The Labyrinth Gladiator 2010

8/8/2019 The Labyrinth Gladiator 2010

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Xavier Institute of Management, Bhubaneswar

in association with

presents

THE LABYRINTH



GLADIATOR 2010

INSTRUCTIONS

1. The case solution should not exceed 2000 words in total. This is exclusive of all

exhibits and appendices if any.

2. The front page of the answer document should contain

a. Full name of the participant

b. Name of the institute of the participant

c. Email id (primary and alternate)

d. Contact number

The details of the participant should not appear anywhere in the case solution

except the first page.

3. You are to submit the answers to the questions in the form of a Word

document (.doc or .docx format) with the following naming convention:

Gladiator10_Participants Name_Institute Name.doc(x).

4. The duration of this round is 150 minutes. Your answer document must be

emailed to us at [email protected] before 01.30 hrs (October 28, 2010). Late

submissions will not be considered for evaluation. 5. The results of this round will be announced within 48 hours after the

completion of the round. The decisions of the organizers will be final and binding

on the players regarding all matters.

In case of any queries, please feel free to contact:

o Debojyoti Srimani: +91-9776295420 ([email protected])o Suvendu Panda: +91- 9439177529 ([email protected])

Best of luck!!



GLADIATOR 2010

Suzuki Auto (SA) - Time to Change

MUCHhas been written about the importance of market focus in recent years, and

justifiably so, since global corporate managers have come to realize that how they applyand adhere to this critical strategic and market-planning concept can make or break theircompanies, to say nothing of their careers. There is no better example of just howimportant market focus is than the case of Suzuki Auto, which has been devastated becauseof a complete loss of market focus in their corporate portfolio. SAs unfolding failure and itscascading impact on various stakeholders have been accompanied by a deluge of comments, literature and media reports. As a result, a still-growing mythology has sprungup to explain the fundamental causes of the failure of Suzuki Auto.

The major myth is that SA is just one more victim of the current global downturn. It is amyth that has been propagated and, lamely and lamentably, offered as the cause of thecompanys troubles by none other than the corporations CEO. What exposes us to failurenow is not our product line-up, or our business plan, or our long-term strategy, said theCEO last fall, before a Congressional considering whether to offer bailout money. What exposes us to failure now is the global financial crisis, which has severely restricted credit availability and reduced industry sales to the lowest per-capita level since World War II.

Such denial withstanding, the reality is that the last five years have been financiallydevastating for SA. However, the fact is that, during this time, highly market-focusedcompetitors like Toyota and Honda have had solid net cash flows. This points to the

purpose of this article, which is to identify and explain the real and central cause of SAsfall, namely the loss of market focus across the many different portfolio levels in thecompany. These levels include the portfolio of divisions, brands within divisions, modelswithin brands, the physical and cosmetic variations among models, market segments,dealers and suppliers. The article will argue that the major problem with SA is a deeplyimbedded, long-held misconception about the real meaning of market focus and its criticalconnection to cash flow creation. Historically, SAs financial metrics have focused ongrowing market share and revenue, rather than on creating and sustaining positive net cash flow. However, the loss of market focus on the scale and scope of SAs will, in the longrun, inevitably lead to huge cash losses.

It is important to understand that the loss of market focus at any of the above-mentionedportfolio levels has a cascading effect and impacts all the other levels. This corporate, multi-level, cross-portfolio loss of market focus has had a devastating effect on the capacity of SAto generate positive net cash flow. In fact, over several years it has resulted in the onceunthinkable: Suzuki Auto is running out of cash, desperately seeking government support and considering bankruptcy.



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To understand why SA has failed, it is critical to understand what market focus means tomarket planning and strategy at every portfolio level in SA, and its critical connection to thegeneration of positive net cash flow. Without clearly understanding and connecting thesepieces of the puzzle, it becomes impossible to understand the real reasons for SAs failureand the few options for turning the corporation around.

What is market focus?

