Strategic Management - Demand for the Bearings - Essay Example

Strategic Management Table of Contents Introduction 3 Analysis of Porters Five Factors 7 Part 8 About SKF 8 Porter’s Competitive Analysis of SKF 9 Part-2 16 Design in Organisational structure 17 Functional structure 17 Matrix Structure 18 Strategic Planning Style 18 Financial Control 19 Strategic Control 19 Resources 21 Conclusion 22 References 22 Bibliography 25 Introduction Demand for the bearings is mainly arises from the demand of the two major user sectors. They are the automobile & the industrial sectors. The automobile sector is the major growth driver for OEM market, which accounts about 45% of the total bearing market. Engineering section is the second major sector, accounting for about 28% of the total share. Bearing industries largely depend on the production of vehicles. The bearing is also linked with the industrial application such as rolling stock, rolling mills, heavy earth moving equipments and etc, accounts approx 21% of the total market (Bearings Trade, n.d.). Demand of bearings in international market is expected to rise about 5% annually to about $ 40 billion in the year 2010. Growth drivers for the international bearing market are Hastening in global economic growth Enlargement of the fixed investment activity Higher production Uplifting aerospace equipment and motor vehicle output Increase in vehicles in developing countries like Asia, Africa, Latin America regions overtakes the demand in US, Western Europe & Japan. China is the largest market in international market as the country develops as economic superpower in manufacture & fixed investing activity hub. Market develops in India, Thailand, Taiwan & Russia. (Bearings Trade, n.d.). Sales increases with good economic conditions & high income levels which lead to growth in manufacturing activity, boosting combined with the demand in bearing market. Australia & Canada is the most intensive user of bearing products which reflects the advanced industrial & technically nature of the economies. Demand of bearings in industrial machinery will increase at an average rate, stimulating the industrialization in the developing areas of the world. Major market for bearing industry is Motor vehicles Product demand raised by increasing the international motor vehicle output The largest ball bearing sales was in the year of 2005 As bearing industry is rapidly increasing in the global market, developing countries like Russia, Japan etc, are importing the bearing products. Countries of Asia Pacific regions call for 42% of the total demand in the international market. Hence, in future also, bearing industry will be growing in the other developing regions of the world. PESTLE Analysis PESTLE Analysis of the bearing industries in the global market can be as follows: Political - In political terms, bearing industry like Indian bearing industry collaborated with SKF so that the bearings made at India are exported to SKF and specialized bearings which are not manufactured in India are imported through the other industries. Without the bearing Industry, automobile sectors & industrial sectors will be at a loss. Due to the collaboration, friendly atmosphere develops between the nations. Economical - Duty rates are reduced therefore many countries like China, Russia, Eastern Europe dump their production at a low rate due to which price differs in local & international market by about 40-50%, which encourages imports. Demand of bearings in international market is projected to rise about 5% annually to about $ 40 billion in the year 2010. Social – The social aspect of the bearing industry includes encouragement to workforce diversity. It provides quality environment for the employees and discourages child labor. Technological - There are various types of bearings and technology to equip depends on the type of bearings. Specialized type of bearings is not manufactured in India but they are imported. In cases of countries like Australia & Canada are the most intensive users which shows their technically & economically advanced. Technically, countries like China are leading as it manufactures & fixed investing activity hub. Indigenous tools & equipments are utilized in manufacturing the bearings. Environmental - Bearings are used in industrial machineries, automotive industries as well in engineering sectors. It keeps the environment of a vehicle in a good state as it helps in efficiency & less friction, but the emission of green house gas carbon dioxide while manufacturing the bearing, harms the environment. In that case, many companies like SKF target to reduce the Co2 gas to protect the environment. Legal - The bearing industry maintains the code of conduct legally by BICC. Almost all the international bearings industries follow the code and develop the business. Analysis of Porters Five Factors Porter Five Forces model of the bearing market illustrates the five major factors. They