STRATEGY ANALYSIS OF A COMPANY

DISTRIBUTOR OF INDUSTRIAL EQUIPMENT

by

Andrew Yamshchykov
SFU EMBA2006

PROJECT SUBMITTED

IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

In the
Faculty
of
Business Administration

EMBA 2006

© Andrew Yamshchykov 2006

SIMON FRASER UNIVERSITY

Summer 2006

All rights reserved.  This work may not be reproduced in whole or in part,
by photocopy or other means, without permission of the author.



APPROVAL

Name:        Andrew Yamshchykov

Degree:        Master of Business Administration

Title of Project:        Strategy Analysis of a Company Distributor of Industrial Equipment

Insert your title here

Supervisory Committee:

                

        Dr. Neil Abramson
Senior Supervisor
Associate Professor of Strategy

        Faculty of Business Administration

Second Reader                        

        Dr. Ed Bukszar

        Associate Professor

Faculty of Business Administration

Date Approved:                        


ABSTRACT

This project develops a strategic analysis of ARPAC Storage Systems Corporation (ARPAC). ARPAC is one of the biggest distributors of material handling equipment in BC. The material handling industry in North America is mature and highly fragmented, and ARPAC operates in all segments of the industry. Market development and globalization processes accelerate the differences among segments, and as a result, the company needs to redefine its strategy.

This report provides an overview of the company and the competitive landscape and an industry analysis. It identifies major forces that affect current strategies among competitors. The report seeks to identify key success factors that shape rivalry and develops strategic alternatives. It further evaluates proposed alternatives in regards to the company’s internal capabilities and provides recommendations for the company about how to maintain a sustainable competitive advantage.

This report recommends that to be able to provide growth, ARPAC should restructure the company to address the differences between two major industry segments.


DEDICATION

This is dedicated to my family.  Their patience and support throughout the course has been much appreciated.


ACKNOWLEDGEMENTS

I would like to express my sincere gratitude to Dr. Neil Abramson for his advice, input and guidance to ensure the completion of this project and Dr. Ed Bukszar for his review of this paper.


TABLE OF CONTENTS

Approval        

Abstract

        

Acknowledgements        

Table of Contents        

List of Figures        

List of Tables        

Glossary        

1        Introduction:

        

1.2        Material handling equipment Industry:

        

Reference List


LIST OF FIGURES

Figure 1: ARPAC’s product mix        

Figure 2:  Total Orders of Material Handling Equipment        

Figure 3: Predicted Industry Growth        

Figure 4 Market Segments and Equipment Classes        

Figure 5: Summary of Market Forces within Industry Segments.        

Figure 6 Buyer’s Decision Making Factors and Their Relative Importance Scale        

Figure 7 Market Entry Using Current Distribution Channels        

Figure 8 Material Handling Equipment Value Chain        

Figure 9: Market Forces        

Figure 10: Summary of company’s first alternative        

Figure 11: Summary of company’s second alternative.        

Figure 12: ARPAC’s company structure (Equipment Side) _        

Figure 13: Company’s structure using first alternative.


LIST OF TABLES

Table 1: Summary of rivalry intensity and companies’ performance        

Table 2: Summary of rivalry intensity and companies’ performance        

Table 3: Alternatives investment evaluation


GLOSSARY



  1. INTRODUCTION:

This paper presents a strategic analysis of a company: “ARPAC Storage Systems Corp.”, an equipment distributor in BC and Alberta that distributes and provides service for material handling equipment. Initially, the company started with a differentiated strategy and concentrated on Warehousing Equipment (WE) applications within the material handling industry. Following a growth strategy, the company launched new products and entered a new market – the Lift Truck (LT) Equipment market segment. Initially, the strategy appeared consistent with the company’s plans to grow the business, as it allowed utilizing the company’s expertise. However, the changing environment reshaped the intensity and priority of market forces within the industry, so that both segments within the industry have become very competitive. Operating in both segments of the industry brought new and unexpected challenges; costs within the company escalated and the company had to undertake steps to withstand cost pressure. Eventually the company lost its differentiated appeal and is trying to apply both strategies on a case by case basis.

The biggest problem that the company faces is mixing cost and differentiation strategies in one company. Both strategies cannibalize each other, and as a result, the company can’t perform well in either cost or differentiation strategies.  

