MaxiTrans: Competitive Strategy & Risk Analysis

STRATEGIC OVERVIEW

MaxiTrans’ main business activity is the manufacture of many kinds of freight trailers, such as the T-liners, flat tops, container skeletons, dry freight, and temperature controlled trailers. They also engage in the sales, rental, and finance (lease or purchase) of new and used trailers. Other business activities include the supply and distribution of parts, service and repair, appraisals (for insurance, trade-ins, and repairs valuations), and the manufacture of urethane foam and body panels. Truck-trailer is an important component of various industries, such as infrastructure, food and agriculture, transport and distribution, and resources (mining).

Industry Life Cycle

The trailer manufacturing industry is currently in the mature growth stage. Analysts predict that road freight activity will continue to grow at 3% annually1 up to the year 2020, so we would expect the trailer industry to grow in the same direction. This represents a slow but steady growth characteristic of mature industries. The mature characteristics of MaxiTrans’ business will be clearer in the analysis of its cash flow statement [See Part D]. Industry growth is also cyclical and its cycles are closely related to the economy as a whole.

Industry Competitive Structure

There are very few major players in the freight trailer industry, including MaxiTrans. Economies of scale dictate that competitive power is concentrated in the hands of a few large manufacturers, and the industry structure can be said to be oligopoly. Other smaller manufacturers concentrate on niche markets and are not a threat to MaxiTrans’ main line of business.

Trailer Industry: Five Forces Analysis

The customers of MaxiTrans are generally price takers. Since each customer only constitutes a small fraction of MaxiTrans’ customer portfolio, they have a relatively low bargaining power. The bargaining power of suppliers is also low. MaxiTrans is such a major player in the industry that it can pressure the suppliers to lower price of supplies and raw materials. The threat of entry to the industry is low. This is caused by high barriers to entry, such as economies of scale leading to cost advantage, a well-established distribution network, and established customer relationships. The intensity of rivalry is moderately low, because there are only few players in the freight industry. There are, however, some incentives to gain market share. Threat of substitutes from other means of transportation is also low, because freight trailer is an indispensable component of the land transport industry. [For an in depth full Five Forces Analysis see below]

MaxiTrans: Competitive Challenges

With the slow pace of growth of the market, MaxiTrans has turned to concentric diversification in order to grow market share and drive revenue growth in the domestic mraket. The company has acquired of several companies within the past four years [see Appendix B]. A key strategic challenge for MaxiTrans will be its ability to find suitable acquisition targets and to integrate these companies into the operations of the group as a whole. The recent underperformances of some acquisitions (e.g. Hamelex White and Colrain) suggest that all is not running smoothly. The challenge facing MaxiTrans will become clearer in the analysis of the income statement and profitability [see Part B, E].
In the short run, MaxiTrans may find its industry in a cyclical downswing being adversely affected by the macroeconomic conditions such as higher fuel prices and the drought, as well as a slowdown in economic growth as the Australian economy reaches full productive capacity.

FIVE FORCES STRATEGIC ANALYSIS OF TRAILER INDUSTRY

Threat of Entry

The threat of entry into the trailer industry depends on the existing barriers to entry. Maxitrans is a dominant player in the industry. Economies of scale is present in manufacture, research, marketing, distribution, and service network, leading to a cost-advantage. Maxitrans also has a well-established distribution network, while possessing a large capital. There is some research and development, though it not substantial relative to the total of other operating expenses ($763,000 of $18 million). This implies the newcomer must enter the market big to be competitive. Moreover, Maxitrans has established relationships with major customers, such as Safeway, Reflex Papers, etc. Altogether, the entry barriers to the trailer industry are quite high, thus reducing the threat of entry.

Intensity of Rivalry among Existing Firms

The intensity of rivalry is moderately low. The only other notable player in the freight trailer industry is Barker Trailers. Increasing GDP figures3 ($873,197m in 2003-04, $896,568m in 2004-05, and $922,637m in 2005-06) indicates Australia’s economy is still performing well. Along with Australia’s strong economic performance the industry may be experiencing some growth. Thus, firms theoretically can produce better results by just keeping up with the market. However, the industry is already in maturity stage in terms of the industry life cycle. So there are some incentives to gain market share, especially if the firm possesses the amount of capital needed to acquire another firms.

The two main driving forces behind MaxiTrans’ strong performance are its reputation and distribution network. MaxiTrans attempts to differentiate its trailers than its competitors through brand recognition and research and development. Its distribution network supports this strategy by somewhat selling the trailers as differentiated products. With respect to distribution, MaxiTrans is targeting the domestic market with the exception being China. The Chinese market was penetrated in 1996 through a joint venture with Chinese THT, called MTC.

