Archive for the ‘Value Chain’ Category

Home Depot echoes Lowe’s with focus on costs

November 16th, 2010 Comments off

Photo credit: David Neubert on Flickr

Here’s is a Reuters piece from today that focuses on costs at the two largest home improvement retailers in the headline.  Notice, however, the other things mentioned that relate to what we discuss in class (and that seem to me to be even more important than the cost cuts):

  1. A focus on supply chain improvements
  2. Use of cash and the importance of having strong cash flow
  3. Continued investing in improvements even when cost cuts are emphasized

Read more:

Home Depot echoes Lowe’s with focus on costs | Reuters.

Volkswagen to make U.S. push

October 5th, 2010 Comments off

The Wall Street Journal today has an excellent front-page article documenting some missteps made by Volkswagen in the United States market that has resulted in VW claiming a paltry 2.2% market share along with plans to turn that around in an effort to become the world’s largest automaker by the end of the decade. One of the ideas being implemented is designing, for the first time, a car to specifically meet American tastes rather than selling what works in Europe in North America in nearly identical form.  This is interesting to me because I’ve read elsewhere that Ford is taking the opposite approach trying to produce car models that are virtually identical no matter where in the world they are sold.  VW also risks, in the process, alienating the small but devoted following that it currently has.

“A lot of people worry that we are going to start making VWs for the masses,” says Mark Barnes, VW’s U.S. chief operating officer. “I like to say we’re going to bring the masses to VW.”

The retooled compact sedan marks the first time VW engineers have designed a model specifically for the U.S.

Next year, a new family-size sedan is scheduled to roll off the assembly lines at a newly built $1 billion plant in Chattanooga, Tenn. It is VW’s first U.S.-made car since the 1980s. On its heels comes a revamped New Beetle.

“I am fully aware that Volkswagen was too cautious for too long in North America,” Volkswagen Chief Executive Martin Winterkorn said at a test-driving event for the new Jetta in San Francisco this summer. His remark was a nod to the car maker’s decades-long penchant for deploying cars designed for European tastes across the Atlantic. That left its U.S. operations with models too small and expensive to go head-to-head with Asian and American rivals. Now, he vowed, “we have turned that upside down.”

Adding to the challenge is the constant change at the top in VW’s American operations:

Adding to the challenge is an unanticipated switch at the helm of VW’s U.S. operations.

In June, Stefan Jacoby, a blunt-spoken German who took to wearing cowboy boots to dealer meetings and car shows, left his post as U.S. chief to become Volvo Cars’ new chief executive. His departure came just a week after he presented the new Jetta at a splashy launch party in Manhattan’s Times Square featuring pop singer Katy Perry. VW bosses scrambled much of the summer to fill the void left by a key architect of its American comeback strategy.

Mr. Jacoby’s replacement, former General Motors executive Jonathan Browning, is new to the U.S. market, having spent most of his career at GM’s European operations and managing Jaguar under Ford Motor Co.

Some U.S. dealers complain that the revolving door of U.S. chiefs—Mr. Jacoby was the third to go in five years—reflects a culture at VW’s headquarters in Wolfsburg, Germany, that views the U.S. as a career way station, or worse, graveyard.

Assuming that the leadership and design challenges can be met, there is still the issue of getting Americans to notice.  Marketing has been ramped up to target certain demographics such as Hispanics and families, but the results thus far appear to be mixed.  Before reading this article, I didn’t even know that Volkswagen offered a minivan even though my family purchased a Toyota Sienna less than a year ago. In an interesting partnership with Chrysler, VW rabadges the American van as it’s own with some minor tweaks but production had to be halted due to low sales.

After dropping plans for a modern version of its Microbus for fear it would be too niche and costly, it signed a deal with Chrysler to modify and rebrand the U.S. car maker’s Town & Country minivan under the VW Routan name. VW tightened the minivan’s suspension, gave it a sleeker front end and kept it in the same price range as the Chrysler. With an ad blitz featuring Brooke Shields, it aimed to capture 5%, or 45,000, of the 700,000 annual minivan market.

