Change of SKF's Value Strategy - Case Study Example

For many years, procurement organisations have used electronic reverse auctions. Although the use of auctions has not reached its full potential, many companies have got to explore the importance of using the strategy. This will be achieved by applying the various goods and services needed to attain value. These auctions are introduced by one buyer but attribute two or more suppliers competing in a business environment. They are used as tactical ways of achieving certain objectives. Organisations whose goal is to have a fair and free competition among their suppliers, then the most effective tool to use is reverse actions since they transparency to the sourcing process (Ansoff 1965). SKF should change their value strategy. This is based on the strategic method of their business which I can first analyse it using Porters five forces. This model deals with pure competition that shows that risk- adjusted rates of returns are constant across firms and industries. Michael Porter provides a framework of strategic business seeking to manage an edge over rival firms and meant to understand the context in which the industry operates. The bargaining power of buyers is the impact that end users have on an industry. If the buyer’s power is strong, the relationship to the industry nears a monopolistic relationship. In these markets the buyers set their own prices. According to SKF industry this method has been illustrated where the customers demand a flat discount on unit prices. According to US sales executives, every thing is being commoditised. By this he shows how last year some purchasing people in the competitive paper making industry demanded 5 percent discount on purchases of which the distributors and the suppliers complied and thus it became the companies norm. Though these discounts win customers, they bring a loss to the company as they are not sustainable year after year. The buyers become powerful if they are concentrated with in one area. For example if there are a few buyers with significant market share. The buyers also tend to purchase some proportion of output of a standardised product. SKF Company had a brand reputation for quality and engineering excellence which was considered an important factor in purchasing decisions. This brand had allowed SKF access good distributors as well as important end users. This made the company gain a convincing background in the market. One member of the management highlighted certain challenges of selling premium quality in a price oriented market by stating that quality in hidden in the product performance and only becomes apparent over time. The other Porter’s force of strategic analysis is the use of the bargaining power of suppliers. For an industry to be successful, it needs raw materials such as labour and other components. Rumelt (1974) argue that this leads to buyer-supplier relationship where the industry that provides raw materials becomes the seller and the company buying as the buyer. This suppliers power is demonstrated when the suppliers threaten forward integration. It also occurs if the suppliers are concentrated for instance in SKF company the distributors were ruling the market where even the customers’ could buy things from them and not from the company. Suppliers are also powerful if the customers’ are powerful, if the firms in the industry switch their costs then the suppliers’ supplies at their own price. According to the case distributors were becoming the purchasing arms of their customers who at that time were buying a growing and wide range of products from a smaller number of them. In US for example the distributors were supplying all products to the end users. However, their gross limits dropped due to the rising competition from other distributors. Later, policies in US hindered SKF from conducting commercial negotiations directly with end users. The threats of new entrants into the market also bothered the SKF company as the customers’ accessed cost advantages where there distributors could sell at cost lower than the industry. There was also access to distribution as the distributors ruled the market. The other change in the market was taking place inside end users organisation which concerned the maintenance engineers who had traditionally understood and appreciated SKF’s products and technical superiority. The engineers were losing their influence in favour of those in the purchasing and finance who advocated for good quality at a low price. One sales person had observed that the purchasing was only attracting aggressive managers whose salaries had outpaced other functions and who only thought of their direct impact on profitability. Threats of existing firms.SKF competed with more than a dozen of makers of bearing worldwide. The strongest among these competitors was the Germany’s Schaeffer which had approximately 16-18 percent of market share. Three was also Timken and Japan’s NSK with around 10 percent. SKF Company was also facing new competitors form low cost providers in emerging markets especially from Eastern Europe and China. However, none of these rivals matched the company’s vast array of products and services. In US Timken had been considered as an aggressive competitor that fiercely protected its estimates to 30 percent domestic share compared to SKF which was 12-13 percent. The market’s trends were changing the global market for industrial aftermarket for example the threats of substitutes refer to products in other industries. There few substitutes in the market that SKF Company was operating. The factors that led Phil to accept the decision of participating in reverse action was that they had trust on two distributors and refusing could have led to long term ramifications for SKF’S relations with both. The other factor was a downturn in economic activities which has started showing negative division of sales. The market was changing in that there was a growing concentration of distributors and end users. Mergers and acquisitions, lose of fashion and taste. Low quality products, managers concentrated on profitability according to a sales person. Customers bought from suppliers at lower prices. Things were commoditised; they gave discounts which were a loss to the business. There were challenges of selling premium quality in a price oriented mkt. Technology- deployed a compute based sales tool.DSP used for quantifying and measuring end user value from using SKF bearings