For Wendy Lewis
bigfella15
MGT680Unit5GPConclusionsDrawn.pptxUnit 5 GP Logical Conclusions
To some extent, all managers are risk-averse; which means they are leery of drastic change, future unknowns, lack of needed resources, and unproven methods. They are especially leery of change if their firms are already doing well, as is ToolsCorp. To be sure, the best managers will take on risk; but they need good reason to do so.
In the case of ToolsCorp, a decision has been made to expand globally. That in itself is a drastic change; but the promise of cheaper manufacturing costs, larger consumer markets, and expanded needed resources make that risk worthwhile. The question MBAs need to ask themselves when they plan their strategies is have we provided enough justification for our management to approve the direction we propose?
Unit 5 GP Logical Conclusions
I have discussed these conclusions in the chats, but thought I should write them down for you.
I have taken the devil’s advocate position of a risk averse ToolsCorp manager and drawn some conclusions from the information we know about ToolsCorp. These conclusions are based in fact—as can be researched through the benefits of using big-box retailers, the costs and risks of retail outlets and marketing departments, risk management in business strategies, and common business practices.
Of course, these conclusions do not have to be set in stone; if you can present good reason for management to take on the risks, do so.
Unit 5 GP Logical Conclusions
Conclusion 1
ToolsCorp has a very strong retail strategy—they distribute through the big box retailers which gives their products maximum exposure with shelf-space in thousands of retail stores, some of which are already overseas (Wal-Mart for example, with nearly 7,000 Wal-Marts and Sam's Clubs outlets worldwide). Consequently, ToolsCorp needs no retail resources, no retail outlets, and has no retail expense; yet they benefit from some of the most high-profile retail space anywhere.
Unit 5 GP Logical Conclusions
Conclusion 2
ToolsCorp has a very sound marketing strategy—they let the big box retailers place ToolsCorp's products on the hundreds of thousands of retail shelves in outlets all over the world, which is real-time in-your-face advertising; and the big boxers even place ads for ToolsCorp products in all Wednesday and Sunday papers at their thousands of outlet locations worldwide. Although, we are not told in the assignment, one can logically conclude that the big box retailers also have internet presence for online sales of ToolsCorp products—research any big box retailer and see if they have an online presence. Consequently, ToolsCorp needs no marketing resources and has no marketing expense; yet ToolsCorp enjoys wide-spread knowledge of their products, online sales worldwide, and localized continuous advertising for their products.
Unit 5 GP Logical Conclusions
Conclusion 3
ToolsCorp would have to have a very good reason to approve a change in either of these sound and very cost-effective retail and marketing strategies. In fact, a logical extension would be to negotiate additional distribution contracts with other big boxers all over the world—however, having new distributors would require a dramatic increase in ToolsCorp production to supply the new big boxers. Opening their own retail stores or setting up their own marketing arm would be costly and involve much more risk.
ToolsCorp can reach other markets by distributing through European, Asian, South American, or Australian big-boxers, but to have products to distribute, ToolsCorp must manufacture more. It is highly unlikely that a thriving business, like ToolsCorp, is so inefficient that it has surplus products in its warehouses or that it has excess capacity in its factories. Therefore, to have the products to deliver the additional big-boxers, additional products must be produced.
Unit 5 GP Logical Conclusions
Conclusion 4
ToolsCorp is a manufacturer, manufacturing is their core business, there would have to be a very good reason to step out of their core to take on another core business when they are already undergoing considerable change by going global. Firms which choose to diversify into different core businesses most likely will merge with or acquire a firm already in that other core. Again, changing core businesses does happen, but also again, a good reason needs to be given.
A Reason to Think Twice before you Switch Core
PepsiCo, the giant soft-drink and pre-packaged food manufacturer purchased the restaurant franchise companies Pizza-Hut, Taco Bell, and Kentucky Fried Chicken. One of the reasons was to secure lucrative soft drink supply contracts for its fountain drinks. After some time, PepsiCo spun-off these three prepared-food restaurants because they were not cost-effective and were different from PepsiCo’s core business.
Unit 5 GP Logical Conclusions
Conclusion 5
ToolsCorp, like most other manufacturers, is most likely expanding overseas to manufacture because of the cost advantages—facilities, labor, equipment, storage, transportation, raw materials, component parts, distribution, regulatory fees, taxes, etc., ad infinitum are often cheaper. Manufacturing firms will rarely go to manufacture in other locations where the costs of manufacture are of equal or more expense than the area in which they currently produce. There would have to be a very good reason to not seek the competitive advantage of low-cost manufacture in a lower cost manufacturing area. See the Division of Tasking file for some ideas about manufacturing globally.
