Question 1: What is your analysis of the structure of the portable electric tool industry? Has it been structurally attractive? Degree of Competitive forces in the Portable Electric Power Tool industry (Structural Analysis) Barriers to Entry: High The major barriers to entry in this industry were found in terms of 1. Technology, 2. Capital investment, 3. Economy of scale in manufacturing, and 4. Brand reputation in specific market segments & product categories.
Barriers to Entry (Technology/Capital Investment): Per the data given in the case study (Pg 3, Para 3), typically it required 2-4 years for a team of 4-6 engineers to develop a new tool.
This also needed approx. $200,000-$700,000 per year investment in R&D and $250,000-$700,000 in tooling. Therefore it can be concluded that having the right technology and resources was a huge entry barrier for new organizations. Barriers to Entry (Economy of Scale in manufacturing): All of the major cost components in manufacturing have significant economy of scale.
The cost of molding, machining and die casting depended on the volume per part; cost of motor and final assembly depended on the volume per product family [Ref Pg.
6, Para 9]. However, it is interesting to note that, no manufacturer had the technology and scale to produce all the necessary components. Even in case of typical large manufacturers, only the critical components that directly affected the performance of the product where produced in-house and rest were purchased from specialized suppliers.
The cost of purchased components was determined by the volume of purchase. Companies also had to bear large investments in R&D to come up with new product designs and had to spend extra for creating new manufacturing setup. Reduction of average variable cost was also possible through automation in manufacturing, which required capital investments. Barriers to Entry (Brand Reputation): In 1979, portable tools market grew by 50%, leading to the theory that the traditional distinction between consumer and industrial tools was diminishing [Ref Pg. , Para 7]. The advertising had become very aggressive for consumer market and most of the hobbyists; do-it-yourself consumers were more susceptible for brand advertising and promotions. Power of Suppliers: Low Critical components were manufactured in-house, strategically to avoid giving any bargaining power to the suppliers. For the rest of the components purchased, since the supplier’s industries were mature, it may be assumed that the competition in their respective industries were high, leaving no bargaining power with them.
Power of Buyers: Low Although the switching cost for buyers was low and the consumers were price conscious, the power of buyers was diffused by making products available at various price points with varying quality and features. Few of the buyers (or distribution channels) had some advantage in terms of volume discounts. Per the case, each manufacturer had roughly more than 10 price point variants for each product, based on performance, durability, quality and service. Threat of Substitutes: Low
Although stationary power tools and non-electric (gas and pneumatic) power tools are substitutes to Portable Electric Power Tool industry, none of them had an attractive price-performance (utility) trade off to influence this industry. They were not so popular and were infrequently available in the market. Rivalry among existing competitors: Moderately high Competition was largely domestic and the basis of competition was primary on product differentiation in terms of offering multiple product lines with varying quality & features for specific market needs, after-sales service support etc.
Companies also advertised jointly with distribution channels and also in media. The industry growth rate was moderate at 8% in industrial market segment and much higher in the consumer market segment. Consolidated Summary 1. Barrier to entry:High 2. Power of Suppliers: Low 3. Power of Buyers: Low 4. Threat of Substitutes: Low 5. Rivalry among existing competitors: Moderately high With good overall industry growth rate, high barrier to entry and moderately high competition among incumbents, it may be concluded that the industry structure for portable tool industry was moderately attractive.
Question 2: How is the industry structure changing in 1979? Are the changes for the better or the worse? Changes in the industry structure in 1979 1. Increased competition a. With more companies starting to expand to others country markets, the competition was taking global dimensions: i. Rockwell entering UK market. ii. Sears and Singer marketing power tools in Brazil iii. Makita making major push for US market share by combining high quality with aggressive pricing iv. Bosch acquiring Stanley Tool’s portable power tools for business entry in US v.
Emerson acquiring Skil. 2. Increasing significance of Consumer market segment a. Consumer tools were becoming more sophisticated and of higher quality, diminishing the traditional distinction between consumer and professional tools. b. As a result more professionals were buying consumer tools especially in developing countries where both markets were served by same channels. c. Home Centers were emerging as significant distribution channel replacing some of the industrial channels and competing with mass merchandisers in consumer sales. d.