Market focus represents the capacity of managers to constantly -- and with clinicaldetachment -- focus the critical cash and human resources of a company and its portfolioonly on market opportunities that can create and grow long-term, positive net cash flow.This means that managers and teams must make the tough choices of where to competeand to not compete. It means quickly exiting market segments and opportunities forproducts, services, and technologies where it just isnt possible to create positive net cash

flow. There are many examples of companies whose market and strategic planning processesand culture are highly market-focused. General Electric, Wal-Mart, Sony, Toyota, Honda,and Microsoft are a few examples. All of these companies have track records of drivingmarket focus toward opportunities where they can create both wide buyer choice and highcash flows. They also share the clear ability to quickly exit market opportunities that cannot create high, long-run net cash flow.

A critical aspect of market focus for these leading companies is their capacity to deal withmarket and economic downturns of the kind we are currently experiencing. In growth-

market situations, market focus is critical for moving resources to support high cash-flowopportunities. In declining markets, it is even more critical in withdrawing resources awayfrom supporting cash losers. In the case of Toyota for example, even though it is currentlysuffering a car sales downturn and short-term cash losses, the companys historically highdegree of market focus has left it with high cash reserves to buffer the impact and lowernegative cash-flow impact of declining car sales. Not so for Suzuki Auto, whose legacy of annual cash losses in high-growth, car-market years has left it with little or no cash to dealwith the downturn.

As is the case with most powerful management concepts, market focus and its implicationsfor the corporate portfolio, market planning, corporate strategy and cash flow is a simple

concept. Nevertheless, it is a concept that is misunderstood by many of the seniormanagers with whom I have worked. In reality, market focus is extraordinarily difficult toachieve and sustain. It is, in fact, impossible if the management culture of a company doesnot understand, embrace, and practice it on a continuous basis. Suzuki Auto clearlyrepresents such a company and culture.



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Suzuki Auto

Like most other large corporations, Suzuki Auto has an enormous and complex multi-level,interconnected corporate portfolio. Nested in the corporate portfolio are portfolios of

divisions, of brands within divisions, of models within brands, of cosmetic and mechanicalvariations within models, of market segments, of manufacturing plants, of supply chains,and of dealers. This corporate portfolio is currently operating out of control, with acrippling loss of market focus that has been occurring at every level of the portfolio, andwith high and growing cash losses occurring over several years. Incredibly, SAs web sitecurrently lists a product portfolio of over 95 cars! To underline the seriousness of SAsmarket-focus problem, we need to understand that recent indications are that it plans tolaunch 19 new vehicles by 2010 (The Automotive Lyceum,March 3, 2009). Recent estimates(The Canadian Press, January 2009) are that SA burned through $6.2 billion of cash in thelast three months of 2008, and lost $30.9 billion for the year 2008. In 2007, SA is estimatedto have lost $38.7 billion. But it still had hopes on Magnus Opa which the marketing team of

SA considered to be a star. Magnus Opa was already one among the top 5 cars with respect to sales for SA. It acquired ten percent share of the 1 million cars sold in North Dakota.Market focus demands the existence of two critical conditions if planning and strategy areto be successful the creation of car market-segment shares, and the creation of car-positive cash flow. Without both of these conditions, market planning and strategy will fail.

Two conditions for market focus

1. Creating car market segment share

Every level of the corporate portfolio must create, support, and sustain customer choice

and market share for every car in the portfolio. If any level of the portfolio is not supportingcustomer car choice, fast action must be taken to quickly turn the strategy around,reallocate resources being used to pursue the strategy, shut the initiative down, or sell orexit the situation. This means that every car in the portfolio of cars that SA markets must create high market share in the market segments in which it competes. SA cannot afford tomarket cars that sell in small numbers or that compete in very small, specialized market segments. Then again, high market shares of particular segments are not nearly enough tosupport a market-focused company. Every SA car must also create and grow long-run net cash flow from these market shares.

2. Creating car positive net cash flow

Creating customer choice and market share in leading market segments is useless unlessevery SA car in the portfolio is creating high and growing net cash flow from that market share. It is very evident that recently, many corporate managers have begun to regard thegeneration of real cash flow as the only valid and incorruptible financial metric for makingmoney. At the same time, these managers have begun to pay less attention to historicalmeasures of profitability and even less to traditional metrics of financial success, likereturn on investment (ROI), return on equity (ROE), EBITDA, and the like. Many of these



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traditional metrics have turned out to be misleading and illusory, primarily because theydo not account directly for the negative cash flows required to service debt. In the current global financial collapse, this reality is coming home to roost; all negative cash flows must be accounted for, not just left in the denominator of a return calculation.

