Case-5-8 Fisk Alloy Wire, Inc. and Percon – Strategic Management: Concepts and Cases: Competitiveness and Globalization-2 : Book Guide

This Document Contains Cases 5 to 8 Case 5: Fisk Alloy Wire, Inc. and Percon INTRODUCTION This case illustrates the importance of environmental awareness, the long-term prospect of product development, and the resourceful use of an acquisition strategy to achieve organizational objectives. It opens with an overview and history on the Fisk brothers and Fisk Alloy Wire, Inc. The case then provides an in-depth explanation of the wire production process and the difference between pure copper, copper alloy, and high performance alloy materials. The development of Percon, the changing needs in major commercial wire segments, the use of an acquisition strategy to satisfy production requirements, and the introduction of new market opportunities are all featured in the case, leading into a discussion of decisions facing the Fisks as the company moves forward. This case study is structured to emphasize the tools and value of external environment analysis. It also effectively demonstrates strategic uses of acquisitions and the successful employment of strategic entrepreneurship. The following steps can be used to define Fisk Alloy Wire, Inc.’s industry status and then to evaluate the strategic challenges of a company poised to take advantage of emerging environmental conditions and market opportunities. • Build a profile of the copper wire industry, and pinpoint Fisk Alloy Wire, Inc.’s distinct position within the industry. What tools did the company use to shape its strategic perspective? • Describe the company’s acquisition of Strandflex and how it fits into Fisk Alloy Wire, Inc.’s overall strategic plans. • Given Fisk Alloy Wire, Inc.’s current market position, outline the market opportunities available to the company, and explore their strategic potential. • Identify the leading strategic priorities that are supported by the analysis. Explain your recommendations, and conclude with a statement of the key strategic issues facing the company. ANALYSIS • Build a profile of the copper wire industry, and pinpoint Fisk Alloy Wire, Inc.’s distinct position within the industry. What tools did the company use to shape its strategic perspective? The metals industry distinguishes between commodity ore producers and specialty alloy manufacturers. In the copper and brass industry, high volume copper strip and wire is recognized for its conductivity qualities. 87.5% of this $4 billion market (in 2005 values) is copper wire, which bears the mechanical loads that carry electronic, telecommunication, and data signals. Easily processed and readily available, commercial copper competes on price and offers limited functionality. Many large competitors, including raw material producers, compete in this commodity space. Within this broad umbrella, a small sliver (perhaps 1%) is specialized copper alloy, which incorporates other elements to enhance the performance of the metal in different ways. The majority of tonnage in the commercial copper alloy market is strip product. With its expanded alloy development capability and integrated manufacturing operations, Fisk Alloy Wire, Inc. inhabits the remnant wire portion of the copper alloy segment. The very narrow market position within the metals and copper industries maintained by the company is even further focused in the tailored high performance copper alloy market – which is driven by emerging demands in electronics, but represents only a small portion of total demand for commercial copper. Here, at the top end of the conductor trade, copper wire is used for circuits, connectors, and terminations and in the operation of electrical components. Fisk Alloy Wire, Inc. has a core competency in developing and producing high performance wire and cable applications that require advanced metal performance in terms of strength, integrity, conductivity, flex-life, surface electroplating, fabrication, and price-to-performance valuation. Observing and interpreting forces in the external environment that have a potential to impact one’s business can be challenging. However, the greater the understanding of a firm’s general, industry, and competitor environments, the more likely the firm can position itself for success. Fisk Alloy Wire, Inc. has demonstrated how the tools of external environment analysis can successfully poise an organization to take advantage of emerging opportunities. In particular, Fisk’s targeted awareness of long-term trends in the general environment, where data can be incomplete and ambiguous and predictions can be wildly inaccurate, is precisely the source of its seemingly prescient ten-year investment in a cadmium-free high performance copper alloy, Percon 24. Scanning a cross-section of the political/legal, sociocultural, technological, global, and physical environment segments of the general environment, Fisk Alloy Wire, Inc. was able to identify early signals that called for eliminating hazardous chemicals and increasing the eco-efficiency of input materials. The company is at the leading edge of paradigm shifting forces in the external market due to its ability to detect the meaning, develop projections, and determine the timing and importance of environmental changes. Furthermore, its assessment of industry and competitor threats has provided Fisk Alloy Wire, Inc. with a strong understanding of the external factors that can be a powerful guide in making the strategic choices necessary to support its growth and excellence objectives. • Describe the company’s acquisition of Strandflex and how it fits into Fisk Alloy Wire, Inc.’s overall strategic plans. Fisk Alloy Wire, Inc.’s motive for acquiring Strandflex was unique and situationally specific. Rather than acquiring the older steel wire stranding mill for common purposes of increasing market power or accessing new capabilities, the company was singularly interested in adding capacity to process its own newly-developed specialty product. Faced with lengthy and unfeasible options for new equipment to process Percon 24, the Fisk brothers devised a clever plan to recondition, reconfigure, and increase the speeds of the old mill’s tubular stranders. Moreover, selling unusable equipment to overseas outfits defrayed 40% of the purchase price of Strandflex. Consequently, this approach could be subsequently applied, as it was to integrate 50 ultrafine tubular stranders purchased from Houston’s Medallion Wire and Cable in 2008. However, it did not provide Fisk Alloy Wire, Inc. with a platform or competency in acquisitions that can shape its strategy or fuel growth. While highly beneficial to the firm, the acquisition of Strandflex did not prepare Fisk management to merge organizational cultures, resources, activities, or systems; and integrating an acquired firm with ongoing operations is a critical element of an effective acquisition strategy. Brian Fisk has stated that growth might come from acquisitions of purpose (as opposed to acquisitions made for size) and that he would like to see the company able to acquire some little companies for strategic structural opportunities. Should the Fisk brothers decide to use an acquisition strategy for future growth or to take advantage of new opportunities, they must consider that their skill set is still limited in this regard. While it is possible to overcome