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Q: write a managements strategic recommendation ( Answered 5 out of 5 stars,   0 Comments )
Subject: write a managements strategic recommendation
Category: Business and Money > Economics
Asked by: k9queen-ga
List Price: $50.00
Posted: 25 Nov 2003 09:17 PST
Expires: 25 Dec 2003 09:17 PST
Question ID: 280459
Stuff, Inc., manufactures plastic molded components for a variety of
customers who subsequently utilize these components in their product
assembly systems.  Stuff Inc., specializes in components such as small
plastic gears, casings, trays, and frames.  However, they have also
done some custom component manufacturing upon request.  The production
process requires skilled production machine operators and the
manitainance and set up of the equipment requires advanced training
and skills in electronics, computers control systems, hydraulics, and
power mechanics.  In addition to these very specific technical skills
the industry also requires extensive physical plant capitalization to
enter production.

This segment of the plastic molding industry has become very
competitive due to backward integration of many of the large
customers.  That is, companies such as computer manufacturers, who had
traditionally purchased their components from Stuff, Inc., have now
developed their in house technology or acquired firms that produce
these components.  As a result, there are currently three major
plastic molding manufactureres in the U.S. competing for about 90% of
the available business.  Of these three major firms, Stuff, Inc. is
currently the second largest manufacturer.  There are also several
very small firms that do this type of work, however, they are
insignificant in the scope of competition and market share.

Stuff, Inc. also has some large accounts and relationships with
international customers in the Indochina region.  However, Stuff, Inc.
has only supplied these accounts through an export agent and has not
directly marketed to these companies.  Recently, Stuff, Inc. was
approached with a business proposal from one of the large foreign
accounts located in Indochina.  This company, Computers R Us, has
proposed developing a joint venture with Stuff, Inc. to build a
production facility in country and produce components in Indochina. 
Computers R Us is the third largest computer manufacturing firm in the
world, so naturally, Fred Pellin, the CEO for Stuff, Inc. is very
interested in the proposal.  However, as he has further pondered the
proposal, Mr. Pelican is not convinced this is actually the best move
for Stuff Inc.

Both companies are financially solid.  The have low debt to assets
ratios, and strong price to earnings ratios.  Analyze this issue from
a strategic perspective, and make a recommendation.

Some issues to consider:
What issues should Mr.Pelican be particuarly concerned with?
What other options could Mr. Pelican propose to best position Stuff, Inc.?
What are some potential advantages/disadvantages of such a joint venture?
Strategically, why may Stuff, Inc. NOT want to do this?
Strategically, why would Stuff, Inc WANT to do this?
Strategically, why should Stuff, Inc. need to do anything different?
(if it ain't broke, don't fix it?)
Are there any environmental (internal/external) issues to be considered?
What issues must be of primary concern in a joint venture of this nature?
Why would Computers R Us initiate such an offer?
Subject: Re: write a managements strategic recommendation
Answered By: omnivorous-ga on 28 Nov 2003 10:28 PST
Rated:5 out of 5 stars
K9Queen --

In strategic analysis there are three popular ways of looking at issues:


The Boston Consulting group developed a way of segmenting businesses
in the 1970s that looked at dividing businesses by their growth
potential and cash consumption.  It's how we have come to know whether
a business is a "star," a "dog", a "question mark" or a "cash cow."
Quick MBA
Boston Consulting Group Matrix

This sense of segmenting businesses and getting in the important
measure of market share was further developed by McKinsey and General
Electric later in the 1970s.  It led to profit-in-market share (PIMS)
studies and ultimately to the theories expressed by Michael Porter:
Quick MBA
GE/McKinsey Matrix


An assessment of a company's
strengths/weaknesses/opportunities/threats is one way to look at the
environment to determine what strategic actions should be taken.  It's
a good analytical way to examine competition and the changing business
climate.  However, in practice it usually requires going down several
levels into operational units to determine what's really valued by
customers; where the organization is performing at world-class
standards (and where it's not):
SWOT Analysis
"SWOT Analysis" (Dec. 10, 2001)


