The Rise and Fall of Husky Injection Molding Systems – Part 1
This article is part of a series on what causes a firm’s value to increase
Plastic Injection Molding production equipment may seem like a mundane category of product and business. But this case story, like Gucci last month, is a fascinating lesson in what not to do in strategy. To understand this kind of industry, I need to describe it a little more than I did for the Gucci case study.
Robert Schad founded Husky Injection Molding Systems in Canada in 1951 and built the company into one of the world’s premier manufacturers of plastic injection molding production equipment. Husky produced these machines that would allow its customers to mold plastic products like soft drink bottles and yogurt cups to automotive components, to entire bodies of automobiles. An injection molding machine system puts molten resin under high pressure to form thin wall plastic products. Two examples of Husky’s customers were Coca Cola Enterprises (large bottlers for Coke) and Plastipak Packaging.
Schad left Germany in 1951 and emigrated to Canada with just $25 in his pocket and a personal character reference from Albert Einstein. After a failure with Husky Snowmobiles, he got in the plastic injection molding equipment business by underbidding a job to make only molds. The mold captures the molten resin under pressure and makes the end product’s shape. In 1961 Husky introduced its first injection molding production machine: a highly specialized, high-speed system for making thin wall containers, the most demanding to make. Machines were classified as small, medium and large tonnage which is the clamping force of the machine. Large tonnage machines could mold an entire car body while small and medium tonnage machines made smaller products.
By the early 1990s, Husky built itself into the undisputed leader in the premium priced segment of the medium tonnage segment. From 1992 to 1995revenues grew from $250 million to more than $600 million and net income quadrupled with the company earning a return on equity approaching 40%.
By the beginning of 1995, Husky enjoyed being a highly profitable boutique niche player whose purpose was to be “the producer of the fastest, most rugged, most dependable customized machines that could operate 24 hours a day 365 days a year”. Just slight problems in quality (like bubbles in a finished molded soft drink bottle) could cost Husky’s customers millions in costs if their machines went down due to quality problems. Because of its positioning and reputation, Husky was able to command at least a 20% price premium over its nearest competitors.
Suddenly in late 1995, everything seemed to fall apart. Competitors entered Husky’s most lucrative segments with equipment sold at much lower prices and at perceived comparable quality. At the same time there came to be huge shortage of resin, which is what gets liquefied and molded in the machine to make the end plastic products. Resin was 58% of the total cost of Husky’s customers’ molded plastic items. This caused Husky’s customers to cancel machine orders and make do with what they had. The resulting excess capacity for Husky and its competitors triggered a market share battle. What should Husky have done in response to this pending crisis? The sales force wanted an immediate price cut of 20%. Some executives said Husky needed to move quickly into small and large tonnage machines and become the “general purpose provider”. Others suggested waiting out the resin shortage.
To assess options like De Sole and Ford did last month for Gucci, it is helpful to know the current value creation system Husky was using:
- It bought component parts that went into making their machines, instead of making them as most other competitors did, which raised its costs
- It used a job shop operation where it customized each machine for each customer – no mass production
- It provided complete systems for its customers to use on their manufacturing floors – robots, software, etc.
- It spent millions of dollars investing in creating a blueprint of the “factory of the future” for its customers – not just using Husky’s machines and services but everything their customers would need to be world class producers of their end plastic products
- It used highly skilled and trained technicians who to fly overnight to help a customer with a problem
- It maintained spare parts for their machines as old as 20 years
Recall from our discussions of the Laws of Strategy in previous columns. A premium priced differentiator should only drop its prices as a last resort. As costs are higher due to the added value and benefits, dropping prices quickly could result in financial distress. Indeed, dropping prices quickly could cause demand this kind of company could not fill. And also recall that any firm should not take on too much complexity, too quickly.
What would you have suggested Husky do?
Next Up: The Rise and Fall of Husky Part 2
Bill Bigler is Director of MBA Programs and associate professor of strategy at LSU Shreveport. He spent twenty five years in the strategy consulting industry before returning to academia full time at LSUS. He is the president of the board of directors of the Association for Strategic Planning, one of the leading professional associations in the field of strategy. He can be reached at email@example.com