The Strategy of the World's Largest Producer of Bearings - Case Study Example

 I. Part 1 A. Situation SKF is a multi-billion dollar global company and the world's largest producer of bearings which is based in Sweden. The company's major product, bearings, are used by almost all companies that manufacture mechanical equipment – these bearings “help reduce the friction of the moving parts within an engine, a motor or a wheel in order to … [prevent product failure, improve efficiency, and reduce energy consumption and maintenance costs] (DuBrule 2009).” SKF has been contacted by ITC, its major distributor in the United States in order to participate in a reverse auction by Steelcorps, one of SKF's customers through ITC (DuBrule 2009). The process of procurement will award the lowest bid in terms of price for the raw materials that Steelcorp needs, and with SKF as its major supplier of bearings during the past couple of years, the latter is expected to join the reverse auction (DuBrule 2009). B. Complication Answering the invitation and participating the reverse auction is not an easy choice to make for the executives of SKF, however. The executives are on a crossroad between two major decisions: to join or not to join the reverse auction. If SKF joins the reverse auction, it signals the whole industry about the change in its value proposition, which is to deliver excellent services at a premium – a more for more strategy in the value proposition matrix (Fathy & Smithee 1999). If it joins the reverse auction where the winner will be determined based on the lowest price of the bid, the company becomes inconsistent with its strategy and it blurs what its brand stands for; this is one of the considerations. On the other hand, Steelcorp is one of the company's major source of revenues through ITC, its biggest distributor in the US. ITC relies on SKF with the latter's high mark up allowance for ITC, as ITC needs the profit margins from the SKF sales to Steelcorp in order to boost its profitability. Because of the recession, SKF's revenue targets are 5% lower than the previous year; dropping the Steelcorp reverse auction will also substantially affect its profitability for the current year. These are the complications. C. Question Should SFK join the reverse auction and change their strategy? D. Analysis Porter's five forces framework. Porter's five forces framework has long been used in order to assess the profitability of an industry with regard to its structure as certain forces define its dynamics (Spanos & Lioukas 2001). These forces include the threat of a new entrant, threat of substitutes, bargaining forces of suppliers, bargaining forces of customers, and the degree of rivalry, which is the result of interactions of these four forces (Johnson, Scholes, & Whittington 2008, 69). The intensity of the forces have to be determined in order to assess the industry where SKF plays in (Porter 2008). The threat of new entrant to the bearings manufacturing industry is low – the level of scale and experience has an effect on raising certain barriers to entry, such as the high initial capital investments as well as the intellectual capital and experience that is needed in order to compete well in the industry (Johnson, Scholes, & Whittington 2008, 61). Although new entrants will have certain access to distribution through the current channels, this has been cancelled off due to the huge scale of the current players in the industry where their cost structures allow them economies of scale (Johnson, Scholes, & Whittington 2008, 61). With regard to the threat of substitutes, there has not been any substitute to bearings as of the current. Thus, the threat of substitutes is quite low in this industry. With a few very big players in the global bearings manufacturing industry, it is assumed that these companies get their raw materials from fragmented raw materials industries, since no mention in the case has been indicated. The raw materials these companies use are mostly commodities, therefore it is assumed that because of the non-exclusivity of the supplies, the suppliers' power are relatively low in order to influence the input prices (Johnson, Scholes, Whittington 2008, 63). In order to assess the bargaining powers of the customers, the term customer in this case has to be defined. For one, there is the company's internal customers which are its distributors, such as ITC (DuBrule 2009). These customers, who eventually sell to the end-consumers such as Steelcorp play a vital role in the performance of companies in the industry; as per industry regulations direct manufacturers cannot enter 'naked' deals with end-customers as channel distributors would be by-passed (DuBrule 2009). These huge channel distributors have grown large enough and concentrated that they can affect the decisions of direct manufacturers of bearings. This is the case of ITC; the end-consumer is Steelcorp, which is a huge source of the channel's revenue both in terms of volume and price as Steelcorp's primary brand preference for bearings has been SKF (DuBrule 2009). The bargaining power of customers in this case is high. The threat that comes from the high bargaining power of customers is high, while the threats that come from new entrants, substitutes and bargaining power of suppliers are low. At first assessment, it can be concluded that the degree of rivalry is quite moderate, with the existence of quite a few dominant players being incorporated in the analysis (Johnson, Scholes, & Whittington 2008, 69). On the second look, however, as what happens in the case of the reverse auction of Steelcorp where industry players have agreed to join and compete in the basis of price, the degree of rivalry is getting more intense. This increase in rivalry comes from the changes in the macro environment, such as the result of recession where global industry sales have been plummeting and industry growth has slowed down (Johnson, Scholes, Whittington 2008, 64). This can also be attributed to the high fixed costs of the industry players (Johnson, Scholes, Whittington, 64). With the bearings manufacturing industry being placed in between highly commoditised and highly differentiated goods, the industry dynamics can be boiled down into the price dimensions versus value such as how the Steelcorp is trying to do currently (Johnson, Scholes, Whittington, 73). Strategic capabilities and competences framework. After