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Case 6: K&N in the Asia Pacific

Clare Lee Li Ting (S8930447D)

1. How do you see KN s environment changing? Provide your assessment. Global integration of custom procedures for the EU The Single European Act of 1993 poses a threat to KN s Customs Clearance business as significant profits previously earned from the business are now substantially reduced. This implies that KN needs to look for new sources of revenues. However, the opening of free transit between EU membership countries gives opportunities for expansion. Free transit makes access to suppliers more straightforward, with the possible exception of highly congested transportation hubs like Germany where obtaining operating slots can be difficult especially with a more open Euro zone. Major shift in customer demands and requirements Profit margins across the traditional FF industry were in decline. Customers now emphasize on SCM and detailed product flow information and it was paramount to develop integrated SCM capabilities to generate higher margins per transaction volume. Scale-related economies, such as the ability to offer a more seamless service to a wider range of destinations, are also becoming vital in the market. Given such an emphasis on SCM, some larger MNCs have begun to backward integrate to develop their own SCM in-house capabilities. In-house logistics is the main substitute threatening third-party logistics companies like KN. This strengthens buyer power of these firms and poses a significant threat to KN s revenue. However, switching costs for buyers are high as they include cost of sourcing and staffing a new supply chain together with the administrative costs of organising air and marine transportation from third-party transportation specialists. For firms who are daunted by high set up costs, this present an opportunity for KN to step in to fulfill unsatisfied customer demand. For firms developing in-house capabilities, KN can also provide logistics consulting and IT services. New entrants to the FF industry With an increasing demand for SCM logistics capabilities, competitors from outside the traditional FF industry could enter the industry to compete for market share. Established competitors have cost advantages especially in the area of proprietary product technology - that new entrants find difficult to duplicate. The emergence of alliances and networks among small local operators and the entry of integrators imply that competitors are benefitting from economies of scale. These suggest that KN should aim towards being a holistic provider so as to compete in terms of product offerings as well as cost. Rivalry in the industry is assessed as moderate given the healthy rate of market growth. Credibility Crisis within the FF industry In the physical goods distribution market, KN may expect greater competition from substitute providers like specialist logistics providers or express courier firms as customers come to distrust FF providers for failing to deliver on their promises. This demonstrates the importance of building a credible brand lest revenue is lost to competitors who can signal credibility more successfully. Huge growth potential in Asia Pacific In the Asia Pacific, companies demand service providers that are capable of providing one-stop-shop SCM logistics services that meet their requirements for a pan-regional solution. Logistics infrastructure in Asia Pacific is currently not mature to meet burgeoning future demands. This presents a huge opportunity to KN who possesses sophisticated technologies that have not been introduced in Asia Pacific.

Case 6: K&N in the Asia Pacific

Clare Lee Li Ting (S8930447D)

2. Given such changes in the industry, what overall positioning should KN seek or what should KN do? Invest in innovation and technology to maintain position as a standard setter and holistic provider Given KN s core competencies in a wide range of specialist activities as well as IT solutions, KN should invest in building a global brand for itself in the area of integrated services. Integrated services reap the highest margin in SCM and such a first-mover investment will be rewarded handsomely in the currently underdeveloped market. KN should also fortify its traditional base in distribution and freight services by investing in new technology. KN can offer highly specialised extra services to differentiate their product to reduce buyer power in the logistics industry. Differentiation can be achieved through provision of lead time and rate information for optimal logistics planning and online tracking services for customers. Expand into Asia Pacific via cross-border strategic alliances Currently, KN is overly dependent on the European market with 69% of group regional results attributable to Europe. On the other hand, it is relatively slow to penetrate Asia Pacific. The fact that logistics infrastructure in Asia Pacific is not mature to meet burgeoning future demands presents a huge opportunity for KN, especially if it invests in technology and integrated services capability. It is proposed that KN adopts an international diversification strategy into Asia Pacific. Regional differences, various barriers of entry and risks in an international environment present a huge challenge for KN in its expansion into Asia Pacific. It is proposed that the formation of cross-border strategic alliances is extremely beneficial and necessary for the below reasons: Future powerhouses like China have governments that strongly prefer to award licenses to local companies. A cross-border alliance with a host-country firm also helps to mitigate risks as the hostcountry firm knows and understands the competitive conditions, legal and social norm and cultural idiosyncrasies of the new country. Operating costs for both parties are also reduced through sharing. Asia Pacific logistics industry lags behind the European one. It is therefore relatively easy for KN to find host-country firms who would want to gain access to KN s sophisticated technologies. There is substantial competition already present in Asia Pacific and a strategic alliance will allow KN to enter the market more quickly and with greater market penetration possibilities. Expanding into Asia Pacific provides the potential for KN to achieve greater returns on their innovations through larger and more numerous markets. Also, a strategic alliance builds flexibility and helps KN innovate faster. As KN learns about new processes and products in Asia Pacific markets, they can use such new knowledge to create further innovation. Exhibit 8 shows that KN s Asia Pacific management structure lacks cultural diversity. KN must have a more culturally diverse top management to grasp greater knowledge of international markets. For a cross-border strategic alliance to succeed, it is important for KN to choose the right partners and develop trust. It is proposed that KN chooses partners in the Trading Tigers of Singapore or Hong Kong where infrastructure is more developed with established legal and political systems in place. Diversify into related businesses to offer more holistic and seamless service to customers As customers demand more seamless logistic services, KN should diversify into related businesses like insurance brokerage and real estate. Insurance brokerage services may tailor insurance solutions for shipments while a real estate business unit can own and manage KN s logistic centers, warehouses and cross-docking facilities. As demand in Asia Pac grows, these generate substantial service and management fees. Such a related diversification corporate level strategy will also allows KN to reap economies of scope through operational and corporate relatedness.

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