Mid-Term Case Analysis
Arborite
STRATEGY 669 Winter 2007
Group 15
Jiji George
Gilles Monniaux
Taro Nagao
Nanda Rajanala
Sharad Srivastava
Q1. What do Porter’s forces say about the industry?
The analysis has been conducted for the Canadian HPL market only as that was the focus of this case.
Based on our analysis of this industry using the five forces framework, we concluded that this industry was
not attractive. The detailed analysis used for this conclusion is presented in Exhibit 1 of this paper. The
reasoning behind our diagnosis is given below.
Barrier to Entry (High): The market for the HPL in Canada is about 100 Million dollars. Assuming a
high net margin of 20%, the total profits of the industry will be about 20M. The investment for a new
plant is 70 million dollars. If an entrant company has about 10% of the share (compared to the incumbent
share of 35%) the profit for the company will be about 2 M. Ignoring the discount rate, it will take about
35 years to recover the cost of the new plant. This shows that the industry is capital intensive and it will be
not an easy decision for a company to enter this industry. Additionally the plants are a scale intensive
investment. For a 250 million sq ft plant the rate per square feet comes to 0.25 whereas for an 80 million
sq ft facility this rate is 0.43. The variable cost of this smaller plant is also about 150% of the bigger plant.
So a new player trying to enter the industry with a smaller plant faces huge cost disadvantages. The other
individual processes also seem to be scale intensive as evident from the importance of MES at each level of
value chain. The government duties also make it difficult for small players to enter Canadian market.
WilsonArt and Formica are able to overcome these barriers as they had attained a certain scale in
manufacturing and procurement. The product differentiation in this market is mainly based on delivery
service and it might be difficult for a new entrant to make easy inroads.
Industrial Rivalry (High): The industry growth rate in Canada is very low, about 2% and there are three
large companies competing for this market. These three companies have about 82% of the market share.
HPL is more of a commodity than a differentiated product as exhibited by the fact that architects and
OEM can change the brands of the HPL very easily in the job driven sales. In the inventory driven market
the most important factor is the price. As a result of the rivalry in this industry, HPL prices have been
decreasing continuously since 1971.
Supplier Power (High): The three main inputs to the industry are resins, cover paper and core stack
paper. Resins are commoditized, the prices are decreasing over the years and the suppliers have to resort to
value added activities for the buyers in order the get the business. So we can conclude that the resin
suppliers have low power. Cover paper and core stack paper account for 33% of the cost of the HPL.
The core stack industry consists of two players and they did not offer any discounts to the HPL
manufacturers. Although three players dominated the cover stack market, they gave about 50% discount
on volume. A possible explanation is that the changeover process or delivery in the industry is scale
intensive. This discount gives huge cost advantage to the big players in the HPL industry. There is also no
clear substitute for the papers for the HPL industry and the quality of the input makes a difference to the
final product. Hence we conclude that the paper suppliers have power over the HPL manufacturers.
Threat of Substitute (High): There are five substitutes available for HPL in the market. Of the six
market segments, HPL has a clear advantage in the post forming segment and that too because of the lack
of competition there. In the kitchen cabinets and custom designed segments, the HPL advantage over the
substitutes is not significant. All substitutes other than Veneer are lower in price and this might put a
downward pressure on HPL manufactures if they want to capture market share in different segments. The
total usage of HPL also is much lower than other substitutes.
Buyer Power (High): The two distinct buyers in this industry are the job driven buyers and the inventory
driven buyers. The job driven purchases are driven by OEMs and architects who are not price conscious.
The choice of the HPL was made more on the appearance. The architects contracted with OEMs.
Architects selected HPL based on appearance, reputation of the manufacturers for product availability,
performance and the delivery times. However a failure to meet these criteria led to the OEMs switching
between different brands. This switching seems to be easy and a common practice. For the inventory
driven buyers, price was the most important factor in choosing HPL. The post formers don’t seem to be
doing that well as an industry resulting in further price pressure on the HPL manufactures. Moreover, the
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dealers and the distributors have limited shelf space and keep only one brand and popular colors with them.
This way they will have a lot of power in terms of bargaining with the HPL manufactures, putting another
pressure in terms of prices.
Q2. In order to understand what value HPL create for buyers, we must first define what we mean by value.
Value here means the difference between the HPL and the next best alternative. The next step is therefore
to understand the needs of these buyers and then analyze how HPL and their substitutes perform on the
fulfillment of those needs.