But the Routan’s launch coincided with the auto industry’s nose dive in late 2008. So many of them sat unsold on VW dealer lots last year that the auto maker asked Chrysler, which builds them at its Windsor, Ontario, plant, to temporarily halt production. While much of the rest of the minivan market has rebounded, Routan sales have slipped 0.8% to 12,539 vans so far this year, one-seventh of the number of Town & Country sales in the same period.

VW officials argue that the Routan has enabled them to sell to a key new customer segment. The company still expects the Routan’s market share to grow as more consumers become aware of it as a minivan option.

But Casey Gunther, VW’s top-selling U.S. dealer, says the Routan isn’t what people expect from VW.

“It’s like someone trying to sell you a piece of chicken and claiming it was a steak,” Mr. Gunther says.

VW, he argues, could achieve its 800,000 sales target, “but we need to elevate the brand with products that play up our heritage,” such as the Microbus concept or VW’s sporty Scirocco, which it sells only in Europe. “There are so many people out there who love the lifestyle VW represents,” Mr. Gunther says. “I’m worried we’ve turned into a follower and not the leader.”

There are countless other great examples in this article that address things we discuss in class like strategy, international competition, product design, and more.  It is not a short piece, but is well worth the read when you have 10-15 minutes.  Seeing where things are at in 2, 5, or 10 years will be even more interesting.

Volkswagen Aims At Fast Lane in U.S.. Vanessa Fuhrmans. Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 5, 2010. pg. A.1

“Bolt-on” Merger Deals Dominate Business Scene

September 27th, 2010 Comments off

Piggybacking on the Southwest/AirTran piece I posted earlier, here is a video piece from The Wall Street Journal that touches on that strategic move along with few others.

Southwest Airlines to Acquire AirTran

September 27th, 2010 Comments off

Spreading Low Fares Farther | Southwest Airlines to Acquire AirTran Holdings, Inc..

See the link above for the official website related to the buyout of AirTran by Southwest.  There are numerous news reports as well that you can read elsewhere.

Photo credit: Brenden Schaaf taken September 29, 2010 at MSP using a BlackBerry Bold

Probably the biggest way this story relates to our class is in the value chain discussion with Southwest obviously feeling that they needed expand to remain competitive.  Specifically, news reports I have read and heard have indicated that Southwest had a desire to expand and/or enter the Atlanta, New York City, Orlando, and Milwaukee markets.  A year ago, Southwest was seen a suitor for Midwest Airlines but they lost out in that attempt to expand to Frontier Airlines.

Mega-mergers are the pattern in the airline industry these days following tie-ups by Delta/Northwest and United/Continental.  It will be very interesting to watch how Southwest proceeds as they try to avoid the negative aspects of mergers that have plagued many companies including other airlines (such as America West and US Airways).  Southwest probably has the most unique culture of all airlines with a playful, fun way of dealing with customers.  Anyone that has ever flown Southwest can tell you that you will not mistake it for a legacy carrier.  Culture clash is a common reason for merger failures…Southwest will have to be careful to avoid the traps associated with this as they proceed.

Another challenge will be how Southwest integrates aircraft and frequent flier programs at AirTran into the Southwest fleet and system.  Southwest is known for flying only Boeing 737 aircraft to make maintenance and other issues easier, while AirTran flies Boeing 717 aircraft in addition to 737s.  Perhaps this is a strategy for Southwest to branch out to different, but related, types of aircraft.

Another issue that will be interesting is how Southwest configures the AirTran aircraft post-acquisition.  AirTran has a small First Class cabin on most (all?) planes and they likely attract a certain segment of the business traveler population that is accustomed to the additional services provided.  Will Southwest risk alienating business travelers by going to the “cattle call” seating that they have today once they acquire AirTran and enter markets like Atlanta where there is a loyal business traveler following?  Will business travelers defect to Delta, which is also based in Atlanta?  Perhaps they already have?

Stay tuned to this situation in the months to come.  There will be lots of examples in the news related to what we discuss in class.

