Company Overview
SAP, established in 1972 by a group of five German software engineers, has emerged as the third world-largest software provider in collaborative business solutions for all types of industries and for every major market. SAP began with P/1, software of accounting transaction processing program, is now call Enterprise Resource Planning System or ERP. Before 1999, it focused of developing a powerful ERP system for the largest multinational companies and outsourced consulting service to external consultants for marketing, installation and implementation. It used to sell the whole ERP package and wanted to provide a superior software system. However, under the threats of changing technology and intense competition, SAP changed its business model and strategy in 1999 to become more responsive to customers’ needs by creating new business solutions to large, medium and small firms, breaking ERP package into separate modules and making them easier to use and maintain. The strategy move and organizational restructure, together with mySAP solution, have marked a great leap forward in SAP’s growth journey. Now SAP continues to add new solutions and customize mySAP to meet the needs of every customer in all industries.
By applying Five-force model and PEST, I analyze the external environment and determine threats and opportunities that SAP is and will face. Going deeply inside the company, I analyze SAP’s business model, strategies at all levels, resources, capabilities and value chain to determine SAP’s strengths and weaknesses. Then, I come to the conclusion with problems that SAP is and will face. Finally, I suggest some alternatives, analyze the costs and benefits of these alternatives and come up with some recommendations and their implementation plans. I suggest the use of Balanced Scorecard to measure our solution with described criteria.
I. Situational Analysis and Problems Identification
A. External Analysis
1. Five Forces (Appendix 1)
· Potential Competitor – High. Microsoft is now focusing on PC software but may become competitor in ERP software market because it has bought 2 companies that compete with SAP in small and medium size markets and it has competencies in a wide range of software products and resources and capacity to develop quickly and easily an ERP system with web-based solution.
· Power of Supplier – High but decreasing. Before 1999 SAP depended heavily of consulting companies to market and promote its ERP system to both local and overseas markets. After changing strategy in 1999, SAP focused more on developing in-house consultants and has became stronger in consulting service related to ERP solutions.
· Power of Buyer – Low because the switching cost is very high but this power is increasing due to complementors.
· Power of Substitute – High. Here substitute means modules or parts of ERP package because customers do not usually buy the whole ERP package but tend to buy some modules of ERP that fit exactly their needs.
· Rivalry – High because: 1) competitors catch up SAP technology in developing ERP by exploiting weaknesses of SAP software; 2) Oracle has became main competitor who can offer product nearly the same as SAP products; 3) Niche players (Siebel, Ariba, Marcum…) emerge as main players; 4) Competition in niche market is very intense; 5) IMB has changed its strategy to provide customized software that customers want.
· Threat of Complement – High. Sun has provided Java Platform and Free Linux Platform that enable computers to work with any software systems. This will decrease switching costs and buyers can buy ERP modules from any providers to run in their current system. Therefore, the power of buyers will increase.
Environment Analysis
· Political, demographic, social environment is favorable.
· Macroeconomic environment: in early 2000s, firms tend to spend less on IT system due to economic downturns in 1990s.
· Technology environment: fats growing web and internet technologies and software development capacity in the U.S and abroad may become a threat to SAP if it can not change its technology ahead of time.
Threats
· Oracle developed its own ERP that have features that SAP does not have.
· Competitors exploit weakness of SAP software and offer products more customized and less expensive.
· Development of the internet and broadband technology may make SAP’s P/3 be outdated.
· Development of new web-based software technology puts SAP under the threat of losing product advantages.
· Threat from compilementors like products of Sun.
· Niche competitors get stronger and more aggressive in competing with SAP.
· Microsoft may become a competitor in the future.
Opportunities
· Large market segments of small and medium-sized firms.
· Large untapped overseas markets.
· Large market segments for new industries such as insurance, food, logistics, public sector.
· Opportunities in current markets if SAP can customize ERP to customers’ needs and make it easier to implement and use.
· Large market segments for new solutions in ERP package that SAP has not yet develop like corporate governance, risk management, finance, compliance.
· Opportunities for consulting and maintenance service that comes along with ERP solutions.
5. Conclusion
SAP is vulnerable and risks losing market shares due to intense competition from Oracle and niche players and threats from fast changing technology and complimentors. Potential competitors might come from both red and blue oceans to challenge SAP technology. But SAP has many opportunities in all markets and industries. The question is that how SAP uses its competencies to develop its technology and create new solutions to offer such large markets.
B. Internal Analysis
1. Business model (Appendix 2)
Before 1999, old model
- Applied focused strategy to largest international firms
- Focused only on software development
- Outsourced marketing, installation, implementation and software maintenance
After1999, new model
- Pursued differentiation strategy to serve all customers
- Focused on software development, consulting service and software maintenance
- Outsourced implementation and maintenance
- Developed consulting and maintenance capabilities to reduce outsource
The old business model worked well because customers do not require sophisticated and customized products and competition was very low. However, this model was not sufficient for the new environment where there are many threats from competition and changing technology. The new model is a good and timely response to such new market environment and it helped SAP generate revenues and growth.
2. Resources
· Brand name and brand recognition
· State-of-the-art ERP system
· High skilled software programmers, talented and professional staff
· Control and reward system that motivate and retain employees
· Cross-functional teams focusing on customizing products
· Loose matrix structure that allows maximum capacity and competencies
3. Capabilities
· Management team with long term vision
· Culture of value and norms that emphasizes technical innovation
· Capability to innovate and develop technology
· In-house training and consulting capabilities
· Decentralized control that allows flexibility in work
SAP’s distinctive competency is product innovation.
Value chain (Appendix 3)
Before 1999, SAP had many weaknesses in its value chain because it ignored marketing & sales, outsourced customer service, human resource management and related consulting service. Its flat structure caused the loss of control over marketing, sale, installation and relationships with external consultants and its product-oriented culture made it less responsive to customers. The weak value chain did not allow SAP to transfer its competencies into value to customers and caused implementation problems.
Together with the change of strategy, SAP has strengthened its value chain through series of activities such as building its own HRM, centralizing marketing & sales, developing consulting capabilities, changing organizational structure from divisional to matrix structure, building a new corporate culture based on customer-oriented concept. The new value chain allows SAP to implement the new strategy. Please refer to Appendix 4 for further information about how corporate infrastructure affects SAP’s implementation plan.