The HPL buyers can be put in two main categories: job driven buyers and inventory driven buyers. Since
these two groups differ in many of their needs, it is necessary to look at each sub-group individually. In fact,
the only need that all those buyers have in common is “product performance” which could be defined as a
mix of durability, reparability, pliability and delivery without chipping or breaking.
Inside the job-driven group itself, there are two distinct decision makes and each has its own criteria (See
Exhibit 2A). On the one hand, the architects and designers are the ones who specify the use of HPL
(they play the role of a gatekeeper between the HPL industry and the end-customer). As the cost of HPL is
not relevant for them and they are not directly responsible for the finishing the project, they only care
about emotional attributes, namely the product variety and the product appearance as reflected in its color,
texture, design. On the other hand, OEMs have to buy the HPL to use it in a time sensitive projects. As a
consequence, they are mainly concerned about the “product availability” as a low availability could lead to
delays.
Inside the inventory-driven group, there are three different buyers. The dealers who buy HPL or HPLmade objects are mainly concerned about prices as the activities in their HPL value chain are simply “buy,
store and sell”. On the other hand, distributors are in the business of delivering HPL and OEMs are in
the business of transforming them, two activities that need reliable supply of HPLs. Consequently
availability is their main concern.
Having identified the five attributes buyers are looking for in HPL-like products (variety, appearance,
availability, performance and price), one can compare how HPL and their substitutes perform on those
attributes (see Exhibit 2B). One of the results is that the main attributes on which HPL and non-HPL
compete are appearance, performance and price. Plotting the positioning of each material along the first
two criteria (see Exhibit 2C) allows one to see that HPL have a very distinct positioning: higher prices but
market-leading performance and very reasonable appearance (see Exhibit 2D). This unique differentiation
is what allows HPL to create value for those buyers who have the mix of needs on which they are
positioned.
Q3. A comparison of the strategic positioning of the three companies is presented in Exhibit 3A. In summary,
Arborite has a strong presence in the inventory-driven segment, WilsonArt focuses in job-driven segment,
and Formica is in the middle of the other two, targeting both segments. Each company’s strategy and
sustainability of its competitive advantage are discussed below.
Arborite
Product-market domain: With its basic and relatively undifferentiated products, Arborite has a strong
presence in the inventory-driven segment in Canada. Customers in this segment are characterized as
follows. First, their needs are concentrated in basic products (“bread and butter colors”). Second, their
purchase amount is highly predictable every month. Third, they are not willing to pay premium for better
appearance, high quality, or quick delivery. Finally, they are highly price sensitive.
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Value proposition: Arborite provides value to customers by offering its products for low prices; it keeps
product costs low by eliminating attributes that are unnecessary to the target segment.
Set of activities: This strategy is well-implemented in Arborite’s marketing activities: it does not advertise its
products, does not spend much on distribution of samples, and stays away from investing in “innovative”
products. Consequently, Arborite enjoys significant cost advantage in marketing (See Exhibits 3B and 3C
for the detailed comparison).
On the other hand, Arborite fails to achieve any cost advantage in the other areas: operations, outbound
logistics, and firm infrastructure. Operation costs are inflated mainly because 1) Arborite lacks scale on
purchasing 2) both Toronto and Montreal plants operate at low capacity utilization, and 3) Montreal plant
is equipped with old, inefficient technologies. Outbound logistics costs are inflated by producing large
number of colors and grades, which may be unnecessary for target customers. Two-layer management
structure brings an additional cost disadvantage to Arborite. These activities are not consistent with
Arborite’s strategy of cost focus.
Sustainability of competitive advantage: Arborite’s operating costs are 9% higher than Formica, even
though Arborite is considered lower quality. For the reasons discussed above, Arborite is not located on
the efficient frontier; it does not have a competitive advantage in the industry.
Formica
Product-market domain: As a largest producer of HPL in the world, Formica targets both job-driven and
inventory-driven segments in Canada.
Value proposition: Formica provides value to customer through its extensive marketing capabilities
(customer focus, innovative products, frequent sales call).
Set of activities: In marketing, Formica leads the industry in such areas as customer relationship
management (210 sales representatives make frequent calls), marketing research (sophisticated customer
preference transmission system), and promotion (regularly distribute samples and pamphlets).
The company reduces operation costs by fully utilizing economies of scale both at the corporate level
(coordinated purchases of materials) and at the plant level (high capacity utilization). In addition, Formica’s
operations are highly automated with cutting-edge technologies, further diminishing costs.