Market focus in SA means that every existing or new car in the portfolio must producelong-term, net cash flow and high market share in those segments in which it competes. It is very difficult to create these two critical conditions necessary for market focus. Manyexamples can be found of cars that achieve significant customer choice and market share,but lose cash. One example is SAs Saturn Division, a major cash flow loser, which will beexplored later.

Market focus and cash flow: How cars really make money

The most fundamental market focus question is: How do cars make money? You would think this would not be a problem for SA; after all it has literally thousands of accountants, finance majors and MBAs from the finest business schools! Yet how do youexplain their failure to predict the inexorable slide into huge cash losses? To answer thisquestion, it is critical to understand how individual SA cars and the SA corporate portfoliogenerate real net cash flow and create the conditions that make this happen. The cash flowdynamic for an individual car is shown in Exhibit 1. As shown, there are only sixfundamental drivers of net cash flow for any car in the SA portfolio. These factors are:

y Market segment share (percentage of car units) y Market segment size (number of cars/year) y Car unit price (dollars/car) y Car unit variable cost (dollars/car) y Fixed cost negative cash flows (dollars/year) y Investments negative cash flows (dollars /year)

Working in combination, these six factors define and drive the positive and negative cashflow drivers for any car. Together, they combine to determine whether a car will producepositive or negative net cash flow over time.

Car-positive cash flow

As shown in Exhibit 1, CAR POSITIVE CASH FLOW = CAR UNIT SALES x UNIT M ARGINS

for a particular car. It is critical to note that positive cash flow has nothing to do withannual revenue for a particular car. Conceptually, it is easy to see what a high, positive-cashflow car must do, namely sell a lot of cars at high unit margins. For example, Toyota Camrysells around 400,000 cars per year at solid unit margins. It is a high positive net-cash-flowproducer in the mid-price sedan market segment. This segment will be explored later.



GLADIATOR 2010

How are high unit sales created? As shown in Exhibit 1, CAR UNIT SALES = M ARKET

SEGMENT SHARE x M ARKET SEGMENT SIZE. In order to sell a lot of units, a car must have a significant market share of the large market segments. One example is the ToyotaCamry, which has a high market share of the mid-priced sedan market, one of the largest market segments. To create high unit sales for a particular car, a car maker has to be

concerned about the unit size of market segments, and what share of the segment will becritical for making some positive cash flow.

Car unit margins

Creating cars with high unit margins is a difficult factor to manage in the cash flowdynamic. These unit margins represent the dollar difference between car prices at thefactory level and the unit variable costs of manufacturing the car. CAR UNIT M ARGIN =

CAR PRICE UNIT VARIABLE COSTS. Setting factory and dealer retail prices for a

particular car can be controlled to some degree, but managing unit variable costs is muchmore difficult, since most car companies, including SA, make extensive use of outsourcingand supply chains for the thousands of parts that go into a car. Creating and sustaining highunit margins for each SA car is very difficult to control, especially with a large portfolio of cars.Majority of the SA Cars apart from the other examples given in the case had a variablecost of 70% of the price of the car and an adhoc cost of 20% of the price for the first half amillion cars sold. Also a fixed cost of 5 million dollars which is apportioned for every carsold up to the first 1 million cars. The price of Magnus Opa was the lower limit of the highpriced sedan segment which was a bit different to the rest of the SA cars.

Looking at these positive cash flow factors in total, we can see that a high, positive-cash-

flow car is one that produces a high level of car unit sales with high unit margins. Needlessto say, it is difficult for every car in the portfolio to generate high positive cash flow. But it isabsolutely critical from a market focus perspective.