Competitive advantages (Appendix 5)
· Quality: High. ERP system is highly reliable and added more attributes
· Superior innovation: High. SAP continuously add new solutions to its ERP system
· Customer responsiveness: low before 1999 but high from the introduction of mySAP
· Durability of competitive advantage: SAP’s high quality, superior innovation and high customer responsiveness competitive advantages are vulnerable because: 1) the barrier to imitation is high due to fast changing technology; 2) competitors such as Oracle and potential competitor such as Microsoft have capabilities to develop ERP system which has nearly the same features ad SAP’s ERP system. 3) companies in software industry are dynamic to changing technology and business environment.
Value discipline (Appendix 6)
· SAP focused on product leadership before 1999 because it believed that technical advances were competitive advantages and allowed it to charge premium prices. However, SAP changed the strategy to pursue both product leadership and customer intimacy and gradually achieve cost reduction.
Global strategy (Appendix 7)
Before 1999, SAP pursued international strategy because it was not under the pressure of cost reduction and was not well locally responsive. However, in response to intense competition and threats of changing technology and customer needs, SAP changed this strategy in 1999 to a transnational strategy to have more local responsiveness and cost reduction.
I think that the new global strategy is a timely and effective response to the fast change of business environment and will be successful in the future: 1) SAP will have deep understanding customers’ needs and therefore it can use its competencies to develop and current products and create new solutions to them; 2) SAP will enter new potential markets in terms of locations, industries and business processes before its competitors; 3) SAP can gradually reduce costs to offer cheaper products because premium prices will be eliminated by competition; 4) Through customization, SAP can build brand loyalty, increase brand awareness in every market and all industries; 5) SAP can surpass its competitors in technology, solutions, customer base. However, SAP needs to be able to change its strategy in response to changing environment.
8. Corporate level strategy
- Outsource strategy: SAP’s outsource strategy before 1999 allowed it to penetrate overseas market quickly while eliminating huge capital investment but brought it serious problems: 1) losses of high revenues from consulting service; 2) losses of contacts with customers so SAP did not have knowledge of its customers and understanding of changing needs of its customers; 3) less customer responsiveness because SAP did not contact directly its customers; 4) increasing complaints from customers regarding consulting service; 5) external consultants became more expert in installation, implementation and software service; 6) SAP became much more dependent on those consultants. However, SAP limited outsourced activities to implementation and service after 1999 to solve the above problems.
- Horizontal integration: SAP considers small acquisitions as important parts of its strategy to reduce costs, enhance functionality of its products and build its customer base. SAP also builds strategic partnerships with its niche and potential competitors to exploit competencies that it does not have and synergies across partner companies.
- Vertical integration: SAP builds strategic partnerships with external consultants to promote its products. This strategy is necessary since SAP still needs to expand market quickly with little capital investment, especially in overseas markets.
- Strategic partnerships: SAP not only builds partnerships with its competitors and suppliers but also builds partnerships with companies who provide complimentors such as Netscape and Sun to develop its products. The partnership strategy helps SAP reduce competition, increase market shares and develop its products. But there is a risk that SAP will lose its technology to its partners if it does not have effective control methods.
9. Business level strategy
Before 1999
Focused differentiation strategy
This strategy is suitable for the market situation at that time because technology was not changing fast and competition was not yet intense.
After 1999
Differentiation strategy but attempting to reduce cost
This strategy move was to respond to threats of changing technology, intense and new competition and is consistent with its global strategy.
10. Functional level strategy
11. Strengths and weaknesses
Strengths:
· Superior product innovation and development capabilities
· State-of-the-art ERP system
· Skilled, talented and professional employees
· Cross-functional product development teams
· Brand name and reputation
· In-house training & consulting service
· Loose matrix structure that allows SAP to be very responsive to customers’ needs
Weaknesses:
· Cooperation between subunits
· Control over external consultants
C. Problems Identification
· Coordination between and among subunits
· Control partner consultants
· Vulnerability of business model in intense competition and changing technology
II. Alternatives, Cost/Benefit Analysis
III. Recommendations and Implementation
A. Recommendations
I recommend SAP to choose all the above alternatives.
B. Implementation Plan
1. Build corporate culture to enhance cooperation between subunits and implement strategies in the entire company
- Hiring & Training: hire qualified people who fits SAP’s culture; create and maintain: learning corporation; environment of trust and nurture unconventional thinking and creativity; share values and behavior norms in the entire corporation; customer and service-oriented, performance-enhancing, unified, open and diverse culture. To do so, SAP needs to have in-house professional training centers to design and conduct training programs, good managers at all levels who can tell stories, become models, transfer the corporate mission, inspire passion, promote team-work spirit and experience sharing.
- Reward system: offer equal career opportunities to all employees; set up performance-related pay system; reward individual efforts; offer bonus plans, annual profit-sharing programs, stock options, equity saving package, capital saving programs, retirement and pension program; welcome package to welcome foreign nationals to work at SAP Germany and foreign subsidiaries.
- Organizational structure: flat and flexible structure.
2. Selective acquisitions (Appendix 8)
3. Develop consulting and maintenance as a main business
- Hiring: increase number of qualified consultants and software engineers
- Training: develop training packages for newly recruited consultants and software engineers; create training programs to upgrade consulting skills and maintenance capabilities
- Reward: reward systems to motivate, retain and develop staff in these two areas
4. Strategic alliances, network and partnership with external consultants and other software firms
- Choose strategic partners carefully. Partners may include niche competitors, potential competitors, external consultants and complement providers who have competencies and technology that SAP does not have or wants to improve.
- Create a learning environment to learn competencies from the partners while working with them
- Create an implementation plan so that SAP can acquire synergies of the network to reduce costs and develop its technology and service capabilities.
5. Non-competitive strategy to prevent new entrants, manage rivalry and seize opportunities
- Product development strategy: create new solutions to add in mySAP such as corporate governance, risk management, IT management, customer profitability analysis; develop mySAP solutions for new usage such as internet, mobile business, ebiz, on-line, broadband; increase consulting services to all business processes such as finance, strategy, risk management, corporate governance.
- Market development strategy: customize mySAP to new market segments such as insurance, public sector, food, textiles; customize mySAP for all size foreign customers; enter more foreign markets.
IV. Balanced Scorecard (Appendix 9)
SAP should use Balanced Scorecard as a measure of business performance. The Balanced Scorecard starts from SAP’s vision, mission statement and goes to four specific perspectives. Here I recommend only measures of the above recommendations and implementation plan.