Other links to news about this story:

Estée Lauder touches up makeup push

September 7th, 2010 1 comment

Estée Lauder has been mentioned in at least one class the last couple weeks as we have discussed strategy.  In that context, here is an interesting piece from today’s Wall Street Journal that talks about changes that are being made at department store cosmetic counters to revitalize the Estée Lauder brands with younger shoppers.

In an effort to reshape Estée Lauder’s U.S. department-store base, which is nearly one-third of the company’s revenue, executives from the company’s Clinique, Estée Lauder and MAC brands have been testing new counter designs that allow shoppers to browse on their own, new promotions and express lanes for busy shoppers.

“There is huge opportunity to restart sales growth and shopper traffic in department stores,” says Mr. Freda.

There are also some elements of cooperation between value chain partners highlighted in the article:

Shaking up beauty departments involves cooperation between cosmetics manufacturers and retailers, because the counters and sales staff is typically funded jointly in closely guarded agreements. Mr. Freda says the economic downturn has helped ease negotiations.

“The recent recession has opened up many companies—for sure ourselves and many of our retail partners—to be willing to put more dynamic change into the way we go to market,” he says. “We are cooperating, I believe, better than in the past in the area of change.”

Theory & Practice: Estee Lauder’s Counter Makeover — Cosmetics Company Touches Up Department-Store Sections With Express Lanes, Browsing Areas. Ellen Byron. Wall Street Journal. (Eastern edition). New York, N.Y.: Sep 7, 2010. pg. B.10

BlackBerry Torch & CVP/Breakeven Analysis

August 23rd, 2010 Comments off

There is a group of educators that closely watches Wall Street Journal articles related to different disciplines (accounting, international business, technology, economics, etc.) and that put together discussion questions based on a few articles each week.  I receive these emails and from time to time there is one that pretty much sums up what I like to do with this blog and I post it verbatim here.  This is one of those times.  The BlackBerry Torch was recently released and many are calling it Research In Motion’s answer to the Apple iPhone.  See the material below that relates the Torch to some concepts we cover in class including the value chain and cost-volume-profit (breakeven) analysis.

Piece by Piece: The Suppliers Behind the New BlackBerry Torch Smartphone
by: Jennifer Velentino-Devries and Phred Dvorak
Aug 17, 2010
Click here to view the full article on
Click here to view the video on

TOPICS: Cost Accounting, Cost-Volume-Profit Analysis, Managerial Accounting

SUMMARY: The article was written based on analysis and component price estimates by research firm iSuppli after dismantling Blackberry’s new Torch smartphone. The product was assembled in Mexico from parts made by at least 7 companies headquartered in the U.S., South Korea, the U.K., Germany, Japan, and Switzerland. Questions ask students to identify manufacturing cost components, determine gross profit, and consider what manufacturing costs are not separately identified when a company buys completed components for assembly.

1. (Introductory) What are the three components of cost for any manufactured product?

2. (Introductory) What is the total cost of the components of the new BlackBerry Torch as estimated by iSuppli?

3. (Advanced) Assuming that the cost shown in the article comprises all of the cost identified in your answer above, what is the gross profit earned on each sale of the Torch? What is the gross profit rate on this product? In your answer, define the difference between each of these amounts.

4. (Advanced) What other costs might be included in the cost of selling this product beyond the component costs shown in this article? What other costs will Research in Motion (RIM) incur in selling this product that are never included in product cost? In your answer, define the terms period cost and product cost.

5. (Introductory) View the video that is affiliated with this article. How many Torch smartphones were sold on the opening weekend for this product? What is the possible result of this sales level?

6. (Introductory) According to the related video, what is the lowest price at which this new phone is offered? Recalculate the answers you gave to question 4 above based on this selling price.

Reviewed By: Judy Beckman, University of Rhode Island

Vertical Integration is Back in Style

August 8th, 2010 Comments off

Courtesy of Scott Ingram Photography on Flickr

I’ve written before about companies like Boeing and Pepsi that have sought more control over their products with the result being that they have purchased other value chain members.  Credit goes to a current (for another week) student, Kevin Hoese, for pointing out an article in today’s Star Tribune that focuses make vs. buy and vertical integration opportunities at Minnesota companies like Arctic Cat, 3M, and Toro.

