Case: Walter Hundhausen Gmbh

Size up Germ alls foundry Industry? Is WH nearly positi iodined in it now and in the future?The beginning of the invigorated millennium has presented Walter Hundhausen (WH) with a big hurdle to jump. The German economy is experiencing economic stagnation, an aging population and a German labour commercialise that is filled with many intrusive brass regulations. The German economy has been ontogenesis at an average rate of 0.6 portion per year for the last 4 years making it one of the slowest growing economies in the Euro Zone.However, studys suggests in 2004, the domestic economy is evaluate to grow above 2 percent. More over, one-third of Germanys economy is comprised of exports. In acting a Pest Analysis (see Diagram 1 below), there atomic exit 18 many macro factors f on the whole uponing the German Foundry Industry.MACRO FORCESThe acronym stands for Political, Economic, Social and Technological concerns that could affect the strategic development of the dramatis per sonae foundry effort in Germany. By identifying PEST influences it helps gage the external environment in which the cast foundry perseverance operates. PoliticalStrict Layoff Regulations Government regulations had strict policies in place on how organizations could layoff employees. Before employees were laid-off, focal point had to advise the Works Council and they had to agree to the nature and timing of the plan. In addition, the management team had to develop a social plan for each employee on how the layoff would affect them and what remedies the organization would put in place for them. If asocial plan was not presented, employees could claim for compensation through the courts. This could prove to be costly in time, money and reputation.National Bargaining on Wages The current German industrial trans exertion policy was based on a duel model. One part dealt with the collective dicker, while the other dealt with code enclosureination. The collective bargaining agreement d ealt with minimums and maximums, with respect to advantage and salaries and wricking hours. Codetermination was an actual Act or Law that provided labourers in Germany with three levels of representation Supervisory Board, Works Council and Labour Director. However, in the end, all collective bargaining agreements could be adjusted and then ratified through this process.Social Market Economy The political climate in the country is based on the social market economy, where employers and unions perished as partners to better the organization as a whole. However, in existingity, the balance of power lay in the hands of the union. Unions treatd national and regional wages and hours of trading operations in addition, they also negotiated remunerative time-off. In 2004, the average individual worked 1,542 hours. The standard legislated work week was set at 60 hours with a minimum paid leave of 24 days. That translates to 2,832 hours per year. Despite the legislation, the average in dividual worked 54 percent less than was legislated in 2004.Ordnung Principal This is Germanys version of the Triple Bottom Line, where economy, corporation and the establishment all participate in the mechanism for workers democracy. New Environmental Legislation The government imposed a new ecological tax in 2000 that focuse on waste reduction as opposed to waste recycling. This added cost in the form of time and money to the WH casting process. From an economic perspective, the government wanted the pains to focus on the externalities and slash them or remove them totally.EconomicalDomestic Growth The last three years (2001 to 2004), the German economy was growing at an average rate of 0.6 percent per year. Germany had been experiencing the slowest growth in the Euro zone. This affected many organizations in Germany, particularly mid-sized companies that were not big enough to fully habituate economies of scale. Future Growth The economy in Germany has been slated to grow ar ound 2 percent for the year 2004.This represent an increase of 1.4 percent over the previous year and that may notseem big, but relatively speaking that is a 233% increases from year over year. Increase in Value of the Euro Another concern at the macro level is the appreciation of the Euro against other currencies, most notably the American dollar. As the Euro increased, the cost of WHs products also increased. However, the opportunity to purchase at a set out price scrap iron and steel from non-European countries has also increased. As the Euro appreciates in value, it can now purchase raw materials at a pull discomfit cost.SocialAging Population The current labour shortage in Germany is creating a nightm atomic number 18 in the casting industry. In order to attract and retain employees, organizations were paying a premium over scheduled tariffs. These costs were substantial, as many companies were running multiple shifts in order to keep up with demand. Reduction in regular Em ployment The current macro environment suggests a reduction in the number of full-time resources, because of the steep labour costs. However, because of the aging population, its becoming increasingly difficult to find