and related services. The company enjoyed core competence in bearing technology. The company lacked equal deep knowledge of user requirements, due to economic fall down the company announced that it would cut its global workforce by 13 percent and had anticipated an 18 percent drop. They were also in search for low cost suppliers to meet their target of 20 percent savings for total purchases. The company aimed at standardising SKU and centralising all steelcorp’s previously local decisions. This project aimed at reducing the number of producers in all categories. By participating in reverse auction, Todd thought that SKF would be falling into a commodity trap that was in ones interest he said that the enemy of value selling is this evil internet reverse action because it completely undermined a strategy they were following with many customers. The ICT manager however argued that if they failed to participate then the company would not loose its profitable sales of SKF products but will also damage its relationship with Steelcorp. Brad maintained that keeping this customer happy was paramount; He also said that ICT’S build-up of inventory resulted to economic downturn. Steve saw an opportunity to increase SKF’S share of Steelcorp’s total bearings business but he also feared a loss of volume and the long time good relationship with ICT if SKF failed to participate in the auction. Value chain analysis shows the activities which firms operate in order for them to develop a competitive advantage as well as creating a shareholder value. In this a business is separated into a series of value-generated activities. These activities are called value chain which is divided into primary and support activities common in most firms. Coyne and Sujit (1996) describe that the primary activities include inbound activities which concern receiving and warehousing raw materials in addition to their distribution as they are required by the manufacturing. In the SKF Company we find that they had 110 manufacturing sites across the globe which served about two million customers. Their distribution channel supplied equipments such as airplane engines, gas turbines etc. This shows that the company was technically developed and was a threat to its competitors. The strategic process of arranging the activities into groups improves efficiency as the companies industrial division accounted 32 percent of sales, 35 percent for automotive and the service division that had grown to 18 percent. In the service division, predictive and preventive systems gave engineers warnings of the problems with mechanical parts before failures could occur. It also includes the operations which transform inputs into finished products and outbound logistics which is the storage and the distribution of end products to the end user. Marketing and sales department involve identifying the customers needs and making of sales. The service stage is the support from customers once the product is sold to them. These primary activities can be maintained by; one, changing the organisational structure, company culture and the control system. The activities are also supported by human resource management. This will be effective if the company included employee training, hiring, development and compensation. Technology development to support value- creating activities especially the DSP computer based sales tool that was used for quantifying and measuring end user value using SKF’S bearings and related services. This system increased customer’s benefits by reducing failure rates, shorter life, costs of labour and frequent replacements. There were also customer’s investments where by the customers premium paid for SKF bearing lowered and other benefits were condition monitoring and end user training. In value chain analysis, the firm’s margin depends on how it effectively performs these activities for the customer to be willing to pay for the products. According to Quinn (1979, p. 25) competitive advantage is achieved by reconfiguring the value chain to yield low cost or better differentiation. It also defines a firm’s core competence through cost advantage and differentiation. We find that SKF Company had enjoyed proven core competence in bearing technology though it lacked a deeper knowledge of user requirements. The company had been accused of using soft dollar to sell expensive products and unnecessary services as it mostly concentrated on value. Recently the company has got to document value in order to get paid for it. The introduction of DSP offers measurable customer benefits which translate into performance guarantees. Reverse auction introduced to RKF Company has various strategies which include; relying on incumbency. Big companies major motive at times is to compel a supplier to cut on prices. If these suppliers suspect that they are the target, they tend to bid their current price and hold firm. One does not have to win the auction outright since the buyer factors the cost of switching suppliers. The lowest bidders have good shots of keeping the business. Michael (2008, p. 80) state the second strategy of reverse auction is looking beyond the price. Some bidding web page provide the suppliers with an overall ranking basing on various factors such as shipping costs and contract terms. This method is referred to as transformational bidding by experts. According to Berg (1965) one advantage is that it improves the offer methodologically through price, shipping and terms. The low-ball early is where companies make their first bid their lowest if they anticipate that their competitors are not prepared. Start high method is used when one thinks of being the cheapest in town. The trick is starting high and dropping slowly as possible. The final strategy is sabotaging the industry. This is quite risky and nasty though certain companies use reverse auction in order to lower prices hoping that their rivals will underbid them. They finally win unprofitable businesses. This strategy is called the suicide pact. Once the SKF Company decide to change their strategy, the implementation of the reverse auction will bring certain problems. The strategy execution will use various models such as commander model, change model, cultural model and crescive model. These tools are meant to guide their enterprise. The commander model has a strong normative bias towards centralised direction. It deals with asking managers how they can plan traditional strategic management. This model assumes