are Competitors - Timken is the world’s largest manufacturer of US ball bearing. Timken produces highly engineered bearings, alloy steels & related products & services. Timken operates in 25 countries. On the other hand, SKF is world’s largest roller bearing market. Later SKF introduces spherical & taper roller bearings. SKF controlled 20% of world market, which was twice the market share of its competitors. NSK Ltd of Japan is another leading manufacturer, who manufactures automotive parts, precision machines and etc (WBDS, n.d.). Suppliers - The sale of the final product is done through distributors’ i.e. industrial distribution & independent vehicle aftermarket. The raw materials & tools or equipments that are needed to make bearings of different size & form for different sectors are bought from different part of the world. Threat of substitute products - Same kind of product of different industry is found at a lesser cost and high quality, a machine bears SKF4308 which is also made in Japan providing same performance all over the world. This is a threat to bearings industry. Buyers - As the customers will always look for the lesser cost & higher quality, there many companies who provide same kind of product at lesser cost and high in quality. The bearing industry buyers are the automotive sectors, industrial sectors, transport sectors, and etc (Scribd, n.d.). New Entrants - Possibility of new entrants is always present in the market. Many upcoming industries are the new entrants in the market, as there high demand of bearings. Many established industries are entering into new sections of the market to produce the lesser cost & better quality product. Part-1 About SKF SKF Group is a leader in worldwide delivering products, solutions & services with rolling bearings, seals, mechatronics, services & lubrication system. They provide services such as technical support, maintenance services, condition monitoring and training. SKF started its journey in the year 1907. It is present in more than 130 countries. Its sales division is supported by 15000 distributors. It also had e-business marketplace through which efficient worldwide distribution is done. SKF technologies are divided into five segments: Seals, Mechatronics, Services, Bearing units & Lubrication systems. SKF products are improving in performance, decreases the energy use, lower the total costs which added the value to SKF. SKF had three divisions which comprises of Industrial division, Service division contains servicing industrial original equipment manufacturers (OEMs) & aftermarket clients & automotive division contains servicing automotive OEMs and aftermarket clients. SKF operates about in 40 customer segments, e.g. cars & light, trucks, railways and etc. SKF’s long term financial targets operating margin level of 12%, annual sales growth is about 6-8% & return of capital of 24%. Beyond zero was launched in the year 2005, where it aimed at positive impact of the environment by reducing the negative impact. SKF has a global certification to ISO 14001 i.e. for environmental management systems and OHSAS 18001 i.e. for health & safety standards. Its operation is certified to either ISO 9001 or applicable to client’s industry standards, e.g. ISO/TS 16949 for automotive sector, AS9100 for aviation or IRIS for railway for quality management systems. SKF define sustainability as SKF care, consists of business care, environmental care, employee care & community care. They focus on continuous performance improvement. To reduce green house gas like Co2 emitted during the SKF operations. SKF has set up a target to reduce the gas so as to protect the environment. SKF supports free enterprise and thus competes fairly and recognize other company’s equal right to do so. The company set its policy independently & does not fix prices in agreement or collusion with competitors. Porter’s Competitive Analysis of SKF It can be discussed as follows: Threat of New Entrants - SKF is global brand so there will be difficulties for new entrants to challenge the company. Therefore, it can be said that the threat of new entrants is quite low. Another reason is the amount of capital requirement and economies of scale cannot be acquired easily by the competitors. Threat of Substitute Products - Products manufactured in SKF is similarly found in other bearing companies. The products of SKF are of high quality, unique & well known for their performance. Bargaining Powers of Buyers - Bargaining power of buyers for SKF is low. SKF maintains fixed price & discount rates is available in the global market. SKF do not have any potential competitors so it almost enjoys monopoly. Bargaining Power of Suppliers – Bargaining power of suppliers is low for the suppliers of the company too. As SKF is operating on a global market, thus, the suppliers do not belong to one particular region. If the suppliers are charging more from SKF then it can shift to another