Terra Firma - Case Analysis and Recommendations

Unfortunately, the 2010 Kogod Case Competition had to be cancelled due to the imminent blizzard. However, I’d like to share my group’s thought processes and ideas. The most important things to focus on were plausibility and creativity. While it was important to address the obvious, we also tried to develop suggestions that would set us apart from other groups.

My group identified three critical issues:
• Box-It’s financial situation is too confusing to its owners
• There is the potential for expansion that is not being utilized
• The chain of command is unclear

Under Box-It’s old accounting system, all boxes were expensed and priced the same. This inefficient pricing strategy (about $1.10 per box) has caused the company to lose customers. For example, the Swiss suit company which recently cancelled their account with Box-It was being overcharged. We calculated that the marginal cost of producing one unit for this company was only 43 cents. This rose to 74 cents in total costs when a fair amount of fixed costs were added. As such, Box-It could reduce its price on these units from $1.10 to about 88 cents. This is a large enough price reduction that it would probably satisfy their customer, while still allowing Box-It a healthy profit margin of about 16%. We recommend that Box-It immediately contact this customer and notify them that Box-It has lowered its prices.

More generally, Box-It has made no effort to distinguish between customers or types of boxes. Low-end boxes are commodities, and therefore are extremely price-sensitive. The company should not expect as high a profit margin from those boxes as they do from high-end boxes that are less price-sensitive. Also, the company needs to be aware of the cultural differences between its European and Moroccan clients. While Europeans are used to fixed price tags, Moroccans are not. Therefore, Box-It should mark up its products for Moroccan consumers so that the company can maintain its target profit margin after haggling.

Additionally, the new costing system showed that raw materials were not as expensive as Hassen feared. As such, there is no need for a new recycled paper plant. The price of raw materials is simply not a significant problem for Box-It. Additionally, we believed it to be unwise for Box-It to take on any more debt. While the company’s current debt load is manageable, many corrugated manufacturers have no debt at all, putting Box-It at a competitive disadvantage. The company is simply not leveraging its existing resources enough to justify even the current level of debt, let alone taking on more. Therefore, we recommend that Box-It takes the money it had set aside for the new paper plant (25% self-financed) and use this money to pay down its debt.

However, merely pointing out the financial flaws of the paper mill is unlikely to be effective, since Hassen is obviously attached to the idea. Instead of merely shooting down his idea, we believe it would be more effective to get him excited about other expansion opportunities that make more financial sense. The most lucrative of these are high-end services like multicolor printing, bleaching, and waxing. The transformation process is the only way for a corrugated manufacturer to differentiate itself, as the production process is almost entirely commoditized. As mentioned before, high-end boxes will also generate a higher profit margin. Box-It needs to purchase new machines with these capabilities, so that it can brand itself as a high-quality manufacturer. It will not need to take on additional debt to finance them; the company already has many machines that are not being used efficiently at all. It has ten transformation machines, many of which can transform 10,000 boxes per hour. An extremely conservative estimate is that Box-It can transform 10 million boxes per month, even though its monthly sales are less than 1 million boxes. We recommend selling the six least efficient transformation machines, and using this capital to buy machines with multicolor, bleaching, and waxing capabilities.

Box-It also needs to expand its customer base. One important thing to remember is that Box-It’s location in Morocco both helps and hinders it. The cost of shipping cardboard over large distances is prohibitive. Therefore, there is no hope that Box-It could find customers in the Western Hemisphere. In the United States, for example, there is a corrugated manufacturer approximately every 150 miles due to high shipping costs. The only reason Box-It is even competitive in Europe is because its high shipping costs are offset by lower labor costs than its European competitors. Therefore, it is important to remember that Box-It’s primary customer base is geographically constrained to Morocco, Spain, Portugal, Italy, southern France, and Switzerland.

Fortunately, there is a large industry in Southern Europe which uses over a billion corrugated boxes per year: Pizza delivery. We recommend that Box-It form a strategic partnership with TelePizza, which is the largest pizza delivery chain in Spain, and also operates in Portugal, Morocco, and France. This is an extremely high-volume industry, and Box-It’s cheap labor costs and close proximity to TelePizza will give it a huge competitive advantage. We estimate that this new revenue stream could increase Box-It’s annual net profit by as much as $600,000.

Finally, we come to the issue of management style. This is an extremely delicate subject to address, since we need to change some of Hassen’s management techniques without offending him. Our group decided that the best way to address this issue was to praise Mr. Abdul’s vision for the company and his skills at dealing with his employees, rather than to criticize Hassen for lacking those things. By couching it as praise rather than criticism, Hassen should be able to read between the lines and recognize that we believe those traits are desirable in a manager.

One source of conflict within Box-It is that no one really knows whether Mr. Abdul or Hassen is in charge. From the case background, we can assume that Mr. Abdul is at least in his mid-60s and may be looking to retire soon. Since Hassen is now in charge of the daily operations but Mr. Abdul hovers over him, most employees do not know whom to obey. They cannot defy Mr. Abdul since he clearly sits atop the chain of command, but they also cannot defy Hassen since they know he will one day inherit the company. Therefore, we think it is preeminently important that the two agree on a succession plan. We designed such a plan for them. When it begins is entirely up to Mr. Abdul.

We recommended that Mr. Abdul plan for his retirement three years in advance, to give Hassen time to adjust to his new position and to preserve continuity in the company. In Year 1 of the plan, Hassen remains in charge of the daily operations while Mr. Abdul remains in charge of the overall strategy for the company. During this time, Mr. Abdul would teach Hassen about his strategic thought process, and the two would discuss strategic issues together although Mr. Abdul would have the final say. During Year 2, Hassen would remain in charge of daily operations but play a greater role in strategy. The two would still discuss strategic issues in depth, but Hassen would have the final say. In Year 3, Mr. Abdul would take on the role of a trusted advisor whenever Hassen needed guidance on strategic issues. Mr. Abdul would be able to take planned absences to leave the company in Hassen’s capable hands. Finally Mr. Abdul would fully retire at the end of Year 3.

These are our group’s recommendations, core issues, and presentation strategies. Any feedback or criticism of our ideas is most appreciated.