Harvard's Michael Porter wrote this book in 1980 to attempt to explain
how businesses compete.  Of course the 5 forces that determine
intensity of competition are: supplier power; barriers to entry; buyer
power; threat of substitution; and finally the degree of rivalry.  
But even further, Porter explains that there are three basic
strategies that work in response to the 5 forces of competition:
lowest cost, differentiation, and focus.
Porter's 5 forces model:


We really don't know enough about Stuff, Inc.'s business to pursue a
good analysis of the GE/McKinsey type: we don't have growth rates or
profitability data.  Inasmuch as all businesses are a portfolio of
investment opportunities, we could use the Indochina joint venture as
a separate business in a growth matrix analysis -- but Stuff, Inc. has
no history of operating outside the U.S., making any market share,
profitability, growth rate and other predictions highly suspect.

Note that the absence of trend data makes it difficult to answer the
question: "Why should Stuff, Inc. need to do anything different?" 
While growing a business is often considered an imperative by
managers, it's really only important insofar as it leads to market
share and profitability.

Business risk comes from the unknown; opportunity comes from taking
the unknown and making it known.  The largest issues here can be
looked at in a SWOT analysis and Porter's ideas provide a way of
looking at key issues.


There are at least four aspects to the overall commercial environment
that apply to a joint venture in Indochina.  For a company that's a
novice in the international environment, there may be others -- such
as management skills of the current team or even export restrictions
on key technologies, but these factors require assessment:
1.	proximity to customers
2.	labor costs
3.	intellectual property protection
4.	infrastructure, including labor


The International Finance Corporation (a World Bank investment arm)
released a study done with Booz, Allen in June which indicated that
computer manufacturing will explode in China over the next 5 years. 
China will capture 77% of the growth in electronics assembly, with 72%
of that number going to computers:
International Finance Corporation (World Bank)
"Electronics Industry in Emerging Markets" (June 3, 2003)

An indication of the speed with which that's occurring is in this
recent press release from Infineon, a German memory manufacturer,
which predicts 30% annual growth in the China market.  Importantly,
Infineon is partnering with another company to build a 12"
semiconductor fabrication facility in Beijing.  Semiconductor fabs are
at least as complex as Stuff, Inc.'s plant -- and 12" wafers are the
leading edge of semiconductor production:
Taiwan Times
"Taiwan Vital to Infineon's Growth Targets" (Nov. 28, 2003)

Being positioned somewhere in Southeast Asia for production makes
sense -- but where?


A major issue for the joint venture will be proximity to the
customer's factories.  Working with Computers R Us may make sense, but
only if freight costs to other potential customers are reasonable.

The electronics industry is already so well-developed in portions of
Indochina and Southeast Asia that computer disk drives, which are
sophisticated storage devices requiring clean-room assembly, are 15%
of Singapore's GNP.  Similarly, Malaysia and Thailand enjoy robust
electronics export businesses:
ASEAN Free Trade Online
Electronics -- Region (1996)

However, several factors are working from those three countries that
may or may not work in a Computers R Us joint-venture.  Singapore,
Malaysia or Thailand would rate relatively well on any of these
attributes; Myannmar, Laos and Vietnam would rate poorly.  Even China,
which is becoming the center for large amounts of computer
manufacturing, is still dealing with port, road and telecommunications
infrastructure problems:
?	excellent transportation infrastructure, providing fast water and air freight
?	protection of patents and copyrights
?	skilled labor

However, if the skilled labor can be acquired in the host country of
the joint venture -- or brought in as part of the management team,
there is significant opportunity for labor cost savings.  Here are the
average earnings and literacy rate (in parentheses) in each country in
the region compared to U.S. labor:
U.S.: $37,600 (97+%)

China: $4,400 (86%)

Vietnam: $2,250 (94%)
Malaysia:  $9,300 (89%)
Singapore:  $24,000 (93%)
Thailand: $6,900 (96%)

"World Factbook"