Arctic has manufactured ATVs since 1995, but has been making the engines in Minnesota for only about four years and at the St. Cloud plant since 2007. The previous supplier, Suzuki Motor Corp., still makes Arctic’s snowmobile engines, but that too is about to change. Arctic has plans to move production of those engines, now built in Japan, to St. Cloud as well — a move that will add a still undisclosed number of jobs to the plant’s roster of 35 workers.

That control is even more difficult when plants are in far-flung corners of the world. “In a volatile economy like this one it is hard to be flexible when you’re sourcing things from half a world away,” Zimmerman said.

That was the case for Bloomington-based Toro Co., which used to buy wheels and tires for its snow throwers and mowers from a Chinese supplier but now produces them at a Toro facility in El Paso, Texas. “Over the past two years, with demand fluctuating down and then up, we need suppliers that are flexible and responsive in shorter windows,” said Judy Altmaier, vice president of operations. “Some of our off-shore suppliers are capable of supplying us with quality products at a competitive price, and are flexible in meeting our changing schedules. Others are not,”

Factors range from quality concerns to flexibility issues to rising costs of transportation, but whatever the reason, it seems that too many companies overestimated the ease with which they could outsource work to the other side of the globe.  Chances are that they overestimated the cost savings as well.  It will be interesting to watch the economy to see how much of this continues to happen in the next few years.  There certainly are skilled laborers in the United States that are looking for work and perhaps “onshoring” will be part of the answer to the high unemployment figures we see right now.

Of course there are some local companies that are hurt when their customers move some work in-house.  So the fact that more companies are doing work themselves isn’t the cure-all for everyone:

The move by manufacturers to do more work in-house has hurt some businesses that have been suppliers. Permac Industries, a Burnsville-based company that makes precision-machined parts for a variety of industries, saw its sales fall about 40 percent in 2009 partly because customers were doing more of that work themselves, said CEO Darlene Miller. She said she knows of other precision parts makers that experienced the same drop-off in business.

Still, for all the reasons we talk about when we discuss make or buy decisions it is important to weigh all of the factors before making business decisions about where to locate work.  For each company that has outsourced only to find that it isn’t working I suspect that there is a company doing something in-house that they really aren’t doing that well.  Sometimes it is better to focus on core competencies and let others do whatever falls outside that boundary.

Read more at:

In a shift, more companies deciding to make, not buy: Many manufacturers are reversing the decades-old outsourcing trend, preferring to build more parts in-house. Susan Feyder. McClatchy – Tribune Business News. Washington: Aug 8, 2010.

Motorola Bets Big on Google, Verizon –

June 4th, 2010 Comments off

For a week I’ve had the Marketplace section of the May 28th Wall Street Journal sitting next to my keyboard.  On the front page, there happened to be three articles that are quite relevant to the things we discuss in Strategic Management Accounting.  This blog post is about the first of these articles.

In class I often discuss the same kind of companies over and over: airlines, car manufacturers, cell phone manufacturers, etc.  What makes cell phone companies so interesting is that they operate in a competitive environment that is among the least forgiving and the most changing of any product market today.

As recently as 5 years ago, Motorola was on top of the world with their Razr phones.  Even in the late 1990s, they were in the spot Apple occupies today.  Nimbler and more innovative competitors rose to the top and today Motorola is hoping to recapture some of that magic by introducing new models in partnership with Verizon Wireless that are based on the Google operating system, Android.  Interestingly enough, Verizon Wireless is hoping to gain some competitive leverage to blunt AT&T’s position as sole marketer of iPhones and 3G iPads in the United States and has branded its Android phones with the Droid moniker — whether they are made by Motorola or not.

Motorola, and its clam shell StarTac, introduced in 1996, dominated the nascent cellphone market at that time. It was overtaken the next decade by Nokia Corp.’s superior logistics and mass production as well as South Korean rivals. Since then, Motorola has bounced between flop and hit. The ultrathin Razr sold more than 110 million units after being introduced in 2004, but then-CEO Edward Zander failed to find a successor and Motorola’s market share shriveled.