their inexperience, there is still substantial risk associated with an acquisition strategy that is not backed with proven integration capabilities. Fisk is wise in his concern that expansion through an aggressive acquisition strategy could easily take the company into non-core territories. Also, initiating acquisitions “because growth is fun and challenging” is far from advisable. The effectiveness of an acquisition strategy can be increased by seeking targets with complementary assets and resources for their potential to yield synergistic strengths that can lead to a competitive advantage. It is also important that financial slack be available to fund purchases. Other conditions which can improve the chances for a successful acquisition and integration include avoiding “unfriendly” acquisitions, conducting effective due diligence to properly establish the value of an acquisition, and selecting targets with low debt positions. Finally, it is important for Fisk Alloy Wire, Inc. to internally maintain its own product development skills (rather than depending on acquisitions to boost this capability) and to have organizational flexibility to handle changes associated with growth through acquisitions. • Given Fisk Alloy Wire, Inc.’s current market position, outline the market opportunities available to the company, and explore their strategic potential. At the time of the case, Fisk Alloy Wire, Inc. is a $28 million firm with 3 divisions and 150 employees. The potential market for its cadmium-free high performance Percon 24 is estimated to be $30 to $40 million. Although the size and timing of this budding market are still uncertain, capturing it involves doubling revenues (and operational capacity). Fully developed, tested, and certified, and with no likely direct competitors, it appears that the firm can selectively pursue distinct market applications for Percon 24. In addition to designing a strategy for building the Percon 24 market, Fisk Alloy Wire, Inc. has a need to expand business that optimizes its ultrafine stranded conductor capacity and enhances its profile in the conductor business through both higher volume and its specialty high performance product offerings. All of this activity is centered in the Fisk Alloy Conductor (FAC) division. Achieving these goals involves both increasing the volume of specialty alloys for electronic connectors and components and aligning markets with the company’s core high performance alloy wire process and production competencies. The company also needs to further develop its original specialty shaped wire business (FAW) to maximize volume and performance at its Hawthorne operations. While the case provides only limited information on Fisk Alloy Wire, Inc.’s internal electroplated wire unit, it is a capability that distinguishes the company from other wire producers as well as provides an opportunity to add value that is compatible with its platable metal finishes. The table below features Fisk Alloy Wire, Inc.’s primary end use markets and identifies both positive and negative conditions in the sector that impact their attractiveness to the company in terms of current and future business potential. Commercial End-Use Pros Cons Military - NAVAIR Certified – qualified producer - Need for highly engineered products, thus copper alloys - Exempt from RoHS directive - DX order to fulfill contracts before other orders Aerospace - Certainty of growth - Increasing demand of eco-friendly material - Pre-qualified through NAVAIR - Large material usage per unit - Service requirements of applications fit with Fisk’s high performance quality (conductivity, strength, heat dissipation, vibration tolerance, etc.) - Competitive market Biomedical - Miniaturization of components fits Fisk’s high performance quality (conductivity, strength, heat dissipation, vibration tolerance, etc.) - Electric blankets, electrodes, and sensor cables require flexible copper alloy materials - ‘Cannot-fail’ requirements can be met by Fisk’s high performance alloy products - Not yet certified - Developing market and applications, less defined Automotive - Increasingly electronic, especially in luxury vehicles, with higher performance needs that shift from copper alloy to high performance alloys - New electric vehicles with increased material performance needs - Already supplying major automotive components with Percon, inroads made - Competitive market Electronics and Computers - Need for highly engineered products, thus copper alloys - Competitive market Telecommunications - Miniaturization of components fits Fisk Alloy Wire Inc.’s high performance quality (conductivity, strength, heat dissipation, vibration tolerance, etc.) - Decline in older applications using Fisk’s original shaped connector wire – product changes and offshore manufacturing Another factor that Fisk Alloy Wire, Inc. should consider in its strategic planning process is the profit potential for each commercial segment. Below is a table that reviews the company’s current volume, revenue, and revenue per pound based on the case data provided in Exhibit 3. End Use Volume (Lbs.) Volume % of Total Revenue ($) Dollar % of Total Revenue per pound Aerospace 696,695 66.69% $20,228,851 62.75% $29.04 Electronics 193,912 18.56% 5,679,423 17.62% $29.29 Medical 110,566 10.58% 4,073,513 12.64% $36.84 Military 23,444 2.24% 1,148,182 3.56% $48.98 Automotive 11,655 1.12% 695,815 2.16% $59.70 Jewelry 7,527 0.72% 404,779 1.26% $53.78 Misc. 874 0.08% 8,129 0.03% $9.30 Total 1,044,673 100.00% $32,238,693 100.00% $30.86 Clearly, the automotive segment is the most profitable for Fisk Alloy Wire, Inc. in terms of revenue per pound. Skipping over the jewelry category (as it is outside the scope of the case material and represents very low volume), the military segment is the next most profitable end use segment. The medical category follows. Electronics and aerospace trail, with nearly half of the revenue per pound realized in automotive sales; however, together they represent 85.23% of the company’s tonnage and 80.37% of Fisk Alloy Wire, Inc.’s total revenues. STRATEGY • Identify the leading strategic priorities that are supported by the analysis. Explain your recommendations, and conclude with a statement of the key strategic issues facing the company. Based on the preceding analysis, the table at the top of the next page has been constructed to integrate the critical decision factors for Fisk Alloy Wire, Inc. The end use sectors are sorted according to their revenue per pound profitability; and current volume, revenue, and revenue per pound figures are entered in the first column. Next, each sector is cross-referenced to the company’s strategic groups: Fisk Alloy Wire (FAW – original shaped copper alloy), Fisk Alloy Conductor (FAC – high performance copper alloy), and Percon 24. A fourth space for a “Next Generation” category is also provided. The positives (pros) and negatives (cons) from the market opportunity analysis above are considered across these strategic groups, and suggestions are entered based on this assessment. Note that a box for certification status is also included next to the end use market category. Keeping in mind the firm’s intent to (1) capture the $30 to $40 million Percon 24 market, (2) expand its profile in the conductor business through volume and specialty product offerings (FAC), and (3) increase volume in its original specialty shaped wire