Sona School of Management, Salem

IFM-8th September 2009

Case study Corporate Strategy and FDI Instructions This is a group assignment and is part of evaluation for continuous internal assessment. The number of members in a group cannot exceed four. Read the case and try to prepare a power point presentation outlining the response of the group in respect of the questions provided at the end of the case. Ensure that the response arises out of a consensus opinion after group discussion. Spend about 1 hour to read and discuss the case and another 30 to 45 minutes to prepare the responses. The presentation material is to be forwarded to sreeraman.venkatesan@gmail.com by 4 p.m. positively. In case of any clarification, you may ask Ms. Dhivya to get in touch with the undersigned.

The US Tyre Industry Gets Run Over The U.S. Tyre industry illustrates the troubles faced by multinational firms that have lost their source of differential advantage. Although Europe had once been a profitable market for the Big Four U.S. tyremakers Goodyear, Firestone, Goodrich and Uniroyal each of these firms has, by now, partially or completed eliminated its European manufacturing operations. The reason is the extraordinary price competition resulting from a lack of unique products or production processes and the consequent ease of entry into the market by new firms. Moreover, these firms then faced well-financed challenges in the U.S. market by, among others, the French tyre maker Michelin, the developer of the radial tyre and its related production technology. Uniroyal responded by selling off its European tyre-manufacturing operation and reinvesting its businesses that were less competitive there (and, hence, more profitable) than the tyre industry. This reinvestment includes its chemical, plastics and industrial products businesses into Europe. Similarly, Goodrich stopped producing tyres for new cars and expanded its operations in polyvinyl chloride resin and specialty chemicals. In 1986, Uniroyal and Goodrich merged their tyre

MBA-Trimester IV-Batch 2008-2010

Sona School of Management, Salem

IFM-8th September 2009

units to become Uniroyal Goodrich tyre, selling only in North America. Late in 1989, its future in doubt, Uniroyal Goodrich sold out to Michelin. The previous year, 1988, Firestone sold out to the Japanese tyremaker Bridgestone, the largest Japanese tyremaker. The deal covered Firestones world wide operations. Like other Japanese companies that preceded it to the U.S., Bridgestone was motivated by a desire to circumvent potential trade barriers and soften the impact of the strong yen. The move also greatly expanded Bridgestones customer base, allowing it to sell its own tyres directly to U.S. automakers, and strengthened its product line. Bridgestone excelled in truck and heavy-duty-vehicle tyres, while Firestones strength was in passenger-car tyres. But beyond these facts, a key consideration was Bridgestones wish to reinforce tyes with Japanese auto companies that had set up production facilities in the United States. By 1992, these companies, either directly or in joint ventures with U.S. firms, are scheduled to produce about 2 million vehicles annually in the United States. Firestone also contributed plants in Spain, France, Italy, Portugal, Argentina, Brazil, and Venezuela. Thus, Bridgestones purchase of Firestone has firmly established the company not only in North America, but in Europe and South America as well. Formerly, it had been primarily an Asian firm, but had come to acknowledge the need to service Japanese automakers globally by operating closer to their customers production facilities. The increasing globalization of the automobile market has prompted vehicle producers and tyremakers alike to set up production facilities in each of the three main markets North America, Western Europe and Japan. Two main factors have been responsible for this trend toward globalization transport costs are high for tyres, and, as a result, exporting has ceased to be a viable long-term strategy for supplying distant markets. For another, shifting manufacturing overseas was the only way for the tyre companies to meet the logistic challenges posed by the adoption of just-in-time manufacturing and inventory system by automakers.

MBA-Trimester IV-Batch 2008-2010

Sona School of Management, Salem

IFM-8th September 2009

A series of combinations in the tyre industry including Sumitomo Rubbers purchase of Dunlop Tyres European and U.S. operations, Pirellis acquisition of Armstrong Tyre and Rubber, and Continental AGs acquisition of General Tyre and Rubber and its subsequent joint venture with two Japanese tyremakers practically forced Bridgestone to have a major presence in the important American market if it were to remain a key player in the United States and worldwide. Absent such a move, its Japanese competitors may have taken Bridgestones share of the business of Japanese firms producing in the United States and Europe. This result would have affected its competitive stance in Japan as well. A similar desire to increase its presence in the vital North American market was behind Michelins 1989 acquisition of Uniroyal Goodrich. For Michelin, the addition of Uniroyal Goodrich provided entry into private-label and associate-label tyre markets from which it had been absent, as well as added sales to U.S. automakers. Having read this, consider the followingGoodyear Tyre and Rubber Company, the worlds number-one tyre producer before Michelins acquisition of Uniroyal Goodrich, is competing in a global tyre industry. To maintain its leadership, Goodyear has invested over $1 billion to build the most automated tyre-making facilities in the world and is aggressively expanding its chain of wholly owned tyre stores to maintain its position as the largest retailer of tyres in the United States. It has also invested heavily in R&D to produce tyres that are recognized as being at the cutting edge of world-class performance. Based on product innovation and high advertising expenditures, Goodyear dominates the high-performance segment of the tyre market; it has captured nearly 90% of the market for high-performance tyres sold as original equipment on American cars and its well represented on sporty imports. Geography has given Goodyear and other American tyre manufacturers a giant assist in the U.S. market. Heavy and bulky, tyres are expensive to ship overseas. Required A. What barriers to entry has Goodyear created or taken advantage of? B. Goodyear has production facilities throughout the world. What competitive advantages might global production provide Goodyear? C. How do tyre-manufacturing facilities in Japan fit in with Goodyears strategy to create shareholder value? D. How dill Bridgestones acquisition of Firestone affect Goodyear? How might Goodyear respond to this move by Bridgestone?

MBA-Trimester IV-Batch 2008-2010