Cumberland Gasket Company Inc. had been formed in 1970 by the merger of three small companies. It consists of three divisions: Maryland Division that manufactures a wide range of products for oil processing industry and Michigan and California plants that make parts for the automotive industry. The company was manufacturing products that were essential components of the equipment in which they were used.
The Maryland Division was producing asbestos-based products such as washers and gaskets that were used in air compressors. The production took place on two separate plants: one was housed in the original factory, where Cumberland began, the other, constructed in 1976 in which most of the asbestos processing took place, had a completely enclosed asbestos filtration system.
Asbestos is a mineral that is impervious to heat and fire and it has a multitude of applications in industry and consumer products. It has been generally known that inhaled asbestos fibres are principal cause of extremely hazardous diseases. Furthermore, asbestos fibres have a peculiarity to cling to clothing and skin, as a result, the dust could be widely dispersed creating a potential health risks for both, workers and their families. The entire process of manufacturing asbestos-based products created the exposure to asbestos dust that concerned the vice president Mr. Fred Barlow. Mr. Barlow concluded that processing asbestos-based products could be a major health hazard and dealing with that should be one of his major responsibilities.
The market for asbestos- related products consisted of a few large clients and numerous small customers. The only suppliers of products containing asbestos were Cumberland Gasket Company Inc. and another supplier, thus competitor. The Regulations regarding asbestos production were not severe enough in the past. However, the growing concern about the risks associated with inhaling asbestos dust as well as increased pressure of independent groups have led to more strict rules. There were indications that the government will soon adopt the rule of one-tenth 5-micron fiber.
Mr. Barlow decided that the business could not go on without major changes and he is confronted with the following three alternatives:
* To stop producing asbestos-based products entirely.
* To process the products containing asbestos under water or other liquid.
* To investment into new equipment and to move the production to a completely isolated room.
The primary objective of this report is to analyse the alternatives that are presented to Cumberland Gasket Company Inc. in relation to the future operations of the company and the manufacturing of products containing asbestos.
In order determine the best solution for Cumberland Gaskets Company that would allow the company to continue and expand a successful business operation in the asbestos product industry the following factors influencing the company and the market will be considered and analysed:
The Cumberland Gasket Company Inc.
The Cumberland Gasket Company, Inc. is a merger of three smaller companies. It consists of: the Michigan and California Division that were producing automotive parts and the Maryland Division that was producing parts for oil processing industry. In 1977, the Maryland Division had $20 million in sales. In the same year, the Michigan and California Divisions had combined sales of $60 million.
The primary goal of the merger was to enable the individual companies to serve an increasingly dispersed nation-wide market and to allow the divisions to retain their independence with the general managers having a great authority of decision-making.
The merger provided the company with more power and a stronger position in the market and authority of decision-making had put the vice presidents in a very influential position. As one of the vice-presidents, Mr. Barlow had undisputed power within the company and ability to take important decisions. However, taking a wrong decision would lead to personal responsibility. Mr. Barlow is vice-president of the Maryland Division of Cumberland Gasket for 3 years. He has great determination to perform a good job and has over 10 years of experience in manufacturing of industry products. Mr. Barlow is a person who is sincerely concerned about what he is doing and is constantly looking for improvements in manufacturing of asbestos-related products.
Cumberland Gasket Company Inc has a company policy of manufacturing asbestos-related products as long as the company was complying with the regulations provided by Occupational Safety and Health Standards. In addition to this the company was reluctant to the idea of further capital investments unless the investment had a half a year of less payback. The above stated clearly shows that the company's primary concern was profitability in a short run.
The Maryland Division manufactures a wide range of parts, which are primarily used in petroleum processing equipment (pumps and valves). Some parts are made of asbestos to resist wearing and heat and they are very critical components of the oil processing equipment. The Maryland Division has two separate plants, an old and a modern one built in 1976. Both production plants are manufacturing asbestos-related products.
The old plant has limited capabilities in both, producing asbestos-related products and reducing the critical asbestos dust exposure. On the contrary, the new plant provides the necessary equipment needed to reduce the asbestos exposure, a new liquid filtration system and relevant testing equipment. Most of the asbestos processing took place in this plant. As a result, the new production plant provided a cleaner environment as well as more scheduling flexibility.
The information provided by the case study indicates that the Fabrication Division was only marginally profitable. However, the contribution of products containing asbestos was significant and loss of the asbestos business would have an enormously negative influence not just on the Fabrication Division but also on other divisions within the company. Therefore, an assumption can be made that the Fabrication Division is an essential Strategic Business Unit, which is important for the whole company.