business (FAW), a set of strategic priorities begins to materialize. End-Use C Copper Alloy (FAW) HPA Specialty (FAC) Percon 24 Next Gen. Automotive 11,655 lbs. $695,815 $59.70/lb. -- Competitive High Growth Highly Profitable Product Fit **High Priority** High Growth Highly Profitable Product Fit **High Priority** ** Military 23,444 lbs. $1,148,182 $48.98/lb. Certified Product fit Very profitable *Target volume * *Isolate from HP* RoHS Exemption ** Biomedical 110,566 lbs. $4,073,513 $36.84/lb. **Needed** Strong Growth Profitable Product Fit **High Priority** Begin Certification Growth Potential Profitable Product Fit **High Priority** Begin Certification ** Electronics 696,695 lbs. $20,228,851 $29.04/lb. -- Product fit Competitive Product fit **Monitor ** Aerospace 193,912 lbs. $5,679,423 $29.29/lb. Certified Competitive Growth Volume High Growth Product Fit **High Priority** Integrating the analysis and priorities, a strategic plan can be devised for each of Fisk Alloy Wire, Inc.’s strategic groups. Percon 24 – The company’s proprietary cadmium-free high performance copper alloy is clearly its most important strategic priority. Due to the high growth, high profitability, and demand for an environmentally-friendly product, Fisk Wire Alloy, Inc.’s market development strategy should begin with the automotive sector, where it has already made some inroads. The biomedical sector may be a longer-term prospect as the firm works through application development and acceptance phases. But due to the profitability and growth potential of the category, the company should be quick to begin the certification process for the most promising product uses. And finally, the high growth aerospace market is a key target market. However, due to its lower profitability, steps should be taken to try to increase revenues associated with these orders. Percon 24 is certified for airplane manufacturers, and a premium is reasonable for the product’s unique and unmatched qualities. While the electronics sector is losing ground for FAC, the company should continue to monitor changes, new product categories, and new regulations that would put Percon 24 at the forefront for component specification. HPA Specialty – Even if its environmentally-safe alloy is slow to take off in the automotive market, the growth of luxury and electric vehicles and the high profitability of the sector makes this a high priority for FAC as well. While working through the certification process for Percon 24 biomedical applications, the company can be proactively seeking growth opportunities in the medical sector for HPA specialty uses, some which will also require certification. The lengthy qualification processes in new sectors requires that the company assertively move forward where desirable opportunities exist. The sooner the certification process is launched, the sooner the company can take advantage of profitable opportunities in the rich biomedical user category. In addition, FAC should keep an eye out for ultrafine wire applications that can exploit the company’s expanded fine-gauge capabilities. Copper Alloy – To satisfy its objective of increasing volume for FAW operations, the company should target the military sector. The product fit and profitability for certified copper alloy materials suitable for high tonnage contracts is an excellent way to boost volume at Hawthorne. It is important, though, that this business be isolated from strategically important or highly profitable automotive operations to avoid the threat of having to sacrifice valuable commercial business to conform to the executive DX order. Note that most of the sectors in this strategic group are deemed less desirable due to their more competitive conditions. Next Generation – As Fisk Alloy Wire, Inc. is fully aware, the new product and process innovation period can be quite extensive. While working closely with the end user segments, the company should be continually and actively building a conceptual basis for its “next generation” alloy(s). For all of the reasons that the development of Percon 24 has demonstrated, future success depends on an ongoing flow of high quality product offerings that meet new and valuable customer expectations. It makes sense to target the sectors that are most profitable today, but new opportunities can arise in any user category. Therefore, the company must stay alert to signs that occur throughout the broader metals and copper marketplaces. Probably the most critical of Fisk Alloy Wire, Inc.’s key strategic issues is the need to expand operational capacity at a rate commensurate with sales growth. All 49 of the company’s newly-refurbished stranders are fully being utilized by current known demand. This is especially critical because of the unknown timing and scale of Percon 24 market growth – a condition that does not fit well with the high costs and lead times associated with the company’s customized equipment needs. The Fisks must remain vigilant and as accurately as possible estimate new production so that capacity does not become an impediment to growing sales. Navigating the lengthy certification process and monitoring new entrants and alternative products are also critical to dominating this strategically important product market. Meanwhile, continuing to expand Fisk Alloy Wire Inc.’s alloy and process technology development capabilities and its pool of qualified mechanics are also key strategic issues. With regard to the firm’s rate of growth, manageable growth is more suited to Fisk Alloy Wire, Inc.’s quality and excellence objectives and its focus on long-term profitability above overall size. It is more important for the company to sustain its reputation for excellence and technically-based competitive advantages than it is to adopt an aggressive growth strategy. Managed growth precludes the need for an aggressive acquisition strategy, but identification of a strong target that satisfies strategic objectives and the conditions described during the analysis should be strongly considered. Fisk Sectors Financials Case 6: Business Model and Competitive Strategy of IKEA in India INTRODUCTION The IKEA case provides an excellent opportunity to apply strategic management concepts to a large privately-held company that is expanding into India. IKEA is a Netherlands-based Swedish company with a presence in 44 countries around the world, including the US, the UK, Russia, the EU region, Japan, China, and Australia. It is the largest furniture retailer in the world but did not enter India until 2013, despite the fact that it has been sourcing from India since the 1980s. The purpose of this case study is to examine the factors that are crucial to IKEA’s continued success and to propose strategic actions to sustain its competitive advantage. The case opens with a review of the company’s humble beginning. IKEA was founded by 17-year-old Ingvar Kamprad (Kamprad) in Sweden in 1943. By the 2000s, IKEA has become the world’s largest furniture retailer. The corporate structure was constructed to prevent any takeover and to protect the family from taxes. Thus, the structure is a complicated arrangement of not-for-profit and for-profit organizations. The IKEA stores provide customers with a unique shopping experience with low prices, solid quality, modern designs, and most importantly, the concept of do-it-yourself (DIY) products. The extensive discussion is followed by