From such a perspective, a winner profile car is one that has:

y High market segment share y In a large market segment y With attractive competitive car prices y And low variable costs y And high car unit margins y And low fixed costs per car y And low investments negative cash flows per car

Looking into the future, we can see that the much-touted Chevrolet Volt electric/gas hybridcar, for example, is likely to exemplify this loser profile. I predict that it will lose a lot of cash for SA. Estimated variable costs of producing the Volt are rising. A recent estimate of the cars unit manufacturing costs is $48,000 (F uturePundit , April 7, 2008). As a result, the



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Volts estimated retail prices are rising. The likely outcome is slim unit margins, low unit sales and low market share, mainly because of the high prices.

In the case of the Volt, the market segment for a high-priced, limited-range, electric/gashybrid is tiny. Moreover, Volts real dollar per-year operating cost savings for lower-

mileage car drivers over alternative, much cheaper gas, diesel, and gas/electric hybrid carsare marginal at best. SAs investments in the exotic battery and manufacturing technologiesinvolved will be very high, as will be the fixed manufacturing costs per car, given the likelylow unit volumes. Volt was a niche concept introduced by SA. Competition for such carsgenerally existed in the lower price category .SA was unsure to what segment Volt would fit into. But there was a requirement for high initial investments and a considerable amount of marketing to push the concept. They used a lot of online marketing and stealth advertisingin a lot of Hollywood movies which bumped put their marketing cost as well. As it was highpriced compared to other cars in its category SA would decrease the price post launch tomake sure that it draws in more customers and hoping that once the customers used theproduct word of mouth would generate more popularity.

In the case of Saturn, which was launched in the 1990s, the original concept was to create anew SA Division to prove that SA could compete with Toyota and Honda in the low-pricedmarket, (Cars in segments 13 and 14 in Exhibit 2). At the time, SA had a long and dismalhistory of losing cash flow in the low-price market segment, a legacy of marketing a longseries of cars of frequently poor quality and reliability (Chevrolet Corvair, Chevette, andVega for example). The following market-focus profile emerged for Saturn:

y Relatively high market segment share, driven by low price, and a made in the USAmarket position

y In relatively large market segments (Segments 13 and 14) y Fairly high unit sales (About 200,000 cars per year)

y Relatively low prices compared to Toyota and Honda y Very high variable manufacturing costs, driven by an exotic metal and plastic

composite body, exotic new manufacturing and process technologies in a brand newplant in Tennessee, and the choice to manufacture most of the major Saturn basicdrive train components in the new plant, rather than outsourcing them, or accessingSA parts bins.

y Very high investments due to the above, meaning very high negative cash flows percar to fund these investments

As a result of these cash flow dynamics, Saturn had lost about $15 billion by 2004.(Fortune, December 13, 2004). From a market-focus perspective, the likelihood of losingthis amount became evident very early in the Saturn development process. In a market-focused company, the project would have been stopped, but not in SA. Recently, SA hasfinally acknowledged that the Saturn has failed. SA is now deciding what to do with theSaturn division.



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Car-negative cash flows

As shown in Exhibit 1, negative cash flows for car manufacturing include the entire set of manufacturing fixed costs and the negative cash flows to finance the investments to

produce the cars. These fixed costs and investment negative cash flows can be dramaticallydifferent between cars, manufacturing and outsourcing plants, process and product technologies, countries, and market segments. From a manufacturing point of view it iscritical to minimize these fixed costs and investment-negative cash flows per car produced.In other words, it doesnt help to have low variable costs per car if the fixed costs andinvestment-negative cash flows per car at a particular manufacturing facility are very high.The ultimate objective of car manufacturing is to minimize the total dollar-delivered cost tomanufacture each car.

As an example of how market focus and its connections to manufacturing costs can bewrongly perceived, a recent UAW report (S olidarity , January/February 2009) proudly

boasted of the high productivity of some union auto plants based on lower labor hoursper car. This conveys a very misleading concept of productivity, and it is largely irrelevant.To a market-focused automaker, the highest productivity point of car manufacture iswhere the total delivered dollar cost per car is minimized. In other words, if labor is cheap,the total number of labor hours per car becomes less important to minimizing carmanufacturing costs.