company as it operates in 28 countries. As per the case study, the service division of SKF was invited by Steelcorp for reverse auction. Steelcorp, is the largest buyer of SKF products. In reverse auction, the lowest priced bidder wins the order. Value strategy was pursued by SKF service on price ran counter. “Documented Solutions Program” or DSP was introduced to quantify the client’s benefits and returns while investing in SKF’s products and services that was expensive as well as of high quality. Steelcorp’s invitation was a big debate for SKF. There was number of opinions regarding the issue. Steelcorp & ITC were the main buyers of SKF’s products. Refusal to the invitation may terminate the SKF’s relationship with both the companies. Another refusal might ponder $4 million dollars to the low priced competitor. SKF’s economic condition took a downturn which has negatively impact on the sales division. Steelcorp’s order will be the most important order for SKF during the recession period. It is known that the service of SKF installed a computer based sales tool, known as Documented Solutions Program or DSP, for quantifying and measuring the end user value by using SKF’s bearings & related services. DSP was installed initially with a budget of $5000, contained hundreds of case studies of SKF products, where end users’ benefits & investments are identified, quantified, measured & tracked. Clients’ benefits would decrease if the products failed to have longer life as it would call for replacement and would affect savings in labour, material, inventory, etc. Clients investment includes cost paid for SKF bearings, additional tools, add on services like condition monitoring, end user training, etc. DSP calculates the end users expectation from the SKF products & services in total savings & Return on Investment (RoI). Condition monitoring was executed to prevent costly breakdowns, e.g. a client invests $2.29 million in SKF’s products & services generating a return of about 500% in 54 months from savings in the total cost relate to reduce pump failures & reduction in parts & labour. DSP was allowed to sell more bearings by converting technical knowledge into clients benefit. One of the architects of DSP was Todd Snelgrove, global manager for client value, placed the international tool. SKF accounts manager observed that DSP helps SKF service division to shift from “talking” to “measuring” & “delivering” it. After using DSP, distributors cannot directly access with SKF. SKF used the equipment in collaboration with the channel partners for large end users. A joint meeting was arranged in between the SKF’s accounts manager and a representative of the distributor and the client’s purchasing manager. At the meeting, SKF used a demonstrative tool known as ‘Customer Needs Analysis’ or CNA with clean cut data provided by the end user like materials, downtime, labour, energy, inventory, and lubrication & replacement costs. When the client’s data was unavailable, SKF referred to the database case study from a similar company as a guide. DSP software then calculated estimated savings & returns for the customer on SKF’s products & services. After examining DSP, SKF draft a guarantee to the clients specifying minimum RoI from savings. DSP can stimulate demand for SKF products and acknowledge the buyers about the total amount of ownership. Less than 15% SKF end users were introduced in DSP. Priority accounts were defined into two criteria i.e. STRATT, that would be “Strength” measured by potential volume &”Attractiveness” i.e. orientation towards value & opposed to price. The service division was using DSP by training about 1000 sales worker all over the world. In the words of a recently trained SKF sales person, “DSP is our last defence in a commoditizing market.” SKF was invited for reverse auction and therefore, the benefit of reverse auction for the buyer was to reduce the transaction costs, overall reduction in unit price for large purchases and low investment in sourcing & securing potential suppliers. According to Brad, the concerned person from ITC’s management in this regard, if the company fails to participate in the auction, it would lose the profitable sales of SKF products & also damage the relationship with Steelcorp. Brad also thought about the build-up of the inventory which results to economic downturn, with the operating cost at 23% of sales, the distributor margins from the SKF’s higher prices. Steve thought of an opportunity to add SKF’s share of Steelcorp’s total business of bearing, but feared loss of volume and damage in good relationship with ITC, if SKF did not participate in the auction. Phil (the concerned person from SKF) had transformed the company from a simple manufacturer of bearings into a value oriented provider of solutions i.e. “helped customers get the most out of their machinery investments”. “Three Generic Strategies” of Porter has the following attributes: Lower cost