In 1907, SKF, the world’s largest producer of bearings, was founded. The company based in Sweden is known for having invented the first self-aligning bearing. SKF has dominated the industry for over 100 years with a 20 percent market share in the worldwide bearing market. The net sales of the company were found to be $8.2 billion. SKF has activities in 70 different countries. Bearings are manufactured in 110 production plants that are located all over the world. The company has two million clients. These clients come from various industries, such as oil and gas, pulp and paper machinery, aerospace, medical devices, vehicles, construction equipment, and food and household appliances. The company, since its beginning, has been focusing mainly on the technical aspects of the products. In other words SKF products are made in such a way so that technical superiority can be achieved over the competitors’ products. Two dimensions that differentiate a SKF product are reliability and durability. Prices of the SKF products are found to be little higher than the competitors’ products. The company’s strategies are mainly centred on the quality and technical superiority rather than on pricing. Prices vary from $1 to & $1000. Moreover a premium ranging from 10% to 50% is charged according to the criticality of the application. The products of SKF are either directly sold to the end users or they are sold through the company’s 7000 distributors. It is found that almost 80% end users are served through the distributors. These distributors play very important role in the entire value chain of the company. They are responsible for carrying local inventories, selling to the end customers, delivering, providing the credit and collecting the receivables. As far as US market is concerned all the end customers served through the company’s 1200 distributors in the country. There is a sales force that includes 60 individuals who are further supported by a team of 12 industry specialists. This sales team is mainly responsible for selling products to the distributors and assisting the distributors in selling the products to the final customers.
Above information regarding SKF shows that the company is one of the largest companies in the bearings industry and it play an important role in the industry value chain. Furthermore it is clear from the above discussion that the company produce premium quality products and charge premium prices for them. These prices are often higher than the prices of the competitors’ products, but still SKF manages to get enough customers to retain its leading position in the industry. Its customers are mainly industrial customers; hence loss of even a single customer is likely to affect the company’s business badly. The company is heavily dependent on its distributors and as a result they need to be given enough importance prior to making any strategy.
Industrial Technology Corporation is the largest distributor of SKF products in US market. Apart from SKF products, ITC also deals with products from other producers namely Timken, NTN, Schaeffler, SNR and some of the small sized suppliers. SKF is the second largest supplier of ITC. Steelcorp is found to be one of the largest customers of ITC. In the previous year the company purchased bearings worth 12 million dollars from ITC. According to SKF, ITC can be considered as a one-stop-shop for Steelcorp. Almost one third of total bearings that were sold to Steelcorp are produced by SKF. So it can be said that Steelcorp is an important end user of SKF. Steelcorp recently announced that a reverse auction would be held online and Steelcorp will pick the company that will emerge as the lowest-priced bidder as its supplier. Both the SKF and ITC have issued invitation requests. Now the question is whether or not the implementation of such a reverse auction approach signals the beginning of the end of the value-based strategy. Another important problem is whether or not SKF should change its value-based approach and take part in this sale, or retain its strategy.
It should be said that the implementation of the ‘reverse auction’ style strategy does not mean that the value-based strategy has begun to become redundant as far as the first issue is concerned. Business organisations have learned over the years that it is possible to achieve competitive advantages either by delivering high-quality goods or by selling products at the lowest price on the market. However it is the organization that has to decide whether to move forward with quality or value based strategy or with price centred strategy. SKF is found to be focusing on the quality and value that is being offered to the customer rather than on the price for a long period of time. In fact the company’s target customer base does not include those organizations that want products at the lowest possible price; rather its target customer base is consisted of those organizations that look for better quality and better performance even at a price which is significantly higher than the market average price. The structure of the industry is also likely to influence the success or failure of a particular strategy. Moreover the value chain of the company is likely to determine the choice of the strategy. So it cannot be said that value based strategy has become obsolete just because one customer is looking for a low-priced supplier. The entire scenario can be better examined by using various strategic models like ‘industrial organization style’ strategy model, Marketing M-style Strategy and Resource Based-view RBV-style Strategy model.
