She woo laud soon bee meeting with the heads of each division and woo endured what feedback SSH he should give eve them AIBO UT their progress in implementing their strategies. With TAP’s future on thee line, any m misstep she m made now coo old be repay arable. AR, a $6. 6 billion subsidy diary off U. S. Diversified manufacture urine company, was a T Tier 1 Mann effectuate of original and after-market parts p for auto mobile prod duckers in the United States and abroad ad. TAP had been directly y affected by the downturn in the auto o industry (see TAP’s financial reports in Exhibit 1).
Major customers, include duding Chrysler and General Motors, were on the brink of insole evenly, and eve even robust ca AR makers, us such as Toyota and Honda, were selling g many fewer cars amidst the global recession. He parent com many had hired Ellen Bright, a veteran in the auto and aerospace pace industries, in Actor beer 2008 to TU urn TAP aura undo. The dismal 2008 results and pro ejections for 2009 led Brig get to conclude due that she had to make radical chaw engages in strategy and then implement the new strategy flawlessly. She had d no room for error.
If she were successful, however, TAP could d take advantage of opportunities in the troubled auto industry. She recalled a recent report that outlined booth the challenges and thee opportunities for auto parts makers: d volume pressure, and, at Suppliers rare still facing g challenges Of higher Co sots, price and Tim mess, erratic production schedules fro mom their auto o-producing customers. T Thus, our U original equipment meet sales o outlook for 2009 is negative eve. We see leg get vehicle sales volume of ABA bout 10. 3 million in 2009 and 11. Million in 2010, d down from 113. 2 million for 2008, with Simi malaria scaled d reduction in production on. Because the economy y has weakened, however ever, visibility in 200 09 is more limb mimed than usual. We expo peck the Deter Tit Three to collectively 10 SSE SSH hare to foreign gnu brands in n 2009. Thus, the greater a supplier’s exposures to U. S. -abased companies, the greater will be b the impact on its performance, in o our view. Still, we believe the hat 1 This case borrows he evilly from an EAI earlier case: Robert Kaplan, “Doom meson Auto parts,” ABS NO. 055-078 (Boston: H Harvard Businesses School Publishing, 2005) and its accompanying teaching note: HOBS NO. 107-087 (Boston: Harvard Business school publish inning, 2007), as well w as Professor Kaplan scum emulated published d works on strategy maps and the balanced Soc rerecord. The authors wish to that ann. Professor Aka plan for his GUID dance, ideas, and d direction in dive evolving this case. Professors or V. G. Maryanne n and Research Associate Lisa Bred prepared this case. The company men mentioned in this cease is fictional.
HOBS cases are develop peed solely as the baa sass for class discussion. Cases are no to intended to seer. ‘ eve as endorsement’s, sources of primary data, or illustrations of effective or ineffective man management. Copyright get 0 2009, 2010, 20 11 President and Fellows of Harvard d College. To order copies or request p permission to roper educe materials, call 1-800545-7685 5, write Harvard Buy equines School Pub blushing, Boston, MA M 021 63, or go to w www. Hobs. Harvard d. Due/educators.
T This publication may not be digitized d, photocopied, or otherwise reproduce cued, posted, or trans insisted, without the permission of H Harvard Business S School. This document is authorized for use only in 201 AS Management Planning and Control by Lily Lieu, University of Technology Sydney from March 201 5 to August 2015. 1 10-027 Translator Auto Parts (A) n the long term, rising automobile production in Asia and other emerging markets presents an opportunity for the larger multinational suppliers to increase sales and profits…. Despite near-term challenges, U. S. Auto parts suppliers are increasing the proportion of business they do outside the U. S. Emerging markets are becoming more attractive to parts manufacturers due to lower labor costs for manufacturing and engineering, and/or growing demand in local and regional markets. China, for example, is important both as a source of low-cost parts to ship abroad, as well as for local market vehicle demand. Global expansion among the Tier 1 parts makers is important, as it supports automaker efforts to consolidate designs across international markets and to expand international businesses overall. The Executive Staff Meeting: Defining a Strategy In December 2008, following extensive consultations with her board of directors and the corporate executive team, Bright prepared for a high-level two-day offsets strategy meeting in which she would announce a dramatic restructuring. TAP manufactured two core product lines-?electronics and interiors-?in four customer-centered divisions: luxury, economy, medicine, ND truck. TAP served three geographic markets: North America, Europe, and Asia. The four customer divisions each had very different customers and customer value propositions.
