Hone your strategic planning skills! With planning never more critical, these exercises can help you make informed, forward-looking decisions on your business' core competencies and ancillary opportunities. (Executive Memorandum).
In the past two years, the industry has again experienced the downfall of a recession. While the recovery is in sight, it may be slow and gradual.
On top of that, last month's MODERN CASTING issue on trade stated that more than 33% of survey respondents had lost 16% or more in sales to offshore foundries over the last year. Plus, Stratecasts, Inc., Ft. Myers, Florida, estimates that casting imports will grow to meet 15% of the casting demand in the U.S. next year. Like it or not, many types of castings have become global commodities, what might be called the "floating castings" phenomenon. Labor rates, exchange rates, inconsistent environmental regulations and the absence of trade barriers have each contributed to an increase in offshore casting competition, driving production to Asia and South America. This environment has affected a consolidation that has been felt in every corner of the industry.
To a degree, such changing industry dynamics can be seen on the horizon by those keeping a watchful eye. Other changes may not be as visible; however, careful planning and scenario discussions can take some of the surprise, and sting, out of such changes.
Getting Back to the core
How do you compete in this environment? The companies that survive or even grow are the ones that plan ahead and are able to constantly adapt to change. "Survivors" regularly analyze numerous scenarios--before they occur--and have in their desk drawer a plan "A", "B" and "C." Strategic planning should be something that is continuously practiced by foundries, in good times and bad.
This article looks at one approach to "planning ahead." The strategies are developed in a three-step process, starting with defining a given firm's "core business," then identifying complementary opportunities that strengthen the core, and finally a scenario planning exercise. The scenario planning exercise helps test the robustness of the "core and adjacency" business model in future potential circumstances and allows the company to develop strategies accordingly. Some of the ideas and tools have been borrowed from the book, Profit from the Core: Growth Strategy in an Era of Turbulence, by Chris Zook with James Allen.
The authors maintain that many companies fail to grow or sustain themselves because they have diversified too far from their core business. The authors define the core by a set of related products, customers and technologies that can build the greatest competitive advantage and add the greatest value to the organization.
Unfortunately, there are business school libraries full of companies that failed to succeed because they lost focus of what they do best and most profitably. The authors feel competitive advantage is achieved by having a well-defined core business and expanding from within. Any activities outside of that focus should be closely related and either strengthen or support that core competency.
Define Your core
Defining one's core business is itself an interesting exercise. If you and your colleagues were to provide an off-the-cuff view about your foundry's "core business," some discussion might reveal it is actually something quite different.
Consider the hypothetical example, XYZ Foundry, Inc., which is shared here only as a model of how your foundry might approach the planning process. Beyond making and pouring molds, this foundry is involved in an array of functions that include in-house design of patterns and tools as well as post-casting machining and assembling. XYZ serves several markets (automotive, industrial equipment, etc.) and sells through a direct sales force to both first- and second-tier customers.
The company's founder, Mr. Z, used to work with a large automotive manufacturer and had a natural passion for engines. He started by making engine blocks and small production parts for race cars. These parts required a lot of detail work, and Mr. Z developed expertise in machining and finishing. Eventually, XYZ Foundry branched out and began producing some higher volume parts, but the bulk of its earnings still came from custom automotive parts. Along the way, the foundry developed some impressive metallurgical expertise (including some challenging special requests), thanks largely to Mr. Z's brother-in-law and partner, a degreed metallurgical engineer.
Figure 1 summarizes XYZ Foundry's specific capabilities. Each of the capabilities is highlighted by its relevance to the company's core business. The foundry's core business can be defined in terms of the products it sells, services it provides, markets and customers it serves, and its internal production capabilities. This list can then be segmented into those items that drive the business, those that are necessary and those that add no particular value. The ones categorized as "adding little value" are deemed so because the customers won't pay for it, or because they represent "points of pain" in the casting process.
The items that drive the business and differentiate it, while adding considerable value to it, represent the core. This is the set of pillars the business stands on and can further build upon. Without these capabilities, the company does not have a sustainable business.
In the example in Fig. 1, casting/ pouring, heat-treating and machining are all core capabilities that give this foundry a competitive advantage. For example, XYZ Foundry has a flexible pouring station (allowing easy schedule changes) and highly skilled people on the finishing/machining lines.
On the other hand, this company no longer possesses modern equipment nor expertise in coremaking and the handling of chemicals. Because these functions require a different skill set, this area may no longer be considered a true "core" capability.
Beyond process considerations, this foundry sells most of its castings into the automotive industry and specializes in low-volume, custom parts. Looking at this simplified example, one could come up with the core business statement: "XYZ Foundry is a preferred supplier of custom, finished and heat-treated automotive castings."
Maximize Your Core
Once the core is defined, the question is whether it is operating at its full economic potential. Is there a potential to grow this core business by doing things better and capturing a bigger piece of the market pie? Is the pie big enough to grow within the core business?
XYZ Foundry's core market consists of custom automotive parts. The capabilities and competitive advantages within the core business must be fully understood, and gaps must be identified to develop strategies and action items for the core business.
The planning process doesn't stop here, though. To really protect the core and strengthen and grow it, one needs to look outside of the box. Looking outside of the box, however, does not mean entering into unrelated "diversifications." Rather, it means examining related business areas that complement the core. Examples for this foundry might include entering other (non-automotive) custom markets, expanding its service expertise to offer "finishing work" for other foundries or even forward integration into sub-assembly.
