Posted at 11.23.2018
SKF, founded in 1907 in Sweden is the largest designer of ball bearings, controlling a global market show of almost 20%. The dilemma that SKF is facing is the fact its biggest consumer Steelcorp has asked the company to take part in a reverse auction where the lowest priced bidder will win the order. That is an offer that SKF could have generally disregarded since its value for quality will be undermined, but in this circumstance refusing this offer from Steelcorp means that they would not only lose out on their $4 million gross annual requests, but also on the part of the business enterprise that they do with Industrial Technology Company (ITC), the SKF distributor offering Steelcorp. In this particular assignment we will analyse the SKF business environment and decide if (i) SKF need to improve their strategy, (ii) if indeed they opt to change their strategy what problems they might face and exactly how they should conquer them. .
THE BUSINESS ENVIRONMENT
The diagram explains the the different parts of a business environment.
(Johnson, Scholes and Whittington, 2008)
Analysis of the business enterprise Environment
The environment, in which the organization operates, plays an important role in the strategy that the company adopts. The exterior forces that function can affect the product, service, its marketing strategies and romantic relationships with the purchasers and suppliers.
There are many factors that influence the business strategy in some way or the others such as political, economic, socio-cultural, technological, environmental and legal factors. From the info provided in the event we can easily see that SKF is performing considerably well which is leading the international market with global stocks of almost 20%. Even on the technological front side SKF is ever developing, the company created the self-aligning ball bearing and since that time it's been growing. Now the service department of SKF has started using the Documented Solution Program (DSP), an instrument to measure the customers value from using SKF's bearings. Regarding to a DSP case study SKF was able to generate a return of practically 500% in 54 months with an investment of $2. 29 million.
Bearings have a number of uses ranging from car industry, medical musical instruments, oil and gas, structure equipment to food and kitchen appliances. The function of bearings is to reduce friction between moving equipment in order to save energy and due to this the bearing industry will always enjoy active demand in local as well as international marketplaces.
On the global leading SKF is facing stiff competition from the German company Schaeffler, accompanied by Timken, an American company and Japan's NSK. Although they do not match the wide variety of services and product offered by SKF, low cost companies from Eastern European countries and China also create a significant menace.
The SKF Group is divided into three business divisions to provide specific customer groups. The industrial section functions customers within the industrial segment, while the automotive division dished up the auto industry as well as manufacturers of kitchen appliances and ability tools. The service division provides the professional customers with after sales services and substitution bearings. SKF has 110 making sites and sales companies in 70 countries, and provides service through 7000 vendors across the world.
The Bain Mason Industrial Organisation Paradigm
The Bain mason Paradigm is a systematic model for evaluating the nature of competition in an industry and also helps to determine the performance of a company on the market.
Industry Structure - Industry structure was defined as the relatively steady economic and technical dimensions of an industry that provided the context in which competition happened. The bearing industry was estimated at $40 billion, with 40% demand from Asia followed by Europe and North America. SKF led sales in European European countries with 51%, Asia with 19%, followed by THE UNITED STATES and Latin America. In the United States SKF encountered major competition from the Indigenous American company Timken, which had 30% of the market compared to 12-13% of stocks of SKF. In the global level SKF competed with German Company Schaeffler that was its strongest competition with an estimated global market share of about 16-18%. Among its other competition were American company Timken with about 9-11% of the market and Japanese company NSK with about 10% of the global market show. SKF is also facing strong competition at the international level from new low-cost production companies, in Eastern Europe and China.