that an analysis can be undertaken before an action is taken. The CEO holds some power and has access to sufficient information. The model also includes two rubrics. These are the system model and the incremental model. The system model identifies the objectives of the organisation and tends to give courses of actions which meet these objectives. It then evaluates them basing on economic efficiency and one is chosen for execution. In the incremental approach, the existing strategy is identified and threats and opportunity facing the company are evaluated. The plans are modified in order to fit the current implemented strategy. These two approaches assume a purposive COE that can direct the firm towards the apex of the organisation. The change model is an extension of the commander model in that the managers asks themselves how they will get the organisation to implement their strategy. The model assumes that economic tools for strategy formation are mastered. Rainer (2009) describe that the model involves the use of three tools such as structure and staffing. Structure and staffing is the most commonly used tool in the implementation of a new strategy. The structure of the company should denote the skill set to attain the strategy and a strategy calling for the marketing of commodity products for example the product oriented organisation. These show the firms new priorities and focus their attention on desired areas. The second tool is the alteration of systems and finally is the cultural adaptation techniques meant to introduce the system. Various account and tools support administrative systems for implementing strategy. A firm’s strategy calls for investing in certain businesses and harvesting others. Cultural adaptation deals with fundamentals such as use of demonstrations, use of perceived needs and the support of high credibility presenters. The implications of this are that an executive can carry out difficult plans in various organisations. Change model raises a theoretical possibility of new kind of problem. This model manipulates systems and structures to support a particular situation. Most of these systems take time to design and install and once they are installed they may also take much time to work effectively (Bales 1977, p. 20). The cultural model takes participative elements that lower levels in the organisation. This model helps the CEO to direct his organisation through effective communication and installations of the company’s vision and mission. It allows each individual to participate in designing work procedures according to the mission statement. The model also represents the latest wave of techniques used in management. Reich (1981, p. 28) shows in all the models, cultural model tends to break down the gap between thinkers and doers. This is by assuming that people want to work together in achieving a common purpose as it challenges sharp distinction. The implications are that it yields its primary strength through consensus decision making and other culture- inculcating activities. The crescive model addresses the limitations described in the previous approaches. In this the strategic problem revolves around the CEO and his ability to define the purpose of the organisation. This definition permit diffused attention enough to encourage innovation and to select judiciously from those projects or alternatives that need attention. As investments ascend through the corporate hierarchy, their promotion often overrides their inherent economic justification. Steps have been taken to develop the model and they involve five propositions. One is that the manager can not monitor all opportunities and threats, the second is the limitation of the power of imposing a strategy as the manager can not escape reactive mode. Since the chief mostly relies on his subordinates in data provision and strategy generation, he must therefore be careful with the incentives he establishes. Finally is that the formation of strategies occurs in groups and incorporates perceptions and not incontrovertible facts (Gerry et al. 1998). In conclusion these models gives a means of thinking to the CEO about the range and complexity of tools to be considered when organising the approach that affirm is to employ in strategy making. None of the approach is correct for all companies therefore their use depends on the degree of diversification, the rate of growth and change and finally is the culture used in that particular organisation. The models facilitate the implementation of strategic management process. To achieve wanted goals in the organisation, variety of processes are used such as request for proposal (RFP) and reverse auction process. Reserve auction helps managers to determine the right tool for electronic sourcing strategy. The method is not recommended for a spend category especially with customised specifications for example one that few suppliers have appropriate manufacturing capabilities. Companies such as SKF that are just starting to conduct reverse auction, the best practise would be to employ RFP process in addition to auction. This will enable to prequalify suppliers and obtain quotes before the auction events as the method enables the buyer to get a better sense of the market pricing thus can anticipate the auction parameters with great confidence. The process ensures great success. References Ansoff, H 1965, Corporate strategy, McGraw-Hill, New York. Bales, F 1977, Strategic control: The president’s paradox, Business Horizons, pp.17-28. Berg, N 1965, Strategic planning in conglomerate companies, Harvard Business Review, pp. 79-91. Coyne, P & Sujit, B 1996, Bringing discipline to strategy, The McKinsey Quarterly, no.4. Gerry, J, Kevan, S & Richard, W 1998, Exploring corporate strategy: Text and cases. Michael, P 2008, The five competitive forces that shape strategy, Harvard Business Review, p. 86. Quinn, J 1979, Technological innovation, entrepreneurship and strategy, Sloan Management Review, vol. 20, no. 3, pp. 19-30. Rainer, T 2009, Information systems and the modern organization, Introduction to information systems, 2nd ed, no. 2, pp. 38-39. Reich, B 1981, The profession of management, The new republic, pp. 27-32. Rumelt, P 1974, Strategy, structure and economic performance, Harvard University Press, Massachusetts. The diagram showing the Porter’s five forces model The diagram showing the value chain analysis of strategic management The diagram showing corporate venturing of businesses Read More