Sona School of Management, Salem IFM-8th September 2009

Case study – Corporate Strategy and FDI

Instructions

This is a group assignment and is part of evaluation for continuous internal assessment.

The number of members in a group cannot exceed four.

Read the case and try to prepare a power point presentation outlining the response of the

group in respect of the questions provided at the end of the case.

Ensure that the response arises out of a consensus opinion after group discussion.

Spend about 1 hour to read and discuss the case and another 30 to 45 minutes to prepare

the responses.

The presentation material is to be forwarded to sreeraman.venkatesan@gmail.com by 4

p.m. positively.

In case of any clarification, you may ask Ms. Dhivya to get in touch with the

undersigned.

The US Tyre Industry Gets Run Over

The U.S. Tyre industry illustrates the troubles faced by multinational firms that have lost

their source of differential advantage. Although Europe had once been a profitable

market for the Big Four U.S. tyremakers – Goodyear, Firestone, Goodrich and Uniroyal –

each of these firms has, by now, partially or completed eliminated its European

manufacturing operations. The reason is the extraordinary price competition resulting

from a lack of unique products or production processes and the consequent ease of entry

into the market by new firms. Moreover, these firms then faced well-financed challenges

in the U.S. market by, among others, the French tyre maker Michelin, the developer of

the radial tyre and its related production technology. Uniroyal responded by selling off

its European tyre-manufacturing operation and reinvesting its businesses that were less

competitive there (and, hence, more profitable) than the tyre industry. This reinvestment

includes its chemical, plastics and industrial products businesses into Europe. Similarly,

Goodrich stopped producing tyres for new cars and expanded its operations in polyvinyl

chloride resin and specialty chemicals. In 1986, Uniroyal and Goodrich merged their tyre

MBA-Trimester IV-Batch 2008-2010

Sona School of Management, Salem IFM-8th September 2009

units to become Uniroyal Goodrich tyre, selling only in North America. Late in 1989, its

future in doubt, Uniroyal Goodrich sold out to Michelin. The previous year, 1988,

Firestone sold out to the Japanese tyremaker Bridgestone, the largest Japanese tyremaker.

The deal covered Firestone’s world wide operations.

Like other Japanese companies that preceded it to the U.S., Bridgestone was motivated

by a desire to circumvent potential trade barriers and soften the impact of the strong yen.

The move also greatly expanded Bridgestone’s customer base, allowing it to sell its own

tyres directly to U.S. automakers, and strengthened its product line. Bridgestone excelled

in truck and heavy-duty-vehicle tyres, while Firestone’s strength was in passenger-car

tyres. But beyond these facts, a key consideration was Bridgestone’s wish to reinforce

tyes with Japanese auto companies that had set up production facilities in the United

States. By 1992, these companies, either directly or in joint ventures with U.S. firms, are

scheduled to produce about 2 million vehicles annually in the United States.

Firestone also contributed plants in Spain, France, Italy, Portugal, Argentina, Brazil, and

Venezuela. Thus, Bridgestone’s purchase of Firestone has firmly established the

company not only in North America, but in Europe and South America as well.

Formerly, it had been primarily an Asian firm, but had come to acknowledge the need to

service Japanese automakers globally by operating closer to their customers’ production

facilities. The increasing globalization of the automobile market has prompted vehicle

producers and tyremakers alike to set up production facilities in each of the three main

markets – North America, Western Europe and Japan.

Two main factors have been responsible for this trend toward globalization – transport

costs are high for tyres, and, as a result, exporting has ceased to be a viable long-term

strategy for supplying distant markets. For another, shifting manufacturing overseas was

the only way for the tyre companies to meet the logistic challenges posed by the adoption

of “just-in-time” manufacturing and inventory system by automakers.

MBA-Trimester IV-Batch 2008-2010

Sona School of Management, Salem IFM-8th September 2009

A series of combinations in the tyre industry – including Sumitomo Rubber’s purchase of

Dunlop Tyre’s European and U.S. operations, Pirelli’s acquisition of Armstrong Tyre and

Rubber, and Continental AG’s acquisition of General Tyre and Rubber and its subsequent

joint venture with two Japanese tyremakers – practically forced Bridgestone to have a

major presence in the important American market if it were to remain a key player in the

United States and worldwide. Absent such a move, its Japanese competitors may have

taken Bridgestone’s share of the business of Japanese firms producing in the United

States and Europe. This result would have affected its competitive stance in Japan as

well.

A similar desire to increase its presence in the vital North American market was behind

Michelin’s 1989 acquisition of Uniroyal Goodrich. For Michelin, the addition of

Uniroyal Goodrich provided entry into private-label and associate-label tyre markets

from which it had been absent, as well as added sales to U.S. automakers.

Having read this, consider the following-

Goodyear Tyre and Rubber Company, the world’s number-one tyre producer before Michelin’s acquisition of Uniroyal Goodrich, is competing in a global tyre industry. To maintain its leadership, Goodyear has invested over $1 billion to build the most automated tyre-making facilities in the world and is aggressively expanding its chain of wholly owned tyre stores to maintain its position as the largest retailer of tyres in the United States. It has also invested heavily in R&D to produce tyres that are recognized as being at the cutting edge of world-class performance. Based on product innovation and high advertising expenditures, Goodyear dominates the high-performance segment of the tyre market; it has captured nearly 90% of the market for high-performance tyres sold as original equipment on American cars and its well represented on sporty imports. Geography has given Goodyear and other American tyre manufacturers a giant assist in the U.S. market. Heavy and bulky, tyres are expensive to ship overseas.

RequiredA. What barriers to entry has Goodyear created or taken advantage of?B. Goodyear has production facilities throughout the world. What competitive advantages might global production provide Goodyear?C. How do tyre-manufacturing facilities in Japan fit in with Goodyear’s strategy to create shareholder value?D. How dill Bridgestone’s acquisition of Firestone affect Goodyear? How might Goodyear respond to this move by Bridgestone?

MBA-Trimester IV-Batch 2008-2010