Unit 5 GP Logical Conclusions
Conclusion 6
ToolsCorp is a thriving business, which means they run their business efficiently. Important parts of that efficiency are the strong retail and marketing strategies they use. ToolsCorp wants to expand globally; therefore, distributing through European, Asian, or South American big-box distributors makes good sense—if it works in North America, why not Europe, or Asia? I am sure many of you will consider that obvious strategy. However, please keep in mind the need to have enough products to supply the new big-boxers. You simply cannot expect ToolsCorp to keep thousands of units of product in inventory, that would be highly inefficient. Likewise, you cannot expect ToolsCorp to have the excess manufacturing capacity in its Tennessee factory to produce the thousands of units of product needed to supply the new big-boxers. That too would be inefficient. An efficiently run company would keep both excess manufacturing capacity and excess inventory to a minimum. Consequently, ToolsCorp will have to manufacture more product if it wants to sell more product.
Unit 5 GP Logical Conclusions
Therein lies the question; where to manufacture more product? Certainly, ToolsCorp could expand its Tennessee facility or even build another manufacturing facility somewhere else in the States. That would save American jobs and keep that Made in USA image. However, the only cost advantage would be the increased volume of sales from the new big-boxers; because the continued cost of American manufacture saves no money and the development of additional facilities in the US will cost even more in US prices. Competitive advantage is often based upon expanding profit margins—lower production costs increase profit margins even with the same wholesale prices. Consequently, as explained in Conclusions 5, an easier sell to management would be to manufacture in lower cost areas overseas—that is why so many US manufacturers do that.
Unit 5 GP Logical Conclusions
Example of a Good Reason to Manufacture in High Cost Areas
Japan’s auto industry came to the US to manufacture cars—that is a great example of a good reason to manufacture in a high cost country. Manufacturing costs in the US were not cheaper than in Japan, but the US has a very large consumer market for cars and the US imposes very high tariffs on imported autos. By manufacturing in the US, the Japanese auto makers could avoid the tariffs and avail themselves of the huge consumer base. Therefore, the increased cost of manufacture was overcompensated by the lack of auto import duties.
Unit 5 GP Logical Conclusions
A Vital MBA Skill
You too should draw logical conclusions when you research and analyze ToolsCorp’s situation to develop a solution for this GP—see the Drawing Logical Conclusions file uploaded to the LM section, posted to your small group DB, and discussed in the chats and DBs. The ability to draw logical conclusions is a vital analytical skill for MBAs. Logical conclusions must be based in fact.
Unit 5 GP Logical Conclusions
Addendum to the Rationale
I just wanted to provide some more rationale for these conclusions. You must realize that ToolsCorp's management has already decided to go global—that in itself is a drastic change. However, the reason is most likely to try to gain competitive advantage—remember, we are not told. Competitive advantage is key to all business endeavors; it is what separates you from your competitors. A manufacturer can gain competitive advantage not if its products are just as good as the competition, but if they are cheaper, better, or faster. One way to make it cheaper is to manufacture at less cost; which usually means going to a cheaper country to manufacture. To make it better or faster often requires newer features or better technology.
Unit 5 GP Logical Conclusions
As explained above, managers are generally risk averse—which means they do not like taking chances without good reason. Since ToolsCorp is already a thriving business using their present strategies, the management would be reluctant to enter into more drastic change; unless persuaded to do so by good reason and logic. That is the crux of what MBAs do, convince management to do as the MBA recommends. To do that, you must provide convincing evidence of great potential to succeed.
Unit 5 GP Logical Conclusions
Pay special attention to the marketing and retail strategy soundness that ToolsCorp employs. Certainly, ToolsCorp enjoys the thousands of retail stores’ shelf space and the local, in-your-face, and online marketing; but it is not free. ToolsCorp must sell its products to the big boxers at wholesale prices, undoubtedly with special payment terms. Therefore, ToolsCorp does pay for the services the big boxers provide, but the price difference is nowhere near the cost and resources they would have to expend to manage and operate the retail and marketing arms of their business themselves.
Consequently, if you intend to have ToolsCorp enter a retail or marketing capacity, you need a very good reason with sound and sustainable profit potential.