Industrial Organization style strategy model includes the relationship between value chain, generic strategies and industry. The model also shows that these three aspects lead to competitive advantages which further results in better performances. Basically industry, value chain and generic strategy, these three aspects are involved in a cycle.
The industry can be analyzed by using Porter’s five forces model. The five forces that influence an industry are buyers’ bargaining power, suppliers’ bargaining power, threat of new entrants, threat of substitutes and competition among the rivals (David, F. R. 2006). In the bearing industry buyers are referred to the distributors and they have strong bargaining power. This is simply because these products reach to the end users through these distributors. Distributors are mainly responsible for keeping local inventories, selling the products to the final customers, providing after sales services, giving credits and collecting the receivables. Moreover these distributors are not single individuals rather they are medium sized organizations that have strong negotiating power. As far as distributors are concerned, they are also very powerful as the without timely supply of raw materials it is not possible to improve the efficiency of the production system. Threat of new entrants is moderate as any new player can start producing bearings, but initially it has to start in small scale. It requires lot of efforts and resources to produce in large scale and to build a strong network of suppliers and distributors. So it can be said this threat is moderate. As far as threat of substitutes is concerned it is found to be very low as the requirements of bearings in various machines cannot be met by any other parts. The bearing industry is intensely competitive as there are several large players like Timken, SKF, NTN, Schaeffler, SNR etc. Moreover there are number of small players that give tough challenges to the larger players.
In such an industry it is very important for a firm to have its core competencies and properly defined strategies in order to gain sustainable competitive advantages. In addition to industry firm’s decision regarding strategy will also be influenced by the value chain which includes both primary and secondary activities. The value chain of SKF starts with receiving of raw materials from the suppliers. Once these raw materials are obtained they are processed in order to produce the final product. Finished products are then sent to the distributors who sell the products to the final customers. There is a sales team of 60 persons who are responsible for selling the product to the distributors. They are also responsible for providing all the possible after sales services to them. Distributors have their own sale force to market and sell the products to the end customers.
[Source: Exploring Corporate Strategy, Gerry Johnson, Kevan Scholes, Richard Whittington]
Considering this structure of the value chain and previously defined industry structure four strategies can be thought of for gaining competitive advantages. These four strategies are actually on the basis of the Porter’s generic strategy model. According to Porter it is very important to identify appropriate generic strategy for achieving competitive advantages. This can be a single strategy or a set of three strategies which are cost leadership, focus and differentiation. By adopting a cost leadership strategy an organization attempts to become the lowest cost producer in an industry. On the other hand by adopting differentiation strategy firm tries to distinguish itself as well as its products from the competitor and the competitors’ products. Differentiation is generally achieved by creating distinctiveness in quality, brand name, technical superiority, distribution, packaging etc. Finally in the ‘focus’ strategy firm concentrate on a particular market segment to market and sell its products (Stonehouse, G. et al. 2009).
[Source: Stonehouse, G. et al. 2009]
It is found that SKF has been adopting both differentiation as well as the focus strategy over the years. The company has always been focusing on producing products that will be technically superior as compared to competitors’ products. Moreover the company targets only those companies that consider quality and performance as the decisive factors not the price. In other words SKF has been targeting a particular segment of the market. However the company is not found to be focusing on the price aspect as in it has not been trying to become cost leader in the market. SKF operates in such an industry where competition is intense and distributors have strong bargaining power. As a result any company has to differentiate its products from others; otherwise it is expected to loose business in the long term. Moreover there are large numbers of producers that are having similar kind of value chain. It is expected that most of them will be trying to minimize their cost of production so that the final product can be offered at a lowest possible price. In other words competition is concentrated on price. In such a scenario SKF has been able to retain its leading position for a long time just because it has not got into the price war so far. It has focused on the ‘value’ aspect. However the recent global recession has forced some of the customers like Steelcorp to look for low-priced suppliers so that cost of operation can be reduced, but this is basically a short term demand. Once the global economic condition is improved this situation is bound to change. When overall demand of the products will increase organizations will again look for quality products. This situation will stay in the long run and then SKF’s value based strategy will be again successful. As a result it can be said that value based strategy has not started to become obsolete because low-priced products that are low quality cannot help a company to gain sustainable competitive advantage.
