Posts Tagged ‘value chain’

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.

“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

Caterpillar Joins ‘Onshoring’ Trend –

April 10th, 2010 Comments off

This article has been sitting in my brain for a few weeks now and I’m finally getting a few minutes to share it.  It involves heavy-equipment maker Caterpillar and their approach that may result in moving some manufacturing production back to the United States.  Several factors including foreign exchange pressures, quality issues, transportation costs, and inventory management are making “onshoring” an attractive concept to many companies that only a couple years ago were moving manufacturing operations overseas.

Many of these factors such as quality and logistical concerns are similar to those we looked at in make or buy situations and they come into play as well in value chain situations.  It just so happens that for these companies the decision is entirely within their own organizations but it could just as easily be about deciding to source materials locally vs. from overseas.  Some important things to keep an eye on in the coming months and years.

Caterpillar Joins ‘Onshoring’ Trend. Kris Maher, Bob Tita. Wall Street Journal. (Eastern edition). New York, N.Y.: Mar 12, 2010. pg. B.1

Caterpillar Looks Forward to Increased Production

January 29th, 2010 Comments off

I referenced this article in class last week when speaking about how companies have to plan for different scenarios in our discussion of “sensitivity analysis. ” It isn’t enough anymore to arrive at one long-term plan and ride it out to the end.  To be competitive today (or, in fact, to survive sometimes) companies need to engage in several “what if” plans so that they are being proactive when the inevitable surprises arise rather than scrambling to keep up.  Caterpillar is not only planning for their “most likely” scenario, but they are also planning in case other scenarios occur.

Caterpillar says that even if demand for its equipment is flat this year—an unlikely projection it calls its “Great Recession scenario”—it would still need to boost production in its factories by 10% to 15%, just to restock dealer inventories and meet ongoing customer demand.

Meanwhile, output at Caterpillar’s suppliers would have to rise 30% to 40% in this scenario, because Caterpillar would also be refilling its shelves.

Caterpillar is also expanding their planning process to be inclusive of their suppliers and their customers (including dealers) so that everyone is on the same page.  We no longer cover the “value chain” concept in as much depth as we have, but working beyond the legal boundaries of Caterpillar to engage these other participants is growing in importance and moves like should work in the favor of companies that make them.

Going forward, a big question is how well suppliers are positioned to ramp up production. Bottlenecks and other headaches may occur as spot shortages cause unexpected price hikes and hamper companies’ ability to meet demand.

That’s why Caterpillar took the unusual step late last year of visiting with key suppliers to ensure they had the resources to quickly boost output. In extreme cases, the equipment maker is helping suppliers get financing.

‘Bullwhip’ Hits Firms As Growth Snaps Back. Timothy Aeppel. Wall Street Journal. (Eastern edition). New York, N.Y.: Jan 27, 2010. pg. A.1

Companies More Prone to Go ‘Vertical’ –

December 8th, 2009 Comments off

296px-Sun_Microsystems_logo.svgInterestingly, today’s Wall Street Journal contained a trio of articles that all relate to how companies are handling their value chain partners and positioning themselves for the future.  I’m going to make a post for each article because it will make it easier for me to tag/categorize but I think reading all three and understanding how these moves relate to each other is quite interesting.

The first article from page A1 is about how companies are embracing vertical integration — a practice that fell out of favor in recent years.  Specifically mentioned are Oracle’s purchase of Sun Microsystems and Pepsi buying back some bottlers it had spun off a decade ago.

Mr. Ellison is among the executives reviving “vertical integration,” a 100-year-old strategy in which a company controls materials, manufacturing and distribution. Others moving recently in this direction include ArcelorMittal, PepsiCo Inc., General Motors Co. and Boeing Co.

The reasons vary. Arcelor, the world’s largest steelmaker, wants more control over its raw materials. Pepsi wants more authority over distribution. GM and Boeing are moving by necessity, to assure quantity and quality of vital parts from troubled suppliers. Some are repurchasing businesses they only recently shed.

Companies More Prone to Go ‘Vertical.’ Ben Worthen, Cari Tuna, Justin Scheck. Wall Street Journal (Eastern edition). New York, N.Y.: Nov 30, 2009. p. A.1

Sharp’s New Plant Reinvents Japan Manufacturing Model –

December 8th, 2009 Comments off

612px-Sharp_logo.svgThe second article from today’s Wall Street Jouranl includes some elements of equipment-replacement decisions with value chain strategies in looking at Sharp Corp’s newest LCD television manufacturing plant in Japan.  Sharp made the decision to build a massive new facility to save costs by doing things on a larger scale and also by moving many suppliers into the same building.

The facility, considered the most expensive manufacturing site ever built in Japan, started churning out liquid-crystal display panels last month, and Sharp’s new flagship televisions featuring the energy-efficient LCD panels go on sale in the U.S. next month. Sharp moved forward the factory’s planned opening by six months, saying the new plant would help it be more competitive.

“When you look to the next 10 or 20 years, the existing industrial model doesn’t have a future,” Toshihige Hamano, Sharp’s executive vice president in charge of the Sakai facility, said in an interview. “We had to change the very concept of how to run a factory.”

Sharp aims to streamline the costly LCD-panel production process by moving 17 outside suppliers and service providers inside its factory walls to work as “one virtual company.”

In the past, Sharp kept suppliers within driving distance. Supplies are sent not by truck from a nearby factory but by automated trolleys snaking from one building to another.

The suppliers, which include Asahi Glass Co. and Dai Nippon Printing Co., built and paid for their own facilities and are renting the land from Sharp.

Despite their location inside the plant, Sharp says its suppliers are permitted to sell their products to other companies.

At Sakai, Sharp has also linked its computer systems with suppliers so an order to the factory alerts suppliers right away. In the past, Sharp would email or call suppliers and place orders, creating a longer lag time.

Sharp wouldn’t disclose how much, if any, cost savings will result from manufacturing LCD panels at Sakai, but analysts estimate a 5% to 10% savings.

Corning Inc. the world’s largest maker of LCD glass substrates, built a factory next to Sharp’s Sakai plant. Corning says the arrangement reduced total order cycle time from an average of one to two weeks to a matter of hours. Corning also says the proximity reduced the damage risk in transporting massive glass sheets on trucks.

Sharp’s New Plant Reinvents Japan Manufacturing Model. Daisuke Wakabayashi. Wall Street Journal. (Eastern edition). New York, N.Y.: Nov 30, 2009. pg. B.1