Logoplaste Case Analysis

Summary

Founded in 1976 as a small privately held company, Logoplaste has exhibited continuous growth ever since reaching the rankings of the top global leaders in the production of plastic containers. By 2010 the company has already operated 60 plants with approximate revenues of $ 300 million in sales. In its early stage, Logoplaste developed its own business strategy that was quite different from its competitors’ ones and thus offered a competitive advantage to the company.

Logoplaste initiated the hole-in-the-wall concept, which implied on-site plant operations. For instance, the company established plants inside or next door to its clients’ production units in order to tailor production of containers to specific customer’s needs and foremost, eliminate transportation costs. Despite high proximity to the customer, Logoplaste always retained absolute ownership and control over its plant units and resources. Indeed, this strategy has granted Logoplaste with several significant advantages over its competitors, including in-time delivery and supply chain integration. Moreover, such a business approach has allowed building long-term close and trusting relationships with the clients, who remain loyal to Logoplaste until today.

Logoplaste was extremely successful in attracting giant fast-moving consumer goods (FMCG) companies as its clients. Among them are worldwide leaders such as Procter & Gamble, Coca-Cola, Heinz, Nestle, Johnson & Johnson, Unilever, Reckitt Benckiser and many others. Company’s clients preferred Logoplaste due to the benefits offered by its business model. Logoplaste has held an open-book policy for contract negotiation, which allowed prospective clients to assess their possible investment, which played a very important role in the company’s success. However, the company’s hole-in-the-wall strategy was the key element of Logoplaste’s competitive advantage at the time when its rivals concentrated on both on-site and off-site production. Today’s company’s market position, growth and development show that the strategy has proved very successful over the course of time. However, considering ever-changing market trends as an effect of globalization, Logoplaste management has been highly concerned with the future strategy formulation in order to maintain company’s growth rate.

Overall, Logoplaste appears to be a great target for acquisition due to the reported achievement results. Its business model is highly regarded by the existing clients who tend to choose Logoplaste as a preferred producer for long-term cooperation. Whereas many other companies have tried to copy the company’s hole-in-the-wall strategy and failed eventually, Logoplaste has sustained continuous growth over the decades. Moreover, Logoplaste is among the leading worldwide brands, which has been built very carefully in congruence with company’s values and leveraged great relationships with the clients.

Core Issues

• Pressure of global expansion

One of the major issues that the company has been facing in 2010 is market pressure of global expansion. When Logoplaste was born as a small single-country manufacturer of plastic containers, the business was far easier to operate due to smaller scales of production. As the company grew significantly over years and gained the status of a preferred supplier for the major FMCG companies, it started facing pressures from its clients to become larger to satisfy their increasing needs. Thus, it resulted in high management’s concern for formulating a new efficient strategy to sustain company’s business growth and expansion.

• Financing new markets

As a part of the global expansion strategy, drawing finance resources to sustain new foreign markets became another sufficient challenge for Logoplaste. In order to maintain its business model and competitive advantage when expanding the operations abroad, Logoplaste had to find efficient ways to maintain its entrepreneurial governance and maintain low costs of production.

• Client retention and customer relationship management

Although the company has been long-known for its customer retention rate of almost 100%, in a rapidly changing market environment and given increasing clients’ needs, Logoplaste is facing potential threats of losing its customer base to competitors. This challenge comes as a side-effect of the global expansion initiative. In case Logoplaste does not expand its operations, it will be harder for the company to maintain its current clients due to their growing demands. However, pursuing global expansion strategy implies loss of control and difficulties in managing new operation units in terms of customer relationship management.

• Culture of foreign markets

Moreover, throughout the course of its operations, Logoplaste has already faced difficulties in adjusting its business in regard to foreign cultures. These include social and political infrastructures of the regions where Logoplaste either has already established or plans to establish its plants. For instance, Central and Eastern Europe markets turned out to be rather challenging in terms of market entry due to language barriers, social security and tax regulations.

• Industry growth rate

Today’s rigid plastic production industry is highly fragmented with top ten leaders producing only 16 percent of the world’s output. With the fast-developing new technologies, manufacture of plastic containers has become much easier in many ways. Therefore, the market is crowded with large, medium-sized and small producers. Although Logoplaste’s position is quite competitive, its major rivals are the top market players that own bigger market shares and offer the same competitive advantages. Moreover, high industry growth rate is also attributed to rapidly evolving consolidation trends and product innovation facilitated by a greater access to innovative technologies and approaches. Therefore, Logoplaste’s hole-in-the-wall strategy no longer seems to be enough to sustain competitive advantage.

Porter’s Analysis

Bargaining Power of Suppliers – the major inputs in the production of plastic containers are plastic pellets, energy, technology and labor force. The most expensive input elements are plastic pellets. However, Logoplaste as any other manufacturing business is quite dependent on energy and machinery. Thus, suppliers have a moderate bargaining power as they can certainly influence prices and manipulate market demands. On the other hand, there will always be other suppliers since the inputs are not industry specific as products become commodities.