Sustainability of competitive advantage: The strengths mentioned above are, however, highly vulnerable.
First of all, operation procedures can be easily imitated. Indeed, WilsonArt operates more efficiently than
Formica (38.7 vs. 39.9 cents per square feet), and Arborite’s new Toronto plant (45.1) is almost as efficient
absent the difference in scale on purchasing. Secondly, Formica’s marketing activities are not tightly linked
to each other (compared to WilsonArt, discussed below) and are relatively easy to imitate. Therefore, the
competitive advantage of Formica is not sustainable in the long run.
WilsonArt
Product-market domain: WilsonArt concentrates in the job-driven segment in Canada. Customers in this
segment are characterized as follows. First, availability of products is critical to them. Sometimes OEMs
requires products to be delivered in two to three days. Second, their buying decision is affected by wide
range of product attributes, such as colors, patterns, textures and grades. Third, they are less price sensitive
than inventory-driven buyers.
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Value proposition: WilsonArt provides value to customer by committing to extensive service and shorter
shipping time.
Set of activities: WilsonArt put significant resource on development and maintenance of distribution
capabilities. The exclusive relationship gives dealers incentive to carry high level/variety of inventories,
making quick deliveries possible. In addition, the customer service and support standards can be followed
more rigorously in the exclusive dealership, which is aligned with needs of job-driven customers.
Although the distribution strategy significantly increases WTP of the job-driven segment, it also brings
significant costs. To offset the cost increase, WilsonArt is involved in various cost-cutting efforts in
operations and marketing (“WTP-arbitrage”). In operations, the company fully utilizes economies of scale
both at the corporate level (coordinated purchases of materials) and at the plant level (high capacity
utilization). Its plants employ current, efficient technologies, and use cheaper materials when possible (e.g.
thicker core stock, only one separate sheet). In marketing, WilsonArt does not invest in innovation. Instead,
it copies what Formica developed. Consequently, its products cost less than competitors’ (net of tariffs).
Sustainability of competitive advantage: For competitors, WilsonArt’s strategy is hard to imitate for the
following reasons. First, WilsonArt’s activities are reinforcing each other in a complex way. For example,
its quick delivery capabilities are enabled by maintaining exclusive dealership network, employing
sophisticated order processing system, carrying high level of inventory, and owning its fleet of trucks.
Copying one or two of these activities will not help competitors achieve the same level of service. Second,
competitors have been locked-in to certain types of activities such as non-exclusive, large distribution
network, and it is difficult to reverse them and redevelop new activities. For the reasons mentioned above,
WilsonArt has a sustainable competitive advantage in the job-driven segment.
Q4. Arborite should concentrate in the inventory-driven segment because 1) the needs of the segment fit with
Arborite’s capabilities (old technologies, no marketing), 2) the segment is not yet preempted by either
WilsonArt or Formica, and 3) significant demand (42% of HPL buyers) is identified. To obtain a
sustainable competitive advantage in the segment, we recommend Arborite to take the following actions.
First, Arborite should close its Montreal plant because operation costs in Toronto are significantly lower
(45.1 vs. 51.5 cents per square feet). This will increase the capacity utilization of Toronto plant from 30%
to 52%, further reducing unit costs. Resulting potential increase in delivery time will not be a problem,
since inventory-driven buyers are typically willing to wait 3 to 4 weeks. Second, Arborite should seek to
export its products to the U.S. to further increase capacity utilization and diminish the scale disadvantage
on purchasing. Third, Arborite should use cheaper materials wherever possible, because use of high-quality
materials does not increase WTP of inventory-driven buyers. This includes uses of thicker paper (0.3 cents
per square feet) and only one separate sheet per press (0.3 cents). Fourth, Arborite should reduce variety of
products offered, as most inventory-driven buyers purchase only basic "bread and butter" on a regular
basis. By focusing on core products, Arborite will be able to reduce costs in pressing and outbound
logistics while maintaining WTP. Focusing on core products also makes demand more predictable,
improving efficiency of plant operations. Fifth, Arborite should reduce the fixed cost in the West (where
its scale is less than MES) by outsourcing the warehousing operations. Finally, Arborite should simplify its
management structure. Simplified operations (only one plant) will reduce the number of management
layers and functions needed.
These activities are complementary to each other and hard to imitate for competitors. For example, it is
difficult for Formica to reverse its commitment to the innovation and cut number of products. Similarly, it
is difficult for WilsonArt to intentionally reduce its perception of high performance, availability and service.
Therefore, the strategy developed above is likely to give a sustainable competitive advantage to Arborite.
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Exhibit 1 Industry Analysis
STRUCTURE
Number of firms