Protection of intellectual property (IP) -- specifically process
patents, design patents and copyrights -- was such a critical issue
that even Taiwan suffered from lack of computer investment until the
1990s.  This article from Electronic Engineering Times, a leading
trade journal, describes briefly how electronics manufacturers moved a
step at a time to increase IP protection during the 1990s:
EE Times
"China IP Rights Enforcement Faulted" (Sept. 16, 2003)

China's protection of IP, which is important to a company with complex
process technologies like Stuff, Inc., can only be described as
stop-and-start.  As the CIA Factbook notes, China has "a complex
amalgam of custom and statute, largely criminal law; rudimentary civil
code in effect since 1 January 1987" though "continuing efforts are
being made to improve civil, administrative, criminal, and commercial

As noted by the presence of Infineon and others, this hasn't stopped
semiconductor manufacturers with similar problems from investing in
China now.

Taiwan suffered from many of these same legal problems in the early
1990s, yet had a domestic semiconductor firm -- Taiwan Semiconductor
Manufacturing Ltd. (NYSE: TSM) -- emerge as a  significant player in
the industry.  Part of the reason that TSM grew from NT$19.3 million
in 1994 to NT$144.1 in 2004 was its "first mover advantage," which
allowed it to construct a unique business plan (serving as the factory
for design companies with engineering specializations, such as
"First Mover Advantage"

For Stuff, Inc. it is important to ensure that key process and product
technologies are protected in the joint venture; from competitors; and
from customers.


The company has been highly profitable in the past, giving it a strong
balance sheet that can be used to raise additional debt or equity.

Customers are also solidly profitable, even #3 player, Computers R Us.
 This strengthens the cash flow to Stuff, Inc., as its customers will
pay bills faster than others.

It is one of the top three companies in a highly-consolidated market. 
And the U.S. market for computer manufacturers leads the world in
market share.

The business has significant barriers to entry, as witnessed by the
large amount of capital needed to enter and the presence of only 3

A process-driven technology such as the company's also will have
significant intellectual property, even if in process patents (as
opposed to design patents for components).


But baseball writer Bill James says "Every form of strength is also a
form of weakness."

And Stuff, Inc. is narrowly confined in one segment of a world market.
 It is one of three competitors in the U.S. plastic molding market
sharing 90% of the available U.S. market.

Studies as early as 1975 ("Market Share - A Key to Profitability,"
Buzzell, Gale & Sultan, Harvard Business Review) show not just that
market share is key but that the leader in market share gets the
lion's share of the profits -- and number 3 in the market IS likely to
be struggling to break even.
Harvard Business Online
"Market Share - A Key to Profitability," Jan. 1, 1975

As Chinese output of computers increases, U.S. production MAY be lucky
enough to remain stable, but market share will decline -- and it can
be expected that volumes will also decrease.  If domestic plastic
component vendors don't act, the following will happen:
?	potential emergence of a Chinese or other offshore vendor in the U.S. market
?	increased price competition among the three U.S. suppliers, who as
Porter would predict, have exit barriers from being so capital
intense.  And industry shrinkage (resulting from computer assembly in
China) would increase pricing competition among the Big Three plastic
molders -- certainly forcing at least one major vendor from the market
?	potential vertical integration by computer vendors, further reducing
available market.

Thus, today's strength can also be viewed as a strategic weakness for Stuff, Inc. 


Though the joint venture with Computers R Us is potentially attractive
because it would probably be the fastest way to build sales; would
share the risk, presumably add technical competence from the original
equipment manufacturer (OEM) side, and assure a customer, the
management of Stuff, Inc. has to ask itself how it wants to get to be
the largest GLOBAL competitor.  Michael Porter's (and Stuff, Inc.'s)
*  lowest cost producer?
*  differentiation by innovation?
*  by focus (On geography?  On sales/marketing? On product/process refinements?)

Stuff, Inc., thanks to an excellent balance sheet, has the luxury of a
wide range of options:
?	establishing production in Asia by itself
?	expanding direct sales presence outside the U.S.
?	licensing of technology to vendors in markets where it doesn't
compete (Europe, Japan)
?	joint ventures with other component vendors or computer manufacturers
?	sale of the company to a computer manufacturer
?	sale of the company to another component vendor
?	acquisitions


By forming a joint venture (JV), Computers R Us also reduces its risk
-- this time in building complex process equipment for its plastic
parts.  It cuts the investment necessary in the business by 50%;
speeds the process; and gains access to key technology.  Obviously,
like Stuff, Inc., it will be lowering unit costs because of the lower
cost labor.

