In: Economics
The TMA Questions
PART A: FORTUNE MOTORS (TAIWAN): IMPLEMENTING STRATEGY CHANGE USING
THE BALANCED SCORECARD
Jung Hua Li, chief executive officer (CEO) of Fortune Motors, the
largest Mitsubishi dealership in Taiwan, sat in his office in
eastern Taipei on a chilly day in January 2004, thinking carefully
about his vision for the survival of his company. He knew that
Fortune Motors’ sales in 2003 had fallen below 50,000 units for the
first time in 10 years. Fortune Motors’ market share had in fact
been falling for several years, which Li attributed in part to
Toyota’s aggressive growth. With long experience of selling and
financing new Mitsubishi cars and small commercial vehicles
throughout Taiwan, Li had what he thought was a good plan to enter
the business of financing used-car purchases. He thought the
“Balanced Scorecard” would be a very useful tool to help implement
this change. The first step would be to construct a corporate
scorecard. But what should the corporate scorecard look like? What
critical variables should he monitor carefully to give him a clear
picture of how well his change plan was proceeding?
TAIWAN IN THE EARLY TWENTY-FIRST CENTURY
Taiwan, with a population of 22 million in 2000, was one of the
so-called “Asian Tigers” that had experienced enormous economic
growth since 1960. Per capita gross domestic product (GDP) had
doubled approximately every five years until the mid-1990s,
exceeding $1,000 for the first time in 1976. (This value was
considered by some to indicate that a country was no longer
“developing.”) Even the Asian financial crisis of 1997 had only put
a small dent in that decade’s average annual growth rate of
approximately 7 per cent: growth in 1998 had been 4.5 per cent, but
had recovered to nearly 6 per cent the following year. Part of this
increase had been attributed to the growth of the People’s Republic
of China (mainland China). Taiwanese companies were active and
enthusiastic investors in the mainland economy, despite political
differences between their respective governments, which created
difficulties for the Taiwanese. For example, except for holiday
specials, no direct flights were available from Taiwan to the
People’s Republic of China; travelers had to fly via Hong Kong. The
new millennium had brought more difficulties. For the Taiwanese
economy, 2001 had been an annus horribilis: GDP per capita had
fallen 2.2 per cent, and by the end of 2003, had still not
recovered to 2000 levels.
THE AUTOMOTIVE INDUSTRY IN TAIWAN
Several major automakers were represented in domestic auto
manufacturing industry in Taiwan. Toyota, Nissan, Ford/Mazda,
Mitsubishi, Suzuki and Honda all had local assembly plants, which
primarily served the local market, though Ford exported
approximately 4,500 units (7 per cent of output), and Mitsubishi
exported approximately 1,500 units (1.5 per cent) of production in
2003. This domestic manufacturing industry operated under the
protection of an import tariff, which had been 30 per cent during
most of the 1990s, but in 2002, had been reduced by one percentage
point per year.
The total market for new cars in Taiwan was approximately 400,000
vehicles per year. The market had been in steady decline during the
late 1990s and had fallen drastically in 2001. Sales had recovered
to some degree in the two following years, but 2003 sales had still
not recovered to their 2000 level. Toyota was the most successful
local manufacturer, with sales of about 100,000 units (28 per cent
market share) in 2003. Mitsubishi’s share was nearly 24 per cent
market share, or about 86,000 units. Various reasons for this
decline had been suggested, including high oil prices and the fact
that in recent years, many Taiwanese businesspeople had either
temporarily or permanently immigrated to China. Exact numbers of
immigrants were difficult to obtain, but some estimated the number
at between two million and four million.
As in most countries, new cars in Taiwan were sold through
dealerships appointed by the manufacturers and were usually
exclusive to a single automaker. Financing for new car purchases
was provided by both banks and the dealers (or by automakers
through their dealers). Auto loans in Taiwan were a small part of
most banks’ business, so they usually subcontracted the credit
evaluation to outside companies, which relied on public credit data
and were paid based on the number of applications processed, not on
the accuracy of their risk assessment. As a result, banks’ bad auto
loans were about 3 per cent per year, whereas Fortune Motors, for
example, with a close relationship with its customers, enjoyed a
bad loan rate of only 1.3 per cent on its new car loans.
Consequently, new car financing was a profitable business for
dealers.
The used-car market, however, operated differently in Taiwan.
