Question

Howard Equipment Company (HEC) manufactures heavy construction equipment. The company's primary product, an especially powerful bulldozer (PD10), is among the best produced in Europe. The company operates in a very price-competitive industry, so it has little control over the price of its products.

A Porter’s five-forces analysis reveals the following:

The PD10 model faces severe competition based on price, timely delivery, and quality. Companies in the industry have persistent pressure to reduce selling prices and utilize capacity fully. Robert Benson, the HEC's president, has stated that to be successful, the company has to keep production costs in check by operating as efficiently as possible, must provide a very high-quality product and meet its delivery commitments to customers on time.

The threat of new entrant is low due to small profit margin and high capital costs.

Customers, such as Parker Co and Global Power, negotiate aggressively with HEC and its competitor to keep prices down because they buy large quantity of product.

HEC tailors the PD10 to customers’ needs and lowers price by continuously improving design and processes to reduce production costs. This reduces the risk of equivalent products or new technologies replacing PD10.

To produce PD10, HEC requires high-quality materials and skilled employees. The high level of skills required of suppliers and employees give them bargaining power to demand higher prices and wages.

Required:

Recommend to the management the generic strategy (i.e. cost leadership or differentiation) that HEC should pursue. Support your recommendation with clear reasoning drawn from the analysis prevalent in this industry. Answer in full answer.

Answer 1

For better understanding, first of all let’s discuss cost leadership and differentiation;

Cost leadership;

Under this strategy, a company try to minimize its’ production cost so that production cost can be minimized and offered price of the products can be kept low. So this is major type strategy, which is adopted by the most of the companies to face competition.

Differentiation;

Under this strategy, a company try to keep their products different from other companies. This is adopted to eliminate competition effect, so as a result company can face competition easily and prospective customers can easily identify products of that company. So this is also one type of strategy to face competition in the industry.

Now come to main point;

As per information of the question, Howard Equipment Company (HEC) should adopt cost leadership strategy.

For adopting cost leadership strategy following are the reasons;

·        There is entry barriers in the industry so number of offered products are low hence differentiation strategy is not required because buyers can easily identify the products due to less numbers of firms in the industry. Thus cost leadership is good strategy.

·        Margin is very low in the industry so for maximizing profits cost reduction is necessary.

·        HEC can reduce its cost as compared to its competitors. Thus HEC will be in position to capture market and also in position to earn more profits.

·        HEC can maximize its volume of sales by reducing costs because lower cost will result into lower price of the products.

·        With the help of cost leadership, HEC will be in position to eliminate its’ competitors.

·        As per question, it is clear that there is price competition in the market hence cost reduction is required to face price competition. Thus cost leadership is necessary.

·        With the help of cost leadership, HEC will save sufficient funds for improving efficiency and for improving quality of their products. Hence cost leadership strategy is good option.