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 that reason, it is likely that the companies would make minimal profits or losses, if they do not make a long term investment plans. The raw material supplies, which include the quarry and coal that is used during the production process, have a high bargaining power,. This is because since they maintain a monopoly over the services that they offer.

2. Is Aget’s contemplated expansion into Lebanon, Kuwait and UAE advisable or Inadvisable? Argue your position. The contemplated expansion of Aget is advisable. It is important to note that the global market in the field of construction is contemplated to have a 22.6% increase within the period of up to 2008. Considering the financial structure of Aget being strong and stable, as depicted on their profit and loss account that shows a marginal increase from the year 2003, it is advisable that they invest in Lebanon, Kuwait, and UAE. With a low utilization rate of 76%, Aget has excess capacity that it has not utilized, which makes it not able to fully utilize its profit margin. Similarly, Aget has maintained a feasible market position in the Middle East that has been made possible due to as a result of distinctive futures.

Having already built a good image that has already penetrated in the Middle East, it can easily establish links, as well as the networks within the expansion grounds that would enable it take hold of a higher percentage of the market share. It is estimated, that the market potential of the expansion area collectively is 9.7mmt. Considering the preliminary requirement of an investment worth $6.5 million in sales, as well as 1.94mmt, the proposed areas are potential grounds to start up business. This would expand the customer base, and in so doing, stabilize the market share held by Aget in the three target countries, and which would challenge make future potential investors in the future be challenged. Finally, with the increased constructions that are believed to be in the verge of developing in the Middle East, there should be a ready market for the provision of cement to the developers and Aget is better placed to meet the needs of the customers. 3. Use Exhibits H & I. Estimate and evaluate the ratios:

a. ROI
Return on Assets = ROA
2003:ROA = ($ net profit) / ($ total assets) × 100
ROA = (79,058) / (552,139) × 100 = 14.32%
2004:ROA = ($ net profit) / ($ total assets) × 100
ROA = (82,759) / (532,097) × 100 = 15.55%
According to Exhibit H and I, Aget has increased in ROA by 1.23% b. Profitability
Gross Profit Margin = (Gross Profit) / (Sales) × 100
2003:Profitability = (107,755) / (393,559) × 100 = 27.38%
2004:Profitability = (108,815)/ (390,215) ×100 = 27.89%
Net Profit Margin = (Profit Before Interest & taxes)/ (Sales) ×100 Profit Before Interest & taxes = Gross Margin – Operating Expenses 2003:Profitability = (79,623) / (393,559) × 100 = 20.2%
2004:Profitability = (83,439) / (390,215) × 100 = 21.3%
Aget has increased in Profitability from these calculations. c. Liquidity
Current Ratio = (Current assets) / (Current liabilities)
2003:Liquidity = (303,570) / (146,471) = 2.07
2004:Liquidity = 302,383/ (101,650) = 2.97
Acid Test Ratio = (Cash + Accounts Receivable + Short-term Investments) / (Current liabilities) 2003:ATR = (240,032) / (146,471) = 1.63
2004:ATR = (243,990) / (101,650) = 2.4
Aget has increased liquidity and its ability to have enough short-term assets
to cover its immediate liabilities without selling inventory d. Financial Strength
Debt-Equity Ratio = (Total Liabilities) / (Shareholders Equity) 2003: DER = (175,016) / (290,413) = 0.60
2004:DER = (102,899) / (335,542) = 0.31
The Debt-Equity Ratio shows that most of the capital was in terms of ordinary shares and is becoming more reliant on Shareholders Equity than on debt to finance operations. 4. For 2008, Aget is contemplating adding two new dry-process kilns for an investment of 10.7 million €. That investment is expected to increase current capacity by 18%. a. Assuming the most current operational cost levels, what sales must it generate to recoup the above investment? Capital Increase = 12.7 × 118% = 14.986

14.986 – 12.7 = 2.286mmt
Investment = 10.7 million €
2004 Contribution Margin = (Sales – Variable Costs) / Sales
= (390,215 – 286,247) / (390,215) = (103,968) / 390,215 = 0.2664
= 26.64%
Breaking Even = (Investment) / (Contribution margin) = (10.7) / (0.2664) = 40.17
(40.17) / 390.21 × 100 = 10.43%
In comparison to the 2004 sales, the new sales have a 10.43% increase. b. If we assume 2004 prices of 45.91 €/mtt. What does the new break-even level do to the utilization rate, given its new capacity level? What can you say about its effect upon Aget’s pricing? (40.17) / (45.91) = 0.874972 which is equal to 874,972 metric tons considering every figure was in millions. Capacity after investment = 118% × 12.7 = 14.98mmt

