Victoria Heavy Equipment Final- Group 1

Composed by: Julie Torgerson , Faiysal Kothiwala, Adrienne Shamku and Patriva Thapa

2

Table of Contents

Background .................................................................................................................. 3

Summary of the Analysis .............................................................................................. 4

Alternative 1 ................................................................................................................ 6

Alternative 2 ................................................................................................................ 9

Implementation ......................................................................................................... 10

Appendices ................................................................................................................ 12

3

Background Victoria Heavy Equipment Limited is the world’s second-‐largest producer of mobile cranes, led by progressive entrepreneurial chief executive officer Brian Walters who is considering taking a less active role in the business. But before he can embark on his own personal endeavors he feels that his firm needs improve on its current product line, competitive position and organizational structure. Victoria’s product line currently focuses on the custom segment of the market. Although the market size of this segment is unknown the total world mobile crane market is said to be a $945 million industry. Victoria’s main crane, which accounts for majority of its sale, is the LTM 1000 with 5 different models each with numerous options. Each cranes is custom built in sixty days to the preference of the customer, usually a contractor. Aside from this model Victoria carries the A100, which is one of a kind in this industry, the main feature of this crane is its ability to reach heights of 61 meters, which was not possible in the past. Although the A100 is shown to be a crowd attraction at equipment shows, the sales of this model has been disappointing. Victoria’s main competitor is the current industry leader, Washington Crane Company who is four times larger in size and holds 50% of market share of the world. Survey data suggest that Washington Crane offers superior service and reliability therefore is able to charge a premium on its cranes that are similar to Victoria. Thus, in an attempt to combat this Victoria is lowering their prices by reducing costs through backward integration. However, much of these savings are negated because of old and inefficient equipment in their Squamish plant. Aside from this firm, Japanese crane producer Toshio has been aggressively pursuing sales worldwide and has recently entered the North American market. The organizational structure of Victoria has been facing tremendous difficulty due to simple structure of management. This occurs when majority of firm decisions rely on being made from a centralized source, as a result a tremendous amount of work piles up and is not being completed. Between 2001 and 2004 an attempt to fix this took place, by setting up separate companies and a corporate staff group. This new structure caused an overlap in powers and resulted in many political and factional disputes between line managers and staff VPs. The second attempt and current organizational structure has been put into place by establishing an executive committee; moreover this new structure also involves establishing cost and profit centers for measurement purposes. This again has caused a problem between the two groups on issues such as budgeting and allocation, resulting in political wars and dissatisfied employees.

4

Symptoms

• Customers buying similar products from Washington at a higher price • Cost of sales increasing at a greater rate than actual sales • Lack of growth for the business in the worldwide market • Two re-‐organizations in the last two years • Scheduling and production problems • High-‐turn employee turnover • Dissatisfied employees • Lack of confidence in leadership • Increasing competitors from the Japanese market • Failure of new product line (A-‐100)

Problem Statement How can Victoria design strategies to increase the overall synergies within their operations while accomplishing their goal of increasing worldwide market share?

Summary of the Analysis The Analysis’s are in the appendixes, however we have created short summaries of each analysis for the crane manufacturing industry. PESTI Analysis An analysis of the external environmental factors affecting Victoria Heavy Equipment was conducted through the PESTI model. The crane markets is a $945 million industry and for Victoria to achieve its goal it must control twenty-‐five percent of it, it also showed that the international market has seen very little growth since 2002 indicating that the industry might be a in decline stage. An expected decline in total market size of 10% may occur during the 2008 mortgage subprime crisis, proper planning and cut backs might be necessary to keep the business afloat. A socio-‐economic trend identified during this analysis shows that contractor’s value reliability and service more than price of the product, this shows an area where Victoria may choose to improve upon.

5

Porters – Crane industry The Porters’ Five Forces analysis provides insight into areas of strengths and weakness for Victoria. Both the Threat of Intense Rivalry and the Threat of Substitute Products are high. With so many competitions entering the already dominated industry, Victoria will need to differentiate itself and focus on their strengths of product innovation, knowledge and flexibility to stimulate consumer demand. They will need to emphasize production efficiencies and process engineering to lower manufacturing costs and continue expanding into global markets. Another alternative may be for Victoria to exit the business or implement a joint venture or merger with the new firms. Victoria could expand by negotiating win-‐win deals for all distributors overseas and find the right partners with compatible goals and values to create valuable relationships. Information systems must be designed and integrated to facilitate communication with potential suppliers/distributors. Victoria will also need to look at their internal structure and emphasize and review their service and reliability with the competition.