Competitive carmarket segments: Choosing market focus

The most critical market focus choice for any automaker is to decide in which car market

segments it wants to compete. A simplified map of the competitive car market segments isshown in Exhibit 2. As shown, there are at least 18 basic market segments in which tocompete. This has huge significance for any car maker. Even if an auto maker positions andmarkets just one car in each market segment, it means that they require a minimumportfolio of 18 cars. This raises the question of why any auto maker would want to market more than one car in each segment. Indeed, there are many car companies that onlycompete in a few of the 18 market segments.

From a market-focus perspective, more successful car companies (Toyota and Honda) havepositioned themselves to compete with highly market-focused cars in segments where theycan create and sustain high and growing net cash flow. Examples abound when exploringthis segment map. For example, Ferrari competes only in segment 6 and Rolls-Royce onlyin segments 1 and 2. Mercedes-Benz competes in segments 1, 2,5,6,7,8,10, and 12. It isevident from Exhibit 2 that any company with a product portfolio that has two cars in everysegment would have 36 cars in their portfolio; three cars in each segment would result in54 cars.SA has over 95 cars in its product portfolio! Quite clearly, the companys carportfolio has grown out of control.



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By examining this segment map, it is clear that for SA, having multiple vehicles in manydifferent segments has the potential to destroy market focus by fragmenting segments.There are many other dangerous effects of such strategies!

Critical market focus choices: The SA multi-level corporateportfolio

Suzuki Autos portfolio exists at several different levels: portfolio of divisions; portfolio of brands within divisions; portfolio of models within brands; brands, models and priceranges, and mechanical and cosmetic variations. Let us examine each.

Portfolio of divisions

Unlike many other automakers, SA has five major car divisions: Chevrolet, Pontiac, Buick,

Cadillac and Saturn (not counting Saab, and the recently shut down Oldsmobile Division).When you consider these divisions and the competitive market segments outlined, it appears that several possible market focus choices are possible. One obvious one is for thefive different SA divisions to focus on different market segments. In the history of SA, thiswas essentially true for many years.

However, over the years, this market focus at the divisional level has completely unraveled.Over time, and for a variety of reasons, each SA division has offered an expanding array of brands, physical platforms and models across many of the 18 market segments. As a result,a huge divisional and cross-divisional replication of cars in many of the market segmentsoutlined now occurs. For many of these market segments, SA now competes with itself for

market share and cash flow.

Brands wit hin divisions Within each division, SA has always been able to choose which cars to have in the portfolio.Over the past years, SA divisions have begun positioning more and more cars in different segments across this potential market The examples of mid-price sedans will be used laterto demonstrate the loss of market focus and its impact on cash flows.

Models wit hin brands Within each of the major divisions, SA markets a number of brands and models. Not only isthere a significant number of different brands and platforms within each division, but theplatforms are often used to create rebadged replicate cars within and across divisionsthat are essentially the same physical car, replicated at the same price point across otherdivisions. This rebadging merely magnifies the absence of market focus.



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Brands, models and price ranges Another indication of SAs loss of market focus is its habit of having wide price-bandoverlaps within a division and across divisions. Within divisions, there are many different SA car brands and models whose prices at retail (with different cosmetic and mechanical

options) cut across each other, so that the top-end, fully-equipped car of one brand ishigher-priced than a stripped version of another car brand. This has the potential tocreate huge price confusion among buyers.

Moreover, price band crossing occurs not only within a division, but also across divisions,mainly because of the replication across divisions. In Toyota, if you have about $25,000(Canadian) to spend, you can only buy two or three different vehicles. Across SAs divisions,you can buy many different cars and variations of them for $25,000. The car buyer with$25,000 to spend is definitely confused as he or she tries to cope with the huge SA brand,model, and dealer portfolio. This is not true of many of SAs major competitors, particularlyToyota and Honda. Mechanical and cosmetic variations

Even within a particular brand and model, SA often offers a great number of variations andoptions, mechanical and cosmetic. For most of its cars, Toyota offers two basic enginechoices, a V6 or an inline four cylinder engine. In some SA divisions there are many moredifferent engine choices, some manufactured in SA and others from different outsourcesuppliers. There are also many more mechanical options and model variations. This meansthat the SA portfolio is even larger than 95+ cars, , when you look at the total number of cars, variations, price ranges, brands, replicates, and dealers within five major divisionsand between them.