My goal in this project is to analyse the industry and ARPAC’s capabilities and to provide recommendations to the company as to whether it should pursue either cost or differentiation strategies exclusively, or if both, how to do so effectively and efficiently

The analysis of the industry is done on the equipment distribution side and covers North America and BC market. The BC market is significantly smaller, composing approximately 3,000 units of equipment, as opposed to the 190,000 units sold in North America; however, the market structure is similar. Because the North American market reflects all trends in the material handling industry, an analysis based on larger markets will give a better understanding of the market in BC. The rivalry analysis section will be performed on the BC market that is the home market for ARPAC.

The analysis starts with the company overview and a more detailed summary of the company’s problem. The industry overview is described at the end of chapter one. Chapter two performs industry five forces and value chain analyses.  The results of industry analyses allow the identification of the key success factors (KSF). Based on the KSF, existing rivalry within the industry segments is analyzed, followed by an indication of the possible strategic alternatives to improve the company’s performance. Chapter three will perform a comparison of the alternatives and execution analysis, followed by recommendations in Chapter four.

 

  1. Company overview

  1. Description:

ARPAC is a company operating in the material handling business. It consists of two independent business units: storage systems equipment and lift truck divisions. The company operates in BC and Alberta, with its head office in BC. The storage systems division manufactures and distributes storage products under the ARPAC brand name. The storage division operates a manufacturing facility in BC and employs approximately 80 people. The lift truck division distributes and services lift trucks and other warehousing equipment. The lift truck division has three locations, one in BC and two others in Alberta, with a staff of approximately 80 people, split equally between both provinces.

  1. History/Evolution

The company started in 1973 as a local BC manufacturer and marketer of storage systems. From the beginning, ARPAC’s Storage Division used a differentiation strategy. The company possesses manufacturing facilities and its own engineering personnel. Every project can be developed from scratch and customized to the customer’s requirements. ARPAC has a well-defined strategy to position itself as a company that leads the customer through all stages of projects, including assistance in project coordination, obtaining the necessary authorizations. At the moment, ARPAC has the highest reputation among similar storage equipment suppliers.

The Equipment division was created in 1983 to facilitate existing differentiation of the Storage division. Initially, the Equipment division distributed and sold the equipment manufactured by Crown Equipment, one of the leading equipment manufacturers in the industry.  The Crown brand, with its premium products, naturally complemented ARPAC’s activities. After adding the Crown line to the company’s portfolio, ARPAC was able to serve a wide range of warehousing applications within the industry by supplying premium equipment and providing quality services and an organically shared differentiation model with its “older” Storage Division. In the warehousing equipment market, ARPAC faced a formidable competitor - Johnston Equipment, a direct subsidiary of one of the biggest warehousing equipment manufacturers in the industry, Raymond Equipment, which operates in all provinces of Canada. Due to its size and market presence, Johnston Equipment represented a serious threat to ARPAC’s business. The limited size of the market in BC and the pressure from the stronger competitor forced ARPAC to consider new business opportunities.

The new business opportunity for ARPAC came up in 1996. Nissan Forklift dropped its previous dealer in BC because of some operational and financial disputes.

Nissan Forklift equipment works predominantly in general use lift truck equipment applications (LT). As the LT market was relatively new to ARPAC, the company decided to add the Nissan brand to the company’s portfolio. The presence in the new LT market seemed a good fit, as it allowed ARPAC to grow by entering new markets. The addition of new product lines seemed to fit well the company’s previous expertise in equipment distribution business. With new products, ARPAC was able to cover the entire material handling equipment industry, and appeared likely to benefit from economies of scale by serving the industry with one sales and service network.

  1. Latest developments

New product expansion brought new challenges to ARPAC. The LT market proved to be different from WE, where ARPAC had its expertise. The intense rivalry in LT, a market with an economy that is close to the perfect competition model, puts enormous cost pressure on all equipment vendors. The equipment users in the new LT market and their requirements were different from those in the WE market. Following cost pressures, ARPAC started transforming its initial differentiation strategy. The strategy eventually drifted towards a low cost model by adding low cost product lines such as Heli Forklift and other ”me-too” product lines, and in some cases reducing the amount or the quality of service. Eventually, the company’s experiments with lowering costs in some cases and increasing differentiation in others led to the point where the company’s strategy became mixed and confused.

  1. Product mix

Currently ARPAC offers a wide range of products and covers all sectors in the material handling equipment industry. A wide range of products suggests a very broad customer base. A brief summary of ARPAC’s product offerings is indicated in the following diagram (Figure 1), which shows most of the common products and the most common industry segments served by ARPAC.