Conduct (Strategy) - Conduct is the main element decision variables in a firm's strategy. These could include aspects of advertising, capacity, quality and charges. Conduct is sometimes considered as the economic dimension of the business's strategy. SKF is a brand reputed for its quality and scientific excellence. SKF assumed that the price tag on their product was much like the purchase price value, hence as a general rule the company did not do business with those customers whose decision was exclusively based on the price tag on the product
Performance - Porter (1981) broadly described performance as success, cost minimization or specialized efficiency and innovativeness. SKF has been impressive since the beginning when they invented the first self-aligning ball bearing. Since then the company has had online sales of $8. 2 billion, and handles almost 20% of the global market share. The company upholds the grade of the merchandise and the value of the customers' money. Hence SKF service deployed the Documented Solutions Program (DSP), which is a computer centered sales tool which measures the end-user value from using SKF's bearings and services. A DSP case study performed on the petrochemical industry proved that in 54 a few months SKF's bearings and services could actually generate about 500% from personal savings related to decrease in pump failures.
SKF can be an established brand, providing around 2 million customers, and well known companies in diverse sectors.
The company is searching for over a hundred years now, has had net sales of $8. 2 billion, and its global market shares are getting close 20%.
Focus has always been on developing officially superior bearings.
SKF bearings commanded a substantial price premium varying from 10% to 50% with regards to the application.
Implementation of the computer structured sales tool, DSP was proving to be always a good move.
With the tough economy SKF was shedding its customers to companies supplying a cheap for average quality products.
Competition was due to low cost makers from China and Eastern Europe.
PORTERS FIVE FORCES
Porters five pushes are shown in the diagram below.
(Johnson, Scholes and Whittington, 2008)
Rivalry on the market is measured by the percentage of market share held by the companies. When a large percentage of stocks is kept by lots of firms in the market the competition is more. In cases like this SKF manages almost 20% while Schaeffler comes close with an estimated 16-18%. While in the US market, SKF is the owner of 12-13% and encounters major competition from Timken who is guarding its 30% of the market.
The existing rivals are not the sole threat; new companies also pose a considerable threat. Although in reality there are specific barriers, alternatively certain characteristics of the industry that protect the high earnings organizations from the new entrants.
Buyers can have a substantial impact on the industry depending on how much power they have. SKF's customers are ITC, who's a major provider for Steelcorp, because SKF does not do business straight with end users. Since Steelcorp decided to have a opposite auction to counter its downturn in sales, SKF is facing a problem. For if indeed they accept, the value of the superior product is undermined, but if indeed they decline they lose out on annual requests of $4 million.
According to Porter new entrants bring in new capacities that put pressure on the prices, costs and the rates of ventures. A threat of an alternative product is engendered because of the change in cost of the other product. To counteract the threat the businesses need to either keep down prices or increase investments. As more products become available the clients have a wider choice for a lesser price, hence this affects the industry through price competition. Threat is significant when the entrant is diversifying from another industry for their existing functions (Porter, 2008). SKF was losing its customers to products sold for a lower price and of 'good enough' quality.
The ability of the suppliers, those who supply the raw materials can also play a substantial role, although the case does not mention any danger from the suppliers.
Every company positions itself on its talents, which get into two major categories- cost and differentiation. By applying both of these in either the extensive or narrow market, three general strategies, not reliant on the organization or industry were discovered by Porter. They are shown in the diagram,
Cost Control Strategy:
When a company produces a certain quality at a lower price, it is called cost leadership strategy. Some companies can gain cost benefit by improving processes, gaining usage of lower cost resources or cutting unneeded costs. Although SKF appears to have applied this plan early on by producing high quality bearings, it still retained the high price in a market where less expensive products were available. This strategy is at the chance of increasing technology which is also available to the competition. Besides those companies utilizing a focus strategy could also gain a lesser cost advantage within their segment of the marketplace.
This strategy demands the merchandise to stand out from other products or services that is respected by the client and recognized to be better or different from that offered by other companies. This plan happens to be being pursued by SKF, where they are selling their superior quality bearings for a higher price, plus they face the potential risks of imitations or changes in customer preferences. Although in this case the lower costed lower quality products are increasing the huge benefits. The release of the DSP tool is also a service strategy to make the client alert to the cost savings from using SKF products.