Bargaining Power of Buyers – Logoplaste’s clients choose the company as a preferred producer based on the company’s long-term solid reputation and the benefits it offers. However, the market is changing significantly and as clients grow, they become more aware and self-conscious of their bargaining power.

Threat of Substitutes – plastic packaging emerged as a cost-efficient alternative to traditional packaging materials such as glass, paper and metal. Although there is a chance that advanced technologies can shift the production of glass, paper and metal packaging to a new level, they still present a low risk in terms of substitution mostly due to higher production costs.

Threat of Potential Entrants – rigid plastic packaging industry has been facing a lot of changes during the last decades. Today, the market is technologically and knowledge-advanced as it has never been before, which makes it harder for new ventures to enter the market. Moreover, market demands have grown substantially with customers being more educated and aware of potential choices and benefits, which shifts their requests to a whole new level. Thus, the barriers to entry are rather high today.

Rivalry among Existing Competitors – due to high fragmentation of the market of plastic container production, the threat of rivalry is rather high within the industry. Logoplaste faces fierce competition from the world’s leading players such as Alpha-Werke, Amcor, PlastiPak, Graham and even small and medium-sized enterprises. Thus, the company’s position can be rated as competitive but not aggressive.

SWOT Analysis

Strengths

• Customer retention rates almost 100%
• ILab
• Price competitiveness
• On site production strategy – cost-efficient
• Strong knowledge base
• Centralized back office (Portugal)

Weaknesses

• Lack of human resource
• Gap in communication skills mostly due to cultural differences
• Lack of necessary financing sources

Opportunities

• Local recruitment of country managers
• Market growth in rigid plastic packaging industry (though new or existing customers)
• Acquisition of Graham

Threats

• Currency risks (financing non-euro operations)
• Cultural differences
• Centralized control system
• Pressure for global expansion (recruiting new and retaining existing customers)

Alternatives

In terms of further business development and future strategy formulation Logoplaste has four choices. Although every option has its advantages and disadvantages, Logoplaste must consider and evaluate each strategy carefully in order to be able to choose the most appropriate one in terms of future growth and development.

Market development. First of all, the company’s management can pursuit market development by expanding its business to foreign territories. Considering Logoplaste’s accumulated growth and results, it has been forced by its major clients to expand. Although, it might seem as a threat to the business, it may as well be treated as a great opportunity to bid for larger projects in new locations secured by long-term contracts with trusted clients.

Market penetration. The second option for further business development is penetration into the current local markets. Instead of taking risks of going global and incurring huge investment expenses, Logoplaste can approach firms in the markets where it has already established its presence. Since these areas are already familiar to the company and its image is known within the markets, it grants several benefits to Logoplaste.

Acquisition. According to the market research, one of Logoplaste’s major competitors, Graham, has been reporting negative results over the last years mostly due to a high accumulated debt. Moreover, Graham has announced IPO in the nearest future. Since this company differs in the business model (off-site production mostly), its acquisition (or merger with) can greatly leverage Logoplaste’s market position.

Product development. Last but not least alternative for future growth of Logoplaste is product development. For instance, in the market context where a company’s product is becoming a commodity, offering higher quality products and services along with innovative solutions presents huge growth opportunities for Logoplaste. Moreover, since the company has established Logoplaste ILab (innovation lab) leveraging its brand, it already has a solid foundation for product development.

Decision Criteria

Each of the four strategies has its own advantages and disadvantages. For instance, the key benefits of the market development strategy include greater access to a new customer base; business diversification (management of different large projects can greatly enrich the company’s portfolio); economies of scale grant opportunities to enter manufacturing and technology cluster and build respective relationships; the industry in general has been reporting high growth rates, which certainly signals about opportunities for market development. Since Logoplaste’s management has been discussing a new strategy to sustain growth, global expansion is a perfect fit to secure continuous development. Nevertheless, this strategy also presents some significant drawbacks. These include difficulties in financing new projects due to accumulated debt in the past and bank unreliability; new projects imply increased product complexity and thus more sophisticated operations; besides, financing new facilities and projects requires huge investment in human resources; cultural differences – lack of local market knowledge and difficulties in hiring appropriate senior management.

Among the advantages of market penetration strategy include generating higher profit margins while operating on a smaller scale; cost-efficient operations (cheaper financing and initial costs); higher negotiation power; knowledge of the local market. Strategy’s disadvantages include possible heavy presence of competitors (small and medium-sized enterprises) in the market; failure to satisfy clients’ needs due to neglecting the invitations of existing customers’ to expand.

Merger or acquisition of the Graham Company presents several significant benefits. First of all, Graham is the top three industry company that shows increasing market potential in North American region. Secondly, Graham mostly operates off-site, which means that Logoplaste can diversify its business strategy targeting more customers and responding more efficiently to their needs. Third, this opportunity entails technological synergies, which is an obvious benefit in terms of improvement of production facilities and processes. However, as any other strategy it has certain disadvantages. These include high financial risks due to debt accumulated in the past and possible failure to finance the M/A; Graham’s market presence is limited to North America; and the most critical factor – negligible growth over the last years.