As far as the question of change in SKF’s strategy is concerned, it can easily be said that in order to retain its dominating position for long time the company should not change its strategy. It is already clear from the Porter’s generic strategy model that the company has been adopting appropriate strategies as it is focusing on differentiation and focus strategy. So it can be said that SKF can afford not to change its current strategy and may not participate in the reverse auction.
On the other hand if the scenario is looked into from resource-based point of view by using RBV style Strategy thinking model, then it will be found that the company should change its strategy and involve itself into reverse auction. It is found that if the company decides not to participate in the auction it might results in a yearly loss of $4 million. In a market where demand is at the lower level due to recession, the company cannot afford such a huge amount of loss. Moreover the relationship with the key distributor (ITC) and with a key customer (Steelcorp) might also be affected due to such decision. For a sustainable growth the company cannot afford a hampered relationship with the distributors and customers in a recessionary market.
On the other if M-Style Thinking model is considered product market and ‘critical success factor’ are likely to play crucial role in the process of gaining competitive advantage. SKF’s critical success factor is found to be the high quality of its product. The company has been able to show the value created pout of its products in tangible terms to its customers. Through the DSP tool SKF has been able to measure and quantify the end-users’ value from using bearings of the company. As a result it is proved that this value based strategy is the key behind the success of the company. So the company should not change this strategy.
If it is assumed that SKF decides to change its strategy and implement a new price based strategy, then several problems are likely to arise. Most of the problems are likely to arise at the process of strategy execution. First of all SKF’s executives have not been able to reach the consensus regarding the adoption of new strategy. Phil Knights, the president of the company has the right to make the final decision, but he prefers to discuss with his key executives before taking any decision. So far it is found that some executives are in favour of change in strategy whereas some are against it. For instance Steve Benedetto, the corporate account VP believes that price based strategy might be the future of the industry and if SKF does not adopt such strategy it might lose significant amount of revenue. On the other hand Todd Snelgrove who is involved with DSP feels that the company should not step forward in a ‘commodity trap’ and it does it will lose its competitive advantage. In order to solve the problem a commander model of theory can be used. In this model CEO has all the power to make the final decision. He even has the power not to consult with any other executives. In case of SKF its current CEO, T. Jhonstone can handle the situation by his own. However if decides not to consult with people like Phil Knights and Steve, it might results into major communication gap in the top management of the company.
Change in SKF’s strategy might require change in the organization’s structure and its resourcing strategy. In the present organizational structure of the company, service and quality related departments are given maximum priority. However if the company decides to adopt price based strategy it has to give more importance on the departments like finance. Such change in structure might not be well accepted by a section of the company’s present employee. Moreover the relation among different departments might also be affected and this is likely to results in significant decline in organizational performance. Furthermore the company’s resource base might also need to be changed. New technologies might require to be implemented in order to produce the products at the lowest possible cost; new people might also need to be recruited for better cost management.
Change in present organizational strategy is likely to lead to change in culture. Change in culture means there will be change power structure, change in control systems, change in rituals and routines and change in structure. If changes take place in all these aspects then the entire operation of the organization might be changed and this will be huge setback for a company like SKF which has been operating on the basis of value based strategy for a long period of time.
Problems are also likely to come in regards of brand image of the company. SKF is renowned for the high quality products not for low priced products. Now if the company changes its strategy for a customer, its image might be hampered to its other customers who still look for high quality products. Moreover once the company gets into this price war it will be very difficult for it to return back to the previous value based strategy. Some competitors might also capitalize on the situation by repositioning themselves as value based producer and gain the competitive advantages for the long run.
Now if there are problems, there must be solutions. In order to manage cultural changes organization need to conduct strategic analysis process very carefully. Techniques like re-engineering, bench marking can be exercised for managing the operational changes. Problems regarding organizational Structure can be solved by taking the organization through a systemic process of change that leads to a specific structural model after a certain period of time. Problems regarding brand image can be solved by promoting the brand SKF in a different way. The company should promote itself as a producer that is capable of producing high valued product at a lowest possible price. Moreover the company is financial sound enough to invest in implementing new systems. As a result it can install new technologies to produce the bearings at the lowest possible cost.
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