The article points out that Motorola is currently losing $22 per handset sold so they will need some successes soon to avoid ending up as a former player in the cellphone market.  This article highlights how important it is for strategy and execution to remain solid because as soon as a company falters these days, especially in a market like cellphone manufacturing, there is little time to recover.

Motorola Raises Bet on Verizon, Google Raises Bet on Verizon,. Sara Silver. Wall Street Journal. (Eastern edition). New York, N.Y.: May 28, 2010. pg. B.1

“Performance Pricing” Strategy to Avoid Cost Leader Pitfalls

May 27th, 2010 Comments off

As we discuss in class when contrasting cost leadership vs. product differentiation strategies, the cost leader is in a dangerous position.  All it takes to knock of a cost leader is for someone to be even cheaper…not that cost leaders can’t be successful (Costco, Walmart, etc.) but the majority of firms need to offer value that they can charge a fair price for without racing to the bottom to be the cheapest provider.

This article is for everybody else: those who choose not to compete on the basis of cost and low price. This article is for companies that can and should compete on the basis of performance, for which their customers willingly pay higher prices.

By competing on performance instead of price, you shift the battle to where your company’s strengths lie—in the ability to deliver unique benefits. So-called performance pricers are adept at three core activities: identifying where they can do a superior job of meeting customers’ needs and preferences; shaping their products and their business to dominate these segments; and managing cost and price in those areas to maximize profits.

The Wall Street Journal on Monday had a feature section that contained many good articles related to management theory but the quote above came from a piece that suggested that more companies need to find their strengths, match those strengths to needs in the marketplace, and price their products/services accordingly (i.e. higher) to maximize profits.  There is an element of Value Chain cooperation at the end of the article as well.  Typically the way prices have been set has been a closely guarded secret but there are times when cooperating with customers and/or suppliers can result in two companies doing things together to lower costs, for example, that they would have been unable to do on their own.  This creates value for both participants and can tie together companies to work together in the future.

WSJ Executive Adviser (A Special Report): Pricing — Raise Your Prices! Face it: Most companies can’t compete on price; And the good news is they don’t have to. Frank V. Cespedes, Elliot B. Ross, Benson P. Shapiro. Wall Street Journal. (Eastern edition). New York, N.Y.: May 24, 2010. pg. R.8

Sears Canada Cuts Payments to Suppliers Due to Strong Loonie –

May 19th, 2010 Comments off

In a skirmish that is sure to have lasting impressions, Sears Canada is pressuring suppliers to accept reduced payments for goods given the recent strengthening of the Canadian Dollars (aka “the Loonie”) vs. the Greenback.

Foreign currency exchange rate pieces I’ve posted before tended to focus at higher points in the value chain and generally looked at income reporting and comparison of performance across borders, but in this case Canadian consumers are pressuring retailers because they can cross the border and buy goods at much cheaper prices than they can get them for at home.  Sears Canada has, as a result, tried to pressure (perhaps not a strong enough word) its suppliers into accepting revised terms on otherwise valid contracts.

The Toronto-based retailer, which is publicly traded but majority owned by Sears Holdings Corp. of the U.S., has told many suppliers it is permanently reducing what it pays them by about 10%. It argues that since the stronger Canadian dollar means vendors pay less for a product, be it a grill or a shirt, Sears should pay less too. It also wants some “retroactive recovery” of what it has paid so far, according to an April letter viewed by The Wall Street Journal.

Sears Canada says it needs to lower its prices, as U.S. retailers are luring away shoppers whose Canadian dollars go further south of the border

Given that many of these suppliers also must deal with Sears in the United States it could be interesting to see how the companies reacts and how strong the “partnership” relationship is between members of the value chain.  Suppliers will be concerned about irritating Sears but they will also try not to cave because doing so could cost them in similar negotiations with other retailers.  Many are predicting that the Canadian Dollar will remain strong for some time so prices will have to come down in Canada to reflect this fact…but it will be interesting to see if this action is the catalyst for such change or if it will just take time.

Strong Loonie Sets Off a Retail Tiff. Phred Dvorak, Andy Georgiades. Wall Street Journal. (Eastern edition). New York, N.Y.: May 19, 2010. pg. B.1