Figure 1: ARPAC’s product mix

ARPAC carries equipment from Crown Equipment, Nissan Equipment, HeliIndustrial Equipment, Taylor Dunn, and Isle Master. Crown products, in some classes of equipment, competes directly with Nissan and Heli, Nissan Forklift is a direct competitor to Heli Industrial Equipment, and some Isle Master products substitute for those in Crown’s range. Such a brand-products mix situation is typical for the industry.

  1. Current strategy:

ARPAC’s current strategy is to supply the entire material handling equipment industry with the maximum possible range of products by providing quality services. The two biggest equipment segments, WE and LT, however, have different rivalry intensities and market forces. The WE segment allows differentiation, while LT, with its enormous cost pressure, makes a differentiation model very difficult. Competition in both market segments has forced ARPAC to change its initial differentiation business model and to apply a differentiation strategy in one industry segment and low cost strategy in others. As mixing two opposing strategies within one company is practically impossible, the resulting strategy became a mix of both strategies.

  1. Company challenges

The mixing of two opposing strategies within one company has become the biggest challenge for ARPAC. ARPAC can’t lower costs while operating in a cost-sensitive market because it still has a legacy of a differentiation business model in WE. Nor can ARPAC better differentiate in WE, which requires differentiation, because the company’s services have already been affected by its low cost strategy. The resulting “mix” strategy doesn’t work effectively as the basis of competition, for both industry segments are different. By applying a single strategy, ARPAC can’t compete well in either industry segment, which represents an efficiency problem.

  1. Material handling equipment Industry:

  1. Industry overview:

The Material Handling Equipment includes lift trucks and inventory-handling systems such as conveyors, sorters, storage racks, shelving systems and carousels. The industry generates combined annual sales of $15 billion, about half due to lift truck sales. NACCO Industries, Toyota and Linde AG are the largest manufacturers worldwide.  There are approximately twenty lift truck brands, with about 4,000 distribution outlets for material handling equipment in the US.

The lift truck industry in North America is a mature one. Aggregated figures of the equipment sold in America and Canada total around 180,000 – 190,000 units (Figure 2).

Figure 2:  Total Orders of Material Handling Equipment

Source: J. Malvaso (Raymond Corp.), Material Handling Equipment Dealers Conference, 2005

Demand for material handling equipment (MHE) depends on the level of goods moving through the US economy from domestic production, imports, and sales. In general, demand for equipment reflects economy conditions. In a stagnant economy, the only demand for new MHE is to replace retired units.

In the last few years, the industry has gone though rapid growth following the general trend in the US economy. The one-percent industry growth in 2002 was followed by a 16-percent spike in 2004. However, predictions for 2006 and thereafter for aggregated sales in material handling industry indicate a steady industry decline, down to 4 percent growth in 2008 (Figure 3) due to the predicted cooling of US economy.                

Figure 3: Predicted Industry Growth

 Source: Interindustry Economic Research Fund, Inc. (IERF), College Park, MD, 2005

  1. Industry definitions

A basic principle of material handling is the concept of unit loads. A unit load is a number of items arranged as one unit, to be moved or handled at one time. In effect, the unit load implies the container and the support platform or pallet. The main advantage of using unit loads is the ability to handle more items at one time.

The material handling equipment industry has different classes of equipment that serve different working applications. Only a few manufacturers produce an entire range of equipment “in-house”; the majority of manufacturers specialize in particular types or classes of equipment. The number of companies in the industry varies from class to class. Depending on geographic area, the market share for every manufacturer within certain classes of equipment varies greatly. Worldwide, in general, none of the competitors has a market share of more than 10 percent. Locally, however, the market presence of some brands can reach up to 50 per cent.

Major customers are manufacturing plants and inventory-handling facilities. A typical customer is a distribution centre that services 100 stores a day with 300,000 cases, 21,000 pallets, and 20,000 SKUs. The facility has a flow-through design, with receiving at one end and shipping at the other, and uses single and double-deep pallets and pushback racks, and forklifts to move material. Because the material handling equipment industry is diverse and fragmented, equipment prices vary greatly, depending on the size and complexity of the equipment. High-volume, lower-priced products are susceptible to competitive pricing, but more expensive equipment is less vulnerable to price pressures. A key element in the sales of complicated inventory or process systems is the physical configuration of the customer’s production floor or warehouse space. With construction and real estate costs increasing, customers have distributors help them design and build the best layout and material handling system to maximize use of a compact space.