assessing the five forces that define the structure of the industry, the company's other source of competitive advantage, from a resource-based point of view is assessed. This includes identifying the threshold resources, threshold competences, unique resources, and core competences of SKF (Hussey 2002). The company's threshold resources are resources that are needed in order to produce the bearings and meet the customers' minimum requirement when it comes to product performance (Johnson, Scholes, Whittington 2008, 95). The SKF has its production plants and facilities, its set of managerial and technical people, as well as financial capital in order to produce the bearings in the industry. As for the company's threshold competences which are processes and activities that are needed in order to meet the minimum customer requirements, these include production of bearings, marketing these bearings through the company's marketing and sales functions, as well as certain administrative and support processes – all in order to keep the operations of the company running (Johnson, Scholes, Whittington 2008, 96-97). These resources and competences can usually be found in the company's other competitors as well (Farjoun 2002). What gives a certain edge for SKF includes some of its unique resources and core competences. One of the company's unique resources include its proprietary system which is called DSP or Documented Solutions Program (DuBrule 2009). The company is able to stand by its claim of delivering value to the customers by measuring this value. With this system, the company is able to show the customers the benefits they can get by availing of the offers of the SKF. Aside from the DSP, the company's human and intellectual capital are also some of its unique resources (Johson, Scholes, Whittington 2008, 96). The company has a set of engineers that have developed a technical know-how in order to produce superior bearings, which are currently unparalleled in the industry. The company's organisational culture, which emphasises on looking from the point of view of customers is a reflection of the value of its workforce as a unique resource (Black & Boal 1994). The brand SKF, which is part of the company's intellectual capital is a unique resource, as it stands for the relationships that are built based on the customers' trust on the company's ability to deliver quality and reliability in its offerings. The core competence of SKF arises from its ability to look from the customer's point of view, measure value through its proprietary system DSP as facilitated by its workforce that embraces a culture of understanding the customer. This is apparent in the company's certain process that includes offering a minimum guarantee based on the result of the DSP in order to minimise the risk of the customer in terms of their investment in the offerings of the company; a true promise of value and a source of uniqueness customers look for (Johnson, Scholes, & Whittington 2008, 97-99). The company's ability to deliver value from its superior bearings to its value-adding services to the businesses of its end-consumers through its resources is its other source of competitive advantage from an outside-in perspective. With all these, the success of the company during the past years can be attributed to its ability to measure value and deliver these to customers and consumers. Implications on strategy. By looking at the strategy clock or the choices of the company's competitive strategy options, the company ranks high with regard to the perceived benefits of its products and services (Johnson, Scholes, & Whittington 2008, 225). The company is left with two options, to retain its current strategy which is focused differentiation, or to adopt a hybrid strategy, that is, adopting a low cost base and reinvestment in low price and differentiation, in response to the changing dynamics in the industry, more specifically the increasing price sensitivity on the part of the customers (Johnson, Scholes, & Whittington 2008, 225). While the second option looks promising because its satisfies the need to adapt to the company's environment and addresses the factor with regard to the sensitivity of the price on the part of the customers, the second option requires that the company changes its business model in order to cut down on its prices. Cutting down on costs in order to lower the prices will have an effect on the other stakeholder of the company – its distributors which rely on the company's high profit margins because of the premium that SKF charges with regard to the superior quality of its products. From a strategic marketing point of view, lowering the price and adopting a low cost strategy through the hybrid strategy, will signal a different message to its customers – SKF eventually lowers down its quality in order to compete more in terms of price (Fathy & Smithee 1999). The company will then have to invest in marketing communications in order to convince the stakeholders that the change in price does not have a strategic implication on quality (Fathy & Smithee 1999). This will lead to confusion among the customers and may result in the company's losing of its major value proposition, as well as one of its unique resources – its brand equity. E. Conclusion and recommendation The recommendation in the case of SKF is that it should stick to its current strategy which is its focus on value and delivering superior quality of products and services to consumers at a premium. The decision to stick to its current strategy is based on the assessment of long-term consequences to the company. If SKF participates in the reverse auction, the company sends a mixed signal to the market with regard to its positioning strategy. This inconsistency blurs the company's brand identity and brand equity – what the brand SKF has been known for, improved value through cost savings that are delivered by reliable products and services, that are also superior in quality. Price plays a strategic role from a marketing point of view, and changing its price strategy by joining the reverse auction will eventually lead the company to lose its current positioning in the market – the basis of its success in the previous years. Joining the reverse auction will send a message to the market that the bearings industry is becoming commoditised, and value-adding and enhancing services are no longer a big deal to consumers. Although