The focus strategy attempts to use either the price authority or differentiation strategy in a narrow market segment. Generally focussing on the certain segment tends to lead to a much better offered consumer hence increased devotion to the brand. Although businesses that follow a differentiation focussed strategy might be able to sell more costly products to the customers within the section. According to the case SKF will not appear to be following concentration strategy since it generally does not give attention to any market segment in particular.
According to Prahalad and Hamel (1990), central competencies will be the skills behind the products, the company of work and the delivery of value. It isn't about being able to outspend the competition. The service division is using the DSP in order to build center competency. Using the client data the DSP calculates the estimated savings and results for the client on a package deal of SKF products and related services. When customer data was not available SKF runs on the database research study of a similar industry and an application guide. SKF's vendors also learned that tool could also supercharge sales of SKF products and teach buyers on the full total cost of ownership.
RESOURCE BASED VIEW
According to the resource structured view, all businesses do not have usage of the same resources, these resources should be purchased at an efficient price and really should continue steadily to produce appreciated market products. A significant positive relationship sometimes appears between differentiation and market talk about, and differentiation is another method of establishing a low cost market position (Hill, 1988).
A resource founded view accentuates the utilization of a firm's reference and capabilities to produce an edge that ultimately can ends up with superior value product. To produce this advantages the firm must have superior resources and functions when compared with its rivals. The resources should be firm-specific assets to create the cost or differentiation gain, while a functionality is the capability to utilize these resources effectively. At SKF the DSP software enabled the company to put a financial amount on customer value, by measuring person benefits. DSP could calculate for just about any application what a finish consumer could expect from SKF products and services in terms of total personal savings and return on investment. Another service was condition monitoring, which allowed factory workers to examine a rotating machine and take precautionary measures to avoid costly breakdowns.
The examination of the business's service division shows that the strategy the business is using hasn't become obsolete as was thought before, since the quest statement of the business appeared to be the accomplishment of low total cost, using high quality products.
If the service department at SKF makes a decision to improve its strategy, it would first have to adopt a fresh strategy. Bourgeois and Brodwin (1984) explain five process methods to strategy implementation. In the first approach economic and competitive evaluation is used to plan resource allocation to be able to accomplish certain objectives, this was known as the commander model. The next approach is normally worried about the adoption of a fresh strategy, therefore called the change model, and handles the execution of a technique using the organisational structure, control systems and motivation compensation. The third approach is named collaborative model and is about taking decisions at older levels. It entails the management in the strategy formulation process, that emerges a negotiated end result. The fourth model is called ethnical model and will try to implement a technique by infusing a corporate culture, by inculcating a couple of work related ideals within the organisation. The fifth approach is named the crecive model since it requires 'growing the strategy from within', by expanding day to day opportunities, somewhat than dividing the firm into developers and implementers.
SKF should follow the commander model to the execution of a new strategy. It consists of two approaches
The systems model
The incremental approach
The systems model consists of id of the targets to look for the plan of action to help meet up with the objectives, they are then assessed for monetary efficiency and is chosen for execution. The incremental strategy identifies the existing strategy and evaluates the opportunities and dangers and modifies the existing strategy to meet up with the changes in the market conditions (Bourgeois and Brodwin, 1984).
The commander model however has its restrictions; these could be some issues that SKF would face if they intend to choose a new strategy.
It requires that the CEO have a whole lot of capacity to make decisions, Execution can be easily achieved if the strategy does not pose a significant threat to the organisational customers.
Accurate information should be available and environmentally friendly change should be sluggish.
The model cannot allow for personal bias and politics influence.
The firm is divided into 'thinkers' and 'doers'
According to Bourgeois and Brodwin (1984), the best conditions to put into action this model are:
The targets of the strategy formulator and implementer should match.
The current system in the organization should not impede changes made by the strategy.
The use of top down approach.
Mostly succeeds when only hook change is required.
Environment should be stable, with low degree of diversity.
At SKF the change means that either they might have to improve their motto and sell the bigger quality product for less cost to keep its market talk about or they would have to find another substitute of maintaining the quality and cost.