A tool that is used to identify other complementary areas is the "spider diagram." Zook and Allen refer to this exercise as "adjacency mapping." Adjacencies are related expansions that share economics and capabilities with the core, and provide increased revenue and profit potential.
A typical foundry's business model already includes some adjacencies. It is important, however, to understand which ones support growth and which ones deter from it. In the example used earlier, XYZ Foundry makes its own patterns, tooling and cores and participates in the high-volume automotive parts market. Many more opportunities, however, could support a growth business model.
A good way to list these potential expansions is to categorize them into some general and common areas. While there are many examples, some might include functional capabilities, products and technologies, metal types, channels and geographies, backward integration, forward integration and customer segments.
Figure 2 shows an illustration of the "spider diagram" for XYZ Foundry, with the core and some possible adjacencies.
The adjacencies can be prioritized in terms of attractiveness and relatedness to the core. For example, criteria that would define attractiveness would be market size, growth potential, competitive threat (who is in the business already and how powerful are they?) and value to the customer. Highly attractive adjacencies that are closely related to the core become potential opportunities and eventually part of a growth strategy.
To take the example a step further, an attractive adjacency could be sub-assembly of custom automotive parts. This may be a niche market yet to be served by current casting suppliers. Another attractive adjacency might be to 'sell" the competency of the machining! finishing area to a new group of customers in other markets, by offering it as a specialized outsourced service.
Figure 2 shows a few other expansion possibilities. A "mini-business case" should be developed for each new opportunity to prioritize them. By the same token, there may be areas the company is currently involved in that don't add value to the core, as explained earlier, and should be analyzed again. For example, if coremaking is not one of XYZ Foundry's strengths, it may consider outsourcing some, or all, of it to clear floor space for another activity, and redirect limited resources in a way that will increase profitability.
Following this exercise, the company can reevaluate its business model and define the activities it needs to be in, or expand upon, to sustain or grow its business.
Test its Logic
The final step in this strategic planning approach is to "test" the new business concept in some possible future scenarios. Of course, these are hypothetical scenarios, but one can imagine the direction that the business world may go based on where it currently is and by making some educated guesses on the future.
What variables would have the biggest impact on the economic cycle of the casting industry? A short list of variables would likely include technology change, cost of raw materials (metals, consumables, etc.), other nations' political stability and customer preference (value).
Take, for example, technology change. Technology can change gradually and slowly (as it has in the castings industry) or it can change very abruptly (as is often the case in the electronics industry). A high-production investment casting process would be an abrupt technology change that could impact many foundries. Another important variable is customer preference: does the customer value a solution or does it only care about the product? A product is a commodity. A solution is not.
The two variables just described can be charted into two axes (Fig. 3). Along the technology axis, one would have "disruptive technology" on one extreme and "evolutionary" (gradual) technology on the other. Along the customer preference axis (call it the "y" axis), the extremes would extend from product-focused to solution-focused. Each quadrant represents a "scenario."
One scenario that could easily be envisioned is if technology remains slow moving and the customers are very product-focused. This is a commoditized world; we'll call it the 'castings mart." In this scenario, price is the main driver regardless of where the castings come from and relationships are unimportant. One way to survive in this world is to expand the product offering for the customer, the "supermarket concept." Going back to the foundry's business model, which is very custom- and solution-oriented, it might make sense to include expanding into new applications/markets as one of the strategies. Cost is important in the "castings mart," so ridding overhead for things that can be outsourced would be another possible strategy. The foundry should analyze its strengths and weaknesses in each of the scenarios and develop strategies that reduce its weaknesses.
A scenario that might put this foundry in a better competitive position is the lower right hand quadrant in Fig. 3. This scenario involves evolutionary technology and solution-focused customers, called the "comfort zone." There is an important service component in this situation. Working closely with the customer can indeed differentiate a foundry from others. This scenario certainly fits XYZ Foundry's business model of providing specialized castings. A growth strategy might be to expand services into third-party machining and finishing, resulting in a new service for current and potential customers.
Another possible scenario is described as the "solutions" scenario. Technology can change fast, and customers focus on solutions and innovation. How would the foundry survive (with an unchanged business model) if a competitor arose with a better casting process to handle specialized parts? Well, XYZ may not survive, but it could provide a new solution to customers through services such as subassembly of parts. Again, this could provide a new growth area and one that the foundry can better compete.
Finally, the fourth quadrant describes a scenario of rapid technology changes and customers that are only concerned with the final product--a very R&D-intensive world. For the foundry, the strategy would be to outsource certain activities to reduce overhead costs, and potentially getting into casting of other metals, such as magnesium. To do so, it would have to focus its technology know-how into new areas, such as new metals.
A Never-ending Process
Figure 4 shows a summary of the outcome of XYZ Foundry's strategic planning process, and how its strategies might help the company survive and grow in the potential business environments described.
This planning process is certainly not static and should be an ongoing event. Strategies must be revised and adapted as the external environment changes. A robust business model is one that can be adapted quickly to a new environment. This is one approach of a strategic planning process--there are many other ways of doing it. Strategic planning is important and, as stated earlier, should be done in both good times and bad.
For More Information
Profit from the Core: Growth Strategy in an Era of Turbulence, Chris Zook with James Allen, Harvard Business School Press, Boston (2001)
About the Author
As market development manager for Ashland's Foundry Products Div., Ruben Bake is responsible for assessing and developing the division 's new growth opportunities. A mechanical engineer with a master's in business administration, he recently facilitated a new strategic planning process at the foundry supply company, which incorporated some of the thought processes shared within this article.
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|Date:||Oct 1, 2002|
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