CHAPTER 4 Case Study of Smiths •••.•
5.2 Strategy Analysis
5.2.9 SWOT Analysis ...................................................... l 08
The SWOT analysis reveals a perceptive understanding of the external environment and Smiths' resource capabilities and deficiencies. The aim therefore is to match likely external environmental changes with internal capabilities, to test these out and challenge how Smiths can capitalize on new opportunities, or defend itself against future threats. This
highlights areas that might need changing to sustain or develop its competitive position (Fleisher and Bensoussan, 2003 :95).
The following SWOT matrix reveals Smiths' strengths, weaknesses, opportunities and threats of Smiths.
Figure 5.6: SWOT Analysis of Smiths
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• Low Electricity cost
• International license agreements
• Well established relationship with customers & suppliers
• Skills and knowledge of human resources
•
High barriers to entry• Internationally recognised quality accreditations
•
Good Information Technology infrastructures•
Established and ever improving manufacturing and production systems• In close proximity of most customers, suppliers and the port
•
Ability to manufacture in-house facilities• Denso's assistance in technology &
improvements
• AGOA allows duty free access to US markets
• EU also allowing duty free access
• When rand currency depreciates, more exports are realised
• MIDP provides a big opportunity
• New product trials such as step iv condensers etc
• Smiths' own design of integrated condensers
• Nurturing of modular assembly supply
• Enhance the value chain with customers and suppliers via use of internet
• EU's redefInition of original parts
•
Expanding African markets• Better business prospects through Denso
• Operator level skills low in relation to international standards
• High cost of labour with unmatched levels of productivity
• Certain key suppliers not up to international standards as per Smiths' requirements
• High inventory of raw materials
• Appreciation of rand undermines competitiveness to an extent
• High prevalence of AIDS among the workforce
• High cost of imported material due to suppliers opting for purchase price parity
• Increasing unionisation of work force
• Imported machinery/tooling proves to be expensive
• Excess global capacity in the component industry
Source: Adapted from Fleisher, C.S., and Bensoussan, B. E., 2003:94. Strategic and competitive analysis. Methods and techniques for analysing business competition. Prentice Hall: New Jersey.
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The SWOT analysis matrix of Smiths above reveals the substantial strengths and numerous opportunities reflected against only a few weaknesses and moderate threats. Smiths' unique advantage of being able to produce under license gives it a competitive advantage in terms of exposure to new world class technology. A major spin off from this orientation is the transference of knowledge and information into the exports product arena. The "follow design" "follow source" strategy has enabled Smiths to become a major player in the market. Given the long standing relationship with the OEM's and the added benefit of international quality accreditations, together with the adoption of modem production systems and practices, the firm stands to benefit further in terms of growth.
According to the literature, a firm with substantial strengths and numerous opportunities whilst having few weaknesses and moderate threats, must undertake growth oriented strategies to further enhance their growth.
Mapping Smiths' position on the SWOT matrix cluster diagram below yields the result of an aggressive strategy to be followed.
Figure 5.7: SWOT Matrix Cluster
Crltlcal Internal Weaknesses
Numerous Environmental Opportunities
Major Environmental Threats
Source: Pearce, A, and Robinson, R. 2000:204 Strategic management formulation implementation, and control 7th ed. Malaysia: McGraw-HiII '
Substantial Internal Strengths
5.2.10 Life Cycle Portfolio Matrix
Smiths' position in the market seems to be strong. As previously stated, Smiths finds itself in a maturing market, where it is also reliant on already existing customers for repeat business. The market is experiencing more and more competitive forces but in spite of this, there was evidence that the OEMs are fortunately undergoing significant expansions perhaps partially due to the growing local and international demands.
As a result of global drive for better quality and more economical cost efficiencies, firms like Smiths are coming under increasing pressure to constantly review the cost factor as well as a concerted effort towards improving quality. Applying the model of life cycle portfolio matrix as shown below, the recommended strategy for shifting from a mature industry stage to the growth phase matched with strong competitive position is, fast grow, catch up, and attain cost leadership and differentiation.
Figure 5.8: Life Cycle Portfolio Matrix of Smiths
Source: Ambrosini, V. 1998:209. Exploring techniques of analysis and evaluation in strategic management. 1st ed. Essex: Prentice Hall.