Market focus f ailure in SA: Portfolio, proliferation and replication

SAs portfolio proliferation has now been detailed, from the number of portfolio divisionsto the number of portfolio brands, models and rebadged replicates within and acrossdivisions, to the brand and model price ranges and overlap to the huge number of brandand model cosmetic and mechanical variations. This amounts to out-of-control portfolioproliferation, a fragmentation of market segments and car product positions, and acomplete breakdown of market focus. Such a proliferation has huge impacts on a largenumber of factors that affect SAs cash flow and competitive performance.

SA versus Toyot a: The example of mid-priced sedans Looking at the overall SA portfolio, we see that SA currently competes in most of the 18segments described in this article. However, the company has multiple competing vehiclesin many market segments, and many of these are cross-divisional rebadged replicates.For example, let us explore mid-priced sedans, which are segment 8 (Exhibit 2). Here, SAsloss of market focus stands in stark contrast to Toyotas very high market focus. In the case



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of Toyota, the Camry brand is their market-focused basic entry in this market segment.Further, the Camry has only two engine options, and a very limited number of choices of cosmetic and mechanical options, which are organized into very clear packages. Bycontrast, virtually every one of the five divisions of SA has car offerings in segment 8 (not tomention SAAB). The following SA cars are positioned in segment 8 by division.

y Chevrolet Malibu y Chevrolet Impala y Pontiac G8 y Buick Allure y Buick Lucerne y Cadillac CTS y Saturn Aura

This loss of market focus in SA is replicated in many other market segments. The differencein market focus is not just slightly different than Toyotas, but dramatically different. Theimpact of this huge portfolio proliferation, replication and loss of market focus has a large,complex, and interrelated set of negative effects on cash flow, which will now be outlined indetail.

Market focus loss: Impact on SA cash flows

The ultimate objective of market-focused strategies is to create and sustain high andgrowing cash flow over the long term. Over the last few years, SA has clearly been movingto a devastating cash position, the result of years of negative net cash flow. As a result, SAs

cash needs have now grown to the point where the company needs government money tosurvive. While it is true that Toyota and Honda are also currently having short-term cashflow difficulties, they do not have SAs history of cumulative cash flow losses. Their highdegree of market focus has paid off, not only in producing reasonable cash flow, but inminimizing their cash losses when global markets turned down.

Making reference to the cash flow dynamics (Exhibit 1), we can explore how the loss of market focus and multi-level corporate portfolio proliferation in SA hurts every majordriver of the cash flow dynamics, including their impact on unit sales, unit margins, unit market share, unit prices, market segments sizes, and unit variable costs, fixed costs, andinvestments. These will now be outlined in detail. Impact on SA market segment share and segment size

SAs portfolio proliferation, as exemplified by the proliferation in segment 8, has a dramaticimpact on the drivers of SA cash flow.

y Segment 8 is a large-market segment, but only if you attack it with one market-focused car. When SA fragments the segment by offering seven different cars, they



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effectively reduce the size of the segment open to each SA car. The impact of this isto dramatically increase the market segment shares that each SA car in segment 8must have to create positive cash flow.

y Given the number of SA mid-priced sedans in this segment, most cannot sustainhigh-enough market share to drive positive cash flow. This tends to reduce unit

sales of many of the SA cars. But, worse than that, the fragmentation willdramatically affect other costs, as will be discussed later.

y This proliferation dramatically increases the number of market segments that SAeffectively competes in by fragmenting the segments.

y SA vehicle proliferation and replication cause many price-range crossovers betweenmany SA cars, which can confuse many potential buyers A potential car buyer with$25,000 to spend on a mid-priced sedan is faced with one clear offering from Toyotaand one clear one from Honda, but a huge offering of at least seven cars from SA. Inaddition, there are many price range crossovers between cars that SA offers insegment 8, and cars it has in segments 2 and 14.This means that car buyers with$25,000 to spend could be faced with the task of choosing a top of the line modelof one SA car in segment 14 and the entry level of another SA car in segment 2.

y The end result is that many SA cars are attacking the same car buyers and market segments, which increases the size of the market share needed before a particularvehicle can create good unit sales and positive cash flow.