Rate of growth of
industry

Nature of Product 
Switching Costs

Cost Structure

Diverse Business

Exit Barriers

Number and
concentration of
Suppliers




Substitutes
available


FACTORS
EFFECT and CAUSAL LOGIC
INDUSTRY RIVALRY (HIGH)
Fewer firms - Arborite, Formica, and
 Positive effect on Revenues
Wilson Art control 80% of market
 Smaller number of firms makes price
Fairly consolidated industry
wars less likely (tacit collusion
argument)
Slow – roughly less than 2% growth
 Negative effect on Revenues
 Lack of growth means only way to
grow revenues in by increasing market
share. This in turns leads to price wars
and revenues reduction.
 Market not attractive
Largely commodity based (Specialty in
 Negative effect on Revenues
some cases depending on buyer)
 Low product differentiation means
competition largely based on price,
leading to lower price of products
Low for the most part – buyers had
 Negative effect on Revenues
choice to select different HPL
 Increases the value of the next best
manufacturers based on quality or
alternative (which is reduced by
delivery speed
switching costs) and therefore reduces
value of HPL and buyers’ WTP –
affects ability to price or sell products
leading to reduced revenues
High variable costs – labor intensive
 Positive effect on Revenues: no one can
processes, volume based production
price above MC which is high due to
variable/fixed artio
 Volume determines extent of revenue
generated
Except for Wilson Art, diversity of
 Lesser category of products to sell
business is absent
leading to lower revenues
Capital intensive business
 Decision to sell assets may not be easy
SUPPLIER POWER (HIGH)
Two main raw materials – resin and
 Negative effect on Costs
paper
 Resin: Low bargaining power of
For chemicals used in resins or presupplier – lower costs for HPL
mixed resins—supplier power is low;
manufacturers
low prices or bulk prices were offered.  Cover Paper: greater bargaining power
Paper was the main driver of the
of supplier over HPL manufacturers –
demand for resin
costs will be high for HPL
Paper – Cover paper and core stock
manufacturers; however volume
paper. Cover paper – monopolized by
discounts are given to them
three suppliers, high cost item
 Core Stock: High bargaining power
Core Stock – Heavily monopolized,
over HPL manufacturers – costs will be
only two players, strong bargaining
very high for HPL manufacturers
power with high prices and no volume
discounts
No substitutes for raw materials
 Negative effect on Costs
provided by suppliers
 Lower bargaining power for HPL
Resin and paper manufacturers serve
manufacturers leading to high costs of
5
HPL manufacturers among several
other industries
 Valuable
Materiality of
product to your
value chain
(criticality of
input)
Threat of forward  None
integration
Initial Capital
Requirements



