Case V.3 SKF Rolling Bearings

554. Implementing and coordinating the global marketing programme Case V.3 SKF Rolling Bearings Asia: the great challenge It is spring 1996. Outside ...
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554. Implementing and coordinating the global marketing programme

Case V.3 SKF Rolling Bearings Asia: the great challenge It is spring 1996. Outside SKF's HQ in Göteborg the grass is sprouting and growing vigorously in the fertile Swedish soil. Inside there is just as much activity. Peter Augustsson, chief executive officer of SKF, has during the last couple of years followed the explosive development taking place in the Far East. Asia has shown the fastest economic growth in the world. The increase in China's gross domestic product exceeded 10 per cent in 1995. In Korea growth was 9 per cent and in Taiwan 7 per cent. As a consequence of this development, Peter Augustsson and the top management group have decided to hive off the Asian division. However, some problems have arisen from combining an organizational structure based on geography and an organizational structure based on products. At the same time Peter Augustsson has been somewhat in doubt whether it is possible to increase SKF's market share in bearings in the Japanese market from its present level of 1 per cent (see Table 1). The reason for the law market share is, of course, that Japan has same of the world's largest producers of bearings to the car industry. But SKF has been able to take the lead over the Japanese in all other markets, so why not challenge the Japanese manufacturers in their home market?

Background A basic form of ball bearing existed even in early Roman times. One was discovered in the remains of a ship dating from the reign of the emperor Caligula in AD 40. But the breakthrough did not occur until the nineteenth century, with the invention of the pedal cycle. In order to ease the effort of the rider, the wheels had to rotate easily. This accelerated the development of the ball bearing. In 1907 Sven Wingquist, a bright young Swedish engineer, developed the world's first self-aligning ball bearing. In the same year that the self-aligning ball bearing became a commercial reality, Svenska Kullager Fabriken (SKF) was founded. Over the next six decades, SKF grew and became the world leader in bearing technology and its applications. In 1926 production of cars was started by a subsidiary of SKF, called AB Volvo. In 1935 AB Volvo became independent of SKF, and it later grew to become one of the major car producers in Europe. Through the 1960s and 1970s SKF was highly centralized and large economies of scale meant that huge quantities of bearings could be sold at competitive prices in the world market. In 1987 SKF's rolling bearing business was restructured into three business areas, each with world-wide responsibility: SKF Bearing Industries, SKF Bearing Services and SKF Specialty Bearings. Today, operating in some 130 countries, SKF is world leader in the rolling bearing business. Bearings, seals and special steels are SKF's main product areas. In addition the group also manufactures and sells a host of other industrial precision components. The company has same 43,000 employees and more than 80 manufacturing facilities throughout the world. Its international sales network is backed up by about 20,000 distributors and retailers. SKF's major customer areas are the automotive industry, the industrial aftermarket, railways, electrical industry and heavy industry. World-wide availability of SKF products is supported by a technical advisory service. One of the main contributors to SKF’s strength is its R & D. The company's R&D strategy is to concentrate

Table 1 The bearings market in 1995: world-wide market shares of top manufacturers Europe

North America

Latin America

Asia (excl. Japan)

Japan

Manufacturer

%

Manufacturer

%

Manufacturer

%

Manufacturer

%

Manufacturer

%

SKF (Sweden)

30

Timken (USA)

20

SKF (Sweden)

30

SKF (Sweden)

20

NSK (Japan)

30

INA (Germany)

15

Torrington (USA)

14

FAG (Germany)

20

NSK (Japan)

15

NTN (Japan)

30

FAG (Germany)

10

SKF (Sweden)

12

Timken (USA)

15

NTN (Japan)

15

Other Japanese

Japanese manufacturers Others Total

15 30 100

Japanese manufacturers Others Total

Source Adapted from Annual Report, 1995, and other material

20 34 100

Japanese manufacturers Others Total

10 25 100

Timken (USA) Others Total

10 40 100

manufacturers

35

SKF (Sweden)