qualified workers.Sounds counter intuitive a reduction of full-time staff to cut costs, but many companies in the industry ar paying premiums over scheduled tariffs in order to keep their current workforce. Strong Social Employment Contracts The Germany foundry industry has a strong custom contract scheme, where employers are responsible for the well organism of their workers. The contract is enforced by the Works Council and the Labour Director who is part of the origination. Their main objective is to settle down disputes through intensive informal contacts.Strong Union Presence The dual model in the industry consists of a collective bargaining agreement and codetermination. This dual system gives the unions a strong position within the foundry industry. Their presence has lead to numerous bouts of conflict with management when negotiating collective agreements and in some cases these disagreements lead to spacious and bitter strikes.TechnicalAbove Average R&D Investment R&D is a major competent in the casting foundry industry. R&D produces better products and above all reduces costs through the automation of the casting process. Moreover, by being a Tier 1 supplier, customers are expecting better products and lower costs year overyear. Frequent Technology Changes In the casting process, technology changes occur frequently, in order to maintain lower sand-to-metal ratios and scrap ratios. Largest European Foundry Being the queen-sizedst casting foundry in Europe, economies of scale can have significant cost savings, as the organization can purchase large amounts of scrap iron and steel.Close Proximity to Clients By being close to customers, shipping costs and delivery times are reduced substantially giving the local casting foundry a cost advantage over their big distance competitors. Efficient Sand Casting Process The casting process is super integrated and labour intensive. By having a disjointed process, the cost of the process go away be high and the products produced would be of an inferior quality. A process that is tightly controlled and automated will reduce unnecessary waste and cut costs in the form of wages and raw material.MICRO FORCESBelow are the specific micro forces that will influence how WH reacts to the environmental exits assessed above.SupplyThe cost of raw materials was increasing 23 percent year over year (see Diagram 2 below). Raw materials have been the hotshot most expensive cost to WH. Diagram 3 below, illustrates the cost of raw materials to revenues and the cost of wages and salaries to revenues. As for wages and salaries, they have been holding steady. Moreover, the curve seems to be downward sloping (see Diagram 3, below).Total revenues have been increasing steadily since 20 01 with a significant increase occurring in 2004 (see Diagram 4, below).Year over Year Increase in Revenues2001 2002 2003 2004Total Revenues 97 99 103 1172.06% 4.04% 13.59%However, in 2004, the index price of scrap iron and steel has been averaging around 191.00, that is a 43 percent increase, year over year. The trend seems to be heading higher, potentially breaking the 250.00 barrier (see Diagram 5, below).Average 81.25 99.91667 99.91667 111.5 133.75 191.25CompetitionCompetition from non-OEM organizations was growing. However, customers today are much sophisticated and assure that quality plays an important role in the decision to purchase a product versus purchasing a product on price alone. The real threat will descend from organizations in the casting industry from Eastern European that will eventually become tier 1 suppliers. One of the challenges facing WH is the current workforce in Germany. WH has been experiencing a high degree of absence due to leaves and sick days.The above graph (see Diagram 6) illustrates by subdivision where the greatest number of absences are occurring. The stars indicate the average per department and in 2004, there was an increase in the number of absences in Core Marketing, Finishing and Heat Treatment. Finishing can be explained because of the nature of the work itself. It is one of the most difficultparts of the casting process. Some of the other notable information to mention, is when the automated casting process is operating efficiently, sick days and leaves are kept to a minimum.For example, pouring and melting in 2003 experienced numerous mechanical problems, thus the department experienced a higher level of absences as opposed to 2004, when the process was operating with little interruptions, sick days and leaves decreased substantially. Moreover, for the first 6 months of 2004, the average cost of the total days off work amounted to 3.39 million, which represents 8.7 percent of the overall conjunctions revenues (see Diagram 7, below).DemandThe biggest threat facing WH is their ability to reduce costs. Their customers are demanding lower prices and the organization has been responding, by investing firmly in R&D to improve the casting process. However, if they do not get the costs of the casting process under control, they will not be able to meet the increasing demand from the motor fomite industry. The motor vehicle industry in 2004 purchased a total of 68% of the