Bright looked over the marketing reports that Mary Stewart, her vice president of marketing and sales, had put on her desk that morning (see Exhibits 2 and 3). These reports reinforced her view that future success would depend on how well she positioned TAP to compete aggressively in its most profitable segments. Attending the meeting were Aaron Gerhard, the president of the luxury division; Kim Swoon, the president f the economy division; the chief financial officer; and the vice presidents of marketing, manufacturing, and research and development.
After presenting a report that showed the product level financial (Exhibit 4), the global market production figures (see Exhibit 5), and the market segment reports, Bright summarized her position: If you look at our data and the reports coming out of the industry analysts at a macro level, you can see that the best course of action for us would be to go after the segments that give us the potential for the most profit.
Those segments are the luxury car makers (mostly serviced from plants in Europe) ND the economy car makers. Now, I realize that plants in both the U. S. And Asia serve a high proportion of economy car makers, but I feel strongly that TAP should focus its resources on Asia, since it is a growing market with great potential. As for our other customer segments, we are losing money in the truck and mid-price segments and these are dragging down our more profitable lines.
After much discussion at the corporate level, a thorough review of the alternatives with TAP’s board of directors, and gaining preliminary agreement from union leaders, we’ve made the difficult decision to shut down the reduce lines and customer divisions that cater to these low-performing segments and focus only on luxury and economy car makers. Most of the plants affected will be in the U. S. , leaving the majority of the facilities in Europe and Asia intact (see Exhibits AAA and b). We have not made this decision lightly, but we feel it is the only way we can save TAP.
On the positive side, I believe we can grow our top line by selling more products to our customers in profitable segments and win over new customers in new markets, primarily in Asia. 2 Afraid Levy, “Autos & Auto Parts,” Standard & Poor’s Industry Surveys, June 25, 2009, up. -4. 2 This document is authorized for use only in AAA Management Planning and Based on a competitive analysis conducted by an outside market research firm [see Exhibit 7] and an internal analysis of our core competencies, we’ve decided to differentiate ourselves in the economy division by producing high quality car parts with the lowest lifetime price.
All of our major competitors in the economy segment focus their strategy on producing parts with the lowest initial cost. We will differentiate ourselves by instead producing high quality parts that will be known in the industry for durability and low maintenance cost. We must make sure that we clearly communicate our value position to auto makers who have built a reputation for durable, high quality cars in the economy segment. In the luxury division, our strategy will be to produce the most innovative, quality parts on the market.
While our major competitors are pursuing a customer integration strategy, we believe that if we focus our efforts on producing the most innovative and technologically superior car parts in the industry, then luxury Memos will come knocking at our door. You all know that our parent company has set a stretch target goal for us: By 01 1, achieve an 8% return on capital employed (ROCK)-?a dramatic increase over our current negative ROCK. The company’s CEO stated that if we do not reach these goals and maintain a positive cash flow, he will seek to either divest or close TAP.
It appears that the unions will agree to the plant closures and offer substantial concessions on health care and pension benefits in order to save the company. We also have some resources available to us for capital improvements, R&D, and other investments; and we qualify for the U. S. Government’s Auto Supplier Stability Program. We must do what we can thin this constrained environment. I’d like to hear from each of you about how your division will help us achieve both our financial goals and our market strategy.
Lets start off with you, Joe. Joe Nathan, Fright’s newly hired CUFF, shared his data with the group: Ellen and I have worked extensively to develop the economics that must be in place for TAP to achieve its financial goals. Designed a simple model to pinpoint the critical economic drivers needed to reach our goal of an 8% ROCK and positive cash flow by 2011. Due to the economic downturn and the extensive plant closures, we forecasted only $4. 5 billion in sales in 2009.
That means, to cut our negative ROCK from -15% to -?7% in one year, we need to reduce our cost of goods sold (COGS) from 95% to in 2009, then to 83% over the next two years. If economic forecasts are on track, and if we can target the right growth segments, we should see revenues increase to $5. 5 billion by 201 0, and $6. 5 billion by 2011. We need to better utilize our capital assets, both current and new-?currently we are operating at 65% on old assets-?and we must get to 90% utilization on an upgraded and downsized asset base.
