Fiat: Intangible Specialization and Product-Mix Optimization - Case Study Example

Fiat: Intangible Specialization and Product-Mix Optimization 1. What do we mean by “Intangible Specialization”? Most of the organizations, which engage in the production of goods or services, usually have measures in place to enhance the specialization of the work in order to reap maximum benefits from the practice of specialization. Though advantageous to the company, specialization may pose problems if the company attempts to change production systems. However, in some situations, intangible factors may lead to the specialization of the company in a certain area. Some of the companies may not be aware of the intangible specialization and are therefore faced with serious problems in their attempt to shift from a certain market segment. Intangible specialization can be simply defined as specialization of a company in a certain area due to some intangible factors mainly brought about by the routinized activities of the company in performing its different operations relating to the production of the main product the company produces. The intangible factors include routinized and path-dependent decision-making routines that help in the regulation of the process and product design and renewal of the product (Maielli, 2005, p. 250). In addition, intangible specialization is mainly concerned with the internal routines and the accumulation of intangible capital in the designing and manufacturing of certain products, making the company efficient in the production of such products, as well as other products. Intangible specialization may restrict the company in a certain field and hinder its attempt to change the area of its operation. It reduces the output mix flexibility of the company even if the company has technical flexibility in its production technology (Maielli, 2005, p. 249). In addition, intangible specialization usually poses great risks to the change of a company especially if the company is not well aware or equipped to deal with intangible specialization. Moreover, efforts by the company to shift into other areas are usually faced with diverse problems and are in most cases not successful. The company should therefore device means of reaping maximum income from the area of specialization, as attempts to shift into other areas will be difficult in most cases. Knowledge of the intangible specialization also helps the company in formulation and application of strategies that will aid the shift to other areas in the supply chain. Intangible specialization is categorized into the evolution theory of economic change. The theory emphasizes the importance and effects of routinized and path-dependent decision-making and output-mix decision-making (Maielli, 2005, p. 250). In addition, intangible specialization usually affects the way a company reproduces the technical skills that aid in the manufacture of certain types of products (Maielli, 2007, p. 285). It usually comes up involuntarily as a response to the domestic market in the area of operation of the company. Intangible specialization may be advantageous or a limitation to the company. This is mainly dependent on the strategies that the company formulates while factoring in the strengths and weaknesses due to its intangible specialization in a certain area of operation. One of the main benefits of intangible specialization is that it may help a company overcome different financial difficulties if efficient strategies are put in place to enable it to have output-mix optimization in the area where it has intangible specialization. 2. How did Intangible Specialization affect Fiat’s strategy and output-mix optimization in the 1970s? Fiat is an Italian company mainly involved in the manufacture of cars. The company has a strong reputation in the manufacture of city cars, though it also manufactures other types of vehicles. Intangible specialization has made the company output-mix to be skewed to the lower market segments. Intangible specialization of the designing and production of small cars has led to the locking up of Fiat at the lower segment of the market. This has led to the reduced flexibility in the output-mix of the company (Maielli, 2005, p. 249). In addition, Fiat has at several times attempted to move in the upper market segments that usually have higher returns per unit of production. All the attempts have usually resulted in failure of the company to move in the upper segments of the market, thus resulting into reduction of reputation in the image of the company and the apparent locking up in the lower market segments. During the 1970s, Fiat attempted to shift up markets through the acquisition of Lancia, an Italian automobile manufacturer. In this case, Fiat wanted to use Lancia, a company that had good reputation in the upper market segments, but was faced with bankruptcy (Maielli, 2007, p. 288). The acquisition of the company was in line with the shift in the strategy of the company from being process-oriented to being market oriented; and hence to help in the movement to the upper market segment (Maielli, 2007, p. 288). However, the management of the company was able to clearly show that vertical integration would greatly benefit the company and help it in its output-mix optimization. Through Lancia, Fiat was able to move into the up market segment. However, the move did not last long due to some factors, which will be explained shortly. To maximize the synergy and produce the up market units in a cost effective method using the economies of scale, the company fitted the Lancia with Fiat engines. The management also formulated methods through which the engineers were able to control the designing of the products and the processes involved. This was necessitated by the internal politics and the difference in strategic thinking between the marketing and operations managers. In addition, the product and process engineers wanted to be in control of the final product of the company. In this case, a compromise was formulated which ensured that the marketing mangers were in charge of the output-mix optimization strategies and the operational manages were in charge of the decisions relating to the operation and product design (Maielli, 2007, p. 288). The internal politicking was mainly due to the intangible specialization, which had ensured the production managers were usually in charge of the product design and the output mix optimization strategies in the past. The production managers and process engineers emphasized the importance of cost-saving methods thus making the design and production of sophisticated and expensive models to be unacceptable to the company’s techno-structure (Maielli, 2007, p. 287). However, the decision led to the dilution of the Lancia brand, thus making the company unable to effectively compete with the other companies involved in the upper segment of the market (Maielli, 2007, p. 288). During this period, Fiat developed efficient product renewal strategies and put great emphasis on the up market units. Moreover, during the early 1970s, Fiat launched several up market models that were outside the Lancia brand (Maielli, 2005, p. 256). The successful launching of the products was mainly due to the acquisition of the Lancia brand, which had helped to improve the image of the company. However, integration of the Fiat’s process and product designs into the Lancia led to deterioration of the image of the company as a manufacturer of middle and upper market segment in motor industry. This led to a significant reduction in the market share of Fiat and it eventually found itself on the verge of bankruptcy (Maielli, 2007, p. 288). 