Bombardier

TEG (A)

Group Case Memo

Class 8 10/09/2012

Ignacio Dussaut, Karen Xinru Guo, Dafne Guisard, Weishi Janice Tan Overview

In 1993, Bombardier (BOM) faced a strategic crossroad in their North American business with the entry of an aggressive competitor, Morrison Knudsen (MK). On one hand, MKs low cost bid and strong Buy America political marketing has made them the preferred supplier in many recent competitive bids, resulting in lost revenues for BOM. On the other hand, BOM stands for high quality, top-in-class technology and impeccable customer services to ensure product reliability and on-time delivery. Recently, BOM higher prices resulted in lost of important contracts in western US, especially in Transportation Equipment Group (TEG) division. TEGs goal to reinforce its presence in light rail train has become unfeasible as its market share decreased by more than 10 points in two years. Consequently, TEGs president Leblanc needs to reevaluate their internal strategy to face the threat from MK. Despite actual MKs winning strategy in western US, this market is becoming more mature, with probable establishment of Transit Authorities and, therefore, a new set of strict quality requirements. Thus, the argument in favor of major changes in BOM strategy tends to be softened if MKs does not delivery what it promised. As a result, BOM can wait and see while lobbying for their product quality, compared to MKs riskier approach in order to strengthen BOM bidding changes. Morrison Knudsens summary and evaluation of strategy As a new market player, MK has positing itself as an aggressive competitor willing to lower prices to gain market share. Foreseeing US growing need to renew its aging transportation infrastructure, CEO Agee conducted a series of cost reduction activities as well as refocused the business on massive and complex infrastructure projects that were MKs forte. Externally, MK was able to enlarge its network and show commitment by bidding on numerous contracts and encircling clients with contacts from several divisions. It also promoted itself as the only American railcar builder in order to play on the Buy America sentiment supported by the regulation. MK was able to secure multiple contracts based on their pricing (7% lower than major competitors) and positioning. During the engineering and manufacturing stage, MK positioned itself as a project manager, subcontracting a high proportion (60% - 65%) of the work to other lower-cost overseas firms. On one hand, this allowed more firms to enter the market as subcontractors. However, since design and engineering was also outsourced, MK has lost some control over the product quality and delivery reliability. Overall, MK currently has a relatively stronger market presence and price advantage to its competitors. In the longer run, the lack of control to ensure high quality and reliable delivery might eventually damage MKs growth and reputation. Bombardiers summary and evaluation of strategy Bombardier (BOM), one of Canadas largest manufacturers, is specialized in three main industrial sectors: aerospace, transportation equipment, and motorized consumer products. Despite the goal to reinforce its presence in light rail train, the Transportation

Bombardier TEG (A)

Group Case Memo

Class 8 10/09/2012

Ignacio Dussaut, Karen Xinru Guo, Dafne Guisard, Weishi Janice Tan

Equipment Group (TEG) faced significant challenges in 1993, when it lost four key contracts in the US to MK. BOM has been the market leader in passenger railcar manufacturing since late 1970s and over the years built a strong reputation for quality and technology of its products. TEG is also known for its excellent reputation with Transit Authorities. Its reputation was based on product reliability, on-time delivery and customer service. TEG actual strategy relies on maintaining control of the design and the manufacturing of the car shell, which are the core activities of the production pipeline. TEG outsourced about 60% of its noncritical activities but still places high priority on keeping control of the engineering and integration of the system, critical to controlling the quality, cost, and delivery time. Overall, TEGs close control over production line enables a quick and effective response to changes in project without jeopardizing delivery deadlines. But, a very selective competitive approach based on lower-price auctions has accounted against TEG. While its competitor has increasingly gained notoriety, TEG has faced political issues due to lack of information received during prospection visits to authorities who havent prioritized product quality for future bids base of the TEG bidding approach. TEG should make more efforts to reinforce relationships in the western US and marketing its high-quality advantage over MKs. Potential buyers should be aware of TEGs advantages, especially because new evaluation criteria for projects are in a development stage, and can be weighted favoring quality instead of price. Recommendation for altering Bombardiers strategy BOM can believe that MK strategy would bring them into serious shortage troubles and ultimately fail sooner or later. Therefore, Bombardier can wait and see whether MK will deliver what they promised. However, there is a small chance that MK delivers on-time and with quality without compromising its margins (e.g. new innovative production technology). In this case, TEG can adopt a niche strategy in the USA, trying to cut cost to bet MK in specific and smaller contracts (lower risks), bearing eventual investment loss. Even in this case, TEG can expand its market share focusing in other markets where quality and high technology can add value to customers. For instance, entering emerging markets, where TEG can add value creating business rules. But considering the fact that the MKs value chain is plaster and does not allow projects adjustments in time summed to a lower Return on sales (compared to BOM), there is a high probability that MK will fail to deliver. In this case, BOM can leverage even more this condition to set the weight of quality as the most important factor in competitive bids. Moreover, BOM can internally conduct a cost reduction measure to reallocate resources to marketing and to invest in new technologies. In conclusion, BOM should maintain its strong internal capabilities and positioning of high quality, on-time, reliable supplier; these are BOMs long time strengths and trademark. In a nutshell, BOM should adopt a wait and see proactive approach, continuing to increase its quality level and engage in extensive marketing with transit authorities (How MK is buy America if it outsources even product design and engineering?) to ensure domestic support that will allow deployment in the US. Future scenario will likely play out to show that MK is an unreliable supplier and they will start losing bids in BOMs favor. Thus, BOM may regain its market share.

Bombardier TEG (A)

Group Case Memo

Class 8 10/09/2012

Ignacio Dussaut, Karen Xinru Guo, Dafne Guisard, Weishi Janice Tan Exhibit 1 ROS Return on sales Bombardier vs. MK 1992 Morrison Knudsen Bombardier -0.3% 3.5% 1991 1.8% 3.5%

1990 2.1% 4.3%

MK need to reverse its unprofitable situation specially to be able to deliver its scheduled projects on time, meanwhile if additional investments are necessary (e.g. rework in the production process due to changes in the original project) MK can not recovery and its situation will significantly deteriorate.

Exhibit 2 Overview Bombardiers high level future scenarios