SWOT

Victoria has adopted a cost leader strategy in the mobile cranes industry, it has done this through extensive backward integration, but most of its cost advantages are negated by inefficient and old equipment from their Squamish plant. An opportunity in improvement can be seen if new equipment is purchased and these cost savings are able to materialize on the income statement.

Victoria provides the industry with a differentiated product that no other firm is currently doing building on this they might be able to establish a larger product line. Victoria’s cranes also lack in product marketing, there maybe potential for increase in sales through the proper means.

Victories weak organizational structure has led to many dissatisfied employees and high staff turns-‐over. Employees at Victoria feel that there is a lack of strong leadership and clear direction. This can translate to an opportunity for members of the organization to step up and assume this role.

Value chain

6

An internal analysis documented on the value chain activities of Victoria Heavy Equipment Limited identified problems caused by the restructuring of general administration. The decision to restructure the organizational structure from a centralized to decentralized system has created a sense of panic and lack of harmony within the company. Therefore, the firm’s primary objective should be to develop and maintain a cohesive staff and management in order to obtain a sustainable competitive advantage among its competitors.

Industry life cycle

Through our analysis it was determined that the mobile crane industry is in the maturity to decline stage of the industry life cycle. Differentiation and overall cost leadership strategies are among the generic strategies adopted by Victoria. The segmentation consists of custom-‐made cranes and standard cranes. Major functional are of concern points towards general management and finance, with emphasis being on Organizational structure. Due to low growth in this Industry, market leaders are defending their market share and extending product life cycles with introduction of new products lines.

Alternative 1 Differentiating Victoria Heavy Cranes from the competitors through custom built cranes by improving in facilities, cost reduction, corporate structure, marketing and customer service. Victoria Heavy Equipment is presently the world’s second largest producer of mobile cranes. By continuing their vision of quality products, professional employees and a high standard of excellence Victoria can sustain competitive advantage in the new environment with a few modifications. Victoria offers its customers, custom made mobile cranes with options of precision lifting capabilities, fast highway travel and effortless city driving. By focusing on custom manufacturing of mobile machinery and creating new innovated products/component from their in-‐house manufacturing plant, Victoria can achieve it goal of achieving growth in the world market. Expansion: They can expand their manufacturing plant to design new components for other industries as they have the experience and capability. They have already done something similar in 2007 when they opened the California plant and doubled sales to

7

150 million. This expansion would further enhance value and increase their R& D research giving them an edge on leading technologies. Utilizing their in-‐house manufacturing plant: With a sixty percent share in Canada, Victoria seems to have gained some loyalty from the Canadian market. They could capitalize on marketing to contractors, who are the primary consumers in the mobile carne industry this can be done by emphasizing on their dependability as well as there in-‐house parts and service availability. Expanding relationships with Dealerships and outlets: The competition currently has over 100 strong dealers worldwide and 200 outlets. Victoria could expand their partnerships with dealerships and promote their differentiated products as well as their in-‐house manufacturing plant. Victoria could also pioneer themselves as the first Canada’s company to develop commercially successful hydraulics crane controls, emphasizing smooth hydraulics. New Technology Equipment: Victoria should increase investments in of technology and new equipment in order to increase efficiency. Moreover, this will also allow them fully capitalize on its Squamish plant that is currently eating away at cost savings that backward integration has provided them with. Strategy controls: With the President Brian Walters retirement and poor organizational structure has made employees at victoria to lose focus and has created dissatisfaction among many of its employees. In response to this, Victoria needs to restructure, clearly defining organization roles and responsibilities and find a strong leader that will be able to uplift the company’s morale. Cost reductions and Customer Service: Create a lean manufacturing production process and work closely with engineers to refine existing procedures. Victoria can also put more emphasis on their after market service. They could follow up with customers to obtain feedback, and work to improve in areas that they lack. Marketing:

8

Victoria will need to increase marketing towards contractors, as Victoria does not do any marketing aside from trade shows. Value Chain Analysis Victoria has several current dealerships but to keep competitive, they will need to create valuable relationships with. By sourcing new low-‐cost material leveraging the machine-‐driven processing and closely working with engineers to refine existing products, Victoria will be able to reduce production expenditures. To further enhance value, Victoria could focus on production of machine-‐made parts and capital-‐intensive products and try to sell their components to other manufacturing companies. The outbound and inbound logistics from the Value Chain indicates opportunities for further exporting with extra inventory and established exports chains. As Victoria currently exports to 30 countries, they have the ability to increase exporting and enter new markets.

