March 21, 2010

Case 1
Strategy Formulation And Implementation

Submitted to: Submitted By:

Professor C.P.Joshi
 March 21, 2010

Q-1 Using Porter’s Five Forces Model and Value Net, make Industry Analysis of Auto component Industry
worldwide.
Porter’s Five Forces Analysis:
Industry Competitors: Weak rivalry amongst the competitors.
 The Industry Growth has been mixed with a medium growth rate. Markets in North America and
Japan were stagnant while the markets in China, Russia, Brazil and India saw the most rapid
growth.
 Concentration and Balance: The industry is fragmented due to the presence of a large no. of
players as well as emerging players from countries such as Russia, Brazil, China, India making an
intense competition among the players. The industry is in imbalance. Bigger established players
such as Ford, Chrysler are the dominant players accounting for majority of the output.
 Fixed Costs, Intermittent overcapacity. The automotive industry involves high fixed cost.
Further, because of the recession, there has been an overcapacity resulting in the closing down
of several units of automobile building. Total capital investment in the U.S. rose steadily from
63.7% in 1997 to 68.5% in 2000.
 Diversity of Competitors: There is a huge diversity amongst the competitors. For example the
dominant players of the industry range from U.S., Japan.
 Corporate stakes, exit barriers: There is high corporate stake and high exit barrier as the
company has to pay compensation in which it may destroy value of the company.

Substitutes: The threat of substitute products is low.

 Relative price performance of substitutes is the same that reduces incentives to switch over to
the substitutes. Like in the US substitutes like public auto component suppliers have little chance
of private passenger auto component suppliers.
 The cost of switching to substitute products is low.
 Buyers have established brand loyalty enabling lower propensity to substitute.

New Entrants: There are barriers to entry against new competitors.

 Economies of scale: Automotive industry continues to give importance to cost-efficient methods
of production involving operational effectiveness, standardisation inspite of the presence of
flexible methods of production.
 Brand Identity: Every country has presence of players in the automotive industry that have a
brand identity amongst its customers worldwide. For example Toyota, Ford.
 Capital requirements: they are high. Companies may adopt fixed or variable source as their
source of capital depending on company policies. If the company relies on Fixed source of
capital, though they can incur large revenues after break-even point is reached because of less
variable cost, however it may take a long time for the company to reach break-even.
 Proprietary Learning curve: The learning curve acts as a huge barrier to the new entrants
because of the existence of large number of players in the industry with Learning curve.
 Access to necessary inputs: The rivalry amongst the competitiors increases because the access
to necessary inputs is restricted due to scarcity of resources and government policies.
 Government Policy: The government policies affect the entry of new players. For example
automakers in North America (or most of the rest of the world for that matter) are not operating
in an environment conducive to making strong profits.

Bargaining Power of the Suppliers: Suppliers have little bargaining power.

 March 21, 2010

 Switching Costs: Switching costs are low for the buyers since there are so many suppliers
required to build the final automobile.
 Differentiation of inputs, substitute inputs: standardization of inputs is done as there are
so many players that can provide the inputs due to vast scale production of the
automobiles. The inputs can be easily substituted by the availability of other buyers.
 Supplier concentration: There are so many parts that are used to produce an automobile,
that it takes many suppliers to accomplish this. When there are many suppliers in an
industry, they do not have much power.
 Impact of differentiation, forward integration: The suppliers produce products which are
close substitutes of each other, reducing differentiation and the comparative bargaining
power. Forward integration suppliers may come forward to gain access to distribution
channels, this gives them power.

Bargaining Power of Buyers: Buyers have little bargaining power.

 Buyer concentration: Buyers are fragmented which decreases their bargaining power.
 Buyer switching costs, buyer information: the costs for switching for the buyer are high
as suppliers provide close substitute products. Buyer information is restricted as the
buyers are affected by brand loyalty.
 Buyer sensitivity: Buyers in the automotive industry are not sensitive to price which
reduces their bargaining power.
 Pull Through: The buyers can be easily pulled by the competitors which decreases their
bargaining power.
 Substitute products: The products are close substitutes of each other as there are a number
of suppliers .Therefore the buyer’s bargaining power is less.
 Product differences: There does not exist differences among the products offered by the
different suppliers. Customers are affected by the brand of the product as they are quality
conscious. It reduces their ability to switch to a new supplier.
 Backward Integration: The customers may integrate and start venturing into production
of automobile components and serve as suppliers.

Value Net:
In the Value Net analysis, there is analysis of the competitors done to study the Industry.
Complementor Analysis:
Relative concentration: The relative concentration of the competitors is high as there are a few
players that supply complementary components in the form of ancilliary units, repair
components, repair services.Therefore, the concentration of the competitors increases their
bargaining power.
Relative Buyer/Supplier switching cost: Supplier switching cost in the automotive industry is
high as the suppliers need to go through legal processes ,technical similarities for tying up with
complementers.
Relative Complementor /Competitor switching cost: Complementors can easily switch from one
supplier to another as the complementary products required are the same for the existing supplier
as well as their rivals.
 March 21, 2010

Asymmetric Integration Threats: The complementors can act as threat to the existing supplier by
various modes such as tying up with rivals, increasing bargaining power by tyong up with other
complementors, by forward integration to become the competitor for the autocomponent
suppliers.
Rate of Growth of the Pie: The complementors bargaining power is high as each of the
complementors are having high share in the market.

