Nypro Case Study

Financials & Profits

Nypro’s financial statements display a growth in Net profit (before-taxes) of about 7.5-8% between 1992- 1995, whereas before-tax profits averaged only 4% in the industry. Nypro ranked 10th in size among the 40,000 firms in the plastic injection molding industry (Block, 1996).

If we now flip to 2006-2008, we see that Nypro’s net margin has dropped to around 3.5% of sales. Nypro was a pioneer in creating differentiating processes, technologies and culture in their organization. However, Nypro’s advancements did not constitute a truly unique and inimitable capability. Process improvements have been difficult to sustain competitive advantages against competitors beyond the short-term. Competitors are able to readily incorporate new production or process techniques shown to improve profit performance through cost, quality and customer satisfaction advantages. Over the last decade, it seems that Nypro has not been able to maintain it’s superior performance in the industry, which denotes the company’s inability to develop an inimitable competitive advantage.

The plastics molding industry possesses almost insignificant entry barriers, low differentiation, and several smaller producers serving a niche, and offering low value-add to the industry. With technological and process emulation, how then does a company excel and differentiate, especially considering the low entry barriers and the inability to significantly differentiate? The answer is to innovate; to become an industry leader, and to remain on the industry’s cutting edge. Nypro has taken this challenge to heart, empowering its employees to facilitate success and to continue stewardship and development of proprietary technology through efforts such as its revolutionary Nova-plast machine.

Market Power

Nypro is part of the Plastic Containers Industry, which is a fragmented competitive industry. In 1995, Nypro was the leader in the plastic injection molding industry among companies that did not focus on automobile industry. Nypro’s customer base is divided into three main categories – consumer/industrial (about 32.2 % of sales), health care (about 46.7% of sales) and electronics (about 21.1% of sales). Nypro needs to identify the profit margin associated with each of these market segments along with the technological advances in these consumer industries. This will help the company analyze which customers will benefit the most from their improved capability and be able to take advantage of the cost savings to counter market competition.

Strategically, in terms of organization structure, Nypro set up medium sized production plants geographically close to its major customers. This created some economies in terms of transportation costs and gave the customer a much more local interface with the company.

Nypro followed the model of an Operating Board in its plants which allowed for maximum participation and engagement. The Board consisted of operational managers from other plants which kept information flowing freely through the organization. Nypro encouraged competition and intrapreneurship among its own plants. This encouraged creativity and idea generation to increase competitiveness in the marketplace.

However, the decentralized innovation strategy precludes the derivation of profit enhancing efficiencies. Although management has sought a localized and client-centric plant strategy, the absence of standardized production approaches codified by Nypro’s industry groups limits scale economies, slows the economies of learning, and more importantly elevates overall cost of products sold and material costs given wide disparities in utilization and cost structures across the company’s various plant assets. As shown by the following table, management has yet to compress the range of material utilization and material costs, which lowers profits and the company’s market power.

Further, the incohesive production approaches has also revealed inconsistent product quality. The following table illustrates the wide disparities between production plants.

The sharing of high visibility innovation has seemingly foreshadowed the accomplishments of plant assets to satiate customers through delivery of high-quality products and the limited costs of product returns. Although post-installation customer satisfaction measurement was not apart of the company’s performance template, it does have real implications to the Nypro cost structure and customer perceptions concerning product quality both of which hold quantifiable impact on market power (i.e., lower client satisfaction and reduced future sales).

In 2008, Nypro is focusing on achieving balance in their three key market areas. Their strategy is to position themselves as a ‘Go To Strategic Partner’ among clients. They have increasing partnerships with esteemed companies like Estee Lauder and P&G’s – Flawless brand of Secret deodorant.

Growth / Innovation

Differentiation and innovation strategies require a strong integration with the environment, the customers, and the technology suppliers. In terms of the Miles & Snow Typology, Nypro played the role of a prospector, i.e. being innovation oriented exploiting new product and growth strategies.

The plastic injection molding industry was a fragmented industry characterized by perfect competition. There were no barriers to entry and many new potential entrants into the market. This meant that buyers had negotiating power over firms that provided similar products. Lankton realized that in order to sustain Nypro among its competitors, he had to introduce technological innovations that would provide the customers cost and quality advantage. He also consolidated Nypro’s business to focus on large companies that could provide bigger orders and were introducing product innovations themselves. This meant that Nypro would grow with their customers and be ahead of the technology innovation curve in the market.