1

Others Total

4 100

556 . Implement ,and coordinating the global marketing programme research in one high-powered centre in the Netherlands and then complement that centre with product development and testing facilities around the globe. The SKF organization During 1995, a new organizational structure was gradually introduced into the group. Originally geographically focused, the group's operations have now been divided into ten divisions (see Figure 1), each with global responsibility for its operations. SKF Asian Bearing Division is an exception, however, since total responsibility for most of the group's bearings operations in Asia has been assigned to this division. The Asian division has been separated not only because the Asian region is showing rapid growth, but also because it is a very heterogeneous market, with very different cultures. These reasons were considered sufficiently important for the company to decide that efforts in this region must be managed locally, and that all decisions could then be made very quickly. The rolling bearings business Of the total net sales of the SKF Group in 1995 (SEK36.7 billion), the rolling bearings business accounted for 84 per cent (or SEK31.0 billion). Table 2 shows the total sales of bearings classified by application and geographical area. -Group chief executive PETER AUGUSTSSON

Group business development KAJ THOREN Group total quality development OLLE RANANG Group technical development HENNING WITTMEYER

Group finance TORE BERTILSSON Group legal KRISTER PEIL Group public affairs LARS G MALMER Group personnel MAGNUS JOHANSSON

Purchasing, Logistics and Information Systems Division CLAES POLLNOW

Industrial Bearing Division CHRISTER GYBERG

Components Division ROLFJACOBSON

Asian Bearing Division GUNNAR GREMLlN

Ovako Steel MARTIN IVERT

Specialty Products Division MICHAEL HAUPT

Automotive Bearing Division TOM JOHNSTONE

Seals Division RAY LANGTON

Electrical Bearing Division GIUSEPPE DONATO

Emerging Business Division PETER KASCHNER

Figure 1 SKF's organization



(Source: 5KF Annual Report, 1995)

SKF Rolling Bearings .557

Table.2 SKF sales by application field and geographical area, 1995

Application field

%

Geographical area

%

Industrial users General machinery

29 17 16

Europe (excl. Sweden)

56

Sweden North. America

5 18

Rest of the world

21

Cars Trucks Heavy industry Electrical industry End users Vehicle replacement Aero-space Railways Total

8 8 6 6 5 3 2 100

Total

100

Source: SKF Annual Report. 1995.

Figure 3 Segmenting customers for rolling bearings



Figure 2, plate 30, show product examples from two application fields: trucks and the electrical industry. If the world market for bearings is divided into customer segments such as passenger cars, trucks, the aftermarket, etc., SKF holds leading positions within all segments with the exception of electronic motors. In general, its customers can be grouped into different categories as shown in Figure 3 (the percentages in Figure 3 are proportions of SKF sales). Traditionally, OEM customers have been given the highest priority by SKF because of their high-volume production standards. However, profit margins are low in the OEM sector and SKF is under constant pressure to keep price increases below the rate of inflation. In the vehicle aftermarket the OEM customers (such as Mercedes, Volkswagen and Ford) may also be competitors through their own spare parts divisions. The specialist suppliers of car parts will typically buy SKF bearings and sell them under their own brand

558 . Implementing and coordinating the global marketing programme name to distributors. Overall, the three largest companies in the world bearings industry are SKF," NSK Japan and NTN Japan.

A breakthrough for bearings in the Japanese market? At the beginning of July 1996 Peter Augustsson receives a fax from Tom Johnstone, president of the SKF Automotive Division. It reads: Hi Peter Good news! As you already know, I am in Japan at the moment negotiating a contract on our wheel bearings with Suzuki cars. I have succeeded in getting a contract involving about US$1 million annually over a five-year period. We secured an order competing against very strong domestic bearing manufacturers. The order signals the start of a long-term involvement with Suzuki which I believe will benefit both our companies. Peter, I think this is a definite breakthrough in our efforts to penetrate the Japanese car industry with our products.

Regards Tom Johnstone Peter Augustsson is, of course, very pleased on behalf of Tom Johnstone and SKF, but is still a little skeptical about the possibilities of SKF seriously penetrating the Japanese bearings market. As a consultant you are asked to give an independent assessment of SKF's business possibilities in Asia. You are specifically asked the following questions.

Questions 1. Give an assessment of the new organization's ability to exploit future global business possibilities, especially in Asia. Include an assessment of the relevance of combining a geographic organizational structure and a product functional organizational structure. 2. How would you assess SKF's possibilities of penetrating the Japanese rolling bearing market? Consider the following: (a) Which kind of entry mode and penetration strategy would you advise ? (b) What is a realistic goal for SKF's market share in bearings in Japan ? (c) Should SKF use resources in other parts of the world rather than in Japan?