its short-term profitability may be affected with the adverse consequences of not joining the auction – possible impairment of relationships with ITC and Steelcorp, the company, being the world's largest producer of bearings can level up the playing field and establish new rules, or reinvent the category in order for its long-term profitability to not be sacrificed. II. Part 2 A. Introduction With the assumption that SKF changes its strategy in response to the changing dynamics in the industry, certain problems with regard to the implementation of the strategy may emerge in their decision. The choice of the model is also crucial with regard to the implementation process where the choices can be narrowed down into two from the four strategy execution models – the change model and the cultural model (Bourgeois III and Brodwin 1984). These comprise the discussion in this paper. B. Body The change model. Over the years, when it comes to strategy implementation it has always been argued that the roles among the senior managers and the lower-level employees differ with regard to their roles in crafting strategy. Senior managers are usually considered the thinkers, the crafter of strategy; and because of the authority that they hold with their positions, they are usually considered as the ones who need to lead change (Balogun 2006). On the other hand, the lower-level employees are considered the doers – they are handed some strategic plans which are aimed to be implemented. The change model is a top-down approach; where change comes from top through strategic analysis and planning, and the implementation is delegated to the bottom part of the organisation (Balogun 2006). The major criticism about this model is that, because the thinkers are separated from the doers, traditional change frameworks expect that authority alone can spur the implementation of the plans that are crafted by the top-level management (Balogun 2006). Changes in structures, control processes and relationships are given importance, as well as crafting strategies in terms of managing resources such as finance, people, information, and technology. The change model is considered a long-haul process; as the plans are made from top to bottom, a significant amount of time and effort in order to both communicate and implement the plans is necessary (Balogun 2006). The cultural model. The cultural model recognises the shortcomings that arise from the change model – that is, the lack or minimal participation of senior management in the implementation process due to the separation of the thinker and the does function in the organisation results in poor performance (Hrebiniak 2006). According to this model, the major role of the top management, instead of solely crafting the strategy, ranges from being change drivers, to providing visionary leadership to enable change (Chapman 2002). Change is not only expected to start from top to bottom, rather it is a simultaneous incident that is driven by communicating a certain vision to all the employees (Hrebiniak 2006). The implementation comes from communicating the vision as well as the strategy, where the focus of change is not just processes and structures, but also changing the organisation as a whole – its culture which is comprised by its attitudes, beliefs and values, while everyone within the organisation is expected to participate (Bourgeois III and Brodwin 1984). This participation is linked with the concept of 'organisational citizenship' (Chapman 2002). However, the cultural model has also drawn certain criticisms. Some of these include that because the top management is the driver of change, by virtue of communicating a vision to the employees, the vision in relation to the company's strategy is considered subjective (Bourgeois III and Brodwin 1984). Also, because the change is not merely physical and deals with structural elements of the organisation, but with the soft factors such as attitudes, changes and beliefs, this model is considered manipulative as it requires a certain degree of organisational politics (Bourgeois III and Brodwin 1984). C. Conclusion and recommendation If SKF ever changes its strategy from value to hybrid where it needs to add some focus on low cost, the conflicting proposition between low cost and differentiation will result in confusion and some inconsistency with regard to choosing which processes to be implemented. For instance, in order to implement change fully, rewarding certain behaviours are crucial. The company will find it hard to find a consistent system of reward if the criteria are focused on both differentiation and low cost, as one cannot cut down on cost if a company chooses to add differentiating factors. Thus, integration is necessary; in this case using the cultural model is more appropriate when implementing the strategy than the change model. Cultural model is easier to implement because when the employees grasp the idea behind the strategy, it is easier to create targets and control in line with the strategy, as long as the attitudes toward change is unified. In contrast to the change model, if employees find something inconsistent, change will be impeded and the senior management will find it as a form of undue resistance. This, however is a result of the separation of the functions – where the lower-level employees who are supposed to be implementing the strategy have not participated in the planning process. Since the hybrid strategy is less uniform than purely low cost strategy or focused differentiation strategy, participation of the whole organisation is crucial to implementing the strategy effectively. References Balogun, Julia (2006). “Managing Change: Steering a Course between Intended Strategies and Unanticipated Outcomes.” Long Range Planning. Volume 39, pp. 39-49. Available at http://www.lpjournal.com Black, Janice A. & Boal, Kimberly B. (1994). “Strategic resources: traits, configurations and paths to sustainable competitive advantage.” Strategic Management Journal. Volume 15. Date accessed: May 20, 2010 from http://0-www3.interscience.wiley.com.darius.uleth.ca/cgi-bin/fulltext/114279875/PDFSTART Bourgeois III, L.J. & D.R. Brodwin (1984), Strategic implementation: Five Approaches to an Elusive Phenomenon. Strategic Management Journal, vol.5, no.3, pp.241-264. Chapman, J.A. (2002), A framework for transformational change in organizations. 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