Porters Diamond Model in China Auto Industry - Assignment Example

TCP - Strategic Management Contents Question 3 Question 3 4 Question 5 5 Question 6 6 Reference 8 Question Assume you were asked to advise a chief executive of a long-established, historically successful business with highly experienced managers that is experiencing declining profits and falling market share. What might you expect to be the causes of the problems? What processes of strategy development would you propose to address them? Declining profits and falling market share often suggest many factors for which the organization might be facing such a problem and is of a huge concern for any organization. The main aim of the organization is to increase profits and capture the market share but when things turn around, organizations needs to find out the reason for such problem. Sales often refer to the top line of the company’s financial statement. Thus trends on sales tend to reflect both the quantity as well as the price at which the sales of the product have been made. Thus declining sales suggest an injury unless and until the domestic market are able to earn a higher profit even when the sales ration declines. One of the reasons in decline sales might be due to emergence of a more competitive market. With fierce competition in almost all the sectors, the new companies with new innovations are increasingly capturing the market share. However a decline market share suggests that the home market is experiencing lower sales and also lower profits (Wolfrum and Koebele 2001, p.61). This could be one of the major reasons for organization not performing well despite of having well trained mangers. Also when the company product reaches a declines stage of the product life cycle it often experiences a declining profits. Therefore it becomes important for an organization to survive in the decline stage. It is suggested that the organization to opt for one of the following alternatives, It is important for the organization to ensure that the marketing as well as the production programs carried out by the company are as efficient as possible. This would help the product to be in the eyes of its target market. It is suggested to “run out” the current product, which means to cut all the cost to the minimum in order to maximize profitability over the remaining life of the product. The company can prune unprofitable models and sizes, this strategy would decrease the sales but eventually would increase the profits Finally the company can revitalize the dying product in some manner or the other. But if none of the alternatives works, the company would therefore have to abandon the product. This is because the expense incurred to carry out the unprofitable product goes way beyond the actual figure in the financial statement (Etzel 2006, p. 250). However there are four strategies that company can adopt in order to deal with the decline. Leadership strategy is a strategy where the organization seeks to become one of the dominant players in the declining industry. Niche strategy is referred to as, where the company focus on the demands of those industry which are declining at a slow rate. Harvest strategy aims to optimize the cash flows and this is highly acceptable in situations when the company faces a deep decline and high rate of competition. And divestment strategy is often based on the idea of selling the business assets and resources to other organizations (Hill and Jones 2011, p.139). Therefore the optimum solution would be to apply the harvest strategy as the company is experiencing a high rate of decline in sales and market shares. Question 3 Consider the strategy choices of: Price-based; Differentiation; Hybrid; Focused Differentiation. Analyze and compare the attributes of each choice to one another in terms of their impact to organizational effectiveness The price based strategy is further divided into two strategies, one is the no frill strategy and the next is low price strategy. The ‘no frill’ strategy is a combination of low price, a low perceived products and also services and focus on the price sensitive segment. In the case of low price strategy, it seeks to achieve lower price as compared to its competitors and at the same time try to maintain a similar product to those of that of its competitors. If a business unit decides to achieve a competitive advantage through a low price strategy, it get an option of two choices, firstly to identify and focus on a segment which is unattractive in the eyes of the competitors and in a way avoid the competition and secondly competition based on pricing. The next strategic choice is the differentiation strategy which aims to provide products the offers which tends to benefits differently from that of its competitors and which is valued by its customers. The main aim is to achieve a competitive advantage by adopting the differentiation approach. Differentiation approach can be attained either through hybrid strategy or focus strategy. In hybrid strategy, the firm simultaneously seeks to achieve differentiation and also a price lower than its competitors. In focus strategy, it tends to provide a high perceived product which benefits a premium price for a niche market segment (Johnson 2008, p. 245-251). b) Then select the one that suits a company of your choice and evaluate critically your decision Toyota the largest manufacturing company in the world has adopted the hybrid strategy. In the year 2002, Toyota announced its plans to use only gasoline electric hybrid engines for all its vehicles by the year end of 2012 in order to increase the efficiency of fuel and hence reduce the tailpipe emissions. Hybrid engines are believed to be more efficient for small cars, but Toyota by 2004 enhanced its technology of hybrid engines and entered the luxury segment of cars. This has eventually leaded to confusion whether Toyota would be able to maintain itself in the luxury car market with its hybrid strategy (Ungson and Wong 2008, p.97). However recently, Toyota Australia has planned to change its strategy after experiencing disappointing sales of its pioneering brands Camry and Prius hybrid lines. The company has tried to implement lot of strategies in order to dispel the ongoing myths. Toyota has been consistently fallen short of its sales target for the hybrid cars. The company predicted to sell off 4500 Prius in 2010 but could sell only 1611. In the current year sales went down by 70% with just 358 Prius hybrid cars getting sold off (Hammerton 2012). Hybrid strategy is often criticized with certain problems with respect to its product offerings and ignoring the important needs of its customers. Toyota is likely to end up being stuck I the middle when it comes to displaying its electric vehicles in spite of shooting