Computers R Us may also be gaining other advantages in the JV which
are NOT in Stuff, Inc.'s best interest:
*  access to knowledge about competitive shipments from revenues at the JV
*  access to patents on process design and other proprietary information
*  positioning the JV so that it has a cost or other advantage over competition

The value of the technology position can't be underestimated,
particularly as computer companies have treated their patent positions
as a portfolio for trading technology, ala the Dell-IBM agreement in
Industrial Heating Journal
"Strategic Assets" (Ashby, Jan. 9, 2002),2832,69997,00.html


The most-critical questions in judging the potential JV might not even
be considered strategic:
1.	what do existing customers think of the JV?
2.	what do potential customers think of the JV?

It is quite possible that the largest two computer manufacturers would
be extremely upset about an investment by their competitor in a key
supplier.  Despite assurances of a "Chinese wall" to protect
information, Computers R Us as a major investor would have access to
more information about competition.


Size of company in the marketplace matters, for all of the reasons
cited by Porter.  Again, the critical issue for Stuff, Inc. is what
competitive strategy it wants to use WORLDWIDE to be the dominant
?	low cost
?	differentiation
?	focus

When Stuff, Inc. chooses to move, it will also want to consider the
environmental factors mentioned above: location of customers;
infrastructure; protection of its technology.

What is clear is that Stuff, Inc. has to move: it's profitability
today is historical and owes itself to the development of the computer
industry in the United States.  But that industry's given us a global
economy, so the sands on which its computer business is built are


K9Queen --

In cases like this it's always helpful to look at what companies in
the real world are doing.  Sometimes there are enormous surprises.

Having been involved in the PC industry, I can really only think of a
couple of companies that come close to a Stuff, Inc. profile in the
real world: ITW (Illinois Tool Works), which supplies dozens of
custom-designed plastic parts; and Hutchinson Technologies, a supplier
of etched metal parts to the disk drive industry:

ITW was very successful providing keyboards and other components to
the computer industry until about 1985.  Its Licon/Corton units built
mechanical-switch keyboards known for high reliability but eventually
were swamped by new entries outside the U.S. using low-cost membrane
keyboards.  OEM keyboards today sell for about 25% of their prices in
the 1980s.

Yet ITW has been a very successful company, with more than 600
business units and literally thousands of patents on product designs. 
A suggestion would be to read the management discussions from 2002 and
1999 to see the strategy from two different time periods:
Financial Reports

The other company is Hutchinson Technologies (OTC: HTCH).  They are
unusual among U.S. component vendors in the concentration of their
customer base among disk drive vendors (and 5 key customers).  The
company literally did start in a chicken coop:
Hutchinson Technologies
"Our History"

Again, you may find reading the management discussion in the annual
report interesting.  HTCH at one point in the 1980s began a dramatic
expansion of its U.S., then overseas facilities.  Unable to supply
products everywhere at once, the company decided to license technology
to Dai Nippon in Japan, a potential competitor.  The 2000-2002 annual
reports are here:

Another way of getting a perspective on these two companies (or other
component suppliers) would be to read Wall Street analysts' reports. 
They are available via Investext, an online service that many
libraries -- and certainly business school libraries -- have
available.  The analysts' reports are typically very good at dealing
with global issues in the electronics and computer industries.

Google search strategy:
stars + "cash cows" + "strategic analysis"
"intellectual property" + China
"disk drives" + Singapore
"profit in market share"
Dell + IBM + cross-license

I also used Google News searches in an attempt to highlight some real,
contemporary aspects of this case:
"semiconductor manufacturing"

Best regards,


Request for Answer Clarification by k9queen-ga on 28 Nov 2003 15:42 PST
HI omnivorous!
Thank you, this looks great! We were on the same track, your
infrastructure part is very interesting, and also the IP part - I did
not think about that part.  I think joint ventures can be a good thing
- but they still scare me (especially if you are moving over seas,
lots of what ifs, and lots of $ for good lawyers to cover your butt! 
What did you do in the PC world?  How familiar are you with Cisco? I
might be posting another strategic deal like this one, for maybe a
SWOT analysis,or a diversification strategy, forward bakward
integration for them or perhaps another company, any suggestions?