Threat of Substitutes

There are only three ways to transport commercial goods, by air, by water, or by land. Air-freight is expensive even though it is so much quicker. However this can only be done from airport to airport and still requires truck-trailers to transport the goods to the final destination. Likewise ferry and railway transports can only be done from port to port and station to station respectively. Hence the threat of substitutes is relatively low because an alternative land transport is less feasible. Truck-trailer is an indispensable component of the transportation industry.

Bargaining Power of Buyers

There are only few players in the freight trailer industry. Moreover, Maxitrans have many customers and they do not pose a credible threat of backward integration. Hence, they have a relatively low bargaining power.

Bargaining Power of Suppliers

Suppliers to MaxiTrans include parts manufacturer, equipment manufacturer, raw materials (paint, aluminium, steel, etc.). The bargaining power of these suppliers is relatively low because there are many suppliers and MaxiTrans is such a major player that they can pressure them to lower the price of supplies and raw materials.

SOURCES OF RISK

International Risk - MaxiTrans operates mainly in Australia and New Zealand. Its operations abroad are confined mainly to its joint venture in China, Yangzhou Maxi-Cube Tong Composites Co., Ltd. The operation has been running since 1996, for more than 10 years, and operates in a non-politically-sensitive industry. Even though there tends to be a lack of systematic legal framework for the business environment and that local policy is often subject to change, we feel that the long track record of joint business and the nature of the industry expose MaxiTrans to relatively low international risk with regards to their operations in China. With regards to exchange rate risk, the Chinese Renminbi is a relatively stable currency that is managed by the Chinese government and we expect a gradual appreciation in this currency with little major fluctuations. Overall, international risk is assessed as low.

Domestic Risk - Domestic risks that MaxiTrans is exposed to mainly refer to the risks in Australia’s economy. Australia has a stable and robust economy that has experienced consistent economic growth for the last 15 years. Because of the global resources boom, we expect this economic growth to continue at a stable pace. Inflation is relatively stable, although lately the economy is seen to be approaching full capacity and this may place an upward pressure on wage inflation and thus labour costs for the company. Interest rates are also relatively stable; the Reserve Bank of Australia does not expect more major upward hikes in the future. We do not expect any major interest rate fluctuations to have a significant impact on MaxiTrans’ debt payments. This is discussed in more detail when discussing credit risk below.

Industry Risk - As mentioned in the analysis of profitability, the trailer manufacturing industry is mature and stable, with relatively low rate of structural change. There are high barriers to entry and a few dominant players, of which MaxiTrans is one. The trailer manufacturing industry is cyclical; this will be factored into the analysis of financial risk later. Other risks related to the industry are that raw material prices may rise materially, and regulation, especially surrounding mergers and acquisitions, may change unfavourably. However, on balance, industry risk is assessed as low.

Firm Specific Risk – The trailer manufacturing industry is currently in a state of consolidation; MaxiTrans has been acquiring related companies in the last few years. The key risk of this corporate strategy is that acquisitions will be unable to integrate smoothly into the company. Furthermore, MaxiTrans has to take on significant amount of debt to finance these acquisitions. This has an impact on the long-term solvency and credit risk of the company, since leverage will increase and interest payments will rise as well. This is discussed more thoroughly below. Management’s ability to manage the acquisitions will play an important role in the success of the company.

Overall, firm specific risk is assessed as medium.

Blackmores - A Strategic Analysis (Part 2)

Porter’s Five Forces Analysis

The intensity of rivalry among competitors in the industry:

• The industry structure is mainly that of monopolistic competition, with multiple firms competing for the consumer’s dollar. In the supermarket, 4-6 brands can be found selling relatively homogenous products.
  
• The high industry growth should help offset battle for market share, as competitors don’t need to steal one another’s customers. Market growth is increasing due to recent pushes towards complementary healthcare, for instance the work of the Complementary Healthcare Association lobbying the government and surveys undertaken by industry help to spread awareness of complementary healthcare among the aging baby-boomer population.
  
• The impact of regulatory bodies. E.g. if the Therapeutics Goods Administration tightens quality constraints, may erode profit margins of smaller firms, lead to push for economies of scale
  
• There are low switching costs between brands for consumers, though the Pan Pharmaceuticals debacle highlighted the importance of strong brand equity to maintain customer patronage. Also, if the healthcare products are viewed as commodities, buyers will focus upon price and service as their differentiators.
  

One of the biggest competitors to Blackmores continues to be lower priced alternative complementary medicines. Bio-Organics and Herron are two brands that are competing directly with Blackmores and given their lower price products are sharing much of the market share with Blackmores. Additionally, there are added incentives to purchase Guardian products, such as Guardian loyalty cards. These factors help to boost Guardian owned products. Therefore, a possible improvement in the future for Blackmores is to introduce a loyalty scheme that will help retain their customers.

The bargaining power of buyers:

• Bargaining power of buyers is moderate to weak.
  
• Many buyers mostly accounting for a small proportion of total sales. The complementary healthcare industry utilizes 3 major distribution channels - Chemists, grocery stores and healthcare stores to access a wide range of consumers who generally all purchase relatively low volumes (ASMI, 2006).
  