Q-2 Identify ABCL’s resource endowments and capabilities and based thereon develop a strategic
framework indicating pros and cons (including risk versus return) for each alternative using relevant
strategic models.
Resource endowments based on Dynamic View:

Human Resource: the company has existing managers with the requisite skills .Further skills can be
developed by training, inexpensive labor can be obtained through investment in areas such as eastern
regions of the country.There can be a huge influx of highly educated engineers from their universities.

Technology: The company has been trying to upgrade its technology and can upgrade its technology
through strategic alliances ,joint ventures with a foreign company.
Capital : The company can seek various forms of loans through banks, debentures .

ABC Ltd. Resources and Capabilities Based on Andrew’s Model are:

Resources:
1. Extending or Constraining Opportunity:The company has been trying to upgrade its technology,
developing capabilities, investing in human resources and in Total Quality Management as a part
of its endeavour to produce world- class auto components.

2. Identification of Strengths, weaknesses, opportunity and Threats: The strengths of the company
are that it has Brand Loyalty,Brand is recognized since the company is established since a long
period of time, and the company has experience curve.
 March 21, 2010

The weakness is that the company has lack of adaptability for the new technology, changes that
are existing in the external environment.
The company has several opportunities such as developing technology to adapt to the changing
environment, have joint ventures with companies in other countries, Overseas investments,
Diversification into related or unrelated businesses.
The threats for the company are that there are new and strict regulations for
automobiles, global consolidation efforts, development of superior technology by the
opponents.
Capabilities:
1. Financial Capabilities: The company can develop Financial Capabilities such as availability of
capital, securing long term debts through debentures or short term loans through Banks,
Obtaining economic reforms by the availability of subsidies and incenrtives.
2. Managerial Capabilities: Managers may be trained through On-the Job or Off the Job training
Methods to develop the necessary Skills and competence, Investment may be made in the
necessary human resources.
3. Functional capabilities: The functional capabilities can be developed by having the technology,
adapt to all the processes, develop efficient operational effectiveness through Total Quality
Management approach as a World- Class provider of Auto components.
4. Organisational Capabilities: The reputation of the brand and the experience curve gained by the
company can help the company sustain its capabilities.
Environmental Conditions: The attainment of economic reforms , financial stability by the
Governments of the country, availability of the advanced and upgraded technology, establishment
of a number of brands and competitors, High growth rate of the Industry which is currently at
greater that 10 % helps in the development of the resources and capabilities of the company.

Alternative 1: Acquisition of Technologically competent competitor based in Eastern India.

 Benefits of the alternative:

 Access to superior, advanced technology.
 Gain access to competitors network of distribution.
 Exploit the location advantage of being in natural resource rich region.
 Absolute Advantage theory: Eastern Region can provide availability of abundant inexpensive
labor which can be made to specialize in production of components which may otherwise
require large, expensive machines and technology. Tap the availability of economies of scale
through standardization, utilization of natural resources to produce good quality components.
Disadvantages of the alternative:
 There exists the threat of competitors who are already established in the Eastern region.The
heavy investment made to tap the resources may go waste as the company may not be able to
establish itself in the region.
 The company may have high opportunity cost as the company could have set up factories at
other regions offering government incentives, subsidies.
 The project requires high investment.

Alternative 2: Joint Venture in India for new auto components with Japanese component manufacturer.
 March 21, 2010

 Benefits :
 The company gets associated to a complementary company that improves its managerial and
technological capabilities.
 Reduces cost of investment as the project costs and risks are shared among the companies.
 Get access to superior technology, newer markets through association with the Japanese
company.
 Porter’s Diamond Model:
Factor Conditions: The ABC Ltd.company in association with the Japanese company explore and
get access to the natural resources which are abundant in India.

Demand Conditions: There is a huge demand for the automotive components as can be seen be
the entry of several leading automakers from abroad and within the country and a high growth
rate of the industry of around 10%.

Ancilliary Industries,Competition: The company faces intense rivalry from competitors.

However, it may be able to withstand competition through a joint venture with the Japanese
company.ABC Ltd provides access to Indian market, Ancilliary Industries while the Japanese
company provides managerial and technical capability.

Company Structure: The company has been engaged in marketing and manufacturing of
automotive components since a long time. The presence of brand identity for the company
helps the joint venture.

 Disadvantages:
 External Environment conditions such as governmental rules and regulations may delay
the formation of a joint venture.
 Competitors may also form joint ventures or strategic alliances with superior companies
that may give competition to ABC ltd’s joint venture.
 Technological progress occurs at a exponential rate which the company may not be able
to develop at the same rate.
 Company may lose opportunity in the form of innovation.

Alternative 3: Major foray into overseas markets for investment in supply chain, manufacturing ,
distribution customer support network.
 Benefits:
 Ansoff’s Model:

Present Product New Product

Present Market Market Penetration New Product
New Market New Market Diversification

 The company gets access to new markets.

 March 21, 2010

 The company explores related fields of automotive components such as customer support
network. Therefore, the company moves into related diversification or vertical diversification.

Disadvantages: Some of the disadvantages are:

 The project requires huge investment in the form of capital, time, legal, technical requirement.
 Cultural differences can lead to wrong selection or unreasonable delay in the factory set-ups in
various countries.
 The external environment such as the governmental policies of the country, socio-economic
stability of the country can affect the set up of the project in the country.
 The company may overlook the domestic opportunities which may get exploited by the
competitors easily.