a description of the furniture industry in India and what IKEA had to overcome in order to enter the Indian market. IKEA first met with regulatory and political roadblocks, and then had to work with suppliers in order to meet the Indian government’s requirement for sourcing. Finally, there are several challenges that IKEA faces. This case is ideal for demonstrating the importance of the general environment, international corporate-level strategy, and type of entry. The following points are to guide a review and discussion of these important concepts. • Review IKEA’s general environment segments and elements in India. What are the segments in the general environment that relate to IKEA’s situation? • Describe IKEA’s intended international corporate-level strategy in India. Is it different from other countries? • What is IKEA’s choice of international entry mode? What are the advantages and disadvantages compared to other international entry modes? • Identify IKEA’s current challenges in India. Based on your analysis, what additional recommendations would you make to help IKEA achieve its goals? ANALYSIS • Review IKEA’s general environment segments and elements in India. What are the segments in the general environment that relate to IKEA’s situation? Factors in the general environment that impact IKEA in India are primarily demographic, economic, political/legal, sociocultural, and sustainable physical environment segments. The primary segments and elements in the general environment that relate to IKEA’s situation are: General Environment in India Segments Elements Demographic Segment Lower household income Large population size Dense population in the cities Large income gap Economic Segment One of the fast growing economies in the world Political/legal Segment Corruption issues Difficult FDI policies Some regulatory/political roadblocks Sociocultural Segment People prefer readymade furniture People prefer shop assistants Cultural difference from other developed countries Sustainable Physical Environment Segment Availability of renewable energy As the table above shows, the general environment in India is very different from other countries that IKEA has opened retail stores in. The initial cost of entering the Indian market will be substantial. For example, the real estate cost in the cities is extremely expensive. People in India generally have small cars and may not travel a far distance to a store. Thus, if IKEA opens a store outside of the city, this could impact the sales negatively. On the other hand, if IKEA opens a store in a city, the real estate price will be extremely high and it will be very difficult to buy a large land like what IKEA usually does in other countries. The table below shows the financial highlights of IKEA: In order to sustain IKEA’s continued success, IKEA will have to address each segment in the general environment. It will be very likely that the cost of sales and operating cost will increase dramatically in the year that IKEA opens a new store in India, which can have a negative impact on the overall financial health of IKEA globally. • Describe IKEA’s intended international corporate-level strategy in India. Is it different from other countries? A firm’s international strategy is a strategy through which the firm sells its goods or services outside its domestic market. There are several reasons for IKEA to pursue an international strategy: » International markets yield new opportunities: If IKEA had stayed in Sweden, it would have been limited by the size of the market in Sweden. Therefore, it would not have become the largest furniture retailer in the world had it not expanded outside of Sweden. » Needed resources can be secured: Because IKEA is the world’s largest furniture retailer, it needs a lot of resources at the lowest price. When IKEA implements an international strategy, it can secure needed resources at the lowest price because of the volume it purchases from the suppliers. » Greater potential product demand: IKEA’s revenue growth since 2001 has been positive due to the global expansion. A table of IKEA’s revenue growth (total revenue in billion €) is as below: » Borderless demand for globally branded products: IKEA usually have standardized design with the concepts of DIY and flat packs. There are three types of international corporate-level strategy: » Multidomestic » Global » Transnational (the combination of the multidomestic and global strategies) Depending on the need for global integration and local responsiveness, a firm can choose from one form the three types of international corporate-level strategy. The figure below shows the relations within each of the three strategies considering the need for global integration and local responsiveness. From the descriptions of the case, IKEA seems to be able to achieve global strategy for its stores in most countries. A global strategy is an international strategy in which a firm’s home office determines the strategies that business units are to use in each country or region. IKEA’s global strategy includes the following: » Large retail space » Renewable energy use » Including standardized services such as food and beverage and play house » Providing a unique furniture shopping experience as a whole » Furniture in flat packs » Concept of DIY » Global sourcing » Strategic and operating decisions are centralized » Strategic and operating decisions are centralized at the home office » Emphasizes economies of scale For IKEA’s intended international corporate-level strategy in India, it seems transnational fits the best. There are several reasons: 1. Retail space in India is extremely expensive, so a large retail space may not be feasible. 2. Renewable energy use is challenging in India. 3. Certain services and products are prohibited by the government in India due to FDI restrictions. Therefore, a customer in India may not receive the same unique furniture shopping experience as a whole. 4. There are sourcing requirements from the Indian government (mandatory 30% from preferably MSME’s). 5. Customers in India like readymade furniture so the concept of self-service and DIY products may not work in India. 6. The culture and taste of the consumers in India are still unknown to IKEA. Thus, the reception of the IKEA products is still unpredictable. As Dutta of Third Eyesight puts it, “In India, the cost of real estate is high, retail space availability is an issue and overall store efficiency is a big challenge. They can’t cut and paste their global model here. They have to develop India-specific strategy.” • What is IKEA’s choice of international entry mode? What are the advantages and disadvantages compared to other international entry modes? There are five main types of international entry mode: exporting, licensing, strategic alliances, acquisitions, and new wholly owned subsidiary. IKEA’s choice of international entry mode is new wholly owned subsidiary. IKEA is a privately-owned company. When IKEA enters a new country, it usually builds its own retail space and implements a global international strategy. A new wholly owned subsidiary is also called a Greenfield venture. It is when a firm invests directly in another country/market by establishing a new wholly owned subsidiary. There are several advantages and disadvantages. The advantages are: » Is costly » Involves complex processes » Carries high risk The disadvantages