Evaluation of Business - Acme Corporation - Case Study Example

EVALUATION OF A BUSINESS CASE. by Course Professor Institution City and state Date Evaluation of a Business Case Introduction Evaluating a company’s underlying environments in an industry is important because of the analysis role in the establishment of the company’s strategic direction in different situations. It gives an insight on how CEOs effectively make use of analytical tools and basic concepts in the context of company’s industry situation and competitive conditions. It also identifies, explores and examines factors resulting into relatively weak, less normal and fierce competition within an industry. Company analysis determines if an industry outlook presents threat to specific companies or opportunity for profitability and growth. According to Per Lindberg (2013) company evaluation analysis is significant in regard to industry competitive and rivalry conditions, evaluations play important role in the formulation of strategies addressing specific company situations (Per Lindberg 2013). Summary of Case Study The Australian building products industry in 2014 was worth over $2billion. Acme Corporation is one of the firms supplying building products commanding a significant market share in this industry. Acme is a business to business (B2B) company selling its materials and products through retailer customers such as Bunnings. Acme Corporation does not have direct relationship with its products end-users. This market consists of trade and DIY (do-it-yourself) as the end-user segments. In 2014 the company’s total sales amounted to $678 million and registering Earnings Before Interest, Taxes and Amortization (EBITA) of 18% making this company best performing in contrast with its competitors. Key major competitors of Acme Corporation include Tasmanian based known as Shesright Pty Ltd and Hammer & Tong (H&T) a subsidiary of a French company that has its operations in 52 countries. The two competitors operating in this market consist 60% of the total revenue. Shesright Pty Ltd control 46% of the market share attributed to its customer financing arrangements initiative making it popular among customers experiencing cash flow problems. This company has strong position attributed to its excellent services, reputation and its customer financing arrangements. It has focused on trade sales (no DIY) through specialist distribution channels. Arrow Inc. is expected to enter this market and it is expected to introduce stiff competition to Acme Corporation. This competition is highly attributed to Arrow’s cost structure of offering discount prices of up to 30% below current market prices. Acme CEO Chris Maxim believes that Arrow’s market entry will significantly affect the industry status quo. The effect is based on the concept of innovator’s dilemma. This is where new industry entrants undermine the incumbents at the same time delivering greater value in a sustainable manner in its markets. Arrow Inc. is expected to achieve this through the combination of lower costs, superior performance, and sharp focus in value propositions that appeals more granular market segments. Therefore, Arrow Inc represents a threat in this market forcing the end-users demand for discount pricing in other companies. This presents attractive propositions to supply some of its competitors in the B2C space Asian-sourced materials. On the other hand Shesright CEO Rupert Pubkin does not consider Arrow Inc to being a threat since it is perceived to being a low cost and low quality player. Rupert Pubkin argues that Shesright trade customers are loyal not only to the company itself but also “made in Australia branding. In regard to Arrow Inc, entry, Hammer & Tong (H&T) company argues that it will bring an opportunity to develop new product lines that are affordable to price sensitive customers in the emerging and existing markets. H&T have the positive perception that this will enable them expand its market segments. Acme’s CEO in the bid to handle this threat emphasizes on the adoption of a cost structure that that generates quick savings to make the company cost competitive. Other measures introduced by Acme include establishing stable relationship with its unionized workforce. Chris Maxim need to be careful in regard to cost cutting approach not to affect important investments on technology, human capital and infrastructure needed for future revenue growth. It is considered inappropriate for a company to register growth only based on cost cutting. Criteria The relevant criterions for evaluating a company’s competitive environment and the industry mainly surround critical strategic thinking in the context of business. These criterions enable managers and CEOs obtain relevant information that can be used to evaluate company’s industry and competitive environment. The criterions are relevant and vital in making company’s strategic choices and decisions (Pride 2014). Key notable relevant criterions’ underlying company’s industry and competitive environment includes. Industry dominant economic features It is notable that most industries differ significantly in various aspects. To carry out an evaluation on a company’s industry and competitive environment it is important to identify key dominant economic features. Identifying dominant economic features is complemented with an accurate insight of the industry landscape (Ajitabh 2008). The dominant economic features entails the market size, size and number of buyers and sellers, market growth rate, geographic boundaries of the market, technological change, product differentiation and the extent of vertical integration. This criterion distinguishes economic features in an industry. Analysis of these features enables managers and CEOs understand the industry and decide the appropriate strategic moves that are required in the industry. An