A single advantage of the product development strategy is the opportunity to leverage brand image and secure the company’s reputation of a high quality producer. However, this strategy has more drawbacks. Thus, product innovation requires the presence of skilled workforce, huge investments in both R&D and equipment.

Recommendation

It is obvious that the best possible strategy for the future growth of Logoplaste is market development. Although some of the disadvantages may seem disturbing, its advantages are the most solid among all. It is noteworthy to say that in order to sustain its business and ensure further growth, Logoplaste must consider taking serious actions, even if they appear to be risky, because at the company’s present conditions it either expands further or leaves the market through a merger and acquisition before more innovative and reactive competitors displace it. Moreover, the market development strategy can be approached in three different ways.

The first one is through the company’s already existing clients. Having earned itself a great reputation, company’s existing clients (P&G for example) have offered larger projects to Logoplaste, which implied expansion to foreign markets (Malaysia for example). Such invitations appear to be a perfect opportunity to expand the business and increase margins, which initially grant demand for Logoplaste products and guarantee fixed profit. Moreover, continuous work with the existing clients ensures their loyalty and appreciation of the business, which positively impacts business relationships.

Secondly, Logoplaste can approach market development through merger and acquisition of its competitor Graham, benefits of which are described in detail above. In a dynamic market environment, a company’s ability to remain competitive and provide innovative solutions to its customers is crucial. Moreover, considering Logoplaste’s lack of human resources and knowledge, consolidation of operations can help to overcome these weaknesses. Thus, integrating Logoplaste business with Graham can greatly serve both companies. Finally, establishing partnerships with new clients is another way to achieve market development. This approach would combine both penetrating the local market and entering foreign markets by leveraging company’s strategy of hole-in-the-wall. Although Logoplaste can also start operating off-site to diversify its strategic approach, there is always a chance that it would ruin its long-established reputation.

Evaluation and Measurement

Once a strategy is implemented, it can be evaluated using various analyzing tools and techniques. First of all, it would be reasonable to conduct a SWOT analysis of company’s internal environment. SWOT analysis would show whether the company was successful at resolving its issues and improving performance, and whether the strategy was helpful in terms of Logoplaste’s weaknesses and threats. Secondly, Porter’s five forces analysis could be applied in particular for the purpose of evaluating strategy effectiveness. Thirdly, if after a certain period of time Logoplaste succeeds in bringing new clients and establishing long-term partnerships, the most likely the strategy has been successful. Moreover, if company’s profit margins increase at a certain rate (projected by company’s analysts) along with at least 15 percent annual growth rate (as mentioned in the case), it will prove the strategy right. As a rule, company’s financial indices (in case the financial statements are prepared appropriately and true information is disclosed) are the best indicators of company’s success or failure. Finally, if Logoplaste decides to follow Graham or adopt the off-site production approach on its own, the results will be seen very soon. While company’s business reputation has been built on its hole-in-the-wall strategy in the first place, there are only two extreme outcomes of the off-site production. First, Logoplaste can leverage its brand and diversify production portfolio serving a wider pool of customers, thus generating much higher margins. Second, it can lose a portion of its clients due to its failure to satisfy all customers’ needs and respond to their requests in an appropriate and timely manner, thus incurring huge financial losses.

Implementation Plan

Indeed, successful implementation of any strategy requires a carefully developed and thoroughly considered plan. Considering that the management of Logoplaste is highly concerned with the company’s future, they must choose the right strategy. Therefore, a market development strategy by means of global expansion entails mixed market entry through both new and existing customers and includes several major steps.

First of all, Logoplaste should increase cooperation with its own-established ILab. Over the course of its operations, ILab has reported very successful results and even has been ventured as a separate business unit, which now generates around 50 percent of its revenues from own clients. At the same time, it still constitutes a great part of Logoplaste’s production of plastic containers. ILab has resulted in developing innovative product solutions that are highly valued by company’s existing clients. Thus, entering new markets through the attraction of new clients, it can leverage Logoplaste brand and build customers’ trust and value.

Additionally, expanding its market presence through existing clients can help diminish the lack of local market knowledge. Close cooperation with its clients and partners can ensure win-to-win performance and thus generate higher profit margins. Since the company has experienced some significant challenges in terms of cultural differences, the presence of its existing clients can strengthen the position of Logoplaste in the local markets.

Moreover, the company’s management should increase local recruitment and provide internal trainings for its employees, which would help overcome cultural challenges, increase knowledge transfer and as a result, improve management performance and company’s operational productivity.

One of the major aspects of ensuring the success of the market development strategy is finding appropriate financing sources. Therefore, the company’s management must take significant efforts to find outside investment opportunities to secure its financial liabilities and eliminate the risks of financial failure. For instance, it would be reasonable to create a management team solely responsible for the financing of Logoplaste business. Another way to ensure easier and faster access to capital is issuing Logoplaste for IPO. In turn, this would guarantee capital increase and stock value appreciation, reduce company’s dependence on bank loans and provide extra funds for financing new markets and projects. Nevertheless, this approach should be very carefully considered before launching due to its high initial investment, need for increased business transparency and reporting. Moreover, it implies Logoplaste’s loss of control to a certain extent.

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