are: » Allows for maximum control » Has the highest potential returns IKEA pursues a strategy of a new wholly owned subsidiary due to the need for global integration is high. In doing so, IKEA can secure a stronger presence in the international markets. STRATEGY • Identify IKEA’s current challenges in India. Based on your analysis, what additional recommendations would you make to help IKEA achieve its goals? IKEA’s current challenges in India are: » The availability of retail space and its cost » Hiring activities and vendor negotiations » Last mile supply chain issues » IKEA’s do-it-yourself (DIY) concept may not work in India » IKEA’s anti-corruption policy » Reception of IKEA’s products is unpredictable Based on this analysis, recommendations for IKEA’s next strategic move(s) should address: The availability of retail space and its cost Based on the analysis, IKEA has two choices in terms of retail space and location: in the city (smaller retail space) or outside of the city (larger retail space). In addition, IKEA has certain renewable energy initiatives that are unlikely to be met by the Indian developers. Thus, the cost of real estate, retail space availability, and store energy efficiency will be a big challenge for IKEA. It will have to develop an India-specific strategy for its retail space. IKEA is more likely to benefit from a smaller retailer space in or near the city. Hiring activities and vendor negotiations People in India may have initial euphoria on IKEA’s entry into India, but with proper education and training, IKEA should be able to solve this issue. IKEA should seek to conduct more charity and public relations events to improve its image. Vendor negotiation will be a big issue due to the government’s requirement on sourcing (30% from preferably MSME’s). IKEA was able to negotiate with the government on the mandatory 30% from MSME’s to preferably MSME’s in five years). In the long run, however, IKEA will have to renegotiate with the government to reduce the percentage from 30% to a lower percentage. It will be crucial for IKEA to find the best vendors that can produce the quality products at the lowest price. Last mile supply chain issues People in India have smaller cars and compact homes in the city. If IKEA is to locate its store outside of the city, customers will face the problems of having to drive a long time to get to the store. Also, low levels of car ownership and a patchy road network would make it harder for customers to shop at IKEA. Therefore, it is in IKEA’s best interest to locate its store in or near the city. IKEA’s do-it-yourself (DIY) concept may not work in India People in India prefer readymade furniture or getting it made by their carpenters. Thus, the concept of DIY may not work in India. Given that India is still a developing country, labor cost should be relatively inexpensive. IKEA can still sell its products in flat packs but provide optional delivery and assembly services. It will need to keep the price low so people will use the service. This way, customers with a big car and like to assemble furniture themselves can save money by doing it on their own. Typical customers in India can still enjoy what IKEA can offer at a low price, while still receiving services they expect. IKEA’s anti-corruption policy IKEA may face difficulties with the Indian bureaucratic setup. However, this is an issue that IKEA has to address from within. It will be difficult for IKEA to change the government in India by itself. Reception of IKEA’s products is unpredictable It is hard to tell whether consumers in India will like the products that IKEA offers. However, judging from the success that IKEA enjoys worldwide, it is more likely that IKEA’s style of furniture will be well-received. IKEA should raise its brand awareness among the consumers in India by sponsoring events and engaging in charity activities. IKEA can also sponsor some movies and TV shows with its products to promote the brand. IKEA Financial highlights Revenue Growth Case 7: Invitrogen (A) INTRODUCTION This case highlights Invitrogen, one of the largest catalog life science companies in the industry. In a highly competitive industry, the company has taken some risky steps in order to continue its growth. Invitrogen built its growth from aggressive acquisitions combined with merchandising and operational excellence. However, not all acquisitions were successful, and as a result, the CEO Greg Lucier and the Vice President of Corporate Strategy Mark Gardner, have some difficult strategic decisions to make as they direct the future course of the company. The case opens with a summary of Invitrogen’s history. The life science industry is discussed, with an emphasis on the future of the industry: next-generation sequencing. A close look at the path to personalized medicine, along with competitive landscape that will impact Invitrogen in the years ahead, is discussed. As Lucier Gardner attempts to manage the quest for growth by acquisition of other companies, they need to be able to enhance the company’s competitiveness. Suggestions for the company’s acquisition strategy can be based on an analysis of different situational factors. This case is ideal for demonstrating the importance of the mergers and acquisitions (M&As), problems on achieving success after M&As, and strategic leadership. The following points are to guide a review and discussion of these important concepts. • Invitrogen has been very successful in the past. Explain the reasons why Invitrogen chose acquisitions as its strategy for growth and expansion. • Are all Invitrogen’s acquisitions successful? What are the problems in achieving success? • Evaluate Invitrogen’s CEO, Greg Lucier’s strategic leadership. Has he been able to expand the company and maintain the growth for the future? • Evaluate Invitrogen’s next move in terms of acquisitions. Based on your analysis, what recommendations would you make to help Invitrogen achieve its goals? ANALYSIS • Invitrogen has been very successful in the past. Explain the reasons why Invitrogen chose acquisitions as its strategy for growth and expansion. Invitrogen was founded in 1987 and is now one of the largest life science companies in the industry. Invitrogen’s customers come from academic research, biotechnology and pharmaceutical companies, and government laboratories. It is a one-stop shop for all major molecular biology, biochemistry and cell culture reagent products. Invitrogen’s revenue relied heavily on government-funded research, and its growth strategy has been based on aggressive acquisitions. Under the leadership of Lyle Turner, founder of Invitrogen, Invitrogen acquired 10 companies. Under the leadership of Greg Lucier, recruited from General Electric, Invitrogen acquired 15 companies (2003-2005). The list below shows a sample of the companies that Invitrogen acquired from 2003 to 2005. » 2003: $325M acquisition of Molecular Probes, developer of fluorescent based chemistries. » 2003: $95M acquisition of Panvera, developer of high-throughput drug screening products. » 2004: Acquisition of Protometrix, privately held developer of protein microarrays. » 2004: $500M acquisition of Bioreliance, a pharmaceutical services company. » 2004: $65M acquisition of DNA Research Innovations, privately held company that developed DNA purification technology. » 2004: $8M acquisition of Bio Asia, leading provider of reagents and