industry with companies dealing with one product needs to invest in the research and development (R&D) to enhance their innovation capabilities and maintain their brand (Triantis 2013). This criterion is used to evaluate the extent to which a company manages its key economic features to gain sustainable competitive advantage in an industry. Strength of the competitive forces Different industries have varying competitive forces. Evaluation and determination of how strong are the competitive forces underlying an industry are executed using five-force model of competition. This criterion identifies the principle competitive pressures within an industry and assesses the strength of each. The competitive pressure underlying this include those associated with buyers choosing rival sellers, pressure associated with new entrants and threats, competitive pressure associated with supplier bargaining power and supplier-seller collaboration, competitive pressure from buyer bargaining power and seller-buyer collaboration and finally competitive pressure from substitute products from companies in other industries (Nijssen 2013, p.38). This criterion evaluates company’s industry and competitive environment making use of the five-force model by determining the strength and makeup of the underlying competitive pressures. This model identifies key specific competitive pressures associated with each of the forces, evaluates the strength of the pressure whether weak, normal, moderate, strong or fierce (Triantis 2013). Finally, this criteria using five-force model determine the straightness impact of the five forces on the earnings and profitability. Competitiveness of Company’s Costs and Prices It is notable in some cases a competitor in an industry with a number of companies may reduce its prices to extremely low levels. Other cases are where new entrants companies enter the industry with low pricing. Regarding this case a competitor may not necessarily buying its way into the market with its low prices below its cost, it may be having lower costs. This criterion facilitates company evaluation in the context of determining business position using the competitiveness of prices and costs of its rival companies in the industry (Denis Bouyssou 2006). This criterion in its evaluation utilizes the comparisons of price and cost, it is suitable for a company that operates in an industry where key market force is price competition. It is also suitable for an industry characterized with product differentiation and rival companies strive to keep costs consistent with other competing companies having similar differentiated products. To determine whether prices and cost of a company are competitive benchmarking and value chain analysis analytical tool is used (Pride 2014, p. 73). Value chain comprises of the various activities undertaken in a company during designing, producing, marketing, delivering and supporting its goods and services. These activities seek to create value for buyers. Therefore, value chain comprises of profit which is part of the total cost which the buyers pay. Value chain comprise of primary activities which create value for buyers and support activities that facilitate performance of primary activities. Primary activities include operations, supply chain management, distribution, sale and marketing and service delivery. On the other hand support activities include system development, product research and development, general administration and human resource management (McIvor 2005). Benchmarking is an evaluation tool which is used to determine particular activities performed best by a company. It also provides techniques and measures which can be put in place to improve internal activities performance of a company. Evaluation of Case Company evaluation using Industry’s Dominant Economic Features criterion entails the following. Australian building products market is relatively big and its one of the fast growing industry in the country. Its products and services lifecycle is at rapid growth and takeoff therefore the industry growth prospects are high. This industry is dominated by few rival companies namely Acme Corporation, Shesright Pty Ltd and Hammer & Tong (H&T) company. Therefore the industry is consolidated with small number of competitors. Competition rivalry scope is that these companies compete for the local markets. Hammer & Tong (H&T) company is the only multinational company having operations in other countries and this provides them competitive success over other locally based companies. The market demand in the context of buyers is not fully fragmented since Acme Corporation is a Business-Business (B2B) and its buyers are retailers and does not have direct relationship with end-users while other rival companies have their buyers as end users. Retailers who are the buyers for Acme Corporation are likely to have bargaining power (Ajitabh 2008). Product differentiation is relatively low in this industry but with the expectation of Arrow Inc entering the market there is likelihood of this industry having its products differentiated (Graham 2008). Competing companies have increased product innovation and short product lifecycles attributed to these companies’ commitment in research and development (R&D) (Egashiru 2013, p.46). Demand and supply conditions are relatively stable but with expected new entrants this stability is not certain. Hammer & Tong (H&T) company is likely to have cost advantage because of its overseas operation thus enjoying economies of scale. In regard to curve effects Shesright Pty Ltd is enjoying cost advantages because of their best experience customer service and customer financing arrangements (Kuijper 2009). Adopting the second criterion of the strength of the competitive forces, rivalry among the competing companies is evident to be stronger among the five competitive