Porter’s Five Forces Analysis – Manufacturing Industry Porter’s Five Forces Analysis provided insight into areas of strength for Victoria, and where they may face threats. Both the threat of intense rivalry and the threat of substitute products are high for Victoria as there are competitors entering from the Japanese market. Victoria needs to differentiate within the industry and focus on what they know and promote which stands to be custom made cranes. Victoria can use insights provided by the Five Forces to create higher entry barriers that discourage new rivals from competing with them. Victoria could promote quality unique designs and utilize in house materials while using technology to assist with pieces that are standard design. Victoria could differentiate by improving products, services and implementing new strategic marketing plans. As noted in the analysis customers value reliability and service over price. According to the Potters Five Forces Analysis, the Bargaining Power of Buyers is medium therefore Victoria needs to differentiate itself from competitors to retain its current

9

clients and attract new ones. Victoria should develop strong relationships with their distribution channels in order to better balance the bargaining power of their buyers The implementation of this strategy would provide an immense amount of positive effects for Victoria such as

1. An increase in market share 2. An increase in revenue and cash liquidity 3. A competitive advantage over competing firms 4. The reduction in cost from economies of scale through new manufacturing

machinery.

Alternative 2 Sell Victoria Heavy Equipment Company There has been much international competition entering the US and Canada from countries like Japan where labour costs are cheaper and the market pool of highly qualified skilled engineers is greater. Their has been little growth in the international industry since 2002 and economic conditions will continue to worsen due to the 2008 subprime mortgage crisis which can potentially destroy the company or greatly hinder it to the point that it may never recover. Furthermore, there does not seem to be any desire for Walter to continues to lead his organization. He has made this clear by his semi-‐retirement and current action of stepping down and appointing an Interim CEO. Victoria needs to sell now and exit the industry while it still can. As the company is currently profitable and can offer strengths to those larger corporations who wish to acquire Victoria. PESTI The industry has reached market cap potential as indicated by the fact that since 2002 the crane industry has not shown any growth. The economic environment is continually seeing a decline especially with the on coming 2008 subprime mortgage crisis which will potentially hurt the firm some more. Contractors are also showing brand loyalty to a firm that is four times the size of Victoria; they see value of superior service and reliability. This is another factor that is

10

not in control of Victoria, it must harvest customers that already show preference in brand. This sort of brand loyalty is built through reputation, which can take a lifetime to build, if it hasn’t built this in ninety years of being the business, what is the probability it will be able to do this in the next twenty or thirty years? Value Chain and Industry life cycle The mobile crane industry is in the maturity to decline stage, with a differentiation and cost leadership strategy. Victoria is implementing this generic strategy by differentiating through custom-‐made cranes and reducing costs through extensive backward integration. The market growth rate has been low for the past five years and has only two segments, standard and custom made cranes. Currently, the major functional concern of the internal aspect of the organization is the general management such as defining roles of each staff member in the organization and finding a strong leader. The current objective seems to be to defend market share from the likes of Washington and current aggressive Japanese competitors like Toshio. Management also wishes to introduce new product lines, and it has with the newly innovative T1000, which has seen to be a failure. The Value chain indicates new technology is required to sustain competitive advantage; this is very costly and doesn’t guarantee success. Also the lack of synergies between departments has negatively affected Victoria’s operation.

Implementation Alternative 1: Differentiating Victoria Heavy Cranes from the competitors through custom built cranes by improving in facilities, cost reduction, corporate structure, marketing and customer service. Investment in Equipment and or Production Facility

Implementation Time: 3-‐6 months Step 1 – After a New president has been recruited, Victoria will need to have a managerial meeting to discuss the new strategies. They will also make plans to upgrade equipment and decide whether to purchase a production facility, or construct a new one.

11

Step 2 – With re-‐organization, a company meeting will be to be established to create unity once again. The different divisions will need to have structured formal meeting and cross relationships with the other departments to create synergies within. Create new targets and operating targets (sales quotas, customer satisfaction scores, operating budget, production schedules) Organization must employ effective strategy control, if they are to successfully develop and implement their strategies. Production and R&D need to meet on a regular basis to create innovated, differentiated products. Regular review projects – assign a project leader

Develop and Sustain Strong Supplier Relationships by Sales and Marketing

Implementation Time: 6-‐12 months; continuous To sustain a competitive, it is essential that Victoria market and develop strong relationships with their Dealerships and outlets. With exclusive relationships, Victoria can focus on innovated engineering and products as well training and development. Victoria could also market their ability to manufacture other components for other companies using their in-‐house manufacturing facility. They will need to emphasize production efficiencies and process engineering to lower manufacturing costs and continue expanding into global markets.