Nypro operated in a team structure where a Development team developed product specs and was responsible through the production phase. Every project & product was then followed by the Continuous Improvement team that represented all the different aspects of the firm and concentrated on innovating the product and process for the customer. These teams worked closely with the customer to maintain quality standards or change processes or product specs based on any feedback from end consumers or competitors’ challenges. This ability to share internal processes with clients brought a close partnership and resulted in product and process efficiencies for both teams.

The NovaPlast could further expand the company’s penetration of customer accounts, providing additional value-added services to clients: low-volume, specialized moldings. NovaPlast permits Nypro to maintain the client relationship and the accompanying revenues without outsourcing low-volume jobs to potential competitors. The customized molding permits the company to set higher pricing and margins given the specialty moldings set to customer specifications. Lower volume levels could be offset with higher pricing to recoup research and development costs

The other innovations that Nypro implemented included clean plant design, visual factory design as their standard plant layout.

Resources

In determining its strategy, Nypro had more of a resource-based view of the firm where they evaluated how to make innovation a core competence in the organization. Lankton was perceptive to find the value creation zone in the plastic injection molding industry by combining his customer’s needs and competitor’s lack of differentiation.

Lankton also invested significantly in changing the culture and retaining talent resources at Nypro. Valuable employees received stock options and as shareholders received the opportunity to select the Board of Directors for Nypro. Performance measures were always comparisons between plants and teams i.e. more collective than individualistic. These performance measurements included evaluating customer’s end product success, customer’s strategic market goals, any improvement in cost and profit margins, cycle time and gaining additional contracts.

The company’s labor capital and decentralized innovation process serves as Nypro’s crucial resource and knowledge capital. In addition, the organizational culture is one of creative tension through internal competition with Lankton’s competitive culture the cohesive dynamic spurring innovation and propagating silos. The company’s culture feeds the knowledge system through the dispersion of process enhancements transmitted by organizational systems.

Despite the dispersion of innovation, the absence of standardized production approaches has prevented the realization of efficiency standards across company plants. This is evidenced by range of machine utilization and customer return incidence levels.

Although plant processes are customized to industry and customer standards, shareholder capital is not efficiently managed and deployed given the competitive tension preventing greater cross-unit collaboration.

Conclusion

In conclusion, Nypro implemented a number of differentiating activities in the industry like improved processes, using Continuous Improvement Teams, focusing on cycle time and precision and setting performance standards based on end customer success and team efforts. In addition, Stegmann provides that matrix and process organizational structures produce positive EVAs for corporate managers. These efforts and cultural changes did help Nypro create some long-term strategic alliances with their clients.

However, Nypro operates in a competitive market, they have to be flexible and continuously improve operations in order to stay ahead of competitors and retain or gain market share. Stegmann, further, offers, that organization strategies generating positive EVAs are task sharing and empowered employees, horizontal communication, teams, decentralized structures and decision-making, and cultural innovation.

Although the Nypro organization reflects a number of these positive EVA attributes, It is our concern that the competitive culture stymies horizontal communication. As noted earlier, plant efficiency is disparate across Nypro’s global system of plant assets. Given process innovation is limited in duration, the company would be better served to also facilitate the sharing of “less visible” production efficiencies to further derive profits, market power, and shareholder earnings. We would like to see management reduce and tighten the range of material costs as a percentage of sales, and increase machine utilization to employ idle capacity. We are not suggesting full capacity run-rates in lieu of the impact on equipment and labor, and the potential need for excess capacity for product ramp-ups by clients. However, production assets operating below 65 to 70 percent denotes more idle capacity than we would like to see.

In terms of the decision making process for implementing NovaPlast machines, Nypro operates in a constantly changing competitive environment. This means that Nypro has to be prepared to respond to changing industry and customer demands. In this scenario, it would be best for Nypro to implement NovaPlast machines in one of the plants and measure success levels and pros and cons before pushing these machines to all plants across the world.

In terms of the decision making process for implementing NovaPlast machines, Nypro operates in a constantly changing competitive environment. This means that Nypro has to be prepared to respond to changing industry and customer demands. Our Novaplast rollout plan would suggest the designation of top plants segmented by the three top industries: healthcare, consumer/industrials, and communication/electronics. This would permit a centralized innovation process predicated on industry specialization. From this basis, general industry specifications could be further specialized to incorporate the nuances featured within individual client blueprints. Although this decentralized approach may elevate costs and mitigate profits, the divisional learning could yield innovative processes and enhancements to offset development and improvement costs with higher sales.

Reference:

Block, M. (1996). An Inside Look at Nypro. American Journal of Engineering 15(2). Retrieved 05/01/2011 from the business source complete database.

Source by Ashley Waters

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