Learning and growth: build a unique and open corporate culture that fosters a willingness to take responsibilities, help others and seize opportunities.
Internal process: reduce cost, develop products, service and technology, innovate new products.
Customer: help all customers win in every business environment.
Financial: satisfy investors’ expectations in terms of returns and sustained growth.
Thursday, July 13, 2006
VIACOM EMPIRE
1. Introduction
Viacom, established by CBS Broadcasting as an independent company in 1970 has now become world’s second largest media conglomerate. Bought by visionary Sumner M. Redstone in 1986, Viacom gradually emerged as an “entertainment colossus” and expanded its empire through a number of mergers and acquisitions, timely strategic alliances and product diversification. Most notable among them were the merger with Blockbuster in January, 1994 and the acquisition of Paramount in July, 1994. However, this transformation into a media giant did not come without its toll. The company incurred huge debt, structure and management challenges loomed and the fast-changing entertainment and media industry posed new threats to the company. In a very risky movie industry where past successes are no indication of future success, Paramount’s share of the box office dropped from 14 percent in 1994 to 10 percent in 1995. To compound the problem, the Blockbuster division was also not doing well.
By applying Five-force model, SWOT, PEST and value chain analysis we explored internal and external environment; then we used M&A evaluation method to get an insight of the company’s relative value. We also analyzed synergy applying discounted cash flow NPV analysis. Finally, we analyzed the costs and benefits of the alternative solutions and came up with some recommendations and their implementation plans. We suggest the use of Balanced Scorecard to measure our solution with described criteria.
2. Internal Analysis
2.1 Corporate-level strategy: global expansion strategy
2.2 Business-level strategy company pursuing: product leadership strategy. (Appendix 1)
2.3 Distinctive competencies
Resource: syndication right for some popular TV programs like Cosby show; product line proliferation; brand name; strategic alliance; knowledge and experience in product development; state-of-art production capacity in Orlando, Florida; good network and connection with other companies like telephone companies, wireless companies; opening of new channels.
Capabilities: keeping cost under control; good functional structure that enables company to manage cost and create profit center.
2.4 Value chain analysis: (Appendix 2)
Viacom has outstanding value chain to transform inputs to outputs that continuously create value to its customers. It has capability to lever resources to design, create and deliver new products to its customers. It also has efficient supporting activities that enable primary activities to be taken easily and timely.
3. External Analysis Through Five-Force Model
Although the industry demand is growing steadily, the intensity of rivalry is high owing to high exit barriers and consolidated industry structure. Because of huge capital investment and high risk of failure (difficult to predict whether a program/movie/song will be popular or not), the entry barrier is high. The bargaining power is low to moderate because the company can make it content in house. Owing to low switching cost and low brand loyalty, the bargaining power is high. The large number of existing and emerging entertainment channels cause high substitute threat. Complementors may become substitutes and the threat of complements is moderate. The environment is in the favor of the company as explained in the Appendix 3.
4. SWOT Analysis
Internal analysis
Strength
Clear mission and vision of future; brand name; management skills; scale and scope of business; copyrights; high market share in the US.
Weakness
Huge debt; often changes of top management; lack of international experience of management team; weak cooperation among business units;
External analysis
Opportunity
Globalization and growing markets (Asia, Western Europe etc.); Prices liberalization in cable TV industry; Market consolidation (increasing bargaining power, and non-price competition); Technology advancement
Threats
Deregulation that lowers the entry barrier; fast changes in technologies that might lead to potential entry with lower costs or create new substitutes; piracy; low brand loyalty of customers
5. Key Issues To Address
- Poor performance of Paramount and Blockbuster;
- Heavy debt
- Global expansion
- Difficulties in realizing expected synergy
6. Cost/Benefit Analysis of Alternatives:
7. Recommendations :
Based on above analysis, we recommend that Viacom should follow : first, restructuring organization; second, finding out possible acquisition & merger ; and third, following a global strategy.
8. Implementation plan (Appendix 4)
8.1. Restructuring: to lever the company’s resources to create value for its customers
- selling unprofitable business units such as Paramount Picture
- integrating properties to reduce cost by sharing resources of cross-business units
- combine value chain activities to achieve lower cost or collaborating to create new resource, strength and capabilities
- Cross functional team to lower cost and enhance productivity and efficiency
8.2. Acquisitions & Merger: Consider possible M&A that would benefit company with steps :
- Analyze the needs and right time
- Search for target companies
- Evaluate M&A by using the methods in Appendix 5
- Negotiation, deal execution
- Post-M&A restructuring
After restructuring and taking possible acquisition, Viacom will have better access to maintain a mixed strategy (combination of cost and differentiation strategy in the future (Appendix 6).
8.3. Global strategy: Move from multi-domestic strategy to transnational strategy (Appendix 7)
The choice of entry mode depends on different countries where it wants to enter because of some political reasons and responses from local communities. For example, in China, it should set up global strategy alliance with Chinese broadcasting partners since Chinese broadcast industry is under the control of the government.
9. Balanced Scorecard to Measure Performance
Viacom, established by CBS Broadcasting as an independent company in 1970 has now become world’s second largest media conglomerate. Bought by visionary Sumner M. Redstone in 1986, Viacom gradually emerged as an “entertainment colossus” and expanded its empire through a number of mergers and acquisitions, timely strategic alliances and product diversification. Most notable among them were the merger with Blockbuster in January, 1994 and the acquisition of Paramount in July, 1994. However, this transformation into a media giant did not come without its toll. The company incurred huge debt, structure and management challenges loomed and the fast-changing entertainment and media industry posed new threats to the company. In a very risky movie industry where past successes are no indication of future success, Paramount’s share of the box office dropped from 14 percent in 1994 to 10 percent in 1995. To compound the problem, the Blockbuster division was also not doing well.
By applying Five-force model, SWOT, PEST and value chain analysis we explored internal and external environment; then we used M&A evaluation method to get an insight of the company’s relative value. We also analyzed synergy applying discounted cash flow NPV analysis. Finally, we analyzed the costs and benefits of the alternative solutions and came up with some recommendations and their implementation plans. We suggest the use of Balanced Scorecard to measure our solution with described criteria.
2. Internal Analysis
2.1 Corporate-level strategy: global expansion strategy
2.2 Business-level strategy company pursuing: product leadership strategy. (Appendix 1)
2.3 Distinctive competencies
Resource: syndication right for some popular TV programs like Cosby show; product line proliferation; brand name; strategic alliance; knowledge and experience in product development; state-of-art production capacity in Orlando, Florida; good network and connection with other companies like telephone companies, wireless companies; opening of new channels.