Utilization after investment = 0.876 + 8.5mmt = 9.37
9.37 / 14.98 × 100 = 62.55%
The current utilization rate has been reduced to 62.55%. 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: = 12.7 × 118% = 14.98mmt

Rate of Utilization = 8.5 × 122.6% = 10.42 mmt which are the sales in the year 2008 as estimated
10.42/14.98 × 100 = 69.56%
5. How can Aget differentiate its position in the eyes of its customers? That is: a. How can it use segmentation to help upgrade its commodity (cement)? With Aget producing cement of different qualities and for different uses, in addition to the fact that packaging of the cements is also different. The company would greatly benefit from Ssegmentation of the customers. It would assist the company to know in knowing how much to spend on producing a specific quantity of a specific quality of cement. and at what quantity. The case study indicates that Aget has segmented its market into the building segment and non-building segments. Similarly,Important to note, bulk and bagged cement made up 26% of the total sales, while ready mix cement accounts for 68% of the total sales, with precast products amounting for 5%. With this knowledge in mind, the company can group the customers in terms of their preferred purchases and work more on ensuring availability of the required quantity.

The company can equally can group locations according to their specific choice of cement, which include blended cement, specialty cement, masonry/mortar cement and white cement. Through segmentation, the company can minimize the unnecessary advertisement and transport cost and instead direct the costs to quality production. b. How can Aget determine what the value of the product is in the customer’s mind? The level of satisfaction that a customer would receive after using the cement would only be noted when after the first purchase the customer comes back for more from the sales agents. This can also be noted when the customers show willingness to continue buying the product even with an increase in price. However, the customers can change suppliers when a new product comes into the market that is better developed.

For that reason, it is important for the company to use the sales agents on the ground not only to deliver products and reduce prices, but also to seek feedback from the engineers, who use wide range of products and can only be satisfied with the best quality of products. The company can then use the knowledge acquired from the field engineers to build up a better strategy to win the customers’ confidence. 6. If Aget does capture 20% market share in the markets of Lebanon, Kuwait & UAE, as estimated, at what sales – units and revenues – will it break-even? What is the B/E market share? The total investment the company intends to use is $ 6.3million Converted to € with the current exchange rate of $ 1 = € 0.80192 6.3 × 0.80192 = 5.052096 million €

Break Even Units = 5,052,096 / 12.23 = 413,090 units per mt
Break Even Revenue = 5,052,096 / 0.2664 = 18,964,324.32 € revenue
Break Even market share = 413,090 / 9.7mmt × 100 = 4.26%
7. In case Aget reduced price by 10%:
a. What effect would such price reduction have on Gross margin? COGS as sales Percentage = (286,247) / (390,215) = 73.4%
73.4% of the sales goes pays for COGS
Gross Margin = 100% – 73.4% = 26.6%
The 10% reduction in price estimating 1 € would mean
1 € – 0.1 = 0.9
0.9 – 0.734 = 0.166
0.166 / 0.9 × 100 = 18.44%
The price reduction will lead to a drop in the profit margin from 26.6% to 18.44% b. By how much must sales increase to avoid a loss in gross profit? Gross Profit = Profit margin × Sales
18.44% (Sales) = 103,968
Sales = 103,968 / 18.44%
Sales = 563,817
Percentage increase = (563,817-390215) / (390,215) × 100 = 44.5% In order to avoid loses, the company must ensure that they increase sales by 44.5% after making a decrease of 10% in pricing. 8. What can you say about the potential implications of such price reduction, upon the industry and the market? A decrease in the prices of cement would sound beneficial to the consumers in the short run as most of them would rush in order to buy more of it. In the long run, it would greatly affect the growth of the industry. First, because it is difficult to make a 44.5% increase in sales in one year of business operation. In addition to that, the competitors in the field may lose business and even become bankrupt, if they cannot manage the cost of production at such a low price.