services in China. » 2005: $381M acquisition of Dynal, developer of molecular separation and purification technologies. » 2005: $130M acquisition of Biosource, developer of kinase and cytokine assays. » 2005: $60M acquisition of Zymed, developer of antibodies used for research. » 2005: Acquisition of Quantum Dot, developer of labeling and detection technologies. » 2005: $20M acquisition of Caltag, developer of immunological reagents. Because of this aggressive acquisition strategy, by 2007, Invitrogen had 4,385 employees and 35,000 products. There are many reasons why Invitrogen chose acquisitions as a strategy for growth and expansion. The reasons are listed below: » Increase market power: Invitrogen was founded in 1987 and would soon become one of the largest life science companies in the industry. When a company conducts horizontal acquisitions, it can increase its market power. Because Invitrogen was able to acquire companies in the same industry, its horizontal acquisition strategy helped the company to increase its company size and market power. » Decrease cost of new product development and increase speed to market: One of the reasons for any company to conduct an acquisition is to be able to use the existing R&D of the acquired company. One of the Invitrogen’s motivations for acquisitions is to acquire new technologies. » Lower risk compared to developing new products: As the case described, Invitrogen is considering acquiring Applied Biosystems in order to gain quick access to the next-generation sequencing. Acquiring an existing company will have lower risks compared to developing the new products in-house. » Increased diversification: Invitrogen has been the leader in life science, but not instrument development, which is where most government funding goes to. By acquiring a company outside of the current product offerings, Invitrogen can increase diversification and can have an opportunity to grow even bigger. » Reshaping the firm’s competitive scope: Every time when Invitrogen makes an acquisition, it is very likely that Invitrogen can bring in new competitive advantage from the acquired company. Therefore, this is one of the main reasons why Invitrogen chose acquisition as a strategy for growth and expansion. » Learning and developing new capabilities: With any acquisition, Invitrogen can lean and develop new capabilities. Thus, this is also an important reason. • Are all Invitrogen’s acquisitions successful? What are the problems in achieving success? Not all Invitrogen’s acquisitions were successful. For example, Invitrogen acquired Bioreliance, a pharmaceutical services business, for $500 million in 2004. In 2007, Invitrogen sold it for $210 million, due to a refocus on a “platform of technologies,” instead of services. There are potentially many problems in achieving success in acquisitions. These are: » Integration difficulties » Inadequate evaluation of target » Large or extraordinary debt » Inability to achieve synergy » Too much diversification » Managers overly focused on acquisitions » Too large For Invitrogen, the potential key issues are inadequate evaluation of target, large or extraordinary debt, inability to achieve synergy, and managers overly focused on acquisitions. While the case does not go into details of Invitrogen’s past acquisition failures, the concerns for the future acquisition show that the potential target companies in the next-generation sequencing space may cause Invitrogen to take on too much debt. There are also concerns of leadership being overly focused on acquisitions because Invitrogen had already invested $20 million in its own 3rd generation, next-generation sequencing program. If it can be developed in-house, why should the company spend so much money acquiring another company? In addition, Invitrogen is best at producing and selling low-priced reagents, acquiring a large instrumentation company would require a very different approach to R&D, sales, and marketing. It is very possible that Invitrogen will have a very hard time achieving synergy after acquisitions. The issues mentioned above represent problems for Invitrogen to achieve success in terms of acquisitions. • Evaluate Invitrogen’s CEO, Greg Lucier’s strategic leadership. Has he been able to expand the company and maintain the growth for the future? Strategic leadership is the ability to anticipate, envision, maintain flexibility, and empower others to create strategic change as necessary. Strategic leadership involves creating vision and mission, influencing successful strategic actions, and formulating and implantation of strategies. All of which yields strategic competitiveness and above-average returns. There are several key components of effective strategic leadership: 1. Determining strategic direction 2. Establishing balanced organizational controls 3. Effectively managing the firm’s resource portfolio 4. Sustaining an effective organizational culture 5. Emphasizing ethical practices Determining strategic direction Greg Lucier became Invitrogen’s CEO in 2003. He was recruited from General Electric. Since he took over, he has continued the strategy of Invitrogen’s founder, Lyle Turner. From 2003 to 2005, under Lucier’s leadership, the company made 15 acquisitions. By 2007, Invitrogen had 4,385 employees, 35,000 products, and many customers. Under his strategic leadership, Invitrogen honed its expertise in integrating companies and streamlining costs. In fact, Lucier said, “Acquisitions will always be a part of our strategy due to the pace of the innovation of our business.” The table below shows the change of selected Invitrogen’s financials from 2004 to 2007. Selected Invitrogen Financials (in US$1000's) However, Lucier also understands that he needs a long-term strategic direction. Because personalized medicine is the future, he needs to secure the technology of next-generation sequencing. Therefore, he has to invest in R&D and also examine the possibility of acquiring another company that specializes in this technology. As the case describes: [I]n order to transform Invitrogen, the company needed two things: instrumentation and a “methodological disruption in the space … as change is the strategic elixir.” Next-generation sequencing was that “strategic elixir.” Establishing balanced organizational controls Lucier seems to be able to maintain balanced organizational controls, in terms of strategic and financial controls. Strategic controls focus on the content (rather than outcome), whereas financial controls focus on short-term financial outcomes. Lucier is able to maintain a long-term strategy by acquiring needed companies for their technology, markets, and products. This acquisition strategy, along with focusing on short-term financial outcomes, contributes to the growth and success of Invitrogen. Effectively managing the firm’s resource portfolio Managing the firm’s resource portfolio includes exploiting and maintaining core competencies and developing human and social capital. Lucier is able to utilize the talent of Mark Gardner, Vice President of Corporate Strategy at Invitrogen. They have both worked at GE and have worked together for more than eight years. Gardner has held various positions at Invitrogen since 2003, including VP of Corporate Strategy, Chief Marketing Officer, and VP of Product Management/GM of the several business units. In addition, under Lucier’s strategic