total industrys output. Diagram 8, below illustrates the percentage increase or decrease year over year by industry and the tonnage sold by industry. Clearly, the industry that has been adding value to WH has been the motor vehicle industry. On average, over the last three years, the motor vehicle industry has increased 13 percent.If the motor vehicle industry continues on their current growth path, by the end of 2005, WH will have reached correct capacity of 95,000 tonnes per year (see Diagram 9, below). The forecast include s a 13 percent increase in motor vehicle tonnage per year and holds the other two industries with no growth or decline in tonnes required.PEST ConclusionThe up boost cost of scrap iron and steel, a stagnate Germany economy, the German labour market and its regulations are proving extremely difficult for WH to deal with. In addition, WH is reaching plant capacity and they have not been able to control rising costs to date. For the last three years, wages and raw material purchases have been well over budget. SWOT ANALYSISA SWOT analysis was completed for WH to evaluate their Strengths, Weaknesses, Opportunities, and Threats (see Diagram 10, below). The analysis identifies the key internal and external factors that will hinder or help WH attain their stated goals and objectives.One of the key factors to WH success was their ability to understand their customers business needs and create new products for them. This was one area in the casting foundry industry that separated WH from t heir competitors WH was and still is Best in Class, when it comes to product innovation. One area of improvement would be to eliminate or reduce the number of products that have low margins.By producing these low margin products, WH is tying up valuable resources both in time, money and material. One of the greatest threats WH will take chances is the surging casting foundries from Eastern European countries, such(prenominal) as Spain, Turkey and Poland. Currently, many of the Eastern European organizations either small or big are not OEM rated. However, with time and additional enthronement dollars, these organizations will be able to compete against WH on price.PORTERS FIVE FORCESOne final assessment was completed to determine the favourableness or attractiveness of the casting foundry industry in Germany. By utilizing Porters Five Force model, a more realistic assessment of the competitive aspiration that exists in the market can be determined. This will give WH insight as to the attractiveness of the industry and determine what course of action (if any) is required.The analysis understandably demonstrated that the industry is highly profitable (see Diagram 11, above). The Barriers to Entry are high, making it difficult for organizations to enter. Entry requires a high initial capital investing and ongoing R&D dollars. Moreover, the bargaining power of the Buyer is Low, because switching costs are high. Substitutes products are available, but in the motor vehicle industry highly unlikely to be used.Thebargaining power of Suppliers is strong, because there is strong union presence and the raw material is based on world append and demand prices. In short, the competitive rivalry within the Casting Foundry Industry is high, suggesting that the industry is profitable. Furthermore, with high exist barriers, because of the high fixed costs, it makes it extremely difficult to exit the industry, and thus remaining organizations will continue to suffer and lose more market share.Question 1AIs WH well positioned in it now and in the future? non with their current casting process. Clearly, WHs core competency lies in their ability to produce exactly what the customer needs and then takes that knowledge one trample further by producing new products that customers ends up wanting WH creates demand for their new more profitable products. Moreover, WH links their internal logistical and informational systems with their customers. Basically, WH becomes an extension of their customers. The future for WH would be to outsource some non core activities of their value chain to 3rd parties in the casting foundry industry perhaps in Eastern Europe, such as Poland, where wages are less and employment is more bountiful.In conclusion, with the current trends in the casting foundry industry, where growth is expected to increase 2% per year in tonnage and 3% per year in value, WH does not have the current structure to capitalize on this growth opportunity. Pricing has also become an issue and they are move to go head to head with their customers and asking them to pick up the additional surcharges on the price of scrap steel and iron. Moreover, with the additional investment in R&D, costs have not decreased. Revenues have been steadily rising, but so have costs and costs have outpaced revenues. This is evident, as WH is expected to lose 6 million in 2004, making it the worst loss in the companys 4 year history.Question 2Is the alternative that WHs management called strategic change really strategic? Justify you answer.In order to justify the answer, one must first define what strategic change is. gibe to Joseph N. Fry, one of the authors of