Q: In the past few decades, the majority of Hong Kong’s manufacturing companies have grown from traditional small factories with fewer than 100 employees in Hong Kong to large manufacturing operations in China with more than 1000 employees. Select a company in Hong Kong that has expanded in the manner described above; and use the conceptual frameworks presented to analyse in detail the company respect to (a) what strategic direction it has taken(horizontal, vertical, diversification) and; (b) what competitive strategy the company has pursued (cost-based, diversification or focus) In your answer, please be specific with respect to strategic direction, market structure, conduct-performance analysis and strategies to be recommended.
Introduction
Hong Kong manufacturing companies have always been keen on finding ways to lower production costs in order to achieve competitive advantage not just in the domestic but also the world market. These Hong Kong companies direct operations based on the core objective of every business organization to achieve competitive advantage or gain an edge over its competitors in the industry. Competitive advantage exists “when a firm successfully formulates and implements a value-creating strategy” (Hitt, Ireland & Hoskisson 2003, p. 6). Two forms of competitive advantage exist, which are cost advantage and differentiation advantage. Cost advantage exists when the business firm is able to sell its products at a lower price relative to firms selling the same product (Porter 1998). In terms of business strategy, Porter (1980) identifies three generic strategies, which business firms may apply to establish a strong position for the firm by leveraging on its strengths. In optimizing the strengths of the firm, it is able to achieve any of these strategies: cost leadership, differentiation and focus. Cost leadership refers to being the producer with the lowest cost in the industry for a certain level of quality. Differentiation pertains to the development and production of unique products and services valued by customers. Focus refers to focusing on a narrow segment of the market and implementing either cost leadership or differentiation.
Company Background
WKK Industries, Ltd. with main office on Kowloon, Hong Kong has been in operation for more than ten years. The company provides both original equipment manufacturing and original design manufacturing services. WKK serves as the manufacturing division for customers, producing a wide array of high quality products in both small and large volumes and providing all component needs and subassembly services including packaging and shipping. Around 20 percent of the company sales are attributed to original design manufacturing. Customers communicate their conceptual designs and specifications and WKK finalizes the design and printed circuit board assembly. (Kelly & Boulton 1997)
WKK has long-term business relations with Japanese clients. The company finalized the design and manufactured Sega colour LCD games, Universal remote controllers, Casio calculators, NEC colour printer boards, and 486 motherboards, Yamaha hi-fis, cable television decoder, Seiko and Kenwood cordless telephones, Sharp’s PDA parts and CD-ROM cards, 16-bit Sega Genesis, among others. The company has been continuously ISO 9001 certified. (Kelly & Boulton 1997)
WKK has operations in Hong Kong and China, with the China factory moved to a bigger site in 1997. In China, there are five operating groups, which are digital/game, audio, and SMT as well as personnel and administration, and engineering. China operations handle production while Hong Kong takes care of research and development, quality assurance and marketing. When the Shajin factory in China was opened, WKK sent 31 managers, engineers and supervisors from Hong Kong and hired 6 managers, 58 engineers, 41 staff, and 1,679 labourers and 135 quality inspectors. The assembly operations run in one shift while the surface mount technology runs 24 hours everyday. At the time that production was moved to China in 1994, the average monthly salary of engineers in China is 5 relative to ,055 in Hong Kong while the average monthly wage of labourers in China is relative to 5 in Hong Kong. There is also a 50 percent turnover rate in China implying a huge labour pool that lowers the cost of labour. (Kelly & Boulton 1997)
Strategic Analysis of the Company
Strategic Direction of the Company
WKK strategic decision to move its manufacturing operations to China and retain the Hong Kong operations to cover R&D, quality assurance and marketing is described as horizontal integration. This type of strategic direction refers to the expansion of the business at the same level of the value chain particularly covering internal expansion (Clemente & Greenwood 1998). By moving its production operations to China, WKK was able to expand its manufacturing capacity so that it is able to meet more demand at less cost.
The internal expansion to China has benefited the company in different ways. First is through economies of scale. Through its horizontal strategic direction, the company is now able to produce more products at the same cost relative to its previous production in Hong Kong. Second is through economies of scope. WKK is able to optimize its resources not only in terms of labour but also in relation to raw materials and other resources needed in production. Third is through increased market power due to the heightened capacity of the company to meet greater demand even if the services demanded may be original equipment or original design making it an attractive firm for suppliers due to potential increase in raw material needs and customers requiring greater amounts of production for their equipment and designs. Fourth is through cost minimization since the lower cost of skilled and unskilled labour, land and raw materials in China enables the company to reduce production cost by as much as 30 to 50 percent. The savings enables the company to increase its concentration on research and development and marketing.