ahead. In the light of high costs and with low global sales the automobile manufacturer might face problems in achieving its targeted sales (Wimmer 2011, p.218). Question 5 Taking an industry you are familiar with that is strong in your home country (for example, fashion in France, and cars in Germany etc.), use the four determinants of Porter’s Diamond to explain that industry’s national advantage Porters Diamond Model is used to explain the beneficial impact of the industrial cluster on productivity and growth. The four factors in Porters Diamond model represent the influence on the competitiveness of the firm (Grant 2010, p.376). Figure 1: Porters Diamond Model Porters Diamond Model in China Auto Industry Factor Condition As per Porter (1990) and Dunning (1980), most of the MNEs invest in international countries mainly because of three major reasons, firstly to seek resources, to get a potential market share, and finally to seek efficiency. MNEs entered the Chinese automobile industry to gain an access to a very large potential market and hence avoid the trade barriers for imports. The government of China has increased investment in the infrastructure and has promoted highways, railways and also waterway transportation projects in order to explore the demand of the domestic market and improve the supply chain management. Government has also attracted the FDI in its transportation sectors as the total FDI reached $459.52 billion. China is known for its technological advancements and also investment in R&D as it has invested about $50.2million and is generally ranked high in R&D (Wu 2006, p. 32). Demand Condition China automotive industry has few competitive advantages as compared globally but it is regarded as the potential demand market across the globe. As predicated by Jing (2005) the average income of China would increase at a rate of 6% and by 2020 the arte would amount to 60million. Accompanied by urbanization, the need for proper transportation has increased drastically. Also private and passenger cars have represented a major market share due to an increase in the variety of product and demand. With a rise in the level of income, about 500 million would become a part of the middle class and eventually to upper class thus many of the sports and luxury car brands are heading to enter China through imports or joint ventures such as BMW, Porsche, and Mercedes-Benz (Wu 2006, p. 35). Related and Supporting Industries Production of cars in China has increased more than about three fold by 2001 and thus the supply chain underwent a huge transformation. The relationship between the assemblers and the suppliers has transformed leading to a global diversity. The direct suppliers had the potential to become global firms and are expected to have responsibility in engineering and designing of the systems and co coordinating the supply chain management. The Chinese suppliers are eager to adapt and learn about new technology from the international firms, but manufactures desire to get into the Chinese market because of low production costs. China’s auto industry tends to contributes much to the automotive exports; suppliers have few competitive advantages over the global manufacturers, in term of R&D and economy of scale (Wu 2006, p. 36). Firm Strategy, Structure, and Rivalry In order to react to the market trends the auto makers are implementing strategies such as expanding operations, replicate the structure of global supply chain; recognize the most desirable product across the common platform; focus mainly on creation of model and services related to cars. With an increasing importance of brand management, design, customer relationship the assemblers of China are joining the cross industry constellation which links them into market research and technical, financial institutions and customers. Thus following the global trend, Chinese automobile industry have developed business groups and with inter firm with the global auto industries, has strengthen its competitive advantage (Wu 2006, p. 45). Question 6 Take a case of a recent merger and acquisition and assess the extent to which it involved related or unrelated diversification (if either) and how far it was consistent with the company’s existing dominant logic Diversification might be chosen for various reasons, some creating more values than others. Diversification is mainly of two types related and unrelated diversification. As in case of acquisition, it might serve the interest of the manager’s better than its shareholders. Mergers and Acquisition might serve the managers interest for two valid reasons, personal ambition and bandwagon effect. As a result M&A tend to grab the headlines as they usually involve a huge amount of money and public competition for the support of the shareholders. However the strategic motives for M&A includes extension I order to reach the product, market or the geography; M&A can also be used in order to consolidate the competitors of the organization in the same industry and thirdly M&A can be used to increase the capability of the company. Apart from the strategic motives, through M&A, companies can also gain financial resources (Johnson et al. 2011). Below is the case of related diversification of health, nutritional company, Nestle. The Swiss food giant Nestle has acquired Pfizer baby food business and has increased its hold in the Chinese market where Pfizer had about 7% of the market share. Nestle entered into a related diversification as Nestle is the world’s largest seller of infant products and Pfizer also dealt with baby food. This acquisition would help Nestle to increase its market share in China. The 6billion Chinese market is a major achievement as the company sets to double the market rate to $12billion by 2016. The Chinese market is growing at an annual rate of 10% and with emerging markets accounting for 73% of the sales with a growth rate of 13% (Kollewe 2012). China is regarded as the most promising market and this is why Nestle decided to enter the Chinese market. With the acquisition, Nestle has not entered into any new terrain; it still maintains its core business of producing artificial milk for infants (The Economist 2012). Nestle has over the years produced many food products and it can be said that it has remained consistent with its dominant logic. It is one of the world’s leading health, nutrition and wellness organizations and has also acquired companies dealing in health and nutrition as in the year 2007 Nestle overtook Gerber, which was also an American baby‐food maker. Thus it can be said that Nestle has been following a strategy of related diversification in terms of mergers and acquisitions and sticks to its dominant logic of nutritional food products. 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