strategic Analysisand Action he suggests that it is a tool for building, communicating and maintain the fashion of the business. As for Lawrence G. Hrebiniak, he suggests that strategic change is all about execution. In his book, Making Strategy Work, he suggested that without a careful, plann ed approach to execution, strategic goals cannot be attained.Albeit, in both examples above, little reference is do to the actual strategy, but in reality both authors agree that the strategy is important, but the execution of the strategy is key to success. An analogy that can be used to illustrate their point of view would be a golfer that needs to fade a shot around a tree. The strategy has been set, the trajectory of lump flight has been visualized wind and all other factors have been taken into consideration. Whats left is the actual striking of the ball. However, if the golfers core competency is to hit a draw, rather than a fade, the strategy has little to do with the result of the execution.One of WH alternative is to shut down Line 2, reduce employment by 114 workers and increase sales through a radical marketing campaign that started in 2003. However, the radical marketing campaign emphasizes a differentiation strategy as opposed to a price strategy as indicated by Klaa s. The key to their current success is WHs ability to understand their customers business needs and create specific casting moulds for them. In addition, WH has been able to develop new products with higher margins for their customers and then sell those products back to their customers push marketing.By adopting a low cost strategy, rivals in the industry will eventually out price WH and take market share away from them. One of the reasons why WH can be out priced in the market is that their main competitors from Eastern Europe, such as Poland, have a much lower wage structures. To conclude, WHs alternative does not fit the traditionalistic definition of a strategic change. After reviewing the data and the definition, the answer remains a resolute no. The reason for the decision is that strategic change must take into consideration other aspects of the organization.The changes suggested by Klaas will not delivery the strategy in a controlled manner that is efficient and effective to implement. Strategic management is not about delivering one single project or addressing one particular issue, but a process that governs the entire organization and how the entireorganization is affected by the strategic change (see Diagram 12, above). The so called alternative strategic change in the end will not deliver any real value to the organization, thus further suggesting that this is not a strategic change. Strategic change at the end of the day must deliver real value, not perceived value.In Germany that value takes on the form of a stakeholder, rather than a shareholder. Thus, by patently focusing on profits and ignoring the human costs of the layoffs, WH will not execute this strategy with any conviction or success. Both Fry and Hrebiniak realize that the process is complicated and contains many moving parts. In short, there is no magic bullet. Simply cutting workers and installing automated processes does not guarantee costs reductions and increased revenues.Quest ion 3How much flexibility did the company have in dealing with its problem?The reality of the situation is that WH only had perceived flexibility. With economic stagnation, an aging population, tight employment regulations and a shortage of workers, WH has expressage flexibility in being able to deal with the problem. Moreover, with the increase in tariffs, raw materials and energy, WH has even less flexibility in addressing their current problem. WH was able to negotiate concessions with the Works Council however, the concessions came with a hefty price. The Works Councils goal was to save jobs in the short term for the promise of better pay in the long term. Thus, WH was able to negotiate special agreements to break the current collective agreement.WH negotiated for more free hours, less pay and forgone holidays and vacation pay, but had no control over dismissals and working exemptions the Works Council held the balance of power in these two categories. For example, if employment dropped below 570 permanent employees, the regional tariff rates would come into effect and they did. The Works Councils position for long term better pay may present a problem with a few of the alternatives being suggested by WH.The Works Council may not approve any of the alternatives that involve significant layoffs and pay reductions. These alternatives are in direct conflict with their own goals and objectives. In conclusion, perceived flexibility is much different than actual flexibility. WH may think they can suggest an alternative thatmakes sense for them, but the reality is that without buy in from the Works Council, the strategy will surely fail to execute.Question 4What could management do to address the problem?WH management must develop a Strategic Management Process. The new strategic management process is to be undertaken by the executives at WH and GMH. The executives will review and interpret the