Economies of
Scale


Government
Influence

 Negative effect on Costs
 Raw materials provided are vital link in
value chain, hence cannot be eliminated
– higher costs of raw materials
 Positive effect on Costs
 HPL manufacturers have lesser
competition as threat of new entrants is
not present from suppliers – higher
revenues possible due to lesser players
in market
BARRIERS TO ENTRY (MEDIUM)
Highly capital intensive process
 Positive effect on Profits
High investments for new comers - $70  New entrants have high costs of entry
million investment (compare to
in turn discouraging them from entering
expected annual profit)
the industry – better market position
for incumbents
Extensive distribution network is
difficult to replicate
Volume driven processes led to greater  Positive effect on Profits
emphasis on scale economies in
 Scale comes here from bargaining
industry
position rather than from allocation of
Economies of scale inconsistent among
fixed costs
different players – Wilson Art was
 There is some challenge to new
better compared to Arborite
entrants in matching the scale
(Operations cost was 38.7 compared to
economies of some incumbents – as
48.5 for Arborite)
HPL products cannot necessarily be
sold at a premium price, new entrants
will find it difficult to gain revenues
 Incumbents with scale economies will
have lower operational costs and better
profits
Mostly no government interference
 Positive effect on Profits
except for some trade tariffs between
 Trade tariffs reduce incentives for new
US and Canada (4% for Canada to US
comers to enter the Canadian market –
and 13.5% from US to Canada)
higher costs involved in carrying out
operations
 Greater revenues through better share
of the Canadian market for incumbents
There is some absolute cost advantage -  Positive effect on Profits
experience in the production process
 Difficult for new comers to achieve
leading to greater volume production,
scale in production, so high costs
especially in labor intensive lay up and
finishing processes
Absolute Cost