Capabilities: keeping cost under control; good functional structure that enables company to manage cost and create profit center.
2.4 Value chain analysis: (Appendix 2)
Viacom has outstanding value chain to transform inputs to outputs that continuously create value to its customers. It has capability to lever resources to design, create and deliver new products to its customers. It also has efficient supporting activities that enable primary activities to be taken easily and timely.
3. External Analysis Through Five-Force Model
Although the industry demand is growing steadily, the intensity of rivalry is high owing to high exit barriers and consolidated industry structure. Because of huge capital investment and high risk of failure (difficult to predict whether a program/movie/song will be popular or not), the entry barrier is high. The bargaining power is low to moderate because the company can make it content in house. Owing to low switching cost and low brand loyalty, the bargaining power is high. The large number of existing and emerging entertainment channels cause high substitute threat. Complementors may become substitutes and the threat of complements is moderate. The environment is in the favor of the company as explained in the Appendix 3.
4. SWOT Analysis
Internal analysis
Strength
Clear mission and vision of future; brand name; management skills; scale and scope of business; copyrights; high market share in the US.
Weakness
Huge debt; often changes of top management; lack of international experience of management team; weak cooperation among business units;
External analysis
Opportunity
Globalization and growing markets (Asia, Western Europe etc.); Prices liberalization in cable TV industry; Market consolidation (increasing bargaining power, and non-price competition); Technology advancement
Threats
Deregulation that lowers the entry barrier; fast changes in technologies that might lead to potential entry with lower costs or create new substitutes; piracy; low brand loyalty of customers
5. Key Issues To Address
- Poor performance of Paramount and Blockbuster;
- Heavy debt
- Global expansion
- Difficulties in realizing expected synergy
6. Cost/Benefit Analysis of Alternatives:
7. Recommendations :
Based on above analysis, we recommend that Viacom should follow : first, restructuring organization; second, finding out possible acquisition & merger ; and third, following a global strategy.
8. Implementation plan (Appendix 4)
8.1. Restructuring: to lever the company’s resources to create value for its customers
- selling unprofitable business units such as Paramount Picture
- integrating properties to reduce cost by sharing resources of cross-business units
- combine value chain activities to achieve lower cost or collaborating to create new resource, strength and capabilities
- Cross functional team to lower cost and enhance productivity and efficiency
8.2. Acquisitions & Merger: Consider possible M&A that would benefit company with steps :
- Analyze the needs and right time
- Search for target companies
- Evaluate M&A by using the methods in Appendix 5
- Negotiation, deal execution
- Post-M&A restructuring
After restructuring and taking possible acquisition, Viacom will have better access to maintain a mixed strategy (combination of cost and differentiation strategy in the future (Appendix 6).
8.3. Global strategy: Move from multi-domestic strategy to transnational strategy (Appendix 7)
The choice of entry mode depends on different countries where it wants to enter because of some political reasons and responses from local communities. For example, in China, it should set up global strategy alliance with Chinese broadcasting partners since Chinese broadcast industry is under the control of the government.
9. Balanced Scorecard to Measure Performance
Kikkoman Corporation in the Mid-1990s
1. Introduction:
Slow sales growth and underperforming stock price present new Kikkoman president Yuzaburo Mogi challenges as Kikkoman faces the end of the 1990s and the twenty-first century. The company, headed by 17 generations of the Mogi family and held 50% of US soy sauce market and 30% of the world market , faces a mature market and slipping market share in Japan for its soy sauce, as well as challenges for its diversified product line in the 94 other countries in which the company distributes. By using Five-force model, SWOT, PEST, value chain analysis we understand internal and external envronment; then we use ratio and ROIC analysis to realize strength and weaknesses in financial situation of company. After all, through evaluating cost/benefit of 2 alternatives and choosing a long-term global strategy for Kikkoman, we come to r recommendation with a plan and steps of implementation aiming to solve facing problems. At last, we suggest using Balance Score card to measure our solution with described criteria.
2. Key Issues to address:
Slow sales growth starting from the early 1996 ; Underperforming stock in Nikkei Exchange in relation to the market; Ongoing changes in taste preferences and dietary needs presented threats; How the company focus on and try to enhance US market while keeping hold of the Japanese market
3. Internal analysis
3.1 Corporate-level strategy: Kikkoman Focused on globalization keeping hold of the Japanese market with high assimilation and long term commitment
3.2 Business-level strategy company pursuing: Company follow a cost leadership strategy in Japan Continuous development of new recipes; Variations of its older products as well as development of new products (APPENDIX 2)
3.2 Distinctive competencies
Resources : Kikkoman has Expertise and more than 300 years of experience in production of soy sauce ; Know-how of esoteric technology developed by family; State-of-the-art laboratories ; A number of patents in Japan and US’ Non unionized dedicated labor force; Localized operation ; Economy of scale; Convenient location of the plant and closeness to main markets
Capabilities : Business network with wholesalers and distributors ; Harmony with society and local community; Good corporate citizen; Decisions made by consensus from the bottom up; Hard working mixed culture; Practice of rotating managers
3.3 Value chain analysis: Kikkoman has a long history of R&D (development of new recipes, number of patents), a family know-how and a marketing and distribution center for its product in the US (APPENDIX 4)
3.4 ROIC analysis / Profitability (APPENDIX 5, 6 )
Return on sales: Return on sales is the main factor that influences ROIC and has the same trend. The ratios of COGS to sales and SG&A to sales keep almost constant. We can infer that there is no big change on average prices of products compared to the cost of products. It is the change on amount of sales or market share that leads to the fluctuation of sales and ROIC. Market share and business strategy based on market share are vitally important to the development of the company.
Capital turnover: This rate has been decreasing in the last few years. Both the ratio of working capital to sales and the ratio of PPE to sales are increasing. We can infer the internal efficiency is decreasing.
4. External analysis through Five-Force Model:
· In Japan: Rivalry is intensive because mature market, Entry barrier is very low (commodity market; technology use is minimal, low capital needed, easy to establish production), Bargaining power of buyers is high (many brands with diversification and price variance, switching cost is low), Bargaining power of suppliers is low (materials are commodity and easy to supply), Complements power is high (cuisine culture).