With the closing of some of these businesses, the unemployment level would increase, which would affect the whole economy. The effect would at last bounce back to Aget by reducing the customer base that comprises of the middle and low class of citizens. However, with Aget remaining monopolistic after winning over its competitors with the price reduction, it can in turn increase the price excessively with the absence of the competitors that would make it hard for anyone to purchase the products. 9. How might a prospective 12% increase in operating efficiencies affect 2004 profitability? 12% increase in operation efficiencies = 67.9 × 12% = 8.15%

67.9 – 8.15 = 59.8% COGS / Selling and distribution expenses
= 281,405 + 4842 = 286,247
Material and freight = 12.4 + 19.7 = 32.1%
The saving attributed to 12% = 286,247 × 59.8% = 171,176
= 281,405 × 32.1% = 90,331
286,247 – (171,176 + 90,331) = 24,740
Gross Profit Margin = (Gross Profit)/ sales × 100
Gross Profit = 390,215-261,507=128,708
128,708/390,215 × 100 = 32.98%
There is a significant increase of the profit margin from 27.8% to 32.98%, which is a 5.18% positive increase. 10. Although cement is largely a commodity, does pricing affect demand in the cement industry? What are the relevant pricing economics? What conclusions could you draw? (Hint: Calculate the elasticity) Cement Demand Elasticity (2002) = (%ΔQ) / (%ΔP) = (4%) / (12%) = 0.33 0.33 < 1 this is an indication of a higher inelasticity.

Cross Elasticity (Fly Ash and Specialty Cement; 2004) = (%ΔQ) / (%ΔP) = (17%) / (9%) = 1.88 1.88 > 0 this is an indication that fly ash and fine cement can easily be substituted for each other. From these calculations, it can be noted that the stronger the inelasticity, the more the commodity is preferred, as compared to its substitutes. On the other hand, the higher the rate of elasticity, the more likely the goods can be substituted to each other. 11. Amidst a commodity product and a highly competitive market how can Aget escape the commodity trap? Cement is a product that is highly in demand and it has no substitute, which is making Aget face the competitors, who are also working to maintain their brand names.

In the event of commodity trap, the company should investigate what the causes of the commodity trap are, set controls that are appropriate to tackle the problem, and, finally, act in an effort to counterattack the problem. Such actions would include the application of market together with sales actions. Aget executive would also need to be innovative and upgrade their products for better quality that would create a difference. In addition to that, Aget can shift to markets segments where the commodity trap does not greatly affect it. The company can also improve on their supply chain and offer better supply services to their customers, hence maintaining the customer trust. Pricing would not help to survive the commodity trap, as the reduction in the price would only lead to shrinking in the profit margin. 12. What are the economics of transport acquisition by Aget? Total cost of Sales = 281,405 + 19,808 + 4, 842 = 306,055

COGS 75% of Production to be transported by own transport: 90% × 75% = 67.5% 67.5% × 306,055 = 206,587
19.7% × 206,587 = 40,698
The amount that Aget would save in the event that it purchases the freight is 40,698. New COGS = 281,405 – 40,698 = 240,707
New Gross Profit = 390,215 – 240,707 = 149,508
149,508/8.5mmt = 17.59€/unit
Net Gross Profit Margin = 26.6 – 38.3 = 11.7%
Break Even Value = 14.5m€/17.59 = 824,332mt
Break Even Revenue = 14.5m€/.383 = 37,9m€

13. How can Aget develop a profitable customer relationship, dealing in a commodity market? That is, can it prevent a market share decrease without cutting prices? Customer relations management is one of the best ways through which Aget can maintain its market shares without having to cut prices. The company can use the information that they have on the customers with regards to in the calls that they made make, mails they sent send and even the deals they made make in order to better understand the customer’s satisfaction needs. Customer relationship data in the company would be beneficial in ensuring that the organization has got the history of all the customers and their specific needs.

Also, the salesmen on the ground can be used by the company to collect vital information about the customers, which would help develop goals that are mutually satisfactory to the organization and the customers. This can be done by collecting the feedback from the salesmen and using it in developing a positive relationship with the customers. Communicating with the customers and responding to their needs is one of the ways through which customers develop trust in the company. Once the customers develop a positive feeling about the industry, they would be in a better position to develop loyalty to the products and still maintain and even increase the market share without really having to reduce the prices.