3. How did Intangible Specialization affect Fiat’s strategy and output-mix optimization in the 1980s and 1990s? During the 1980s, output-mix of the company shifted to down-market as the company used the product renewal strategies that focused on the lower market products. This was mainly done in order to rescue the company from the verge of bankruptcy. In this attempt, the company launched several low markets models, with the most notable being the Uno and the Panda (Maielli, 2005, p. 256). Here, 70 % of the output of the company consisted mainly of small cars. During this period, intangible specialization enabled it to effectively implement the shift to the lower market segment and obtain output mix maximization from the shift to protect the company’s financial position. In the 1990s, Fiat once again attempted to shift into the up market segment. Just like in the late 1960s, the strategy involved acquisition of a company that had a good reputation in the upper segment of the market. The company acquired Alfa Romeo, a company that had a highly reputable brand and was capable of effectively competing with other companies in the upper segment of the market such as Mercedes and BMW (Maielli, 2007, p. 289). However, the Fiat engineers abandoned the technical configurations of Alfa Romeo to the detriment of the company; the engineers changed the technical configuration to enable the production of the vehicle to be as cost-effective as possible and have front-wheel drive. The Alfa Romeo had front engines and a rear-wheel drive with the De Deon Bridge. This technical configuration was less suitable for high performance cars, thus making the company loose many of its customers especially after BMW started using the De Dion Bridge and rear wheel drive (Maielli, 2007, p. 289). Once again, intangible specialization hindered the company from venturing into the up-market segment, as the employees of the company were unable to effectively execute the strategies the company had put in place to ensure the shift to the up-market segment. After acquisition of the Alfa Romeo, the company integrated the activities of the Alfa Romeo with those of the Lancia in order to help improve the general image of both brands, as well as consolidate the company’s position in the up-market segment. The company also started using a different and more flexible production system known as the lean production system. To help improve its image and the perceived quality of its products, Fiat carried out several campaigns to show that, through the system, it was capable of undertaking flexible manufacture of high quality cars (Maielli, 2005, p. 257). After unsuccessfully trying to venture into the up-market segment, Fiat’s performance stagnated, making it to have an output mix that was so much skewed to the low market segment, resulting into a crisis in the company in the years ahead. Intangible specialization has made the company fail to shift into the up market segment on two occasions; this was during the 1970s and the 1990s. However, intangible specialization helped to keep the company afloat during the 1980s when it made a shift into the lower segment of the market to help it overcome financial difficulties. 4. Should Fiat shift up market in the second decade of the 21st century? Suggest and justify possible scenarios and output-mix optimization strategies. The history of Fiat has shown that intangible specialization has made Fiat to be superior in the production of small and relatively cheap cars. This has resulted in increased dependency of the company to the low market segment; indeed, attempts by the company to shift into the up-market segment have been unsuccessful. The company also faces stiff competition from other automobile manufacturers, mostly Japanese, who are also involved in the production of small and cheap cars. A shift in the up-market segment would require it to be able to produce large number of cars in a year without compromising the quality of the cars, a feature that both Mercedes and BMW have managed to achieve effectively. However, intangible specialization makes the company less suited to undertake the above practices. History has also shown that, even if the company acquires a strong position in the up-market segment, it cannot be at par with Mercedes or BMW in mass production of high quality cars (Maielli, 2007, p. 291). The only method through which the company can shift to the up-market segment is through the acquisition of other strong brands renowned in the up-market segment. This is mainly due to the fact the gap between the company and other competitors has increased markedly since the 1970s when most of the competitors (Ford, Peugeot, and Volkswagen) shifted their marketing mix into the up-market segment (Maielli, 2005, p. 269). However, there is no guarantee for the success of the strategy as acquisition of other brands has proved not to be practicable in the past. Therefore, the company should avoid the shift into the up-market segment in the short term. Concentration in the lower market segment would enable the company to come up with effective strategies would enable it to effective counter the stiff competition posed by the Japanese automobile manufacturers. The company can achieve output mix optimization through the undertaking measures to ensure that it captures the largest market share of the lower market and benefit from the intangible specialization of the company in the lower end of the market. The company should also have a long-term strategy of shifting into the up market segment through the gradual improvement of the image of the company especially after consolidating its market share in the lower market segment. Fiat should use the Fiat model to consolidate its position in the lower and middle segment of the market; however, the company should also maintain the high-end models such as the Alfa Romeo and Lancia that are performing considerable well. These models can help in the improvement of the market mix of the company and prevent the market output mix from being skewed to the low-end market segment in the long run. The eventual success of the models can in the long-term help in the improvement of the perceived quality of range of vehicles produced by Fiat. Reference List Maielli, G., 2007. “Counterfactuals, Superfactuals and the Problematic Relationship between Business Management and the Past.” Management and Organizational History, Vol. 2 (4). (Attached material). Maielli, G., 2005. “The Machine that Never Changed: Intangible Specialization and Output-mix Optimization at Fiat, 1960s–1990s.” Competition & Change, Vol. 9, No. 3. London, Centre for business management, Queen Mary University of London. (Attached material). Read More