Smiths has formed strategic alliances with global players for product license agreements to supply the local OEM industry and must therefore continue on this trajectory of growth.
5.2.11 Smiths' Value Chain Analysis
Businesses in many developing nations have been sheltered from competition through protectionism at home and government intervention in foreign trades. The notion of value chains probably has its origins with Michael Porter, almost 20 years ago (Porter, 1985).
Simplistically, Porter proposed the value chain concept as a means of identifying each of the business actions or stages that transformed inputs into outputs. Hitt et al., (2003:93) say that for individual firms, the essential idea of the value chain is to add as much value as possible as cheaply as possible and most important, to capture that value.
Figure 5.9: Value Chain for Smiths
Source: Adapted from Hitt, M., Ireland, R,. And Hoskisson, R. 2003:93. Strategic
management competitiveness and globalisation. 5th ed. Ohio, USA: South Western College.
The figure above encapsulates the value chain for Smiths. The primary activities of Smiths' value chain (viz. inbound logistics, operations, out bound logistics) play a vital role in being competitively priced to the OEM plants. Smiths is heavily dependant on suppliers (component manufacturers, raw material suppliers, tooling suppliers, packaging suppliers, consumable suppliers and various service providers to maintain competitive prices. Waiters and Rainbird (2004:466) say that the less resources the firm has tied up, the less capital intensive it could be, the more likely it would be to achieve adequate returns on those assets. They also add that firms are increasingly specialising in their competencies and forming alliances or networks or clusters to fill in the other parts of the value chain and amplify their own contribution.
Smiths with its relatively low cost of products and together with the internationally quality accreditations is also able to supply on a JIT basis to the local ~EM's. Employee development programmes facilitated by the human resources department enables the intellectual capacity of Smiths to grow. Programmes such as continuous improvements (Kaizen) and TQM are implemented in all facets of the business. These exercises are also driven and facilitated through the MDWT and SBU's.
WaIters and Rainbird (2004:466) argue that the new economy is about a series of changes to the economic landscape, driven partially by technology, but also by different expectations of the market participants. They assert that one of the consequences of this
"new economy" is that value is no longer necessarily created by simply owning as many of the links in the value chain as possible - the traditional strategy of vertical integration.
Instead they argue that what has been termed "virtual" integration assumes a new importance. It is argued that it is no longer an imperative to necessarily own the means the production, but instead simply to have access thereto in an effective manner (Normann, 2001; Ragel, 2002).
In recent years, however, criticism of the lean production model, originally developed by Toyota, has increased, with the primary criticism citing the inability of the lean approach to operate within an environment characterised by non-stable demand conditions (Doran, 2005:657). Re illustrates the transformations of the value chain from a typical case to a newly adopted model as below.
Figure 5.10: Typical Value Chain vs. Contemporary Modular Supply Chain
Typical Value chain
100%
4
Value-added (%)
... remaining tien 0%
Value Transfer within a modular supply chain
Increasing Decreasing
Source: Doran, D. 2005:656. Supplying on a modular basis: an examination of strategic issues.
International journal of physical distribution and logistics management. 35(9).
Drawing upon elements of the lean model, Duguay et al., (1997:1183-95) suggest that a new model is now emerging, which they refer to as the flexible/agile model. Doran (2005:657) asserts that the flexible/agile organisation would be more efficient than a lean manufacturer within a non-stable demand environment since flexible/agile operations can be quickly reconfigured to reflect such demand conditions, where the flexible/agile model is based upon the ability of an organisation to rapidly adapt to changing demand situations in a coordinated manner.
Smiths already supplies modular assemblies to major OEM's such as Toyota and BMW.
Doran (2005:655) argues that indicative of the modular approach is the transfer from the OEM of a higher percentage of value-creating activities to upstream suppliers; at the smart car assembly plant only 20 per cent of value-creating activity is undertaken within the assembly plant.
WaIters and Rainbird (2004:474) conclude that an understanding of current and future customer expectations, market characteristics, and of the available response alternatives to meet these through the deployment of operational processes is needed to maintain an efficient value chain.