Knox Chemical Strategy

The industry structure model contains five elements:

In the following analysis, I will be analyzing Knox Chemicals with respect to these five elements.

The first element is the intensity of rivalry. The intensity of rivalry in the isopropanol industry is high for several reasons. First, demand for isopropanol was expected to grow at only 3% until 1975, when the cumene/phenol process conversion would be substantially completed. Second, the switching cost was low. Although most distributors tend to orient themselves towards one basic producer, most of them purchase from several producers. Third, product differentiation was very low. By far, price is the number one criteria for large distributors when choosing among suppliers. Fourth, exit barriers were high due to high plant and equipment costs that have no alternative uses and cannot be sold off. If a company wished to leave the industry, it had to write-off the book value of these assets. Also the big companies in the industry (at least in the 1970’s) were not diversified and relied solely on the industry for revenues.

The second element under analysis is the threat of new entrants. The strength of the competitive force of new

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eing analyzed is the threat of substitutes. Forty three percent of isopropanol consumption in 1967 was in the manufacture of acetone. The cumene process (Exhibit 4), when completed, will allow acetone manufactures to produce acetone without the use of isopropanol. This process itself, which will account for big losses in the industry, is a substitute for isopropanol. There are also other substitutes that can work as a process solvent for the pharmaceuticals and coatings industries. The fourth element being analyzed is the bargaining power of buyers. In the isopropanol industry buyers have moderate power. Buyers purchase isopropanol in large quantities whether in the acetone, agricultural chemicals, or coatings business. As demonstrated in the case, buyers are sensitive to price differences. Acetone producers have considerable power over suppliers, since 43% (Exhibit 3) of the isopropanol total orders are to them. Also, the buyers can switch orders between supply companies at a low cost. This led to companies playing one off against the other in order to force down prices. The fifth element being analyzed is the bargaining power of suppliers. The case does not cover the suppliers of the isopropanol producers. Due to t
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Approximate Word count = 1293
Approximate Pages = 5 (250 words per page)

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