Attitudes and Risks Associated with Asbestos
The case study presents different opinions and attitudes regarding asbestos and its health risks associated with the working environment. In the following section a separate insight and analysis into the opinions of the company, its workers, customers and government will be provided.
The company did all it could to protect the workers from the exposure of asbestos. Workers were obliged to wear protective gear including masks and overalls. In addition, regular health inspections on the workers were carried out. This strengthened the belief that everything was done to comply with government rules and to create a protective working environment. Despite these implemented measures, Barlow had the impression that not enough was done to protect the health of the workers and their families.
The general awareness of the dangers of asbestos was not very high. Workers compared the inhaling risks of asbestos to smoking and thought that there couldn't be done that much anyway. This belief was undermined by the results of medical records of retired and dead workers, whose post-mortems didn't show any signs of asbestos as the cause of death. However these inspections were conducted in a time span of the last 20 years, although it was said that asbestos related diseases could appear after 20 to 30 years of exposure. Workers were further annoyed by too many ridiculous government regulations at that time and therefore did not take the danger of asbestos serious enough.
Although most of the workers had relaxed opinions about the risks associated with inhaling asbestos, one can assume that they would sue the company in case of contracting any asbestos related disease. Families of affected workers would probably take the same action against the company.
Customers' primarily concern was that products were becoming more expensive and harder to obtain. Further they did not show concern about the health risks involved because they did not directly get in touch with asbestos.
A guaranteed risk free working environment for the Cumberland employees would sooner or later drive prices upwards and would inevitably confront customers with this issue. As a consequence of this, customers would probably be reluctant to pay more for the asbestos related products; therefore it would be necessary to create an awareness of the health risks involved in the production of these products.
Generally speaking one can say that before 1972 there was legally no need to follow any exposure advises for asbestos, given by the "American Conference of Governmental Hygienists". Since nothing was legally enforced before this year, companies, including Cumberland, did not show much (if any) concern about this matter. Nevertheless, the privately funded organisation (ACGH) introduced the topic of asbestos to the public. In 1972 a minimum exposure standard of five 5-micron fibres per cubic centimetre was adopted. Later in 1975 a 2-fiber standard evolved, and in 1977 OSHA proposed a limit of one-half 5-micron fibre per cubic centimetres of air in an 8-hour period. In the short span of 5 years the standards for asbestos exposure became stringent to a very low limit of asbestos exposure and it was intended by the government to strengthen these rules even further. This clearly indicates that the government started to care about this topic.
The case study indicates that trade unions as well as the OSHA did put pressure on the government to come up with harder regulations and to adopt new standards. Consequently, growing pressure and concern about health risks could lead to the adoption of stricter rules.
The Cumberland Gasket Company Inc. specialises in the manufacturing of various products that are designed to meet the needs of two significant industries:
* Products developed for the automotive industry (produced in the Michigan and California plants), and
* Products designed for the petroleum processing equipment (produced in the Maryland plant).
Some products manufactured by the Maryland Division were asbestos-related and they accounted for about 15% of the total division sales. It is important to note that the asbestos-based products were of significant importance to the oil industry and the company's failure to provide the asbestos products could disrupt the supply chain of the industry. As a consequence, this would exert negative influence on the entire petroleum industry and most likely on other related industries.
Since the Maryland Division was offering both, asbestos and non-asbestos related products for the oil processing industry, it created perfect conditions for "one-stop shopping" for its clients creating a joint demand for its products. In another words, a client purchasing washers and gaskets will consider buying other related components provided by the company. By buying multiple products from one supplier the buyer is likely to strengthen the partnership between the two parties, as well as, decrease its costs associated with proportioning the requirements among different suppliers.
The consumer market affects directly and/or indirectly the business market. Therefore, a comprehensive analysis of the economics of both, consumer and business market is needed in order to determine which factors are influencing the market for Cumberland Gasket Company Inc products. The following section represents an insight into specific conditions affecting the demand and supply of the asbestos-based products as well as possible influence on the market.
Asbestos is a mineral with specific and characteristics such as heat and fire imperviousness that are of essential importance to various industries and the manufacturing of a wide array of consumer products. The necessity for asbestos is drawn from the derived demand and its so-called acceleration principle - that is, demand for a certain product not only has a significant impact on the supply of that product, but further, it has a significant impact on the demand for various products, such as raw materials, components and equipment, as well as services, associated with the manufacturing of the final product. For example: demand for consumer electronics will affect the demand for electronic insulation, which in turn will have an impact on the production and demand for asbestos. Another example of derived demand can be found in the automotive industry in the manufacturing of brake linings, where the demand for asbestos is very high.