Substantial volume of professional tools was increasingly sold through consumer channels. e. Compared to the professional/industry segment, the consumer market segment was growing at a much faster rate. The rate varied greatly by individual product category – sales of cordless tools grew 50%, the do-it-yourself market in Europe growing at 23%. Major companies (Black & Decker, Sears, and Rockwell) created new product lines for consumer segment and significantly increased their advertising expenditure to aggressively grow business. 3. Optimizing manufacturing costs and efficiency . Companies started optimizing manufacturing costs and efficiency by focusing on increased automation and standardization of components: i. Black & Decker started replacing single task machines with machining systems. ii. B&D also started standardizing motor and armature shaft iii. B&D appointed professional management for running the business. Were these changes for good? In a sense these changes were good for the consumer, as the product difference in industrial and consumer tools started blurring. Consumers started getting efficient tools for better price.
For some companies which were not coming with attractive products for consumer segment with enhanced features, suffered reduction in revenues. With major companies aggressively committing for higher growth rate in sales and earnings, increasing global competition extended to pricing too, thereby industry profitability was getting adversely affected. This can also be evidenced from the fact that companies were aggressively looking for better ways of efficiency and cost optimization in manufacturing. Question 3: What is Skil’s competitive Strategy in 1979? Evaluate its relative positioning with competitors.
Competitive Strategy of Skil Corporation Distinctly, Skil Corporation was banking on product differentiation to create competitive advantage and was aiming to be a prospector in the industry. From inception, Skil Corporation was following the strategy of product superiority, striving for best product performance rather than commonality. Skil Corporation had a strong focus on Research & Development (R&D). It had a long history of introducing new products and encouraged engineers to develop new models. It was Consumer Responsive too to an extent, with varied product designs according to local needs and taste.
However was not very focused on Operational Excellence. Skil Corporation had a strategy of selling their products directly thru hardware stores and Contractor Supply Channels, not giving much credence for building its brand image thru Mass Merchandising Stores [Refer Exhibit 3]. Skil had a strategy of not having significant spend on advertising or product promotions. It relied more on product publicity thru usage, rather than print media, prime time advertising. Although the market share of Black & Decker was ~30% in consumer market wrt 15% of Skil, it had almost 5 times the advertising spend as compared to Skil Corporation [Refer Exhibit 2].
Skil also had the strategy that each plant did specific job, viz. their fabrication and assembly plants were separate. Probably their strategy was to leverage the labor competency across the region where the plant was located. This advantage probably offset the additional transportation cost for moving goods across plants (for assembly after fabrication). Skil’s Relative Positioning with Competitors in Market Black & Decker, the largest player in the US market, was aggressively creating cost advantage and product variety as part of their strategy for creating competitive advantage.
Rockwell was more of an Analyzer, matching their product line to the industry leader and also focusing on the cost. Sears enjoyed some channel advantage and was able to translate it to above average profitability with average technical advantage and product differentiation. Scope Vs Cost matrix Question 4: What strategic options does Skil have? What strategy would you recommend? Strategic Options for Skil and recommendations From Exhibit 7 and Exhibit 3 of the case, it is evident that Skil Corporation had seen a negative growth from 1978 to 1979. Their revenues from US only sales went down from $124 million to $106 million.
As the market was getting more and more inclined towards the consumer tools, following should be the key objectives for Skil’s strategy in 1979 and beyond 1. Reduction in cost 2. Leveraging their R&D strength for product enhancements for portable electric tools. 3. Using Emerson’s leadership position in electric motors/fan market for supply of materials that were primarily used in portable tools market. Reduction in cost: a. Reduction in cost by using automated machining systems. b. Cost saving using in-house die-casting and molding. c. Consolidation of production/R&D facilities to reduce development cost.
Product Enhancements a. More energy efficient components and tools b. Developing power efficient motors, in-house. c. Continue using more and more, light weight/energy efficient material. Benefits of being part of Emerson a. Leveraging Emerson’s competency in electric motors, focus should be on more power efficient light weight motors for its portable electrical tools. b. Using Emerson financial strength to invest in advanced machining systems and die-cast molding for reduction in marginal cost of tools. c. More focus/spending on advertisement to re-position Skil in the consumer tool segment. ———————–
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