Sparta Glass Products

SPARTA GLASS PRODUCTS

In early August 2002, Christina Matthews, the product manager for nonglare glass at Sparta

Glass Products (SGP), met with Robert Alexander, the controller of the Specialty Glass Division, to

review the product's performance and prepare a pricing recommendation for the coming quarter.

Once approved by the division president, the price would be announced and, as was customary in

this segment of the glass industry, adhered to for at least 90 days.

The flat-glass industry was a $10-billion industry worldwide, of which $2.7 billion was

generated in the United States. Approximately 57 percent of domestic production was for the

construction industry, 25 percent for the automotive industry, and the remaining 18 percent for

specialty products ranging from the mundane, like mirrors, to a wide variety of high-tech

applications. Among the many technical applications of specialty glasses were solar panels,

laminated and tempered safety glasses, heat- and bullet-resistant glasses, electrical and insulating

glasses, photo-technical and photo-sensitive glasses, aerospace glass, and cookware. Nonglare glass

was a fairly simple specialty product designed to reduce the glare of reflected light. It was used

primarily to frame and protect artwork.

With 2001 sales of $345 million, SGP was a midsized, regional glass company serving

several niche markets in the southeastern United States. The Specialty Glass Division was one of

four divisions, each of which was operated as a profit center. For a number of reasons, SGP enjoyed

a dominant market position for nonglare glass in its region: (1) SGP was known for its fast, reliable

service, and was willing to deliver glass on short notice at no extra charge in any of a variety of cutto-

order sizes, including the industry-standard delivery size (48-by-96-inch sheets) and all the

standard picture-frame sizes; (2) SGP provided an exceptionally high-quality nonglare glass with

little light loss and virtually no blemishes; (3) SGP operated its own fleet of delivery vehicles so that

delivery times were well managed and shipping charges were kept low; and (4) SGP's salaried sales

staff was widely acknowledged for its helpful, courteous service and customer orientation.

The production of nonglare glass, like many other coated-glass products, began with flat

glass, the output of one of Specialty Glass's sister divisions. For such derivative products, company

policy was for downstream products to be bought within the company at a market-based price that

was adjusted on a quarterly basis. The flat glass was treated by the Specialty Glass Division with a

patented coating that provided the desired optical characteristics. This process required specialized

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equipment that was usable only in the production of nonglare glass. The finished, treated glass was

then cut to order, packaged, and shipped.

The business outlook for nonglare glass had been flat for the past several years, but was

expected to return to historical growth rates as the economy came out of its slump. Last September,

in response to increased corporate pressure to improve margins, Matthews and Alexander increased

the price of nonglare glass by slightly less than 10 percent, from $2.15 to $2.36 per square foot. This

pricing decision was one of many made during the past year in anticipation of the company's

considerable capital requirements to fund a recently approved long-term expansion and

modernization program. At the time of the price increase, Matthews and Alexander hoped that

competitors would follow SGP's lead and increase their prices as well.

Unfortunately, SGP's competitors held the line on the price of nonglare glass, and Matthews

believed that SGP's significant loss of market share in the last nine months was due solely to SGP's

price change, as little else had changed in the industry during that period. To document the decline,

Matthews prepared Exhibit 1, which presents the sales-volume and price-history data for nonglare

glass in SGP's market region for the past eight quarters. Looking ahead, Matthews believed that a

reasonable forecast of total regional volume for the fourth quarter of 2002 (usually the best quarter

of the year) was 920,000 square feet. On the one hand, Matthews believed that if SGP were to

return to the $2.15 price, it could regain a major portion of its original market share with sales of

275,000 square feet. On the other hand, if competitors' prices were not met, she feared a further

decline. Nonetheless, because of SGP's outstanding reputation in the crafts marketplace, she

reasoned that a sufficient number of customers would stay with SGP and prevent sales from falling

below 150,000 square feet, even at the current price of $2.36 per square foot.

While reflecting on the upcoming meeting with Matthews, Alexander realized that price

would be the