Germany foundry industry and determine the direction for WH. At this point in the process the executives will set the Corporate Strategy (strategic direction) and priorities, while understanding and taking into consideration resources and budget constraints (see diagram 13, below).The seconds rate is to create the right Corporate Structure with the proper incentives and controls to ensure that the Corporate Strategy can be achieved. The final step is to ensure that the Business Units understand the objectives set forth and have the necessary resources in place to achieve their goals and objectives. It is the business unit who is responsible for ensuring that they have the correct skills and capabilities in place in order to achieve the Corporate Strategy. Once the strategic management process has been developed, the next critical step in the process is to formulate a well defined plan that has clear and focused goals and objectives. These goals and objectives must be measurable, attainable and realistic.Moreover, the plan must address how these achi evements will affect the overall organization, but more importantly, if the goals and objectives are not meet, what are consequences to the organization. This process must be open and transparent that will ensure that buy in will occur quickly. In conclusion, the execution of these key activities is the heart of any successful strategic management process. In addition, WH must ensure that the Works Council understands that the long term success of WH is in everyones outflank interest. The Works Councils long term goal is for better pay for its workers, without WH, their goals and objectives will never be realized.Question 5What had management make so far?Management has accomplished a lot to date. They sold WH to GMH who had experience in purchasing distressed companies and providing them with fresh equity and motivating their work force. In addition, in 2003, WH implemented a radical marketing plan that increased revenues by approximately 13.6 % in 2004. WH invested heavily in ope rations, by trying to automate the sand casting process. WH believed that they could further reduce the operating costs by automating a lot of the high touch processes.WH has also outsourced the finishing process, as this is one of the most costly processes in the sand casting process. WH hired a consultant by the name of Knight Wendling who was hired to improve productiveness and reduce costs. His first mandate was to get customer to pay a scrap surcharge and eliminate unprofitable products. By the middle of 2004, 91 percent of customers were paying the surcharge and he eliminated 5,000 tonnes of products that were generating low constituents. Finally, in 2004 WH made some major changes to their current management structure and sent out a new message to their workers, that management was looking for fresh ideas that would make a difference.Question 6What actions were left open to WHs management and would they make sense?One action that was left open was continuing with the Radical Marketing Plan that WH started in 2003. The marketing plan would continue to increase sales by 8.2 million and contribution by 5.2 million in 2005. However, one of the major issues with this action was that costs were also increasing and the increase in revenues and contributions was being offset by the rising cost of scrap iron and steel and wages. The rising costs, coupled with WHs increase in prices were opening the doors to some of their direct competitors in Eastern Europe, such as Poland, Hungary and the Czech Republic.This plan would only make sense if they could get the Works Council to increase the number of hours that employees could work and reduce the minimum number of workers required, before tariffs are enforced. Moreover, this approach would make sense, if WH could convince the Works Council that their short term objective to keep as many employees aspossible is really going to hurt their long term goal of better pay for their workers. If WH and the Works Council co uld overlook their short term objectives and focus on their long term objectives, everyone would be better off.Question 7How could it pursue the remaining actions?WH could simply divest the entire operations and payout the 15.3 million owed to the workers ( 25,000 * 612 workers). However, this may not be in the best interest of the entire organization as an environmental assessment must be completed before the land gets rezoned. Worst case scenario, if the land is grime the purchaser may request that the seller clean the land before title change and this could cost GMH considerable money.The opportunity cost of closing down the plant would be the 15.3 million, thus the company could take that money and reinvest it into WH. Currently, WH is losing 6.2 million per year, if they continue losing this amount of money, that would buy them 3 additional years and then WH could simply sell the business. WH would have to create a strategic plan that takes into consideration all the options a ssociated with investing additional capital. More so, they will need buy in from the Works Council. Without their buy in strategic plans will prove useless.