in the target market Supply of different types of product in the target market Focus on any one of the two above strategies In this case, SKF pursued with different types of product in the target market maintaining its superior quality and services. On the other hand, the price of one product remains fixed as cost was not reduced for the product. But due to DSP, cost of SKF’s product maintenance was reduced. This was beneficial for SKF. Fig 1 - Diagram of Value System After installing DSP software, SKF’s value chain has rapidly increased. SKF used the equipment in collaboration with the channel partners for large end users. DSP software calculated the estimated savings and returns from the customer on SKF’s products & services. DSP also calculates the end users expectation from the products and services of SKF with respect to total savings & RoI. Customers’ maintenance costs are reduced as it was discussed earlier. Investment of $2.29 million in SKF’s product & services would generate a return of about 500% in 54 months from savings in the total cost that would relate to the reduced pump failures & reduction in parts & labour. The values of SKF were adopted taking into consideration the suppliers, channel partners & customers that are correlated. Fig 2 - Diagram of Cost Efficiency Cost efficiency can be maintained by taking into consideration some of the factors like reducing long run cost due to the expansion of the operating unit. At a stipulated time, the production increases and the cost reduce. Supply contracts & supply chain management have to be maintained. In designing product or process, ease of manufacturing, capacity planning & yield should be maintained. In a perfect competition market scenario, resource is homogeneous in nature where as in imperfect competition market condition, resources are heterogeneous. Heterogeneity means that resources are VRIN (or Valuable i.e. in terms of efficiency and effectiveness, Rare and Inimitable i.e. dependent on history, causally ambiguous, socially complex and Non-substitutable). So it can be said, SKF lies on imperfect competition. Taking all the aspects, it is advisable that SFK should maintain equilibrium. SFK loses $4 million by avoiding the auction. It had its core competency i.e. DSP which will generate income for SKF. SKF should shake hands with other big channel partners to get more profit from the end users. DSP calculates the end users expectation from the SKF products & services in total savings & RoI. This strategy implemented by SKF is not likely to impress Steelcorp, an important end user that buys more than $12 million annually. SKF senior management and the company distributors are considering a positive response to Steelcorp’s invitation. The concerned executives and the managers are committed to value selling & total cost pricing. Therefore, SKF should ignore the invitation and should stick to their value strategy. Part-2 If SKF would have changed their ‘value strategy’, they would have thought of implementing the ‘change model’. Bourgeois defined Change Model as “After receiving your planning groups strategic recommendations, you have reviewed them and have made your strategy decisions. Now, on your own or with the aid of a different kind of expert, you plan modifications to the organization which will increase the chance of successful adoption of the plan. Here, you plan a new organizational structure, personnel changes, new information systems, and revisions to the compensation scheme. You may even consider changing the boundaries of the firm through merger or acquisition” (Bourgeois III & Brown, 1984, Pg – 246). If SKF implement change model, it had to look upon the strategies to be used after reverse auction, taking into consideration the suppliers, the buyers, the distributors and the workers. Ultimately, they had to increase the profit to more than $4 million. SKF had to implement design in organizational structure, control processes and relationships and resources from people, information, finance and technology. In order to design the organisational structure, SKF can utilise functional structure “based on the primary activities that have to be undertaken such as production, finance and accounting, marketing, human resources and research and development” (Johnson & Et. Al., 2008, Pg - 436) Design in Organisational structure Functional structure After implementing the functional structure, SKF’s control over mechanism reduces as there is clear and defined role of responsibilities among the employees of SKF. The concerned Chief Executive will also remain in touch with all the operations. Specialist will be engaged at senior and middle management levels. The problem that SKF would face is, senior managers overburdened with routine matters. Senior managers would neglect the strategic matters. It will be difficult for SKF to cope up with diversity, so the coordination between the functions will be difficult and