Advantage Patents or
Proprietary
knowledge/Exper
ience
Product
 Low
Differentiation
Number and
raw materials
 Negative effect on Profits
 Easy for new entrant to create product.
 Less price margins and hence lower
revenues for incumbents
BUYER POWER (HIGH)
 High and with specialized needs,
 Buyers have the upper hand in setting
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concentration of
buyers
multiple processes define different
price points leading to reduced
buyer segments
revenues for HPL manufacturers
 Fragmented
Criticality of input  Most buyers need HPL as only a part of  Negative effect on Revenues
their bigger projects
 Less reliance to some extent on HPL
 Not dependent on any particular HPL
products – greater choice of substitutes
manufacturer - certain products do not
and bargaining power on price leading
require sophistication and hence can be
to lower revenues for HPL
obtained anywhere
manufacturers
 Exception is that HPL is 35% of costs
for post formers, but they are
performing poorly or exiting the
business
How well
 Good for the most part – job driven
 Negative effect on Revenues
informed are
buyers used network of architects and
 Greater information discounts the
they?
distributors
advantage HPL manufacturers may
have in raising prices or gaining other
cost benefits that will not be passed on
to the buyer
Ease of switching  High
 Negative effect on Revenues
 Buyers switching between suppliers
puts a pressure on price and the
revenues that HPL manufacturers can
gain
Ability to
 High – Some buyers such as specialized  Negative effect on Revenues
purchase
manufacturers constituted 49% of the
 Greater bargaining power leading to
significant
sales for HPL manufacturers
price discounts on bulk purchasing
proportion of
leading to lower revenues for HPL
output
manufacturers
Product
 Mostly a commodity based product
 Negative effect on Revenues
Differentiation
 Buyer has no incentive to pay higher
price for such products resulting in
lower revenues for HPL manufacturers
Threat of
 None - HPL manufacturing is not an
 Positive effect on Revenues
backward
attractive investment for them.
 Some concession for HPL
integration
manufacturers to have control over
their market share and existence in the
industry – hence better revenues
THREAT OF SUBSTITUTES (HIGH)
Number and
 High – there were 5 different substitute  Negative effect on Quantity
concentration of
products each with their own share of
 More substitutes leads to greater choice
substitutes
the HPL markets
for buyer to select between products –
lesser power in raising prices and hence
lower revenues for HPL manufacturers
Demand for
 High for products such as Vinyl,
 Negative effect on Quantity
substitutes
Veneer and Paper in some applications  Greater demand for substitutes makes
such as office furniture and custom
buyers price elastic to HPL and would
design office interiors
tend to switch to other substitutes if
prices for HPL products are raised
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Exhibit 2A Needs of Various HPL Buyers
Exhibit 2B Comparison of HPL and non-HPL on Attributes
Exhibit 2C Positioning of HPL and non-HPL on Attributes
Exhibit 2D HPL and non-HPL on the WTP-Cost Efficiency Frontier
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Exhibit 3A Comparison of Strategic Positioning
Exhibit 3B Comparison of Critical Value Chain Activities
The critical value chain activities for this industry are firm infrastructure, operations, outbound logistics and
marketing and sales.
Activity
Firm
Infrastructure
Operations
Outbound
Logistics
Arborite
Costs included charge
for management at
Arborite and allocations
for two layers of
corporate overhead
Formica
Expenditure for quality
control at plant level
declined due to a recent
leveraged buy-out of the
firm. Infrastructure
costs consists of one
layers of management
overhead
2 Canadian factoriesSeveral manufacturing
Montreal: Older factory, facilities overseas, North
produced 42% of firm’s America and in St. Jean
HPL production by
Montreal. 100% capacity
volume, 25% capacity
utilization at St. Jean.
utilization
Investments made to
Toronto: Newer
automate most of the old
factory, 58% of firm’s
plant at St. Jean
HPL production by
volume, 30% capacity
156 lb basis weight paper
utilization
core stock
115 lb basis weight
paper core stock
3 warehouses in
Montreal, Toronto and
Vancouver
75% firm inventory held
in Toronto and 20% in
Regional warehouses at
Toronto and St. Jean and
contracted with
independent firms to
warehouse inventory in
Vancouver and
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WilsonArt
Costs supported 2 levels
of organizational
infrastructure above the
plant level
Three US
manufacturing facilities.
Capacity utilization of
90%.
Not integrated into
resin mixing
156 lb basis weight
paper core stock
14 warehouses in the
US, 3 servicing Canada
Distributed 5% of
products direct to
OEMs and 95%
Marketing &
Sales
Montreal
Edmonton
28% of volume sold to
OEMs and 72% through
independent distributors
and building supply
dealers
40% of Canadian volume
shipped to OEMs and
60% to distributors and
building supply dealers
Distributors carry 120
colors and grade of HPL
Distributors carry 100
colors and grade of
HPL on average
Does not own a fleet of
trucks
Does not own a fleet of
trucks
20 sales representatives
covering territories in
Canada who call on both
distributors and dealers
and were directed to
provide high levels of
service
No advertisements and
widespread distribution
of samples
Firm trains field sales
representatives and does
not provide incentive
based compensation
Worldwide marketing
and sales organization of
215 representatives who
call on architects,
designers, OEMS and
distributors and dealers
Sophisticated system for
transmitting information
on customers’ preference
for fashionable,
innovative HPL back to
management
No advertisements,
distributed samples and
pamphlets to architects,
designers and OEMs
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through distributors.
Each distributor
received a commitment
that the firm would not
sell to any other
distributor or dealer in
the local area
Distributors carried 210
colors/grades of HPL
Owns a fleet of trucks
Shipped stock items
within 3 days and nonstock items within 10
days of receipt of order
Most sophisticated
order processing system
45 sales representatives
across North America
who call on WilsonArt’s
exclusive
distributorships.
Circulated samples to
designers and architects
in greater quantities
than either Arborite and
Formica
Exhibit 3C Detailed Comparison of Value Chain Activities (costs: cents per square feet)
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