· In US/Europe: Rivalry is moderate, because of consolidated market, Entry barriers are low (commodity market; technology use is minimal, low capital needed, easy to establish production), Bargaining power of buyers is high (switching cost is low, despite of the Asians consumers are early adopters), Bargaining power of suppliers is low (materials are commodity and easy to supply) . For details of External environment analysis, please see APPENDIX 1.
5. Evaluation of SWOT analysis:
Internal analysis
Strength
Brand name, management skills, long history, know-how, large market share, hardworking culture, good relation with community, R & D, advertising, Highest productivity in the industry
Weakness
Longer production process compared to technology based competitors, Production process more expensive, more cerebration needed; decreased efficiency
External analysis
Opportunity
Growing markets in USA and EU
Economic growth in USA
Increasing popularity of Orient cuisine
New emerging markets in Asia
Threats
Ongoing changes in taste preferences and dietary needs; highly sensitive to price
Competitors pressure at the retail level in Japan
Aggressive introduction of private brands
Country risk in foreign markets
Low entry barriers
Slowdown in Japanese economy
New automated chemical technology
· Evaluate SWOT analysis : Ongoing chages in taste create an opportunity to diffrentiate (product lines) and high sensitivity of demand to price will create a chance to differentiate product price. Keeping low cost at least in some products is an effective way to guard against external threats. And slowdown in Japanese economy makes an opportunity for Kikkoman to look for overseas markets to grow rapidly.
6. Alternative solutions:
6.1General strategy: Organizational structure: reform its corporate governance structure from a Japanese style to a more internationalized one.
Market strategy: apply blue ocean strategy, by expanding market boundaries to overseas markets. (APPENDIX 3)
6.2 Cost/benefit analysis of each alternative‘s actions
5. Recommendation: Based on above analysis, We suggest that Kikkoman choose Alternative solution #1 (total scores of alternative 1 > that of alternative 2).
6. Implementation plan:
7. Balance Scorecard to measure performance (APPENDIX 7)
Financial: to succeed financially and increase value of Kikkoman’s shareholders
Customers: to achieve Kikkoman vision, mission and strategies
Internal business process: to satisfy Kikkoman’s shareholders and customers
Learning and growth: to know how Kikkoman can sustain its ability to change and adapt to international environments
Slow sales growth and underperforming stock price present new Kikkoman president Yuzaburo Mogi challenges as Kikkoman faces the end of the 1990s and the twenty-first century. The company, headed by 17 generations of the Mogi family and held 50% of US soy sauce market and 30% of the world market , faces a mature market and slipping market share in Japan for its soy sauce, as well as challenges for its diversified product line in the 94 other countries in which the company distributes. By using Five-force model, SWOT, PEST, value chain analysis we understand internal and external envronment; then we use ratio and ROIC analysis to realize strength and weaknesses in financial situation of company. After all, through evaluating cost/benefit of 2 alternatives and choosing a long-term global strategy for Kikkoman, we come to r recommendation with a plan and steps of implementation aiming to solve facing problems. At last, we suggest using Balance Score card to measure our solution with described criteria.
2. Key Issues to address:
Slow sales growth starting from the early 1996 ; Underperforming stock in Nikkei Exchange in relation to the market; Ongoing changes in taste preferences and dietary needs presented threats; How the company focus on and try to enhance US market while keeping hold of the Japanese market
3. Internal analysis
3.1 Corporate-level strategy: Kikkoman Focused on globalization keeping hold of the Japanese market with high assimilation and long term commitment
3.2 Business-level strategy company pursuing: Company follow a cost leadership strategy in Japan Continuous development of new recipes; Variations of its older products as well as development of new products (APPENDIX 2)
3.2 Distinctive competencies
Resources : Kikkoman has Expertise and more than 300 years of experience in production of soy sauce ; Know-how of esoteric technology developed by family; State-of-the-art laboratories ; A number of patents in Japan and US’ Non unionized dedicated labor force; Localized operation ; Economy of scale; Convenient location of the plant and closeness to main markets
Capabilities : Business network with wholesalers and distributors ; Harmony with society and local community; Good corporate citizen; Decisions made by consensus from the bottom up; Hard working mixed culture; Practice of rotating managers
3.3 Value chain analysis: Kikkoman has a long history of R&D (development of new recipes, number of patents), a family know-how and a marketing and distribution center for its product in the US (APPENDIX 4)
3.4 ROIC analysis / Profitability (APPENDIX 5, 6 )
Return on sales: Return on sales is the main factor that influences ROIC and has the same trend. The ratios of COGS to sales and SG&A to sales keep almost constant. We can infer that there is no big change on average prices of products compared to the cost of products. It is the change on amount of sales or market share that leads to the fluctuation of sales and ROIC. Market share and business strategy based on market share are vitally important to the development of the company.
Capital turnover: This rate has been decreasing in the last few years. Both the ratio of working capital to sales and the ratio of PPE to sales are increasing. We can infer the internal efficiency is decreasing.
4. External analysis through Five-Force Model:
· In Japan: Rivalry is intensive because mature market, Entry barrier is very low (commodity market; technology use is minimal, low capital needed, easy to establish production), Bargaining power of buyers is high (many brands with diversification and price variance, switching cost is low), Bargaining power of suppliers is low (materials are commodity and easy to supply), Complements power is high (cuisine culture).
· In US/Europe: Rivalry is moderate, because of consolidated market, Entry barriers are low (commodity market; technology use is minimal, low capital needed, easy to establish production), Bargaining power of buyers is high (switching cost is low, despite of the Asians consumers are early adopters), Bargaining power of suppliers is low (materials are commodity and easy to supply) . For details of External environment analysis, please see APPENDIX 1.
5. Evaluation of SWOT analysis:
Internal analysis
Strength
Brand name, management skills, long history, know-how, large market share, hardworking culture, good relation with community, R & D, advertising, Highest productivity in the industry
Weakness
Longer production process compared to technology based competitors, Production process more expensive, more cerebration needed; decreased efficiency
External analysis
Opportunity
Growing markets in USA and EU
Economic growth in USA
Increasing popularity of Orient cuisine
New emerging markets in Asia
Threats
Ongoing changes in taste preferences and dietary needs; highly sensitive to price
Competitors pressure at the retail level in Japan
Aggressive introduction of private brands
Country risk in foreign markets
Low entry barriers
Slowdown in Japanese economy
New automated chemical technology
· Evaluate SWOT analysis : Ongoing chages in taste create an opportunity to diffrentiate (product lines) and high sensitivity of demand to price will create a chance to differentiate product price. Keeping low cost at least in some products is an effective way to guard against external threats. And slowdown in Japanese economy makes an opportunity for Kikkoman to look for overseas markets to grow rapidly.
