MANA 5336 – Strategic Management
Mid-Term
Due Date: June 27, 2011
Maverick, Inc. is a diversified firm competing in two distinct market segments – lawn furniture and computers. Until 1989, both divisions were exceeding sales goals and maintaining their market positions in their respective segments. The 1990s, however, have proved to be quite turbulent and Maverick’s future is somewhat uncertain.
You are required to answer the following five questions. Be thorough but brief. No single response should be longer than one page (12 pt.) and the entire exam should be no longer than three pages. Good luck!
1. Analyze the computer industry (circa 1992) using Porter’s 5 forces model of industry competition
2. Identify and discuss the business-level strategy used by Maverick’s computer division. Your discussion should include specific comments about the effectiveness of such a strategy. In other words, explain why you think the strategy succeeded or failed.
3. Analyze the lawn furniture industry (circa 1992) using Porter’s 5 forces model of industry competition.
4. Identify and discuss the business-level strategy used by Maverick’s lawn furniture division. Your discussion should include specific comments about the effectiveness of such a strategy. In other words, explain why you think the strategy succeeded or failed.
5. Briefly discuss two recommendations that would help Alan Woodard, the company’s CEO, guide Maverick through the turbulent 1990s.
MAVERICK, INC.
History
Maverick, Inc. was started in the late 1970’s by Alan Woodard. Alan had been employed by a major computer firm since his graduation from the business school in 1970. Alan had worked his way up through the firm until he reached the position of Regional Marketing Manager, responsible for the sale of mainframe computers to major companies.
During the late 70’s, Alan became increasingly interested in the new, smaller computers, which were being introduced by emerging companies like Apple Computer. After extensive study, Alan became convinced that the future probably wasn’t going to be in mainframes, he concluded that personal computers would be the wave of the future.
Alan Woodard’s entry into his current business wasn’t all the result of careful planning. In 1970, Alan’s uncle passed away, leaving the family business to Alan. Maverick had started out as a welding shop in the late 1940’s. By the mid-fifties, Alan’s uncle had begun manufacturing lawn furniture. From its initial start-up in the furniture business, the manufacturing segment of the company had grown from $150,000 in sales in 1955 to $52 Million the year before Alan inherited the business.
Once Alan got into the business, he modernized the entire plant, changed the marketing to a more national focus, and began a growth pattern which would triple the furniture manufacturing business by 1992. While Alan was pleased with the growth of the furniture manufacturing business, he never forgot his experience in the computer business.
In 1983, Alan formed a small computer subsidiary. Initially, he purchased various components through his old industry contacts. The quality of the components was excellent and the quality of Alan’s machines was equally as good. Alan utilized what might be called a “follower” strategy. As the major manufacturers introduced a new chip, Alan would wait until the price of the chip began to fall and he would then introduce a new competitive model which had the advantage of low price as well as high quality.
By 1988, Maverick had gone national in its marketing. The company had been smart in realizing that the mass merchandisers were going to be the future of computer sales, so they entered the market early, still focusing on their ability to copy existing computers at a low cost with good quality. One of the tactics Maverick used was switching its outsourcing from domestic manufacturers to Pacific rim vendors. The parts were competitive from a quality standpoint, and were about 30% lower in cost, F.O.B. Maverick’s plant.
Recent Developments
The furniture division’s growth began to slow in 1989. There were a number of reasons. First, housing starts in the U.S. continued to decrease. Second, in addition to the shrinking market, there were two other significant challenges. A number of the Pacific rim countries were subsidizing local industries for the purpose of developing export businesses. One of the areas chosen by a number of these foreign competitors was lawn furniture. The technology was simple and easily obtainable. More importantly, their labor costs were on the average of 10% that of US companies. As a result, they began importing significant volumes of law furniture to the US. Since Maverick’s lines were not protected by patents (check your law books to understand when something can be patented), the import lines were identical to all of Maverick’s product lines. The real problem was that even after import duties and all, the foreign product was as much as 40% less expensive, on the wholesale level, than Maverick’s. Maverick managed to use its brand recognition to protect some of its markets, but in general, the foreign imports were beginning to erode Mavericks markets rapidly.
One of Alan’s considerations was Mexico. As much as he hated to think about it, the maquilladora programs enabled US companies to shift labor-intensive production processes to Mexico at rates which were very competitive to the Pacific rim companies. One of Alan’s concerns about shifting the manufacturing to Mexico was Maverick’s existing labor force. Although organized since the company was formed, Maverick had been able to remain competitive and at the same time keep peace with the union throughout the life of the company. In fact, the company had been able to foster a “family” type relationship with its union members, in spite of occasional disputes. “As much as I care for these people” Alan said one day,” how can I continue to pay welders $21 per hour, and production line assemblers $17 per hour when my competitors are paying one-tenth that for their labor?”
One of the possible strategies for Maverick was to modernize the entire plant with state-of-the-art robotics. The cost of this modernization would be around $15 Million. That change would allow the company to cut back its labor force about 50% while improving productive capacity about 200%. Even then, the remaining labor force would have to agree to wage cuts averaging 25% to allow Maverick to match the foreign imports. (Caution: Look at the history of management-labor relations before you make any recommendations here).
The computer division had similar problems. Maverick’s foreign vendors had used Maverick’s purchase-base to perfect their manufacturing processes. Now they had begun importing competitive computers into the US market at an ever-increasing rate. Although sales had kept going up for Maverick, they had been forced to begin giving volume discounts to their major customers. As they looked at the future market, they concluded that the pricing cuts by their major global competitors would continue, and maybe even grow more aggressive in the future. In addition, IBM began to change its pricing strategy on domestically produced machines. Since they were vertically integrated (costs about a $billion to do this), they were able to cut prices and compete quite effectively with the foreign competitors.
