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Sealed Air Case Comments

Sealed air case is a comprehensive case that captures many issues that we have discussed in the marketing course. It is also one of the best selling marketing cases and I think for some very good reasons. Here are my comments on the case questions. Question 2: Sealed Air created value to its customers by building high performance (technical) product quality in its coated bubbles and by educating the customers about the benefits of coated bubbles through the educational efforts of its salesforce and its brochures. Sealed Airs salesforce also used consultative sales approach and provided problem solving advice to the customers. However, there are also indications that the company may be providing too high performance(technical) quality at least for some applications. The company created value for its distributors by the strength of its brand equity, the strong demand for its products and its helpful salesforce. The company also used selective distribution policy which meant less competition among distributors and thus this policy preserved the distributors profit margins. Question 3: There are several possibilities here. The important ones (not counting no response) are: Spend more resources in educating customers about the benefits of bubbles Launch uncoated bubbles Cut prices of the products most directly affected by the uncoated bubbles Provide additional services to the coated customers to offset the effects of lower prices of competing uncoated bubbles Develop intensive sales efforts directed at distributors with the goal of getting them to stay away from uncoated products Question 4: (In the discussion below, when I say GAFCEL, I mean GAFCEL and other similar producers who may come to the market.) In analyzing what part of Sealed Air's coated business will be threatened by the uncoated bubbles, we have to examine the price and performance of uncoated bubbles in comparison to various types of coated bubbles. We cannot go by thickness of the

bubble but the case provides assessment of how GAFCELs uncoated bubbles perform relative to Sealed Airs coated bubbles. The case states that in terms of product performance, GAFCELs uncoated bubble is comparable to ST-120 and SD120 lines for applications involving light objects. The case says that at higher loads, the cushioning curves of GAFCELs uncoated bubbles go above SB-110 bubbles. This does not mean that GAFCELs bubbles get better than SB-110 at higher loads but that they get worse than SB-100 at higher loads. What the case does say is that GAFCELs uncoated bubbles are as good as ST-120 and SD-120 coated bubbles. This means that for lighter applications, GAFCELs uncoated bubbles will compete with ST-120 and SD-120 lines. Now, SC-120 coated bubbles are worse and so are SB-110 and A-100. This means that all three 120 lines and SB-110 and A-100 face competition from these uncoated bubbles. When we look at the prices of all of these products, we discover that SB-110 and A-100 are actually lower priced than GAFCELs uncoated bubbles and hence they will not lose much share to the uncoated bubbles. However, the three 120 lines can lose sales to GAFCELs uncoated bubbles for lighter applications. Some of you have written that customers with purchasing department metality or price sensitive customer will buy the uncoated bubbles. That may happen. But sales of uncoated bubbles will NOT be restricted to only those customers. Customers where packaging engineers make the decisions will be perfectly happy buying these GAFCELs uncoated bubbles for light loads because in terms of product performance they are as good as the coated bubbles and of course they are significantly cheaper. Based on the case data, we can also conclude that the uncoated bubbles are unlikely to be a serious threat to the 240 or 480 lines because of the performance gap. We dont know the fraction of short/light applications in the total mix business that Sealed Air has. But the total 120 business can be an indicator of how big is the threat posed by the uncoated bubbles to coated bubbles. Based on the Table C and Table D data given in the case, the three 120 grades have the following sales and dollar contributions (profits) in the US. Grade Sales in Jan-June 1980 in thousands (% of total sales) 3,524.11 (27.9%) 2170.82 (17.2%) 2850.8 (22.6%) Dollar contribution in thousands (% of total contribution) 1858.46 (31.7%) 876.36 (14.9%) 1266.84 (21.6%)

SC-120 SD-120 ST-120

If you want to take a more global perspective on the nature of the threat, you can add an analysis of how uncoated bubbles are growing in Europe. However, we dont have data similar to Tables C and D for Europe.

Question 5: Some of you have written fairly long answers to this question. I am going to focus on some key issues here. Positive Outcomes: Salespeople will have additional products that can help them sell to customers/distributors who are looking for cheaper, uncoated bubbles. Negative Outcomes: Selling any additional product requires more efforts and leaves less time for the existing product portfolio. This product will be a new product so this will mean a lot more work for the salespeople. Sealed Air salespeople have all along been selling against uncoated bubbles and educating customers about why uncoated bubbles were not good for them. Now, if these salespeople try to promote uncoated bubbles as a good solution for any customer, the customers will wonder how the same salesperson recommended a higher price coated bubble in the past for the same application. This can call into question all the past consultations and advice that the salesforce gave to customers. Some of these customers may not be able to trust Sealed Air salesforce and their advice. Even if the salespeople are able to sell the uncoated bubbles, the salespeople may end up with lower commissions. This is because the uncoated bubbles will be lower priced than the coated bubbles that some of the uncoated customers would have previously bought.