6. Alternative solutions:
6.1General strategy: Organizational structure: reform its corporate governance structure from a Japanese style to a more internationalized one.
Market strategy: apply blue ocean strategy, by expanding market boundaries to overseas markets. (APPENDIX 3)
6.2 Cost/benefit analysis of each alternative‘s actions
5. Recommendation: Based on above analysis, We suggest that Kikkoman choose Alternative solution #1 (total scores of alternative 1 > that of alternative 2).
6. Implementation plan:
7. Balance Scorecard to measure performance (APPENDIX 7)
Financial: to succeed financially and increase value of Kikkoman’s shareholders
Customers: to achieve Kikkoman vision, mission and strategies
Internal business process: to satisfy Kikkoman’s shareholders and customers
Learning and growth: to know how Kikkoman can sustain its ability to change and adapt to international environments
AMERICAN CHEMICAL CORPORATION
1. Executive Summary
Dixon, an American specialty chemical producer, wants to buy Collinsville plant from American Chemical Corporation, another typical chemical company in 1979. Dixon wants to diversify its product line buy acquiring the aforesaid plant, which produces sodium-chlorate to supply to paper producers in Southeastern part of the US. This plant initially cost 12 mln. USD and additional 2,25 mln. USD needed to buy laminate technology to increase efficiency and profitability of the plant in order.
Dixon has conducted thorough marketing research for the industry providing cash flow analysis on purchase of the plant. The cash flow analysis based with and without laminate technology cases, where the company should decide whether it should go on further to buy that plant and technology.
2. Calculating of WACC
2.1 Assumptions for calculations in the case:
l Plant life is 10 years (p.4)
l Salvage value of plant is 0 (p.4)
l Book value of plant at end of 1979 is 10.6 million (=12 million purchase price - 1.4 million working capital)
l Tax rate is 48% (calculated from Exhibit 7)
l For the period from 1980 to 1984: all data of sales, depreciation and manufacturing and other costs are given in the case (Exhibit 8)
l For the period from 1984 to 1989 we use the below assumption:
- Price growth rate is 8% (p.4)
- Power cost growth rate is 12% (p.4)
- Net working capital is always 9% of sales (Exhibit 8, current asset and liability items remain historical to sales)
- PPE and depreciation are based on historical data in 1980-1984 period (Exhibit 8)
- Capital investment are based on historical data in 1980-1984 period (Exhibit 8)
- Variable and fixed costs: we use 4-year average growth rates calculated based on Exhibit 8. So non-power variable cost growth rate is 11%, fixed cost growth rate is 6%, selling expenses growth rate is 7% and R&D expenses growth rate is at 5%
- To use this 4-year average growth rates, we assume that the scale of operations of this plant is constant so we need to adjust such cost growths to account for inflation. If the scale increases we should consider growths in costs on percentage of sale basis
2.2 Cost of capital:
a. Calculate beta β of sodium chlorate:
The β of Dixon is 1.06 (Exhibit 7). This beta may be irrelevant to the project to buy Collinsville plant because Dixon produces specialty chemical products but never produce sodium chlorate. The systematic risk of the project could be the risk of the production of sodium chlorate in the industry. Therefore, we calculate beta of the project based on the beta of the sodium chlorate industry.
We do not simply use the beta of Brunswick and Southern, 2 firms purely produce sodium chlorate, because they are small in the industry and their stocks might not be traded largely on the market. Hence, we decide to calculate the beta of all firms that produce sodium chlorate to see the trend of beta of all firms in the market since we believe that such trend can be a benchmark for calculating the beta of sodium chlorate for Dixon’s project.
The average beta is calculated from the formula: βasset = βequity / [1+ (1-t)*D/E], where D is debt, E is equity and t is tax rate. To simplify the calculation, we assume that all these firms have tax rate at 48% and βdebt is zero. The detailed calculation is provided in the Appendix 1. From the table, we notice that the betas of 3 diversified chemical producers American Chemical, Kerr-McGee and Int. Minerals and Chemicals (Ga is a paper company and Pennwalt is a large diversified chemical producer) is less than the market beta (1.00). We also observe that the two pure play firms (last 2 rows) have higher beta than the market beta. Thus, sodium chlorate may have higher beta than other chemical products. Because sodium chlorate is totally new to Dixon, we assume that Dixon plays the role of a pure sodium chlorate producer and consider the average of the beta of Brunswick and Southern as the beta for Dixon in this project. This beta is β=1.09. The beta 1.09 seems more reasonable as Dixon may have more risk to take the project than other companies who already produce this product for a long time.
Now, Dixon needs to re-lever this beta by using its own target capital structure (35%, p.4). The formula for re-levered beta is: βlevered equity = βasset * [1+ (1-t)*D/E] = 1.09*[1+(1-0.48) *0.35/0.65] = 1.40.
b. Weighted average cost of capital (WACC):
Cost of equity: in the case, the yield on Tbonds is 9.5% (p.4). We assume that it is the risk free rate. We use the historical equity risk premium 8.4% stated on the Table 9.2, page 247 of the textbook. According to the CAPM method, the cost of equity for this project is 9.5%+1.38*8.4% = 21.26%.
Cost of debt: because there is little information about Dixon’s debt provided on the case, we assume that all debt Dixon intends to borrow is used in the acquisition of Collinsville plant at 11.25%. We also assume that debt is issued at par. The after-tax cost of debt is (1-0.48)*11.25% = 5.85%.
WACC: we use Dixon’s 35% target level of debt-to-asset ratio in acquiring the plant to calculate cost of capital. WACC = D/V*After-tax cost of debt + E/V*Cost of equity = 0.35*5.85%+0.65*21.26% = 15.87% @ 16%. Therefore, the WACC for Collinsville’s plant cash flow is nearly 16%. We use this cost of capital to calculate NPV of the project.
3. Calculating NPV
To calculate the NPV for the project we have observed two cases during the investment: purchasing the plant without laminate technology and with laminate technology.
