Reference no: EM132471471
Holderberg Cement Co. has been approached by a firm that wants to acquire Holderberg's B Plant, the smaller of the 2 cement plants. The B plant is currently idle. The prospective buyer has no interest in the cement business and plans to tear down the plant and use the land for other purposes.
Jane, head of Holderberg's Planning Group asked Caine, a recent MBA, to come up with a preliminary assessment of the sale for the next day's Planning meeting. While Caine was pleased at the responsibility given to him, he was concerned that the time-frame would put a significant limitation on the amount of information he could collect to support his analysis. Caine knew the following facts:
- Holderberg had an 8,000-ton per year plant (Plant A) and a smaller 2,000-ton per year plant (plant B). The smaller plant was currently idle. Holderberg's only competitor was Cemex, which operated a single 20,000 ton plant
- At current prices there was significant over-capacity. Over the last 5 years each firm had been producing at 50% of total capacity (Cemex 10,000 tons and Holderberg 5,000 tons). There was no difference in the quality of cement from any of the 3 plants, and all the three plants were equally efficient.
- Relative to variable costs, the fixed costs were negligible. The current market price for cement was $5 million per 1,000 tons of cement sold. Variable costs were $2 million per 1,000 tons.
- Marketing had indicated that lowering the price by 20% while the other firm maintained its price at $5 million would likely shift half of the other firm's demand to the firm with the lower price. If both firms lowered the price to $4 million, each would maintain its original share of overall demand. Holderberg's marketing team believed that the marketers at Cemex held the same view. Unfortunately, Holderberg's marketing was unable to commit to an estimate of how much overall demand would change with the lower price.
Based on this information demand responsiveness, cost and capacity, Caine made a number of calculations showing profit implications of various pricing actions by both players before and after sale of Plant B. For the purpose of his initial calculation, he assumed no overall demand increase with lower price.
Holderberg's B plant had not been run for a few years and, while there disagreements within the firm about what to do with the plant, few now believed that the overall demand for cement in this region was likely to increase. At first Caine thought that it was only necessary to determine an appropriate market value for the plant and the land of Plant B. But when Caine asked some of the more experienced members of the Planning Group why the plant had not been previously sold, he was told that the capacity might have played a role in pricing dynamics. Despite chronic over-capacity in the industry, pricing had been remarkably stable. Each company currently had market shares in direct proportion to its capacity. Caine wondered if the sale of this idle plant would impact the price of cement or Holderberg's share of the market.
- Assume you are Caine. Analyze the case and generate a report to the management of Holderberg giving them your recommendation about the sale of the B plant. You must understand the pricing dynamics in the industry and use game theory to make your recommendation.
- Taking the learning arising from this case, present another real life business example where this learning was used or could have been used.