forces. Market maneuvering for buyer patronage is common among the competing companies. The three rival companies compete to retain buyers and earn maximum profits to strengthen their market shares and positions. The CEOs of these companies face the challenge of coming up with competitive strategies that produce a competitive edge. It is also notable that threat of new entrants is also evident in this industry. As Arrow Inc prepares itself to enter the market with new cost structure there is notable significant competitive pressure. Acme Corporation faces competitive pressure offering discount prices of up to 30% below current market prices. Acme Corporation is likely to lose its buyers in the B2B market who are mainly retailers. Shesright Pty Ltd does not expect to face any competitive pressure from Arrow Inc which is the new entrant since its customers have strong brand preferences and high customer loyalty. Hammer & Tong (H&T) company with the new entrant Arrow Inc is expected to strategies on how they will design and produce modern lines of products as a respond to this underlying competitive pressure. In the context of competitiveness of company’s costs and Prices Company industry and competitive environment is evaluated by benchmarking and value chain analysis. This involves comparison of the performance of the value chain activities. It also entails material purchases, customer service and maintenance performance (Rostek 2015, p. 52). Shesright Pty Ltd is effective in customer service as it caters for customers who have cash flow problems thus enhancing customer loyalty and brand preference over other competing companies. H&T Company announcing for an end of “made in France” sourcing policy will enable them come up with new product lines that are affordable from the local suppliers thus minimizing costs. This company is also likely to acquire new emerging markets for their new line of products and services. This will enable this company to expand its product segments thus improving the performance of its value chain. Key major challenge associated with benchmarking is the difficulty in accessing information from rival competing companies. The value chain system for Australian building industry includes the chains of the underlying competing companies, suppliers, distributors and suppliers. For mutual benefit and advantage, companies in this industry work closely with suppliers and forward channel allies to ensure that value chain activities are performed effectively. It is notable that company’s competitiveness in these rival companies depends on costs associated with the value chains of suppliers as well as the internally performed activities and operations (Kuijper 2009). Recommendations Acme Incorporation CEO Chris Maxim should focus on expanding the company’s market size and growth rate. This can be achieved by introducing direct selling of their products to the end users and wooing for more number of retail buyers. Acme Incorporation should also be keen on the expansion of its geographical area of operations. It is also important for them to put emphasis on product differentiation, product innovation and development. The underlying economic features in this industry needs to be thoroughly analyzed and evaluated to ensure that the corporation CEO understands clearly the industry situation so as to make informed and beneficial strategic moves. Acme CEO Chris Maxim should identify the strengths underlying the company’s competitive pressures in regard to the identified five forces. It is important to critically examine each of the forces to determine whether the combination of these forces results into strong or weak competitive force to the overall corporation. The five-forces should be taken into account more importantly when it comes to the corporation strategic thinking so as to match the company strategy with the prevailing competition situation of the corporation. It is also important for Acme CEO to determine the intensity of competition so as to come up with profitable strategies. The company strategy should focus on the achievement of sustainable competitive advantage and defining efficient business model that will add competitive pressure to its competitors. Acme CEO Chris Maxim should effectively manage it value chain activities to ensure that they build key competencies, build competitive advantages, lower cost compared to its competitors and develop key competitive capabilities. Conclusion Company evaluation is basically an analysis or the appraisal of the company strategies both in the short-term and long-term that significantly affects the company’s overall performance. The evaluation involves analysis of the company’s internal resources, all the activities that are performed within the organization and outside by suppliers and its impact of the company have cost structure and its competitiveness. It is also important to note the importance of company’s competitive strength. These underlying evaluations and the analysis of competitiveness and the industry are vital for company and corporation’s managers and CEOs in the identification of strategies issues concerning strategic positioning and the achievement of competitive edge. References Bouyssou, TM 2006, Evaluation and decision models with multiple criteria: Stepping stones for the analyst. Springer Science & Business Media, New York. Despres, C 2011, Proceedings of the 7th European conference on management, leadership and governance: SKEMA business school, Sophia-Antipolis, France, 6-7 October 2011. Academic Conferences Limited, London. Egashiru, S 2013, Globalism and regional economy. London, Routledge. Eversheim, W 2008, Innovation management for technical products: Systematic and integrated product development and production planning, Springer Science & Business Media, New York. 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