Coming up for air

Breezy Auto Parts has been supplying the North American automobile industry with carburetors and air filters for more than half a century. With revenues of about $100 million a year, it is a significant player in the parts industry. Initially, it supplied carburetors and filters to each of the Big Three domestic manufacturers. When foreign car manufacturers entered North America to set up manufacturing operations, Breezy also developed relationships with the newcomers. It redesigned some of its products to fit the foreign models. It also introduced electronic data interchange (EDI) to support just-in-time deliveries to all of its customers. As a result, it successfully realized its original corporate vision of becoming North America’s leading supplier of carburetors and air filters, a position it has occupied ever since. For the past 30 years, Breezy has counted on steady customers and steady revenues. The past two years, however, have raised significant concerns about the company’s future. The price of crude oil has been soaring as have gas prices at the pump. There have been temporary dips in price, but the overall trend is unmistakable: it will be far more expensive to drive in the future. As a result, car sales have flattened and in some cases declined. This is especially true of the big gas guzzling SUVs upon which the North American industry had staked its future. But the slump is affecting pretty much all makes and models except for hybrids and the newly introduced Brainy Car. The contraction is even affecting the Asian and European car manufacturers that have located in North America. In the past, Breezy could always count on respectable profit margins, but this is no longer the case. Sales are anemic and because of the company’s fixed costs, tied to its manufacturing plant, profits are getting razor thin. To avert further deterioration, the company’s CEO announced a visioning workshop for senior managers. The objective is to conduct a PESTE (political, economic, social, technological and environmental) review of current trends, factors and conditions in the marketplace while subjecting Breezy to a rigorous SWOT (strengths, weaknesses, opportunities, threats) analysis. This is the first step in a process of revitalizing the company and its prospects by developing a new vision and strategy.

Analysis to get past paralysis

At the workshop, senior managers made the following observations:

• As a supplier to the auto market, it is dependent on its fortunes, but it has little influence over broad trends such as gas prices, or even the pace at which car manufacturers decide to redesign their vehicles for fuel efficiency. That redesign process may take years but Breezy has obligations now.

• Breezy already dominates the North American market for carburetors and air filters so that there is only limited scope for expanding sales in a market that is already saturated.

• So far, Breezy had focused on carburetors and air filters, something that it does better than others and a product in which it has decisive competitive advantages. Moving into new products would require R&D and retooling and it would have to be carefully coordinated with the redesign of automobiles for fuel efficiency that is under way in the industry.

• Key to Breezy’s existing competitive advantage is the tight integration that has established with its customers by using industry best practices, such as just-in-time manufacturing and just-in-time inventory. Any future development should build on that foundation.

• So far, Breezy had focused exclusively on the North American market. Because of its previous success and the overwhelming size of that market, it has never felt the need to look for markets in other parts of the world.

Filtering the options

After reviewing the company’s financial performance over the past few years, senior managers concluded that Breezy had to expand its markets if it was to sustain its profits. There were two options on the table.

Option 1: Breezy could stick with the tried and true. It could continue focusing on the North American market, working with its existing partners to develop products for the fuel efficient cars of the future. Alternatively, it could try to expand its product offering beyond carburetors and air filters into other auto parts. The market for standard auto parts was already saturated, however. One manager suggested that Breezy could try to move into the customized market, making specialized accessories for car enthusiasts.

Option 2: Breezy could try to develop new customers and new markets outside of North America. It was pointed out during the PESTE analysis that car manufacturing was growing in countries such as Brazil and India. Recently,India’s Tata Company had announced its intention to develop a popular car for the Indian market. Its target price for the vehicle was to be about $2500 a unit. It was suggested that Breezy start developing the same close relationships with overseas car manufacturers that it already had established with their North American counterparts. The CEO assigned two teams to investigate each of these possibilities. The teams are to prepare a detailed course of action for their assigned option, together with an analysis of costs and benefits.

Questions

You are on the team investigating the possibility of developing offshore business for Breezy.

1. In exploring the possibility of developing a relationship with offshore car manufacturers, what questions should Breezy be asking?

2. How should it approach the issue of negotiating with them?

3. How should any offshore operation be organized? What are the key locational considerations?

4. What costs are likely to be incurred in this venture?

5. How could this initiative be financed?

6. What business should Breezy be in? How should it revise its corporate vision?

7. What risks does the offshore venture face that the domestic company does not?