Step 1 – Develop a Management team, which works together to ensure quality performance, accountability, and strengthened relationships with current dealerships. Also strategize on Sales and Marketing processes.

Step 2 – Evaluate current dealerships to determine which avenues have been successful with obtaining our goals and whom we should pursue next. Step 3 – Communicate goals and performance to chosen dealerships and negotiate contract terms

Step 4 – Meet with dealerships on an ongoing basis for routine check-‐ins to ensure adequate quality and performance levels are being met. Maintain regular communication; the key to a successful partnership.

Align the Organizational culture Implementation Time: Immediate and continuous: With the current re-‐structuring, the company will need to relook at the internal opportunities/processes. Work with Human Resources to create processes that offer proper balance between culture, rewards and incentives.

• Implement and action performance measurements, evaluation and feedback (ex based control systems which is based on feedback from peers, customer, suppliers)

12

• Establish concrete goals for each employee so everyone knows exactly what is expected and the related time frame. Implement a reward and incentive system

• The organization culture can be strengthen and sustained by open

communication, • Which can be cultivated and encouraged. Offer divisional pep talks monthly or

quarterly (morning breakfasts)

• Encourage training and development within and create Best practices. (Training builds culture)

Appendices

Pestl Analysis

Political: The case did not talk much about environmental issues

Economical

• $945 million world mobile crane market • Victoria’s US market $360 million (15% share = $54 million) • Victoria’s Canadian market $66 million (60% share = $39.6 million) • Washington crane 30% of crane market (30% of $66 million = 19.8) • Little growth in the crane markets since 2002 • Washington crane is the industry leader with sales of $600 sales worldwide (50%

market share) • 10% decline in world cranes sales expected in 2008 due to US Subprime mortgage crisis

(i) 30% decline in North American market

Sociocultural

• The primary consumers of mobile crane industries were contractors Contractors very sensitive to down time so the machine dependency, parts and service are critical

• Price premium paid for superior service and reliability (Washington crane)

Technological

• Custom made cranes – numerous options such as on-‐site performance, precision

13

lifting capabilities, fast highway travel, and effortless city driving • A-‐100 cranes with 70 ton capacity and lift heights of 61 meters– one of its kind in

the industry • Standard cranes

International

• Not much growth in International Market

Porters 5 Forces – Crane Manufacturing industry

Threat of New Entrants (Medium)

Economies of scale • Victoria has two facilities/plants, one in Squamish and one in Sacramento, California.

They also own a distributor plant in the US – Victoria needs to update equipment in the Canadian plant.

• Increasing competition within the Industry – currently five large competitors in the

Crane business, plus two new international firms entering the industry. Capital requirements • Large monetary capital is necessary to enter the market (high overhead for

manufacturing) Access to appropriate distribution and marketing channels. • Competitors have diversified and have 100 strong dealers worldwide with 200

outlets Victoria should focus efforts on strengthening dealerships and supplier relationships through vertical integration, licensing, etc. Differential • Victoria offers product innovation, knowledge and custom design

14

(1) Pioneered the development of the motorized skidders and produced Canada’s first commercially successful hydraulic crane controls. They offer numerous options for their cranes such as on-‐site performance, precision lifting capabilities, fast highway travel and effortless city driving.

• Victoria offers tailor made cranes to customer specifications and a 60-‐day delivery

guarantee.

• Victoria is able to offer a price reduction for medium and heavy capacity custom cranes compared to their main competitor Washington. Contractors value machine dependability as well as parts and service availability over price.

• Several other companies supply the same or similar products. Some competitors

offer better service than Victoria. • Victoria offers a unique opportunity for prospective buyers to be flown in on the

company’s private jet to the production plants to see the progress.

The analysis shows product differential opportunities and excellent efficiencies of timelines of delivery.

Threat of Substitute Products –(High) • Many competitors who offer substitutes are entering the market, such as Toshio and

Sata from Japan. Washington Crane occupies 50% of the US market share and 30% of the Canadian market. Each of these companies could offer various substitutes.