When analysing the concept of derived demand in the light of asbestos-related products, one can observe the function and effects of price volatility - that is, the strong relation of demand to supply. The shortage of asbestos could lead to increased competition among various buyers over the existing products or timely delivery, which in turn will drive the asbestos price upwards. The above notion of price volatility perfectly relates to the asbestos-based products market described in the Cumberland Gasket Company Inc. case study.
During Cumberland's operation the market for asbestos-based products had a low number of companies competing in the market. At that time there were only 2 companies (Cumberland Gaskets and another company) that supplied asbestos products to the market. As the demand grew for asbestos-products both companies had difficulties in effectively supplying their customers with products. As a result, the limited number of manufacturers of asbestos-based products has created a situation were customers did not receive timely deliveries.
Further, with the automobile and petroleum industry undergoing a radical transformation combined with an increasing demand for various products, the demand for finished goods containing asbestos (pumps, valves, brake linings, electronic insulation, etc.) was expected to remain at the same level. Therefore, an effect of price inelasticity is apparent, that is demand for asbestos will remain relatively constant despite the increase in price. In the case of Cumberland Gasket Company, due to fact that in 1977 the price of asbestos had increased by 16%, just six months after a 10% the demand for asbestos-based products remained constant. Although there was a dramatic increase in price for the raw material the demand was not influenced. However, if the price of oil processing machines increased (let's assume) by 15% an assumption can be made that this would have an apparent influence on demand.
As previously mentioned, asbestos is a material that is essential for the manufacturing of various products, used by a wide array of industries and for consumer applications. In the past the health and environmental regulations imposed by the government on the use and exposure to asbestos in the manufacturing of products were relatively relaxed, but as time passed various studies proved significant health hazards associated with asbestos. As a result of these studies new and stringent regulations were imposed. Further, the introduction of strict regulations on the asbestos and asbestos-based manufacturers led to a situation were producers had to increase their costs associated with the maintenance and introduction of new equipment, as well as an increase in costs related to the protection of workers within their companies.
The effect of new and more stringent regulations imposed on the asbestos industry had further implications. Not only did the manufacturers of asbestos-based products had to increase their costs on workers and for the air testing and special cleaning programs, but also the new laws had a negative influence on the whole production - the production and supply of asbestos-related products became quite restricted. This further impacted the industry as clients were experiencing once again late deliveries. In the light of the above events the whole industry was looking for a new material that would be an adequate and efficient substitute. In relation to Cumberland Gasket Company, the firm was not capable and did not have the necessary resources to focus on the research and development of a substitute.
Du Pont, a manufacturer of chemical based products, developed a substitute to asbestos that was four to five times more expensive and of inferior quality and for which buyers were not willing to pay. It is interesting to note that although an attempt was made to create a substitute, for some applications there is simply no effective substitute material for the asbestos. As a result, it is evident that the cross-elasticity of demand, that is, the degree of the price correlation between one product and its substitute, is quite low due to the lack of a substitute material for asbestos. The higher the number of substitute material available, the greater the cross-elasticity of demand for asbestos.
The Cumberland Gasket Company together with another company are the only producers and suppliers of the asbestos-based products. There were indications that another competitor would leave the market soon. From the information presented in the case study it is evident that these two companies are the only manufacturers of asbestos-based products and this clearly indicates that the industry is an oligopoly - that is, few manufacturers dominate the market.
Due to the fact that there are a limited number of companies in the asbestos-based product market, it could be assumed that other industries, such as oil processing, are heavily depending on the products of Cumberland Gasket Company Inc. and their competitor. Further, in an event of a possible disruption of production and distribution of asbestos products, the prices for asbestos would increase (buyers driving the prices upwards by competing for timely delivery) and/or buyers may seek for an alternative supply source for asbestos, for example an international supplier (assurance for timely delivery would not be guaranteed).
As for the asbestos-based product market, this market is characterised by the presence of a few large companies and by 20 to 30 smaller buyers. This market can be characterised as an oligopsony as it is dominated by a number of small buyers of asbestos-based products who might have a disproportionately affect on the market. In regards to the Cumberland Gasket Company Inc, the firm is dependent on these companies to make orders and final purchases of asbestos-based products.
Since the market in which Cumberland Gasket Company Inc is an oligopoly the firm may find it hard to charge anything more than the going price unless it can differentiate its products. Since Cumberland's competitor is most probably matching the firm's products, Cumberland's competitive advantage and attracting buyers should lie in achieving lower costs and improving delivery. These lower costs could be achieved through Cumberland's pursuit of a higher volume strategy - mass production.