thus, SKF might fail to adapt the structure. If SKF implements the matrix structure into their organisation, SKF’s board members knowledge would integrate. SKF would be flexible in all the dimensions. The negative impact would be that SKF will take length of time to take decisions. The job & responsibility assigned to the employees will remain unclear. SKF’s cost and profit responsibilities would be ambiguous. There will be a high degree of conflict among the employees. Matrix Structure SKF had to design the control process i.e. budget and control, Enterprise Resource Planning Systems or ERP, performance targeting & Balanced Scorecard. If SKF designs relationship in strategic planning style, it has to design a master planner in which details of budget, capital allocation, employment of the employees, procedures and regulations, imposed services and infrastructure are taken into consideration for business units. In business units, bargaining of items should be a prime concern while designing the master plan. Strategic Planning Style While designing the relationship of SKF with financial control, the shareholders of SKF will look into the profit targets and performance appraisal of the business units. The capital bids from the concerned shareholder and the business units would remain equal. Financial Control SKF’s strategic shaper looks into the overall strategic balance, policies, capital allocation, performance assessment, optional services and infrastructure and short term constraints e.g. employment of the business units. An agreed business plan will be executed between the strategic shaper and the business units of SKF. Strategic Control SKF had to opt for resourcing. SKF plans resources like people, information, finance and technology. SKF’s strategies use people as power, where personal and organisational competencies and performance management of the employees are evaluated. Personal behaviour and collective behaviour of the employees are observed by the SKF’s management. SKF organises people by implementing HR functions, line managers with the structure and process of the management. Strategies of SKF through information and strategic capabilities, which improves the product and services features, competitive performance among the companies, easy or difficult imitation of the products and competitive positioning of the companies. SKF’s information and business models is processed electronically had some extended functions, new functions are available and some internal changes are to be done while changing the business strategy. SKF’s value and cost drivers will derive from the funds of operations, investment in assets and financing the costs. SKF’s funding strategies would be funded from any source, business and financial risks will emerge, portfolio issues and also through mergers and acquisitions. The competitive forces and the technology used by SKF should match the bearing market. Technology and strategic capabilities of SKF should comprise of the core competencies of the company and developing the technology. In organising the technology, SKF locating and funding for the technology installed. SKF had to look upon the global and local companies of bearing market that are using advanced technology. Organisational process of SKF should also be looked upon. Resources Conclusion SKF uses the functional structure and designs the relationship in between financial control and strategic control and utilizes strategic planning style and also resource from people, finance, technology and information with respect to the global market. It would reduce the cost of one unit of the product in long run and profit will be achieved taking into consideration the need and wants of the customer. The change model had some pre - requisites, they are eessentially top-down, accurate and timely information, splits the firm into thinkers and do-ers & is a long haul process. Although, this process takes long time and provide accurate & timely information, but SKF cannot take proper decision in a short span of time, in that case many problems will arise, may be they can lose the bidding amount. At the end it can be said that SKF should implement the cultural model to diagnose and execute the strategy, which may be beneficial for SKF in the long run. References Bearings Trade, No Date. World Bearings Demand. Global Market of Bearings. [Online] Available at: http://www.bearingstrade.com/global-market.html [Accessed May 20, 2010]. Bourgeois III, L. J. & Brodwin, D. R., 1984. Strategic implementation: Five Approaches to an Elusive Phenomenon. Strategic Management Journal. Cygnus India, No Date. Industry Insight. Indian Bearings Industry. [Online] Available at: http://www.cygnusindia.com/pdfs/TOC_bearings.pdf [Accessed May 20, 2010]. Johnson, G. & Et. Al. Exploring Corporate Strategy. Harlow: Prentice Hall, 2008. 8th Ed. Scribd, No Date. SKF Pakistan Pvt Ltd. 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