ABC Electric has been in business since 1970. The company makes hand-held arc welders its primary customers are construction firms, shipbuilders, auto-repair shops, and “self-help” amateurs. The company has 30% of the current market share along with four other competitors it has an annual sales of $800 million.
The company has a satisfied customer-base. Although, their products are priced above the competitors, customers prefer ABC’s welders due to their superior finish, reliability, and durability. Recently, demand for hand-held welders in the U.S. was steadily growing at a rate of 7% rate annually but has currently drop. However, demands are growing in the West European market, which is currently value at $1 billion.
Recently, ABC Electric found its market share and profitability decreasing. Due to the fact that the company has made some gain in its customer base by improving product quality and service while maintaining price. Moreover, a component supplier of ABC has raised its price by almost 10%. In addition, industry wide competition has generated excessive price reduction, which help in the fluctuation of the company profitability.
Strategic Issues Facing ABC Electric
ABC Electric is facing several issues that needs to be address in order to stabilize their competitors growth as well as increasing their market share and profitability. These issues are closely related to their external competitive strategy, which seems to be non-existence on a whole. Base on my brief discussion above, I believe that ABC Electric has in-voluntarily allows, one of its competitors to make advancement by improving its quality and service of their product without increasing price. Due to the fact that, ABC perceived its customers to be immune to price thereby remaining loyal to its product because of the quality and reliability that comes with the product image. As a result, this perceived brand loyalty created a threat to the company. The second issue facing the company is, a supplier of whom ABC purchases its electric motors from for its welder has raised the price by almost 10%. In looking at this, the bargaining power of the supplier is very strong because the switching cost might be very high. Moreover, it will become damaging to the company based on the current reduction in price within the industry if the problem is not solved. The company will not be able to compete with their competitors’ price. As a result, they will incur further loss in market share and profitability. Finally, there is an industry wide competition for welders which leads to frequent price reductions. As a result, ABC’s cost structure has been affected. In looking at this issue, ABC has relied heavily on its strategy of product differentiation and maintaining its traditional core competency, which is welding machine with limited or no diversification over the years. Now it is force to restructure its competitive strategy by lowering the cost of its product while maintaining quality or force to conglomerately diversify, which means selling new product to new market whereby creating a market niche, such as, the auto industry.
The recommendations of the strategic planning committee can help solve these problems in various ways. For instance, the recommendation that was made by the committee to backward integrate to make electric motors would be an excellent move because of the fact that the company will have control over the quality as well as the price of the motor. In addition, by making its own motors the company will be able to reduce the component cost, thereby, increasing the profit it makes on its welders. Not having a supplier can reduce the time and effort of maintaining a steady external relationship. In order to implement this strategy, one must consider appropriate structural mechanisms, which needs to be established as to ensure coordination of activities between welder and motor operations. Moreover, the uses of control mechanisms are important to increase the success rate. By implementing this strategy ABC Electric will be able to compete effectively with its competitors within the industry base on price thereby improving its profitability and market share.
Start making welders for the auto industry should be the first strategy ABC implemented. The base of my argument lies in the advantage they would have to be the first mover with such a product. For example, if this action is successful then the company will have above-average returns until other competitors are able to respond effectively. Moreover, with ABC being the first mover they will have the opportunity to further build on customer loyalty, thereby making it difficult for responding firms to capture customers. However, potential disadvantages may result from being the first firm to initiate a competitive action. First among these are the risk taken by first mover. The risk is high because it is not easy to predict the amount of success a particular competitive action will produce prior to its initiation. Oftentimes, first mover has high development costs.
ABC Electric, base on the recommendation of the strategic planning committee on entering the Western European market where there is a market growing at an average rate of 10% can solve the basic problem of reduction in market share. Although, there are three other competitors in that market ABC can form strategic alliance with the French firm D’estang whereby sharing the risk and profit. ABC with its impressive record of quality to customers can bring that same philosophy to this firm as a result creating success. By exercising trustworthiness between the two firms will create a winning formula. Furthermore, by implementing this strategy ABC will be able to enter a new market without employing large amount of capital.
Global Market Entry Mode
In looking at the choices that we have, in order to make an entry into Western European market, one can either consider exporting, licensing, acquisition, new wholly owned subsidiary, and strategic alliances. Exporting which means firms exporting goods are services to other country to be sold. It does not require the expense of establishing operations in the host countries, but exporters must establish some means of marketing and distributing their products. In so doing, exporting firms must develop contractual arrangements with host country. Its disadvantages include the often high costs of transportation and possible tariffs placed on incoming goods. In addition, the exporter has little or no control over the marketing and distribution of its products in the host country and must pay the distributor or allow the distributor to add to the price to recoup its cost and make a profit. As a result, it may be difficult to market a competitive product through exporting. Therefore, this method would not be suitable for ABC Electric strategic venture in Western Europe. A licensing arrangement allows ABC to purchase the right to manufacture and sell the firm’s product within the region. The ABC as licensee will takes the risks and makes the monetary investments in facilities for manufacturing, marketing, and distributing the goods or services. Licensing is possible the least costly form of global expansion. It is also a way to expand returns based on previous innovation. However, licensing carries with it various disadvantages. For example, this approach will provide ABC very little control over the manufacture and marketing of its goods in other country. Furthermore, licensing provide the least amount of profit because profit has to be share with the licenser and licensee. The global firm may learn the technology and after the license expires; they may steal the technology to produce a similar product to compete. So, ABC should not employ this form of strategic global entry. The other form of entry available to ABC is acquiring D’estang, this would be a disastrous move for ABC because this brings with it the cost of acquiring the foreign firm, complex negotiation, and the problems of merging with domestic operation.