GB580 Unit 6 Corporate Strategy Analysis Example

Three Moves, One Budget: A Unit 6 Corporate Strategy Analysis for Tollefson Body Works

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Purdue University Global

GB580: Strategic Management

Unit 6 Corporate Strategy Analysis

[Instructor Name]

[Date]

Tollefson Body Works, the acquisition target and every figure are composite and illustrative; the frameworks and sources cited are real.

Recommendation

Tollefson should spend about $4.6 million of its $9 million capital budget on a panel lamination line in a leased building next to its De Pere plant, producing its own lightweight composite panels. It should defer a venture selling insulated panels for walk-in coolers until the line has run for a year. It should decline the acquisition of a Tennessee body builder at the asking price.

Corporate Scope Today

Tollefson is a single-business firm with two product lines, refrigerated and dry freight bodies, one plant and no ownership of any supplier. Its most important input, insulated panels, comes from a single laminator in Indiana. The Unit 5 strategy commits it to the lightest insulated body in its class, which depends on panels lighter than any the laminator now makes for it. Corporate strategy here is therefore a question of scope: which stages and businesses Tollefson should own to make the business-level strategy work.

The Three Tests

Porter (1987) proposed three tests for any move into a new business. The attractiveness test asks whether the industry entered is structurally profitable, or can be made so. The cost-of-entry test asks whether getting in costs so much that it consumes the future profits. The third, which Porter called better-off, looks for an advantage that the link between the existing business and the new unit creates for one of them. A move must pass all three. Each move below is tested in that order.

Move One: Laminating Its Own Panels

Attractiveness: passes. Panel lamination for truck bodies is a modest industry with a few specialized suppliers, and the laminator's margins on composite panels appear healthy, judging by its quotes. Tollefson would sell almost all output to itself, so attractiveness here means whether the stage earns enough to justify owning it.

Cost of entry: passes. A lamination line with presses, curing equipment and cutting stations, plus fit-out of a leased 40,000-square-foot building, would cost about $4.6 million. The laminator has quoted about $7,200 per body set for lightweight composite panels, a 30 percent premium over Tollefson's current panels, on about 1,600 refrigerated bodies a year. Tollefson's estimated in-house cost, including materials, labor, depreciation and the lease, is about $6,450 per set. The saving of about $750 a set is worth about $1.2 million a year, a payback near four years.

Better off: passes clearly. The weight target depends on panel specification more than on any other factor. Owning the line lets Tollefson's engineers change core density, skin materials and panel joints without negotiating each change with an outside supplier, and keeps what it learns about lightweight panels inside the firm. Stuckey and White (1993) argue that vertical integration is most justified when the market for an input is too thin to protect a buyer's specific investments, and that describes a single laminator asked to develop panels only one customer wants.

The panel is where the weight lives, so the panel line is where the strategy lives.

Move Two: Panels for Walk-in Coolers

Attractiveness: uncertain. Insulated panels for walk-in coolers and freezers in restaurants and stores are sold to refrigeration contractors by several established manufacturers. Margins are moderate, and buyers compare prices.

Cost of entry: marginal. The panel line would have spare capacity in its first years, so production costs would be low, but Tollefson would need a sales team and distribution to refrigeration contractors, a channel it does not know. Building that channel would cost about $2.1 million over three years, before the venture earned a profit.

Better off: weak for now. The venture would use spare line capacity, which helps the line's economics, but it adds nothing to the truck body strategy and draws management attention during the line's first year.

The venture is therefore deferred. It should be reconsidered once the panel line has run for a year and its spare capacity and cost are known.

Move Three: Acquiring a Tennessee Body Builder

Attractiveness: passes. The target is a composite family-owned builder near Nashville with about 140 employees, serving grocery fleets in the Southeast, a region Tollefson does not reach.

Cost of entry: fails. The owners are asking about $14 million, roughly seven and a half times the target's annual operating earnings of about $1.9 million. The price exceeds the whole capital budget and would require new debt. It reflects the owners' own plans for growth, so Tollefson would be paying in advance for gains it would have to create.

Better off: weak. The target builds conventional bodies and has no lightweight capability. Tollefson would be buying geography, not the capabilities its strategy needs, and integrating a second plant would stretch a management team already taking on a panel line. Capron and Mitchell (2012) caution that acquisitions are the hardest way to add capability because they combine the cost of buying with the difficulty of integrating.

How the Budget Is Used

The panel line takes $4.6 million. About $1.5 million is reserved for the licensing and engineering work described in Units 7 and 8, and about $2.9 million remains uncommitted, partly as a cushion in case the line's start-up runs over budget. If the line performs and the Southeast becomes a priority later, Tollefson could revisit the acquisition at a lower price or open a small mounting facility in the region, which would cost far less than buying a plant.

Why Not Simply Ask the Laminator?

One alternative to owning the line deserves a direct answer: asking the Indiana laminator to develop lightweight panels under a long-term contract. Tollefson's buyer raised this with the laminator, which offered to develop composite panels if Tollefson committed to five years of volume at the quoted ,200 per set and shared the cost of new presses. That arrangement would avoid the capital outlay but lock in the higher price and leave the panel design in the laminator's hands. Every improvement Tollefson's engineers proposed would need the laminator's agreement and might be offered to other builders. The contract route is the right fallback if the panel line runs late or over budget, and the recommendation keeps the existing supply agreement in place until the line is qualified.

Conclusion

For a single-business firm, the most useful corporate move is often the least glamorous one. Integrating backward into the one input that defines its strategy gives Tollefson control over the attribute it wants to sell, at a cost it can recover in about four years. The other two moves fail Porter's tests now, one on timing and one on price.

References

Capron, L., & Mitchell, W. (2012). Build, borrow, or buy: Solving the growth dilemma. Harvard Business Review Press.

Porter, M. E. (1987). From competitive advantage to corporate strategy. Harvard Business Review, 65(3), 43-59.

Stuckey, J., & White, D. (1993). When and when not to vertically integrate. Sloan Management Review, 34(3), 71-83.