Howard Equipment Company (HEC) manufactures heavy construction equipment. The co

Question

Howard Equipment Company (HEC) manufactures heavy construction equipment. The company's primary product, an especially powerful bulldozer (PD10), is among the best produced in Europe. The company operates in a very price-competitive industry, so it has little control over the price of its products.

A Porter’s five-forces analysis reveals the following:

1. The PD10 model faces severe competition based on price, timely delivery, and quality. Companies in the industry have persistent pressure to reduce selling prices and utilize capacity fully. Robert Benson, the HEC's president, has stated that to be successful, the company has to keep production costs in check by operating as efficiently as possible, must provide a very high-quality product and meet its delivery commitments to customers on time.

2. The threat of new entrant is low due to small profit margin and high capital costs.

3. Customers, such as Parker Co and Global Power, negotiate aggressively with HEC and its competitor to keep prices down because they buy large quantity of product.

4. HEC tailors the PD10 to customers’ needs and lowers price by continuously improving design and processes to reduce production costs. This reduces the risk of equivalent products or new technologies replacing PD10.

5. To produce PD10, HEC requires high-quality materials and skilled employees. The high level of skills required of suppliers and employees give them bargaining power to demand higher prices and wages.

Recommend to the management the generic strategy (i.e. cost leadership or differentiation) that HEC should pursue. Support recommendation with clear reasoning drawn from the analysis prevalent in this industry.

Explanation / Answer

On the basis of Five forces analysis, Cost leaderhsip strategy seem to be most appropriate one for the company. As it is a competitive playing field, the organization which enjoys the product leadership having its flagship product as market leader, needs to offer this product at the lowest price possible, so as to keep the competition at bay. As the threat of new entrants as well as new competitive products is low, there is little possibility that the product will be replaced or outclassed by a new product, which allows the company to chalk out its long term strategy for growth and leadership. High bargaining power of suppliers and customers tends to keep the company on the toes to maintain its quality, while working on extremely competitive margins. This calls for very lean, agile and efficient production, quality control and distribution system so as to enable it to keep its cost leader position undisputed.

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