Because new car dealers were registered for tax purposes, when they
sold cars, they were required to charge 5 per cent sales tax on
both new and used cars. However, when private individuals sold
their used cars, the transaction attracted no tax — the purchaser
simply registered the new ownership. As a result of this 5 per cent
price advantage, the market for used cars was served by
approximately 3,000 unregulated small, often family-owned, used-car
dealers who were not — and did not need to be — registered for
sales tax purposes. Thus, when a new car customer wanted to trade
in an old car, the new car dealer did not typically buy it.
Instead, the salesperson would put the customer in touch with a
reputable used-car trader to complete the transaction. If someone
wished to buy a used car and needed financing, finding a source of
finance was often difficult. Used-car buyers were perceived as
high-credit risks by banks, and banks did not have the expertise to
evaluate that risk. The only sources of used-car financing were
family or the illegal underground financing market where interest
rates could be up to 1 per cent per day. In contrast, a low-risk
customer would pay about 20 per cent per year for a personal
loan.
FORTUNE MOTORS LTD.
Fortune Motors was the larger of the two Mitsubishi retail dealers
in Taiwan and was the exclusive supplier of Mitsubishi’s line of
small commercial vehicles (less than 3.5 tons). The typical price
of these vehicles was approximately NT$300,000. Fortune Motors was
40 per cent owned by China Motors Corporation, the Taiwanese
manufacturer of Mitsubishi vehicles, and 60 per cent owned by three
local families.
In 2004, Fortune Motor Company operated 89 sales centres throughout
the country and dominated the market for small commercial vehicles,
with 80 per cent market share. Within Mitsubishi vehicles
(including passenger cars), Fortune held 60 per cent share (Shung
Ye Group, which sold only the Mitsubishi car line, held the
remaining share). In the previous two years, the market for new
vehicles in Taiwan had rebounded, growing at about 9 per cent per
year after several years of decline. Mitsubishi’s share had
declined from 25.4 per cent in 2002 to 20.8 per cent in 2003, and
within that, Fortune Motors’ share from 15.8 per cent to 12.1 per
cent.
The company sold and financed new cars (about 40 per cent of
Fortune’s new car sales were also financed by them) and provided
service. Selling new cars was unprofitable, but the financing was
profitable, so overall, Fortune Motors’ new car sales and financing
activity broke even. Servicing was profitable and made about as
much profit as financing new cars.
A critical part of financing was the accurate assessment of the
credit risk of the customer. Historically, approximately 10 per
cent of applications were not approved for credit risk
reasons.
Li attributed the company’s success over its 30-year history to its
strong core values, which centered on its careful attention to
customer service and satisfaction. Fortune Motors’ service motto
was “Get it right the first time — or it is free.”
THE BALANCED SCORECARD
The Balanced Scorecard was a tool first proposed by Professor
Robert Kaplan and others, based on field research into best
practice performance measurement. Each company’s scorecard was
unique, reflecting the company’s corporate strategy, with a limited
number of (typically four) measures on four interrelated dimensions
or perspectives: Financial, Innovation, Customer and Internal
Processes. Senior management would usually prepare each company’s
corporate scorecard. Sub-units of the company would then build
their own lower-level scorecard, informed by and linked to the
corporate scorecard. Often, the process of identifying the key
measures and their interrelationships was a valuable process in its
own right, clarifying the role of sub-units in the corporate
strategy. The ongoing annual review and fine-tuning of the
scorecard was also a valuable strategy communication and
implementation process.
THE NEW STRATEGY
Li’s vision was to build on the company’s expertise in financing
new cars and on the powerful network of relationships between its
1,500 salespeople located in the 89 sales centres with the
thousands of small and medium-sized used car sellers around the
country. These two strengths would allow Fortune Motors to sell
used-car financing profitably through the thousands of small and
medium-sized used car dealers in Taiwan. The dealers that would
offer Fortune’s financing would not merely be a more attractive
source of financing than the illegal market or relatives but would
need to meet strict requirements for cleanliness of their premises
and for quality and safety standards.
Li envisioned a nationwide umbrella branding of used-car dealers
that Fortune Motors would approve as vendors of its financing
service. The name-mark he proposed for this venture was SUM, which
stood for “Serve Your Motors.” SUM-appointed car dealers would be
required to maintain high ethical and customer service standards,
compatible with Fortune’s own values. Not all used car dealers
would be able to become members of the SUM family. Li felt it
important that the SUM dealers share his values of the importance
of customer service. For this reason, Li believed that
husband-and-wife owner-managed small dealerships were most
suitable. (The very largest used-car dealers would typically be run
by hired managers and were already too large to be able to easily
change their existing values, so they would not be appointed. Very
small dealers were excluded because they would probably not be
economical, since signing up a dealer required considerable effort
on the part of Fortune Motors). Li estimated that approximately
3,000 dealers would qualify. In effect, the SUM brand would become
a quality and integrity certification of a used-car dealer. For
warranty purposes, certified dealers would only be permitted to
sell Taiwanese-made vehicles less than five years old. Li did not
plan to charge a fee to the used-car dealers for the use of the SUM
brand, unless their volume was very small.