Impact on SA Unit Margins, Unit Prices and Unit Variable Costs

The segment fragmentation described above has huge potential effects on unit margins,unit prices and unit variable costs.

y In the fierce competition between five SA divisions in segment 8, pricing, pricecutting, rebates, cash backs, and a variety of other dealer pricing and discount dealsbecome more extreme as SA divisions fight each other for market share in thesegment. This competition between different SA brands tends to drive SAs pricesdown and have a devastating effect on car unit margins.

y When you combine the above effects of lowering SA car unit margins with themarket share fragmentation outlined, it becomes clear why so many SA vehiclesstruggle to make any real money (net cash flow).

y The effects of brand proliferation on car unit variable costs are equally devastating.Using the example above, producing and marketing the seven cars in segment 8means complex and fragmented manufacturing, huge increases in the number of

different parts, platforms, engines, and transmissions, both of which drive up theunit variable costs of producing each car and dramatically reduce unit margins. y The combination of pressure on prices plus the escalation of variable costs caused

by segment and manufacturing fragmentation is potentially devastating. Bycontrast, Toyota competes with only one car in segment 8 (Camry), and it sells about 400,000 cars a year. Its high degree of market focus yields lower car unit variablecosts, and therefore higher unit margins for the reasons outlined above. It alsoresults in high positive net cash flow for Camry.



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Impact on suppliers and supply chains

Exhibit 3 shows a simplified outline of SAs supply chains, in which there are many

different parts suppliers, component and module suppliers, vehicle assembly plants, cardealers, and car buyers. SAs loss of market focus has not only affected SA directly; it alsohas potentially devastating effects on some SA assembly plants and outsourced parts,components, and modules outsourced suppliers.

For every company in the SA supply chain, the cash flow dynamics are structurally thesame as for SA itself, as shown in Exhibit 1. Each supply-chain company wants high-unit volume, high-margin parts to drive their positive cash flows.

SAs fragmentation of car market segments, manufacturing, and supply chains leads tolower volumes per part, which is very tough on the parts suppliers involved. The loss of

market focus has some of the following impacts on design, manufacturing and supply-chainchoices:

y Loss of market focus extends new SA car design, redesign, manufacturing andmarket entry cycle times. With too many new-vehicle market entries (19 new carsplanned by 2010) and car upgrades and redesigns, the amount of corporateresources allocated per vehicle becomes very limited, with potentially seriousimpacts on car quality.

y Proliferation dramatically increases the number of car parts, which increases thenumber of parts plants and suppliers. This increase in the number of car partsmakes quality control much more difficult, especially given the many suppliers that have to be managed.

y Proliferation dramatically increases the number of car assembly plants, whichreduces the car volume per plant, which drives costs up, making plant capacityutilization difficult to manage.

y Proliferation also increases the need for greater supplier capacity and variety, andincreases the cost and complexity of managing suppliers. Portfolio proliferationincreases the difficulty of designing, manufacturing and managing vehicle quality.

y It also increases the human resource and management headcount, and creates hugetask and role redundancies in the overall corporate and divisional management,facility, equipment, and staff support infrastructure, which all leads to hugeinefficiencies and increases in fixed costs. Some evidence of this can be found in SAsrecent announcement that it will cut 47,000 people from its world-wide workforce.This reduction speaks volumes about the redundancies in the overall corporatemanagement infrastructure caused by the loss of market focus.



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Exhibit 2 Major Car Market Segments

Exhibit 3 Car Market : SA Supply Chains

Questions to solve:

A. Find t he cash flow generated f romMagnus Opa.Mention a few steps t hat SA could

adopt to generate positive cash flows for its cars.

B. Do you t hink Volt would be a success story for SA? If yes/no give appropriatereasons.

C. Given a f ree run of t he organisation, how would you go about developing a model

t hat could save SA?

The Labyrinth Gladiator 2010

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