The effectiveness of its chosen strategy is reflected in its performance after it moved production to China and boosted its R&D capability. The SMT production unit was able to manufacture eight Yamaha products with an assembly time of .03 to .04 seconds for every component, five Kyushu Matsushita Electric product lines at the rate of .15 seconds for every component for a daily run of more than 1,500 units a day. The lesser cost of labour enabled the company to equip the factory with ten stand-alone machines to do batch production. The factory has Genrad, Tescon Point and Test Research machines for information and communications technology requirements. The Shajin factory in China also manufactures 9,000 Casio calculators everyday. WKK’s manufacturing processes adopts the management methods as well as the innovative assembly practices pervasive in Japan.
The production performance of the Shajin factory in China implies that the company can simultaneously manufacture different products for different customers, which entails the high level of innovativeness and efficiency of the company in terms of management, production processes and production resources.
Competitive Strategy of the Company
WKK applies the cost-based competitive strategy. This industry leadership strategy involves a business firm’s goal of becoming a low cost producer relative to competitors. Ideally, a business firm either can sell its products at the average industry price to gain a higher profit compared to the other high-cost producing firms or it can sell its products at lower than the average price to draw a larger market share. In the event of a price war, the business firm still gains the price advantage of the other firms cannot match its price without incurring losses so that in the long run the company still holds cost leadership. (Porter 1980)
WKK has gained cost advantage in several ways. First is through the enhancement of process efficiencies through strong management leadership and innovative organization of its factory supply chain processes. The company has both managers and engineers from Hong Kong and China to ensure continuity with improvement in the strategic management objectives of the company and the sharing of expertise. This lowers cost by minimizing mistakes that increases cost in terms of raw material wastage and manufacturing delays. Second is through access to large sources of resources or avoiding unnecessary costs. The company was able lower its cost at a significant level by incurring lower costs for the land and factory structure, labour, and other operating costs.
Through its strategies, WKK was able to maintain Japanese customers, who are leaders in their industries, as its biggest market resulting to the company’s access to technology and other innovations. The company is seeking to expand to other markets such as North America and Europe.
Recommendations
Cost-based strategy also has pitfalls. One is the possibility that through technological innovations a competing firm may be able to lower its production cost to either match the price of the company or offer a lower price levelling down the competitive advantage of the company. This risk is a challenge to all Hong Kong businesses that opted to apply cost-based strategy through outsourcing because their competitors in other regions commonly focus on technological advantage. Thus, although WKK is channelling some of its saved resources from the lowered production cost to research and development and quality assurance, it should become aggressive in attaining a technological advantage. In the long run, this would increase its capability and further increase cost. The company should also capitalize on technology sharing with its customers in terms of product development and manufacturing techniques to enhance its operations. Another risk of cost-based strategy is the possibility that competing firms applying the focus strategy would gain a hold over a specified segment of the market and maintain their market share through lower cost by operating in a narrow scope allowing them to gain expertise in the area. WKK offers production services to its customers, regardless of the original equipment or design ordered. On one hand, this is an advantage for the company because customers with specific demands can rely upon the company to deliver its particular order in bulk. On other hand, this prevents the company from honing its expertise for a particular product line, an advantage that focus-based companies have. WKK may divide its production into the manufacturing of particular products and custom-made products to boost the capability of the company to meet focused and specialized demand.
References
Clemente, MN & Greenwood, DS 1998, Winning at Mergers and Acquisitions: The Guide to Market-Focused Planning and Integration, John Wiley & Sons, New York.
Hitt, MA, Ireland, RD & Hoskisson, RE 2003, Strategic Management: Competitiveness and Development, 5th edn, Thompson South-Western, Australia
Kelly, M & Boulton, W 1997, WTEC Panel Report on the Electronics Manufacturing in the Pacific Rim, International Technology Research Institute, Baltimore, \ Maryland.
Porter, ME 1980, Competitive Strategy: Techniques for Analyzing Strategies and Competitors, Free Press, New York.
Porter, ME 1998, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, New York.
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