Finally, we must minimize our total cost structure-?today we are operating above the average Cost in Our competitor group and We are bleeding cash. We need to get to the lowest cost quartile to compete. These are the key drivers needed to get to the financial results expected by the parent company. We must balance them-?one against the other-?to achieve our overall goal of 8% ROCK by 2011. Gerhard, the luxury division president, chimed in: am glad to see that the company is putting its focus and resources toward the luxury division.
As you know, we have always been a leader in product innovation, something our customers continue to value. What you may not legalize is that the innovative products we designed for our high-end customers five years ago have started to filter down to the rest of our customer divisions. Satellite radio and Bluetooth capability, for example, are now becoming options for the economy segments. 3 Bright asked Michael Milton, vice president of manufacturing, for his perspective. Milton said: W?re under huge pressure to reduce costs and prices to the customer, except for the very high end.
Because of the uncertainty in the market, the Memo’s production schedules are all over the map, making it nearly impossible to anticipate their volumes, which in turn sakes any capacity utilization target extremely difficult to make. In addition, our raw material costs are so unpredictable that it’s hard to keep COGS under control. To remain competitive in this environment-?heck, to remain solvent in this environment-? we need to do a lot of internal things better. We need to coordinate supplier management, manufacturing, and product delivery so we can effectively and efficiently get products to the customer.
We need to be on time and on spec just to get the opportunity to sell new products. Key in my mind is managing the supplier pipeline, the raw materials-?there’s a lot of none to be saved there, especially if we can consolidate our product line, increase capacity in the remaining plants, and redesign our products to reduce their materials costs without sacrificing product quality or functionality. We also need to balance our focus on cost cutting with the need to make investments in process improvements and new and upgraded equipment.
Unscheduled downtime and the inability to make fast product switchover on the manufacturing floor are killing us. Upgraded capital will both reduce our costs and help deliver consistently on time and on spec. We talk a lot about reverting maintenance, butte need to get real about it. This could save us big time in terms of costs and effectiveness. If we don’t do these operational things, we will have trouble convincing the luxury manufacturers to pay a premium price for our product.
Plus we won’t be profitable in the economy segment if we can’t get our manufacturing costs under control. Swoon, president of the economy division, added his thoughts: It is not just that we should become better manufacturers-?we have to be the best. Our customers, particularly in Asia, have no tolerance for substandard suppliers. We must not only be competent, but fully master just-in-time 01 T) and lean processes in order to gain and retain the economy car MEMO customers in Asia.
Our entire division must become lean-?every single employee must be trained in these processes-?and we can only do this with resources and total leadership buy-in from the corporate level. Rata Richardson, vice president of research and development, responded to the challenge to produce state-of-the-art, technologically sophisticated products: To go back to what Aaron said, I agree that if we are to compete in the luxury segment, we certainly need to get creative and bring to market ewe and improved products in partnership with our leading customers.
Our customers have been demanding more from us on product development. In Europe, they want us to move faster-?we have to come up with new designs and product innovations-?because they are having trouble keeping up with new regulations on emissions and safety standards, and its very hard to anticipate what the customer will want. TO reduce new product development time, we need to invest in new CAD/CAM software, and acquire and train skilled design engineers, scientists, and technicians from toper schools and competitors. We also need to invest in prototyping equipment.
We want to be able to strip our competitors’ products, see what technology they have that we do not, reverse 3 Original equipment manufacturer. 4 Control by Lily Lieu, university of Technology Sydney from March 201 5 to engineer those technologies, and acquire those capabilities. We should be a one-stop shop for all the technological needs of our premier customers. Stewart, UP of marketing, added: There are many things we should address from a marketing perspective. First, we must be much more aggressive in signing new customers in Asia. Everyone in the industry knows this is a growing segment, so the competition will be fierce.
As Kim pointed out, we need to quickly get up to speed on lean processes to leverage our presence there and gain a reputation for delivering low-cost, high-quality parts in that region. Next, we should respond better to the evolving needs of our customer base. Our MEMO customers are changing the way they do business; they are looking to partner much more closely with their suppliers. The parts suppliers that will flourish in this environment will be able to take total responsibility for key subassembly. Gone are the days when the Memos just wanted a specific part; now they want fully assembled systems that they can use for final assembly.