One of the options for Maverick is to invest in a manufacturing plant which could do most of the manufacturing process in-house. This change would enable Maverick to cut its costs an average of 15%. The investment would probably be around $17 Million, just to purchase the new manufacturing equipment and build the manufacturing facility.
The Decision
By the end of 1992, the US economy was in a serious recession. Economists were suggesting that the boom years of the eighties were gone, and the country was entering an extended period of economic decline, possibly as long as 20 yea5rs. Some of the observable trends were astonishing. Discount stores began to see a migration of middle and upper-middle income purchasers into their stores. Price competition appeared to be the norm at all retail levels, even in some of the more up-scale establishments.
Alan Woodard had some serious decisions to make. How could he compete with these new low cost producers? What could he do about the labor rates he was paying in his furniture plant? As he was considering all of these issues, he asked himself, “What am I going to recommend to the board at our annual meeting next Saturday morning?” His answer came almost immediately: “I have no earthly idea.” At the time of the writing of this case, Maverick had approximately $21 million of excess cash.
Maverick, Inc.
Computers / 1992 / 1991 / 1990 / 1989 / 1988
Sales / 160 / 145 / 132 / 120 / 100
COGS / 115 / 97 / 84 / 73 / 40
Gross Profit / 45 / 48 / 48 / 47 / 60
Expenses / 40 / 35 / 31 / 26 / 24
NEBT / 5 / 13 / 17 / 21 / 36
Lawn Furniture
Sales / 143 / 140 / 132 / 120 / 100
COGS / 100 / 92 / 84 / 74 / 60
Gross Profit / 43 / 48 / 48 / 46 / 40
Expenses / 40 / 42 / 40 / 36 / 30
NEBT / 3 / 6 / 8 / 10 / 10
Combined Revenues / 303 / 285 / 264 / 240 / 200
Combined NEBT / 8 / 19 / 24 / 30 / 46
Note: Cash Balance as of 12/31/92 is $21,000,000
The Metal Lawn Furniture Industry
The metal lawn furniture industry is a highly fragmented market consisting of over 300 companies (with shipments of $100,000 or more) that manufacture porch, lawn, outdoor, and casual chairs, rockers, benches, and related items. The industry generated approximately $1.7 billion in 1992 from wholesale shipments and $4.7 billion in retail sales. Total retail sales volume is expected to exceed $6.1 billion within the next five years. The two major segments that make up the metal lawn furniture industry can be identified by the manufacturing process and raw materials. One segment consists of companies manufacturing tubular aluminum products. The second segment consists of producers of cast and wrought iron lawn furniture.
Although nine percent of all adults have purchased metal lawn furniture in the last year, the largest consumer group for such furniture is the 25 to 44 age segment. This market segment encompasses the majority of new home buyers are well as individuals interested in replacing old, low-end furniture with higher-end pieces. However, the over 45 segment is also quite important because of their replacement tendencies and their greater disposable income. In fact, income is the top indicators for lawn furniture purchasing.
The metal lawn furniture distribution system is also highly fragmented and the competitive rivalry is quite high. Metal lawn furniture is sold by a variety of retailers including department stores (e.g., Sears), discount stores (e.g., Wal-Mart), hardware stores, lawn and garden centers, specialty lawn furniture retailers, and large home improvement centers. While large chain home improvement centers, such as Home Depot and Lowe’s are growing rapidly, most still tend to be regional rather than national. In many areas, smaller companies have managed to maintain the dominant market share. The retail sector’s competitive intensity is evident in its low profitability: the five-year average gross and net profit margins are only 29 percent and five percent, respectively.
The Evolving Personal Computer Industry
The personal computer was a revolution in information technology that spawned a $50 billion hardware business, with another $30 billion in software and peripherals by 1991. During its short 15 years the industry evolved through three successive periods. During its first five to six years, it was characterized by explosive growth and multiple, small competitors vying for a piece of the market. IBM’s introduction of the IBM PC in 1981 launched a second stage in the desktop computing. Over the next five years, the industry became a battle for standards and retail shelf space. Three firms emerged as the clear leaders during this period: BM, Compaq, and Apple. The third era was one of increasing fragmentation. From 1986 through 1991-2, new manufacturers of IBM clones from around the world grabbed share from the industry leaders as new channels of distribution emerged and product innovation as well as revenue growth slowed.
In some ways, the personal computer was a very simple device. Most PCs were composed of five widely available components: memory storage, a microprocessor (the brains of the PC) a main circuit board called a motherboard, a disk drive, and peripherals (e.g. display, keyboard, mouse, printer, and so on). Most manufacturers also bundled their PC hardware with critical software packages, especially an operating system (the software required to run applications.) But from the beginning, PCs have been available in almost infinite variety. They could vary in speed, amounts of memory and storage physical size, weight, functionality, and so on.
During the early years of the industry, venture capital in the United States encouraged the entry of new firms, which offered products in every conceivable shape and size. By 1980, new entrants flooded the market, promoting distinct standards and unique technical features. Almost every firm had a different configuration of hardware and software, making communication or sharing applications between machines virtually impossible. The first PCs introduced by Commodore and Apple had relatively little speed or memory. However, even these early computers allowed managers to perform tasks that were either very time-consuming or reserved for expensive ($50,000 to > $1 million), multi-user mini and mainframe computers. For under $5,000, anyone could now do spreadsheet analysis and word processing.