Clarification of Answer by omnivorous-ga on 28 Nov 2003 17:36 PST
K9Queen --

I'm reasonably familiar with Cisco (and there's a great tidbit of
early Cisco gossip for which I'll have to see if there's an Internet

I thought about some first-hand JV stories but decided that they were
inappropriate.  They've become much more common in these days of
relationship marketing.

BTW, I used to work for Zenith Data Systems -- which until 1990 was #2
in PC market share to Compaq (and not by far).

And thanks so much for the kind rating and extra sum!

Best regards,


Clarification of Answer by omnivorous-ga on 29 Nov 2003 05:24 PST
K9Queen --

While I was walking my yellow Lab last night it occurred to me that in
the joint-venture, one of the critical concerns would be the supply
agreement to Computers R Us.  You might choose to discuss this at some
length -- or simply mention it.

The supply agreement would set the terms on which the computer
manufacturer buys from the JV.  (Even when component manufacturers are
captive sources, this is always a source of great discussion, since
unfair transfer prices subsidize someone's year-end bonus.)

For a good example of a very complex supply agreement, you can look at
what was arranged between Ford and Visteon when Ford spun out that
Ford + Visteon + "supply agreement"

The first couple of Google links cover the subject pretty well, and it
has an unusual productivity clause, which reduces prices to Ford with
productivity gains (unusual because the supplier usually benefits

Best regards,


Request for Answer Clarification by k9queen-ga on 29 Nov 2003 09:12 PST
Hi Omnivorous,
I must say we think of quite different things while walking our dogs!
I have 3 Newfoundlands (one is a Landseer) and 1 Standard Poodle.  I
love Labs (my brother always has one, a black one; she is a great bird
dog)I love dogs (as you can tell by my nickname).

That was interesting about Ford and Visteon, I will have to read more about it.
It's amazing at how many different spins a JV can have on a company.


Clarification of Answer by omnivorous-ga on 29 Nov 2003 09:19 PST
The reality is that you can't believe the things that can go wrong. 
As I'd mentioned, I was thinking about putting some first-hand stories
in because, in general they've been a "window on the world."

However, I've also seen an OEM partner try selling knockoffs of
another company's product.  The names shall go unmentioned.

Request for Answer Clarification by k9queen-ga on 02 Dec 2003 08:39 PST
Hi Omnivorous!
I just posted a Cisco question, thought you might be 

Clarification of Answer by omnivorous-ga on 02 Dec 2003 09:37 PST
Thanks K9Queen!

It's a busy week -- let me know when you'd like to get it done?

Best regards,


Request for Answer Clarification by k9queen-ga on 02 Dec 2003 12:15 PST
HI Omnivorious,
I don't need it until 12/10/03
Hope you can squeeze it in :)

Clarification of Answer by omnivorous-ga on 02 Dec 2003 12:36 PST
K9Queen --

I'll get to it this week.



Request for Answer Clarification by k9queen-ga on 02 Dec 2003 16:25 PST
Hi there again,
You might want to somehow "take" the question, so it shows that it is
currently being worked on - I had one response earlier.

Clarification of Answer by omnivorous-ga on 02 Dec 2003 18:10 PST
K9Queen --

Google Answers has a policy against double locks, so I'll leave it
open.  If another researcher picks it up, I'm sure that they'll do a
great job.

I'm going to try something a little different for this one: using
security analysts comments to build the analysis.  I also have a
friend who's a senior account rep for Cisco -- I may ping him too.

Best regards,

k9queen-ga rated this answer:5 out of 5 stars and gave an additional tip of: $25.00
Excellent and very informative information and great sources for
further details!  Great examples and explanations as usual :)

There are no comments at this time.

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