leadership, Invitrogen has a monthly meeting called Growth and Innovation Board Meetings, more commonly referred to as GIBS. At GIBS, needed resource/technology is identified and target acquisitions are discussed. Then the team will take months or even years to watch target companies and develop an integration plan. Under Lucier’s strategic leadership, the resource portfolio is well-managed. Sustaining an effective organizational culture Invitrogen’s organizational culture is for the company to keep up with the latest technology by acquisitions. As previously discussed, it has worked well for the company as shown in the financial statements and the growth of the company. Emphasizing ethical practices This component was not explicitly discussed in this case. But no violation of ethical practices was mentioned in the case either. STRATEGY • Evaluate Invitrogen’s next move in terms of acquisitions. Based on your analysis, what recommendations would you make to help Invitrogen achieve its goals? About 90% of Invitrogen’s revenue comes from research, which also heavily depend on the government funding for the National Institutes of Health (NIH) and National Science Foundation (NSF). The board of directors believes that the future of Invitrogen’s core competencies should be leveraged to solve the medical problems of the twenty-first century. In the 2004 Annual Report, Lucier wrote in the CEO letter to the shareholders: Over the next several years, we hope to alter the course of our company to more directly serve physicians and patients. The idea that a tools company should remain solely in the laboratory is dated. Due to the pressures facing our clients, and because the value creation is much greater as we move toward the human, we believe that moving towards the patient is the right path for Invitrogen. Our steps will be modest in the beginning. We will continue to explore technologies to both enhance our expanding definition of what constitutes molecular tools and to open up our thinking about how to better treat people with cancer. I am convinced we must continue to drive the business toward a more complete understanding of the human system. There are a few companies that Invitrogen can acquire. They are listed as below, along with an analysis of pros and cons: » Applied Biosystems o Pros • A large instrumentation company • Strengths in developing and commercializing instruments • Has a large forensics business and strategic alliance with Abbott for molecular diagnostics • Low valuation and large cash reserves • Current CEO, Tony White, will likely step down o Cons • No need to acquire a technology when one could be developed in-house • Require an enormous amount of debt • Instrumentation is different from what the Invitrogen is good at • Applied Biosystems may be in financial trouble • The acquisition could be too big and too difficult » Illumina o Pros • 1G Genome Analyzer well received • Has the commercial infrastructure to support capital equipment • Illumina’s management team is strong o Cons • Not clear if Illumina’s technology would emerge as the winner • Who would lead the combined companies post-merger (because the current Illumina’s management team is strong) » Pacific Biosciences o Pros • G3 Technology is desirable o Cons • Still plenty of development until 2010 • Company is likely to be very expensive to acquire Based on the analysis above, it seems that acquiring Applied Biosystems makes the most strategic and financial sense. Applied Biosystems is going to be the least expensive of all three targets and it has many desirable qualities and strengths that Invitrogen is looking for. In addition, Lucier can remain as a CEO post-merger and continue to direct Invitrogen. Acquiring Illumina or Pacific Biosciences does not guarantee that Lucier can remain as the CEO. There are also too many unknowns involved in acquiring Illumina or Pacific Biosciences. Thus, in conclusion, it is recommended that Invitrogen should acquire Applied Biosystems. Invitrogen Financials Case 8: Keurig: From David to Goliath: The Challenge of Gaining and Maintaining Marketplace Leadership INTRODUCTION This case describes a new product success story, set in a competitive business climate. Keurig was one of the companies to commercialize an innovative technology that allowed people to brew one cup of coffee at a time. Keurig was established in 1992. The word, “Keurig,” means excellence, and it has been the guiding principle behind its products and services. Keurig patented its single serve brewing system and first entered the office coffee service, or Away From Home (AFH), marketplace in 1998. In 2003, Keurig became one of the first to enter the At Home (AH) marketplace with a single serve brewing system designed for use in the home. By 2010, 25 percent of all coffee makers sold in the United States were Keurig branded machines. Keurig is regarded as a market leader. However, Keurig faces two major challenges. First, some patents of Keurig’s key technologies are approaching the expiration date. Without the protection of the patents, Keurig can lose revenue from the K-Cup portion packs, thus reducing GMCR’s coffee sales. Keurig can also lose royalties from other roaster coffee sales using Keurig’s technology. The second challenge is the perceived environmental impact of the K-Cup portion packs. It will need to be addressed to prevent erosion of Keurig’s position in the marketplace. A review and evaluation of Keurig’s business-level strategy, competitive rivalry, and SWOT analysis will aid in the discussion and weighing of strategic options available to Keurig. The results of the analysis can then be used to establish and support a strong set of recommendations seeking to ensure a continuation of Keurig’s strong performance and top market position. • Identify Keurig’s business-level strategy. Has the company’s business-level strategy been successful? • How does Keurig’s strategy stand up against competitive rivalry in the industry? • Review the important elements of Keurig’s external and internal environments. Outline key factors in the SWOT analysis. • Weigh the challenges confronting Keurig. What are the greatest risks for Keurig? What recommendations can be made to support Keurig’s growth and profitability objectives? ANALYSIS • Identify Keurig’s business-level strategy. Has the company’s business-level strategy been successful? The purpose of a business-level strategy is to create differences between a firm’s position and those of its competitors. Base on the target market and basis for customer value, there are five business-level strategies as shown below: Keurig’s overall business-level strategy is differentiation based on the following: » Its product is unique. » Focus on patented technology that other competitors cannot imitate. » Focus on offering more coffee selections. » Target everyone that loves a perfect cup of coffee. » The price point is relatively higher than its competitors. » Focus on marketing to educate the consumers. The key of implementing a differentiation strategy for Keurig is to offer products that customers perceive as different in ways that are also important to them. The focus is on non-standardized product that has differentiated features that customers value more than low cost. For Keurig, its differentiation approaches are: » Unusual features » Rapid product innovations » Technological leadership » Different tastes » Engineering design and performance Keurig’s business-level strategy has been very successful. The success can be shown in the tables below: • How does Keurig’s strategy stand up against competitive rivalry in the industry? Keurig’s business strategy leverages the company's unique ability to internally design and develop single serve brewing system that are differentiated by three key product features: » A coffee brewer that perfectly controlled the amount, temperature, and pressure of water to provide a consistently superior-tasting cup of coffee » A unique, patented portion-pack system containing ground coffee beans as well as filter paper » A varied coffee selection to replicate the choices available in a gourmet coffeehouse While competitors seek to imitate Keurig’s successful products and innovative technology, Keurig continues to remain as a market leader. In the early years, Keurig faced competitions from companies such as Salton, Filterfresh, Phillips, and Black & Decker. Their prices of the single-cup brewing system were relatively cheaper than Keurig. The table below shows a comparison of early single-cup brewing systems. Keurig continually re-invents itself and avoid price competition in product markets among retailers. It created a minimum advertised price (MAP) program that minimized price competition by providing incentives to retailers who only advertised prices at or above the MAP price. Before Keurig launched its B50 machine, the company focused on the following issues: » Gaining product placements with retailers » Identifying a logistics partner that would manage the fulfillment to retail stores » Introducing smaller packages of K-Cup portion packs Other competitors were determined to take over the market. Their activities include: » Kraft partnered with Braun to introduce the Tassimo Hot Beverage System in the United States: Tassimo uses a proprietary portion pack that includes a bar code that provides information to the brewer about the appropriate brewing settings. » Kraft subsequently announced a partnership with Starbucks in December 2007, introducing four Starbucks varieties. » Bunn introduced Bunn My Café, which is a pod-based brewer that enables users to pour in the desired amount of water. Although the competition intensified and the competitors’ product introductions were not all successful, Keurig introduced the Keurig Elite B40 and the Keurig Special Edition B60. In fall 2006 the Keurig Platinum B70 was introduced. By 2010, Keurig took approximately 25 percent of the market of coffee makers sold in the United States. Keurig’s strategy involves the pursuit of opportunities to create demand for its products in the market. From this analysis, Keurig’s strategy does stand up well against competitive rivalry in the industry. • Review the important elements of Keurig’s external and internal environments. Outline key factors in the SWOT analysis. One of the most important stages of the strategic management process is the situation analysis, which involves an in-depth assessment of forces in the external and internal environments that can impact the success of the company's strategy over time. A concise summary of the complete situation analysis is provided in the SWOT table below. Strengths Product innovation Brand management New product development Retail stores availability Speed to market Many coffee choices Market Responsiveness Great brewing system Performance Features Adding important partners such as Starbucks and Dunkin' Donuts Clear differentiation Advertising Weaknesses Price higher than competitors’ K-Cup portion packs not environmentally friendly Opportunities International growth and expansion New product and market innovations Product line extensions New features Threats Patents of key technology expire soon Product Substitutes Market saturation Consumers more conscious about the environmental impact New competitors Potential slow market growth STRATEGY • Weigh the challenges confronting Keurig. What are the greatest risks for Keurig? What recommendations can be made to support Keurig’s growth and profitability objectives? Despite Keurig’s current success, the company faces a variety of troubling issues. They include: » Some patents associated with the current generation of K-Cup portion packs were set to expire in 2012 and 2017. Without patent protections, the door could be opened to competitors to market products to compete with Keurig, reducing GMCR’s own coffee sales as well as royalties from other roaster coffee sales using the Keurig technology. » K-Cup portion packs are not environmentally friendly and some environmentally conscious customers are calling for a solution. Thus, the K-Cup portion packs remain on of the company’s most significant environmental challenges and needs to be addressed to prevent erosion of its position in the marketplace. » How to keep its strategy relevant and effective as competitive dynamics drastically change and how to revamp products to serve customers’ needs. In other words, how can Keurig keep up as a leader in the market? Although there are uncertainties and challenges ahead for Keurig, the company has been successful in the market. As the company gears up for challenges driven by the market, Keurig is not only well-positioned to satisfy these evolving needs, but can do so in ways that successfully differentiate the company and add value to its products. Based on the preceding analysis and discussion, the most promising areas of consideration are outlined below. » To tackle the issue of the expiration of the patents, Keurig has applied for the extension of the expiration dates to 2023. If the application is approved, this problem can be dealt later. However, all patents eventually expire. Keurig needs to continue to conduct more research and invest in its R&D. Keurig should be able to find better technology in making portion-pack systems that the company can apply for new patents for. Without continuous innovations, a company cannot remain as a market leader. » To address the environmental concerns of the K-Cup portion packs, Keurig also needs to design better products with a minimal environmental impact. This cannot be done, however, if the company does not invest in R&D. Simple change can be made such as thinner paper box for the K-Cup portion packs. Other more complicated changes can be using redesigned paper as the material to make K-Cups. In short, Keurig needs to use materials that can be recycled or are biodegradable. By doing this, Keurig can enhance its company image and become a leader in terms of the triple bottom line. » Finally, Keurig should carefully consider its gains and strengths in the At Home (AH) marketplace. In addition to continuously improve its single-portion brewer products and coffee choice offerings, Keurig will need to better understand its true rivals for this segment. Some of Keurig’s competitors have been extremely successful in the European market, Keurig needs to learn from them. Other opportunities include expanding to the emerging markets where coffee shops are not as abundant. In short, in order to remain as a leader in the market, Keurig has to continuously invest in R&D, continuously strategize its position in the market, and seek new market opportunities. Keurig Retail Presence Sales Comparison Solution Manual Case for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781305502147, 9780357033838