  1. The material handling equipment distributors (Dealers)

There are almost 4000 distribution outlets for Material Handling Equipment in the US. Distributors usually operate in either the lift truck segment or in the inventory systems segment, but not both. ARPAC seems to be one of the few companies in the industry that operate in both areas – inventory systems and lift truck distribution. Most distributors have just one or two distribution outlets.

Distributors are usually independent, but are often affiliated with a particular manufacturer. Some manufacturers own their own dealerships. Every dealer operates within an assigned territory and assumes all sales and service activities in that territory on behalf of the equipment manufacturers. To reduce uncertainty with future sales, some dealers carry several lift truck manufacturer’s brands; thus it is very common that one dealer sells several products that directly compete with each other.

In addition to selling new and used equipment, dealerships lease and rent equipment, either long- or short-term. Lift truck dealers operate much like traditional car dealers, providing sales, service, spare parts, and financing (often in cooperation with the manufacturer); taking trade-ins; and selling used trucks. A large base of existing trucks provides dealers with a big market for replacement parts, maintenance, and retrofitting. In most cases, the margins on service are better than those on original sales. A dealer’s territory is limited by its ability to provide service. Distributor sales and service personnel of complex material handling products and systems need more advanced training and skills than their peers who work with low-level products. The product lifetime for the industrial type of equipment is in the 5-15 years range. The revenue from the service part of a dealer’s business generally almost equals that from sales of new equipment. The service part of the dealer’s business requires extensive investments in labour resources and supporting infrastructure.

Profitability for distributors is determined by sales volume. Small distributors can compete by specializing in a specific industry or type of equipment, or by offering excellent service programs. Large distributors can negotiate favourable distribution agreements, based on volume. Average sales per employee vary greatly because of the wide variety in equipment, prices, and industries served.

Revenue and cash flow in the MHE industry are highly cyclical, sometimes changing sharply from year to year. The size and quality of receivables depend on the health of the end-use industries a particular distributor sells to.

  1. Decision criteria

The decision criteria are the criteria that the senior management decision-makers use to evaluate whether a strategic change is satisfactory and should be implemented. Market forces and industry value chain analysis will identify the key successful factors the company needs to concentrate on, and will enable the company to maintain and further strengthen its competitive advantage.


  1. INDUSTRY ANALYSIS

Two major segments in the industry will be discussed later in the analysis. The analytical section will focus on applying Porter’s five forces and industry value chain analysis. Both analyses will help to identify key successful factors so as to determine alternatives that will produce a competitive advantage. Further, the findings will be analysed in terms of the company’s internal capabilities, including management preferences.

  1. Product segments

The Industrial Truck Association (ITA) defines five classes of lift trucks – Class 1: electric counterbalanced equipment; Class 2: electric high lift; Class 3: electric low lift; Class 4: internal combustion cushion tire; Class 5: internal combustion pneumatic tire. Classes 1, 2 and 3 are usually described as the warehousing equipment (WE) market segment; Classes 4, 5 (and part of Class 1) compose the general use lift truck (LT) market segment. Even though some degree of overlapping between classes exists, two segments of the industry usually serve different customer bases. Class 1 Lift trucks can be used in both the WE and LT segments.

Warehousing Equipment (WE) segment: The warehousing equipment segment is designed for applications that require storage of the product inside warehouses and require storage systems (racks and shelves) for storing the palletized product. Examples of such applications are packaged goods distribution centres, such as Superstore, Versa Cold, Kalotire, Canadian Tire, Costco, Wal-Mart, and Safeway. Such accounts usually run high density warehouses with a high product turnover. The product offering to those users usually requires complex and carefully selected equipment. A key element in the sales of complicated warehouse equipment is the physical configuration of the customer’s equipment to match the customer’s particular storage systems layout.

The user usually receives the equipment within three or four months after placing the order, as the equipment can be manufactured only after all details of the specification are clarified.

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Lift Truck (LT) segment: LT segment serves more general and less complex working applications with lower density warehouses that do not require complex storage systems for storing the product. Typical applications for LT products are loading and unloading trucks. The users are usually manufacturers, lumber companies, ports, beverage distributors, and similar operations. Product variations for those customers are less than those for warehousing equipment. In most cases, vendors have a certain amount of equipment in stock.  Usually, the different classes of equipment within the LT market compete for one customer, which is an example of cross competition.

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