Customers buying from a SUM dealer would know that they would be
receiving a guaranteed high-quality used car, and if they were
financing their purchase, a fair interest rate. In fact, customers
would be able to buy an additional warranty if they wished. All
this would make purchasing (and financing) a used car from a
SUM-certified dealer far less stressful and risky than was the case
at present.
IMPLEMENTING THE PLANNED BALANCED SCORECARD
Li was aware that he needed to first recruit used car dealers over
the next several years and, through them, build up the used car
loan business. At the same time, he was concerned about the
downturn in the economy, the pressure from Toyota, and the risks of
the new business. His management team fully supported the new
strategy. He knew that as CEO, it was his responsibility to create
the corporate scorecard. How could he best measure the
effectiveness of his new strategy?
(Source: Ivey Publications, 2011)
Required:
Explain each of the following points or inquires separately:
1- Evaluate the strengths and weaknesses of the used-car financing
business proposal. (190 words)
2- What must Jung Hua Li do well in order for the new business to
succeed? (100 words)
3- Prepare a balanced scorecard for the implementation of this
business and discuss the linkage between the measures. (200
words)
1
strength-of the Used-vehicle financing Business proposition was to expand on the organization's ability in financing new vehicles and on the amazing system of connections between its 1,500 salesmen situated in the 89 deals communities with the a great many little and medium-sized trade-in vehicle merchants around the nation.
Solid Brand Equity and Brand Awareness — Scorecard Fortune has the absolute most eminent residential brands in which it works. Anne Wu, as indicated by David J. Sharp, assumes a significant job in pulling in new clients searching for answers for the neighboring serious methodologies.
Scorecard Fortune works in a zone that incorporates different enactment and approach orders.- Balancing Laws and market atmosphere. The association needs to move through close ties with support associations and government arranges in key approach fields.
A decent asset report and Scorecard Fortune Financial Statement will help put resources into creative and changed endeavors that can keep on differentiating salary sources and lift showcase gains and different measurements.
weakness-of the Used-vehicle financing Business proposition was the downturn of the economy, presentation of new business in the market and the high weight from Toyota.
Client disappointment – Although the interest for items doesn't diminish, Scorecard Fortune's clients feel disappointed. The remarks on various online destinations are reflected. Scorecard Fortune should concentrate on territories where client buying and buying experience can be improved.
Disappointment of basic ability I accept that Scorecard Fortune experiences an absence of basic ability in innovation and computerized change specifically. Scorecard Fortune battles in the light of advancements in the computerized reasoning (AI) and AI field, to rebuild forms.
Task the executives concentrates a lot on interior conveyance than every single outer partner's inclinations. This methodology can prompt poor associations with general society and clients.
2.
request for his new business to succeed, Li should initially lead a SWOT examination and plan deliberately. A sweep of inside and outside condition is an absolute necessity and significant part before presentation of another business in the market. SWOT investigation will assist Li with understanding the status and will give data which is useful in coordinating the company's assets and capacities to the serious condition in which it works. Likewise, inner investigation will assist him with understanding the association's capacity which will legitimately impact the advancement of fruitful systems.
A few factors that should have been taken into contemplations are
licenses
great notoriety among clients
cost preferences from exclusive expertise
ideal access to conveyance systems
expulsion of interior exchange boundaries
3,
A Balanced Scorecard presented by Robert Kaplan and David Norton, is a vital exhibition the executives system that permits the firm to oversee and quantify the conveyance of their technique.
The Balanced ScoreCard of Li's business is as per the following :
1) Financial viewpoint : It covers the monetary targets of Li's business and will permit him to follow money related achievement and investor esteem.
2) Customer Perspective : It will cover the client care and fulfillment targets like piece of the pie objectives and well as item and administration properties.
3) The Internal procedure point of view : It fundamentally covers all the inward operational objectives and diagrams the key procedures important to convey the client targets
4) The Learning and Growth Perspective : It covers the elusive drivers of future achievement, for example, human capila, hierarchical capital and data capital including aptitudes, preparing, authoritative culture, initiative, frameworks and Databases.
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