( Case Study 11 J

• Saragani Aluminium Limited*

•

Mr Krishna Kumar, Vice-President, Marketing, of Saragam Aluminium Limited

was considering the type of pricing strategy and policy that would be effective for
the new aluminium extruded products that were to be launched in the Indian
market in December 1991.

TH E COMPANY
Saragam Aluminium Limited (SAL) had invested Rs 1O crore for manufacturing
and marketing of aluminium extruded products. The factory was located at
Hosur in Tamil Nadu, and the marketing head-office was located 38 km away
from factory at Bangalore. The managing director (MD) of the company had
visited various countries in the early 1990s for selection of the extrusion press
and its accessories, which were critical equipment for the manufacture of
aluminium extrusions. The order was finally placed with a French supplier for
the supply and installation of the press and accessories at a cost of Rs four
crore. The MD had earlier recruited the works manager, design engineer,
materials executive, financial controller, and personnel manager-all of whom
were reporting to the MD directly. In August . 1991, Mr Krishna Kumar, Vice-
President (Marketing) was recruited, reporting directly to the MD.

MARK ET SURVEY
Mr Krishna Kumar felt it necessary to carry out a market survey to
understand consumer buying behaviour, market potential and competitors'
analysis to make more effective marketing decisions. Aluminium extrusion
was a new industry for Mr Krishna Kumar, who was basically an electrical
engineer and a management graduate with 15 years of experience in
electrical , air-conditioning and refrigeration industries. He decided to carry
out the market survey in southern and western regions of India, where he
decided to focus the company's marketing efforts initially. The two marketing
executives, who were recruited by the company, were involved in carrying
out the field work of data collection, under

• This case is prepared by Prof. Krishna K Havaldar for class-room discussion .

Case Study 11 363

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the guidance of Mr Krishna Kumar. The major findings of the market survey,
carried out in-house, are outlined below:

Customer and Demand Analysis

The Customer (Market) segments, who require aluminium extruded products
were household consumers , commercial enterprises, government
organisations , and instilutional customers. Industrial buyers considered
aluminium extrusion products as "capital items", where they were used as door,
window, and partition frames. However, extrusions were also used as
"component parts" in the manufacture of electrical control panels, water
purification equipment, computers and electronic equipments (as heat sinks).
The household consumers, who used aluminium extruded products mainly for
window and door frames, were extremely price-sensitive. Aluminium frames for
doors and windows, although costlier compared to wooden and steel frames,
were more elegant looking, rust-free, but less strong than steel. The industrial
customers like commercial enterprises and institutional customers were less
sensitive to prices. However, government organisations had a policy of
purchasing from the lowest priced suppliers . The market potential of various
market segments as a percentage of total market demand is shown in Exhibit
1.

Exhibit 1 Market Segments, Market Potential and Price Sensitiveness

for Aluminium extruded products in Southern and Western
Regions
Mar Segmen"ts 1\ MarJcet Potential (%) II Price Sensitiveness
ket
Household consumers 50 High
Com mercial enterprises 20 Medium
Institutions 10 Medi um
Government organisations 15 High
Cooperative societies 05 Medium
100

Competitive Analysis
There were seven players, manufacturing and marketing aluminium extrusions
in India. None of them was an MNC, but the market leader was Jindal
Aluminium, with its manufacturing unit located at Bangalore.Jindal Aluminium
was a national player serving all the markets in India. Other large scale
national players were primary aluminium manufacturers of ingots and billets,
like Hindustan Aluminium Ltd. (Hindalco), National Aluminium Company
(NALCO} , and Bharat Aluminium Company (BALCO), who also manufactured
small quantities of aluminium extruded products. However, their major
concentration was on primary products
364 IndustrialA1arketing

like ingots and billets. The secondary manufacturers (i.e. manufacturers of

secondary products like aluminium extrusions) were four, out of which only
Jindal Aluminium was a national player and others were local players.
The findings of the market survey indicated that based on consumers'
perceptions, Jindal A luminium ranked first in product quality, followed by
Hindalco and Nalco. On delivery/availability, the rankings were as shown in
Exhibit 2. However, there was a difference in the pricing, based on total cost of
various suppliers.

Exhibit 2 Competitive Analysis

Competitors Primary/ ., Quality Delivery/ Relative

q
Secondary Ranking Availability Price
:, Manufa'!urer !I Ranking ,Comparison
1. Ji ndal Alumi nium Seconda ry 1 1 110
2. Hindalco Pri mary 2 5 105
3. Nalco Pri ma ry 3 6 105
4. Balco Pri ma ry 4 7 105
5. Ma n. Alu mi niu m Seconda ry 4 2 107
6. Ba ngla Aluminiu m Secondary 5 4 107
7. M P Alu minium Secondary 5 3 107

The Secondary manufacturers focused more on household consumers

with thinner (less thickness of 0.8, 0.9 and 1 mm) aluminium sections, which
were purchased on weight basis of Rs 80,000/- per ton by the dealers, but sold
on rupees per meter basis. Industrial buyers preferred thicker aluminium
sections as these were considered as stronger and superior in quality. Primary
manufacturers mainly concentrated their marketing efforts with commercial
. enterprises, and government organisations.

Cost Analysis
The basic problem of all the secondary manufacturers was the (variable} cost of
aluminium billets (i.e. small aluminium bars as basic material used for
extrusion), which was purchased from the primary manufacturers, who were
also their competitors. The minimum difference in the cost of aluminium billet
between primary and secondary manufacturers was six to seven per cent (i.e.
four per cent CST + two to three per cent transportation and handling costs).
The fixed costs (overheads) of primary manufacturers were considered to
be higher than secondary manufacturers, and hence, the difference in prices,
as shown in Exhibit 2, was much less as compared to the difference in the cost
of aluminium billets. The information on other costs like marketing, direct labour,
factory supplies, etc. of various extrusion manufacturers was not available.
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Pricing Objectives
Saragam Aluminium pricing objectives were derived from the corporate and
marketing objectives, which included (a) achieving long-term profits and
(b) maximising sales volume and market share respectively. The pricing
objective as stated by Mr Krishna Kumar, was to achieve market penetration
through low initial price strategy. He justified a low initial pricing strategy to the
management by pointing out several market survey findings and these included:
(i) various market (customer) segments were medium to high levels of price
sensitive;
(ii) competition was severe from primary and secondary manufacturers; and
(iii) as the production and sales volume increase, the unit cost will come down
leading to achievement of long-term corporate and marketing objectives .
On receiving the recommendation from Mr Krishna Kumar, the managing
director called a meeting of key executives like works manager and financial
controller to decide on the pricing strategy. In the meeting, the financial
controller argued in favour of "skimming strategy" through high initial price,
which would give advantage of recovering the investment sooner by generating
larger profits. The works manager said that the workers and production
supervisors were new to the extrusion technology and the concept of
experience (or learning) curve will be applicable, in terms of decline in cost per
unit, after accumulated experience of production over a period of six to 12
months.
The finance manager pointed out that the break-even volume was
estimated at 350 tons of production and sales per month, and wanted to know
when would it be achieved. The managing director intervened to observe that all
these points were important, but it was necessary to take a decision on the
company's pricing strategy and policy immediately to enable Mr Krishna Kumar
to plan marketing efforts.

1. Analyze the marketing environment for Saragam Aluminium.

2. Analyze the nature of competition and its implication on Saragam
Aluminium.
3. If you were the MD of the company, what would be your pricing
decisions? Give reasons for the same.