To reduce the threat Victoria could focus on their current product’s flexibility, custom design and efficiency for developing new cranes. Combining multiple strategies gives Victoria a more competitive advantage. Victoria can offer differentiation and overall cost leadership. Bargaining Power of Buyers (Medium) • Contractors are very sensitive to machine dependability as well as parts and service

availability. Price is important but not the main deciding factor. • Victoria created specific agreements with the buyer/dealers to purchase 10 at a time

15

• Some of the products in the industry are standard or undifferentiated. Agreements

are arranged with the buyers • Victoria acts as their own buyer (forward integration) as they purchased a dealership

in the US to maintain power. • Bargaining Power of Suppliers – (Low) • Machine dependability and service are crucial to the contractors • The supplier of raw materials are easily substituted, Victoria can purchase small

parts from different suppliers, as there is a standard in metals, nuts and bolts. • Victoria manufactures 85% of its crane components in-‐house – backward integration • The Intensity of Rivalry Among Competitors in an Industry – (High) • There are many competitors in this industry, which increases rivalry. The intensity

will only become greater once international companies/players enter the Canadian market -‐ two companies from Japan entered in the US.

• The buyer’s choice between companies is typically based on dependability and

service. SWOT

STRENGTH

• Cost Leader In Custom Cranes • Backward integration • Differentiated product • Worlds second largest produce

WEAKNESSS

• Organizational structure • Old/Inefficient Equipment • Decentralization • Growth Strategy • Leadership • Staff Turnover • Marketing

OPPORTUNITY

• Product line expansion • New equipment • Efficient organization restructure

THREAT

• Number one on Washington capital hit list • Japanese competitors expansion • 2008 subprime mortgage crisis • Employees demotivated

16

Industry life cycle – Crane industry

Maturity to Decline Generic strategy – Differentiation overall cost leadership

• Custom made cranes • Overall cost leader (lowest cost)

Market Growth rate – Low Segments – Two – Custom crane and standard Emphasis on process design – Low Major functional area of concern – General management and finance

• Organizational structure o Victoria does this by the establishment of two cost centers for

measurement purposes

Overall objective: Defend market share and extend product cycle • Defend market share from competitors

o Victoria does this by defending against Washington Crane and Toshio • Management planning to introduce new product lines

Value Chain Analysis

Inbound logistics

• Decentralized inbound materials and parts • Scheduling of raw materials and part for made to order crane • Large inventory management for LMT1000 crane •

Operations: • Accept order of 10 cranes or less • LMT1000 not built to stock due to numerous choices • Sacramento plant produced 60 to 70 cranes per year • Canadian plant produced 130 to 150 cranes per year • Extensive backward integration to reduce price – 85% of its crane component

manufactured in house • Decentralized manufacturing activities

17

• Engineering response to manufacturing was slow and poorly coordinated

Outbound logistics • The company guaranteed 60-‐day delivery and “tailor-‐made” cranes to customer

specification • Sacramento plant exported to US market • Squamish plant catered Canadian Market • 30% Exports • Shipments to dealerships/outlets

Marketing & Sales

• A-‐100 a very crowd attraction device at equipment shows • The firm carried out little conventional advertising • It participated frequently at equipment trade show • Fly prospective customers from all over the world in Executive jet • Due to subprime mortgages in U.S and the subsequent decline in real estate and

construction there was a decline in Victoria’s sale. • International marketing cost centre

Services • Fly prospective customers from all over the world in Executive jet

General Administration

• Centralized decision making process • Middle managers lacked development • Lack of central control over spending resulted in over expenditures • The view of staff and the operating companies’ presidents varied considerably

when they discussed Victoria’s organizational evolution and the operation of the president structure

• Walters reorganized the firm by setting up separate operating companies and a corporate staff group.

o “civil war in the company” Politics and factional disputes were the rule rather than the exception

o Manufacturing and marketing staff function were eradicated with organizational restructuring

o An executive tea, was established in 2006 which included the president and head of al staff groups and general managers of all 4 division

o Executive committee held monthly meeting to discuss about profit and cost problems, handle mutual problems.

o Subcommittees handled subjects such as research and development and new product

Procurement • Decentralized procurement • Large inventory for raw material and parts procured for LMT1000 products

18

Human resource

• Fired 13 – 15 people after forward integration • The engineering group has a high turnover rate with 4 VPs leaving since 2005 • Decentralized operating company structure gave each person the opportunity to

grow and develop without hindrance of other functional executives • Centralized human resource department • 75 shop floor employees were laid off at Squamish • Worker moral suffered as a result of layoffs and profit sharing plan • Shop floor workers and the supervisory staff were disgruntled along with central

and divisional staff group Technological

• Built a crane larger than average height and lifting capacity • Centralized R&D department • New product introduced – A-‐100 (it had a 70 ton capacity and lift loads to height

if 61 metres. • New to upgrade equipment

Documents

Victoria Heavy Equipment Final- Group 1