number of customers $14,000 11% 13,412 $1,043 21,550 Midrange (Truckload:13 tons) $29,200 23% 31,875 $916 3,609 Large1 (Carload: 20 tons) $89,800 66% 103,307 $869 1,428

Appendix B Page 1 of 1

7/27/01

Appendix C SIGNODE INDUSTRIES, INC. (A) Profit Impact Analysis 1983 330,000 1984 339,900 1985 350,097 1986 360,600 1987 371,418 1988 382,560

Total Steel Strapping Market ($000s) *Assume 3% growth per year

Scenario #1 - Raise Prices (lose 3% market share each year) Signode Steel Strapping Market ($000s) Signode Market Share Scenario #2 - Raise Prices (maintain 40% market share each year) Signode Steel Strapping Market ($000s) Signode Market Share Scenario #3 - Price Flex (gain 2% market share each year) Signode Steel Strapping Market ($000s) Signode Market Share

134,112 40.64%

127,938 37.64%

121,274 34.64%

114,094 31.64%

106,374 28.64%

98,088 25.64%

134,112 40.64%

138,135 40.64%

142,279 40.64%

146,548 40.64%

150,944 40.64%

155,473 40.64%

134,112 40.64%

144,933 42.64%

156,283 44.64%

168,184 46.64%

180,658 48.64%

193,729 50.64%

APPENDIX B
Page 1 of 4

7/27/01

Appendix C SIGNODE INDUSTRIES, INC. (A) Profit Impact Analysis SCENARIO #1 - Increase Prices Assumptions 1. The Steel Strapping industry will realize 3% growth over the next 5 years. 2. Signode will erode 3% market share each year over the next 5 years. 3. Signode % of total cost - raw materials (78.7%), other variable costs (9.3%), fixed costs (12%). 4. Signode will remain at current contribution margin of 34.94%. 5. Signode will increase prices 6.8% for everyone.

1983 Signode Steel Strapping ($000s) Revenue Raw Materials Other Variable Costs Fixed Costs Total Cost Contribution Contribution % 134,112 (68,668) (8,115) (10,470) (87,253) 46,859 34.94%

1984 136,638 (69,962) (8,267) (10,668) (88,897) 47,741 34.94%

1985 129,520 (66,317) (7,837) (10,112) (84,266) 45,254 34.94%

1986 121,852 (62,391) (7,373) (9,513) (79,277) 42,575 34.94%

1987 113,608 (58,170) (6,874) (8,870) (73,913) 39,694 34.94%

1988 104,759 (53,639) (6,339) (8,179) (68,156) 36,603 34.94%

APPENDIX B
Page 2 of 4

7/27/01

Appendix C SIGNODE INDUSTRIES, INC. (A) Profit Impact Analysis SCENARIO #2 - Keep prices the same Assumptions 1. The Steel Strapping industry will realize 3% growth over the next 5 years. 2. Signode will be able to maintain current market share of 40.64% each year for the next 5 years. 3. Signode % of total cost - raw materials (78.7%), other variable costs (8.3%), fixed costs (13%). 4. Signode will remain at current contribution margin of 34.94%. 1983 Signode Steel Strapping ($000s) Revenue Raw Materials Other Variable Costs Fixed Costs Total Cost Contribution Contribution % 134,112 (68,668) (7,242) (11,343) (87,253) 46,859 34.94% 1984 138,135 (70,728) (7,459) (11,683) (89,871) 48,264 34.94% 1985 142,279 (72,850) (7,683) (12,034) (92,567) 49,712 34.94% 1986 146,548 (75,036) (7,914) (12,395) (95,344) 51,204 34.94% 1987 150,944 (77,287) (8,151) (12,767) (98,204) 52,740 34.94% 1988 155,473 (79,605) (8,395) (13,150) (101,151) 54,322 34.94%

APPENDIX B
Page 3 of 4

7/27/01

Appendix C SIGNODE INDUSTRIES, INC. (A) Profit Impact Analysis SCENARIO #3 - Price Flex Assumptions 1. The Steel Strapping industry will realize 3% growth over the next 5 years. 2. Signode will be able to gain 2% each year over the next five years. 3. Signode % of total cost - raw materials (78.7%), other variable costs (4.3%), fixed costs (17%). 4. Signode will remain at current contribution margin of 34.94%. 5. Price Flex on average will result in 12% off original list price (offered to 15% of customers) 1983 Signode Steel Strapping ($000s) Revenue Raw Materials Other Variable Costs Fixed Costs Total Cost Contribution Contribution % 134,112 (68,668) (3,752) (14,833) (87,253) 46,859 34.94% 1984 142,325 (72,873) (3,982) (15,741) (92,596) 49,728 34.94% 1985 153,470 (72,850) (3,980) (15,736) (92,567) 53,622 34.94% 1986 165,156 (75,036) (4,100) (16,208) (95,344) 57,706 34.94% 1987 177,406 (77,287) (4,223) (16,695) (98,204) 61,986 34.94% 1988 190,241 (79,605) (4,349) (17,196) (101,151) 66,470 34.94%

APPENDIX B
Page 4 of 4