3.1 Without laminate technology
We have calculated NPV on the basis of the current cash flow provided in appendixes of the case and information provided in case material. So we have used the data in Exhibit 8 and projected cash flow from 1980 to 1984, and we have calculated cash flow to 1989 based on our assumptions aforesaid. For further details please refer to Appendix 2.
It had resulted on NPV being negative – 3,703 thousand USD.
3.2 With laminate technology
Case defines us some cost reductions and benefits such as graphite cost elimination, tax benefits and power cost savings, since 2,25 mln. USD worth of laminate technology is bought and installed. So we had calculated additional NPV, which has derived from cost savings and tax benefits we have out of buying the additional laminate technology. Our assumption is NPV with laminate technology = NPV without laminate + NPV additional savings.
From this approach we have calculated Additional NPV of 6,634 thousand USD in Appendix 3.
So NPV with laminate technology is -3,703+6,634=2,931 thousand USD.
4. Sensitive analysis
In order to see whether the project is viable in case of negative changes in variables, we have conducted sensitive analysis having one of major variables such as sales growth rate, which can be reflected by different reasons such as decrease in demand, production slowdown, economic recession and etc. We have tried other possible valuables, but they occasionally did not have much effect on the project outcomes.
We wanted to know what is the rate of growth rate should be in both cases (without and with laminate technology) so that the company will have Zero NPV. Using Solver function in Excel, we found that in case of Zero NPV without laminate technology sales growth rate should kept up around 14% and with laminated technology growth rate should not go down of around 2% level (Please see Appendix 4).
5. Strategic and economic benefits
Besides increasing shareholders wealth, company gets some strategic and economic benefits, such as:
- Increase in product range
- Larger market share in paper industry
- Opportunities to enter new market
- New market development and competition reduction
- Enhancement of relationships with current customers
- Development of new technology
By acquiring Collinsville plant, Dixon could complement its strategy of supplying chemicals products to the paper and pulp industry. It can use the existing sales force to market products to save selling costs. Dixon will add a new product in its existing product mix.
Laminate technology would allow company to considerably cut power cost and completely eliminate graphite costs. By gaining technological savvy, the company can use the same practices in other plants and reduce production costs.
Company has developed the relationships with Collinsville existing customers. It is 6 more times cheaper to retain existing customer than acquire a new one. Buying plant, company will not incur potential marketing costs in initial selling of new products.
The company is better off buying the plant than building from the scratch a new one. Usually, plants are costly to build. Also, the company can reduce competition in the market. Buying a plant would be the best entry strategy for company. Building a plant would take a year, and market is changing rapidly, so Dixon could lose market potential if it takes a long time to build a new plant.
Laminate technology makes the Collinsville plant acquisition attractive on economic grounds. In acquisition negotiation, Dixon should make a clause in the acquisition agreement, which protects the Dixon in the case that the laminate technology fails to produce the desired results. This clause should include that in the case the laminate technology fails, American Chemical Corporation should compensate Dixon for installation charges.
6. Recommendations
Based on our analysis, we would like to make recommendations as follows:
Most fundamentally, a firm that is operating in the interests of its shareholders should try to accept all projects that increase the wealth of the shareholders. In case of Collinsville, we use NPV to approach to our recommendations.
Based on our calculation, without the laminate addition, the NPV of Collinsville turns out to be negative (-3,703 thousand USD). Under this circumstance, we recommend not to invest in this project since it is against shareholders interests.
But at the same time new Laminate Technology would allow company to considerably cut power cost and completely eliminate graphite costs. Additional $2.25 mln. USD is needed to install this new technology. We consider this technology as a subproject attached to Collinsville and calculate its NPV. The NPV of this new technology is 6,634 thousand USD. That means, by using laminate technology, NPV of Collinsville will change to 2,931 thousand USD. Under this new circumstances, our recommendation is to invest in Collinsville because it will not only increase the wealth of the shareholders, but also complement its strategy of supplying chemicals products to the paper and pulp industry.
Dixon, an American specialty chemical producer, wants to buy Collinsville plant from American Chemical Corporation, another typical chemical company in 1979. Dixon wants to diversify its product line buy acquiring the aforesaid plant, which produces sodium-chlorate to supply to paper producers in Southeastern part of the US. This plant initially cost 12 mln. USD and additional 2,25 mln. USD needed to buy laminate technology to increase efficiency and profitability of the plant in order.
Dixon has conducted thorough marketing research for the industry providing cash flow analysis on purchase of the plant. The cash flow analysis based with and without laminate technology cases, where the company should decide whether it should go on further to buy that plant and technology.
2. Calculating of WACC
2.1 Assumptions for calculations in the case:
l Plant life is 10 years (p.4)
l Salvage value of plant is 0 (p.4)
l Book value of plant at end of 1979 is 10.6 million (=12 million purchase price - 1.4 million working capital)
l Tax rate is 48% (calculated from Exhibit 7)
l For the period from 1980 to 1984: all data of sales, depreciation and manufacturing and other costs are given in the case (Exhibit 8)
l For the period from 1984 to 1989 we use the below assumption:
- Price growth rate is 8% (p.4)
- Power cost growth rate is 12% (p.4)
- Net working capital is always 9% of sales (Exhibit 8, current asset and liability items remain historical to sales)
- PPE and depreciation are based on historical data in 1980-1984 period (Exhibit 8)
- Capital investment are based on historical data in 1980-1984 period (Exhibit 8)
- Variable and fixed costs: we use 4-year average growth rates calculated based on Exhibit 8. So non-power variable cost growth rate is 11%, fixed cost growth rate is 6%, selling expenses growth rate is 7% and R&D expenses growth rate is at 5%
- To use this 4-year average growth rates, we assume that the scale of operations of this plant is constant so we need to adjust such cost growths to account for inflation. If the scale increases we should consider growths in costs on percentage of sale basis
2.2 Cost of capital:
a. Calculate beta β of sodium chlorate:
The β of Dixon is 1.06 (Exhibit 7). This beta may be irrelevant to the project to buy Collinsville plant because Dixon produces specialty chemical products but never produce sodium chlorate. The systematic risk of the project could be the risk of the production of sodium chlorate in the industry. Therefore, we calculate beta of the project based on the beta of the sodium chlorate industry.
We do not simply use the beta of Brunswick and Southern, 2 firms purely produce sodium chlorate, because they are small in the industry and their stocks might not be traded largely on the market. Hence, we decide to calculate the beta of all firms that produce sodium chlorate to see the trend of beta of all firms in the market since we believe that such trend can be a benchmark for calculating the beta of sodium chlorate for Dixon’s project.