Question 6: There are many arguments on both sides. Some of these arguments are fairly complex. Arguments for: As mentioned earlier, if we carefully investigate the case data, it becomes clear that for some applications customers needs would be met very well by the uncoated bubble. For example, for lighter loads, the uncoated bubble was comparable to the three 120 lines of coated bubbles. As customers discover this fact about uncoated bubbles, they are likely to switch to the uncoated bubbles and uncoated bubbles can potentially put a large part of Sealed Air revenues and contributions from this market at risk. Introducing uncoated bubbles can allow Sealed Air to retain these customers whose needs are met with uncoated bubbles. Note that these customers are not only price sensitive customers but also customers with light loads or short shipping cycles.

Trends in Europe give additional support to the above argument. Similarly, GAFCELs ability to get sales at the rate of $1 Million/year with only 1.5 salespeople from only the New York market is a strong indication that the uncoated bubble is going to be a strong competitor for Sealed Airs coated bubble business. As the case states, introducing uncoated bubbles would require no additional capital or R&D investment. In many situations, high-end companies like Sealed Air have a higher variable cost of production than low-end companies like GAFCEL. This cost difference could be a competitive disadvantage. It is important to note that Sealed Air does NOT have any variable cost disadvantage over GAFCEL. Just as Sealed Air would like to retain the customers whose needs are met with uncoated bubbles, distributors would also like to keep them by stocking uncoated bubbles. If Sealed air does not have uncoated bubbles, distributors may end up selling other companies (such as GAFCEL) uncoated bubbles. This would weaken Sealed Airs relationship with these distributors.

Arguments against are many. A major argument in favor of launching uncoated bubbles is that the company can lose as much as 68% of the profit contribution of the coated bubbles business to the uncoated bubbles. However, even if Sealed Air retains this business, it would get much lower price for this business. In other words, the low margin uncoated bubbles would cannibalize the high margin coated bubbles. To see the extent of cannibalization, lets see what would happen if the company launched uncoated bubbles and priced them comparable to GAFCELs bubbles. Lets say Sealed Air charges $36.03 for inch uncoated bubbles. From page 9 of the case, the variable production cost is about $21 and assuming the freight to be comparable to the 120 line, it would be $7.93, giving the total variable cost of $28.93. The contribution (profit) margin then is $7.10. In comparison, the SD-120 line has a margin of $65.35-36.31=$29.04. Thus, launching the uncoated bubble would mean a reduction of
$29.04 $7.10 = 75.55% reduction in the profit contribution dollars $29.04

for SD-120 line. These numbers dont look much better than Q4 numbers! Some distributors are already complaining about having too many products. Adding some new products may result in them cutting back on some of the coated products. As the company adds more products to the salesforce portfolio, the distributors will get less support from the salesforce which will make them unhappy. Distributors have been complaining about the reduced level of support since the launch of Instapack. Sealed airs position in the market is that of a technology leader. It has had a history of innovations. Now if it introduces, uncoated bubbles, it would be doing so after several smaller players have already done so. In other words, introducing uncoated

bubbles would mean introducing a me-too product. This could hurt the companys reputation and brand equity in the market place. Sealed Air can either create a new brand name for the new uncoated bubbles or keep the current name. If they keep the current name, there is going to be some confusion about Sealed Airs products and some dilution of the brand equity of the current name because the new product is so much different from the current products. Some of this problem can be mitigated if the company launched the uncoated bubbles under a different name. However, if the company adopts a new name, it will incur significant additional costs for building the awareness and overall equity in the new name. Note that this point is different from the previous point about innovation above. This point would apply even if Sealed Air was the first company to launch the uncoated bubbles. The previous point applies because Sealed Air is relatively late in launching the uncoated bubbles. Reading the first paragraph of the case, it is clear that the companys CEO (Dunphy) is very much focused on technological leadership and technical quality of the companys product. It will be very difficult for Hauser to do the inside sell to get Dunphy to agree to launching the uncoated bubbles. For years, Sealed Air has told the customers that coated bubbles are better than uncoated bubbles. How can the company now tell the market that for some applications, the uncoated bubble is as good as coated bubbles? Wouldnt these customers feel that the company deceived them for years? Wouldnt these customers have difficulty trusting the company in the future? The company will also lose its credibility as the technology expert in the marketplace. Note that this issue is different from confusion. This is about the trustworthiness of the company in the eyes of the customers. A similar situation may arise with respect to the salesforce. All this time, Sealed Air has taught its salespeople that coated bubbles are better than uncoated bubbles. If the company now tells the salespeople that uncoated bubbles equally good for some applications, the company would lose its credibility among the sales people. In other words, the salespeople may not have confidence in the company. There may be challenges in getting the salesforce motivated for the new product. If the salespeople have to sell the lower priced bubbles (that are replacing the higher priced bubbles), then their commission income will get reduced.