The average beta is calculated from the formula: βasset = βequity / [1+ (1-t)*D/E], where D is debt, E is equity and t is tax rate. To simplify the calculation, we assume that all these firms have tax rate at 48% and βdebt is zero. The detailed calculation is provided in the Appendix 1. From the table, we notice that the betas of 3 diversified chemical producers American Chemical, Kerr-McGee and Int. Minerals and Chemicals (Ga is a paper company and Pennwalt is a large diversified chemical producer) is less than the market beta (1.00). We also observe that the two pure play firms (last 2 rows) have higher beta than the market beta. Thus, sodium chlorate may have higher beta than other chemical products. Because sodium chlorate is totally new to Dixon, we assume that Dixon plays the role of a pure sodium chlorate producer and consider the average of the beta of Brunswick and Southern as the beta for Dixon in this project. This beta is β=1.09. The beta 1.09 seems more reasonable as Dixon may have more risk to take the project than other companies who already produce this product for a long time.
Now, Dixon needs to re-lever this beta by using its own target capital structure (35%, p.4). The formula for re-levered beta is: βlevered equity = βasset * [1+ (1-t)*D/E] = 1.09*[1+(1-0.48) *0.35/0.65] = 1.40.
b. Weighted average cost of capital (WACC):
Cost of equity: in the case, the yield on Tbonds is 9.5% (p.4). We assume that it is the risk free rate. We use the historical equity risk premium 8.4% stated on the Table 9.2, page 247 of the textbook. According to the CAPM method, the cost of equity for this project is 9.5%+1.38*8.4% = 21.26%.
Cost of debt: because there is little information about Dixon’s debt provided on the case, we assume that all debt Dixon intends to borrow is used in the acquisition of Collinsville plant at 11.25%. We also assume that debt is issued at par. The after-tax cost of debt is (1-0.48)*11.25% = 5.85%.
WACC: we use Dixon’s 35% target level of debt-to-asset ratio in acquiring the plant to calculate cost of capital. WACC = D/V*After-tax cost of debt + E/V*Cost of equity = 0.35*5.85%+0.65*21.26% = 15.87% @ 16%. Therefore, the WACC for Collinsville’s plant cash flow is nearly 16%. We use this cost of capital to calculate NPV of the project.
3. Calculating NPV
To calculate the NPV for the project we have observed two cases during the investment: purchasing the plant without laminate technology and with laminate technology.
3.1 Without laminate technology
We have calculated NPV on the basis of the current cash flow provided in appendixes of the case and information provided in case material. So we have used the data in Exhibit 8 and projected cash flow from 1980 to 1984, and we have calculated cash flow to 1989 based on our assumptions aforesaid. For further details please refer to Appendix 2.
It had resulted on NPV being negative – 3,703 thousand USD.
3.2 With laminate technology
Case defines us some cost reductions and benefits such as graphite cost elimination, tax benefits and power cost savings, since 2,25 mln. USD worth of laminate technology is bought and installed. So we had calculated additional NPV, which has derived from cost savings and tax benefits we have out of buying the additional laminate technology. Our assumption is NPV with laminate technology = NPV without laminate + NPV additional savings.
From this approach we have calculated Additional NPV of 6,634 thousand USD in Appendix 3.
So NPV with laminate technology is -3,703+6,634=2,931 thousand USD.
4. Sensitive analysis
In order to see whether the project is viable in case of negative changes in variables, we have conducted sensitive analysis having one of major variables such as sales growth rate, which can be reflected by different reasons such as decrease in demand, production slowdown, economic recession and etc. We have tried other possible valuables, but they occasionally did not have much effect on the project outcomes.
We wanted to know what is the rate of growth rate should be in both cases (without and with laminate technology) so that the company will have Zero NPV. Using Solver function in Excel, we found that in case of Zero NPV without laminate technology sales growth rate should kept up around 14% and with laminated technology growth rate should not go down of around 2% level (Please see Appendix 4).
5. Strategic and economic benefits
Besides increasing shareholders wealth, company gets some strategic and economic benefits, such as:
- Increase in product range
- Larger market share in paper industry
- Opportunities to enter new market
- New market development and competition reduction
- Enhancement of relationships with current customers
- Development of new technology
By acquiring Collinsville plant, Dixon could complement its strategy of supplying chemicals products to the paper and pulp industry. It can use the existing sales force to market products to save selling costs. Dixon will add a new product in its existing product mix.
Laminate technology would allow company to considerably cut power cost and completely eliminate graphite costs. By gaining technological savvy, the company can use the same practices in other plants and reduce production costs.
Company has developed the relationships with Collinsville existing customers. It is 6 more times cheaper to retain existing customer than acquire a new one. Buying plant, company will not incur potential marketing costs in initial selling of new products.
The company is better off buying the plant than building from the scratch a new one. Usually, plants are costly to build. Also, the company can reduce competition in the market. Buying a plant would be the best entry strategy for company. Building a plant would take a year, and market is changing rapidly, so Dixon could lose market potential if it takes a long time to build a new plant.
Laminate technology makes the Collinsville plant acquisition attractive on economic grounds. In acquisition negotiation, Dixon should make a clause in the acquisition agreement, which protects the Dixon in the case that the laminate technology fails to produce the desired results. This clause should include that in the case the laminate technology fails, American Chemical Corporation should compensate Dixon for installation charges.
6. Recommendations
Based on our analysis, we would like to make recommendations as follows:
Most fundamentally, a firm that is operating in the interests of its shareholders should try to accept all projects that increase the wealth of the shareholders. In case of Collinsville, we use NPV to approach to our recommendations.
Based on our calculation, without the laminate addition, the NPV of Collinsville turns out to be negative (-3,703 thousand USD). Under this circumstance, we recommend not to invest in this project since it is against shareholders interests.
But at the same time new Laminate Technology would allow company to considerably cut power cost and completely eliminate graphite costs. Additional $2.25 mln. USD is needed to install this new technology. We consider this technology as a subproject attached to Collinsville and calculate its NPV. The NPV of this new technology is 6,634 thousand USD. That means, by using laminate technology, NPV of Collinsville will change to 2,931 thousand USD. Under this new circumstances, our recommendation is to invest in Collinsville because it will not only increase the wealth of the shareholders, but also complement its strategy of supplying chemicals products to the paper and pulp industry.
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