• Blackmores has sought to differentiate its product via a quality focus and some competitors have a cost-focus. This Differentiation strategy helps to develop brand loyalty and is aimed at nullifying the impact of higher prices on consumer demand.
  
• No real threat of backward integration – given the diversity of customers.
  
• The customers are end-users, so there are no resale issues
  
• The absence of any real switching costs favorably influences buyer power, as it allows dissatisfied customers to change readily within the healthcare brands. Again, the focus on brand image and service helps to offset this lack of switching costs.
  
• The retail stores and distributors, however, have some bargaining power because they are able to influence the amount of shelf space given to Blackmores. However, Blackmores has a good working relationship with distributors and has a good share of shelf space amongst retail outlets.

The bargaining power of suppliers

• Generally quite weak, as there are many supplier companies selling relatively homogenous raw materials and commodity products – price, quality and service are the only real differentiators.
  
• That said, suppliers don’t need to contend with substitute products, except for advances made in specific healthcare products.
  
• The industry is a very important customer of the supplier group (Industry worth more than $1billion). It is a growth industry that suppliers would want to remain on good terms with.
  
• Supplier products are vital to the industry’s business, which gives them some power over the industry. However the push for quality and the high number of suppliers means it is difficult for them to utilize this as leverage.
  
• No real switching costs between suppliers, only real logistical issues. So again industry has the power to shop between suppliers.
  
• Suppliers do not pose much of a threat of forward integration – they manage a diverse portfolio of clients so it is unlikely to be cost effective to develop them within the niche healthcare industry. Furthermore, it would be difficult produce the diverse raw-inputs that are necessary to manufacture healthcare products.
  

Threat of Substitute Products

• Synthetic medicines prescribed by professional doctors act as a substitute for the natural medication that Blackmores sells. However, the trend suggests a growingacceptance of natural healthcare products, such as those produced byBlackmores.
  
• Within the Asian markets that it is competing in, Blackmores will face intense competition from companies selling traditional Chinese medicines (e.g. Eu Yan Sang). Blackmores will have to work around cultural preferences for these products in countries like Taiwan, Hong Kong and Singapore.

Threat from Potential Entrants into the Industry

• No major legal barriers to enter the market
  
• Few secrets to manufacturing of health supplements
  
• Main barriers to entry are the existing supplier/buyer relationships, and the brand name and reputation of Blackmores.
  
• Threat of entry by global multi-level marketing firms (e.g. Amway, Nu Skin, Unicity) which often sell nutraceutical supplements
  
• Another threat that could possibly undermine the success of Blackmores in Australia is the potential arrival of an international company with intact infrastructure taking over local businesses in Australia. Already there is an abundance of companies competing for a segment in the complementary pharmaceutical industry and therefore separating oneself from the rest is an issue Blackmores must attend to.

Competitive Strategy: The Five Forces (Part 1)

When pursuing a qualitative analysis of a business, one of the key components of an analysis is the competitive dynamics of the industry the business is in. Michael Porter, in his book, competitive strategy, outlined the five key forces that determine the profitability of an industry. And while these five forces are not exhaustive, they form a useful guide to analysing a firm's competitive environment.

Force 1: Internal Rivalry Within the Industry

Internal rivalry refers to the state of competition between companies in the industry itself. A company in an industry characterised by low competition is likely to exhibit high amounts of abnormal profits. For example, Microsoft competes in the operating system industry, and has very little competition in this area. For all practical purposes, the company has a monopoly in the desktop operating system market, and faces very little competition. This enables it to raise prices and maximise profit, without having to worry about competitors undercutting its prices to compete away market share. A company such as Microsoft is said to be a price maker, since it has much power to set the prices of its Windows products.

Conversely, a business that is in an industry with a highly competitive market structure is likely to be a price taker. This means that it is forced to take the price that is set by the market. For example, the average soybean farmer's produce, with his few acres of farmland, only constitutes a drop in the ocean amongst the global soybean market. As an individual producer, the farmer has no say on the price of soybeans, since any attempt to sell his produce above the market rate will fail (nobody will buy his soybeans since they can get the same product at a cheaper price), and besides, he has no incentive to sell below the market rate when he can clear his barns at the going rate.

It therefore follows that companies that are within a competitive industry should seek to shape the competitive landscape so as to minimise competition, and derive competitive advantage. This, however, is the subject of another essay.

Force 2: Potential Entrants/Barriers to Entry

Even though a company might be in an industry with little competition, the competitive landscape of the industry can change rapidly once new competitors enter the industry. Thus, industries are attractive to the extent that there exist barriers to entry into the industry. For instance regional newspapers often operate with high barriers to entry. The large amount of fixed costs involved with purchasing and setting up printing equipment, coupled with the high editorial and administrative costs that are necessary to maintain a newspaper, prevent competitors from entering small regional markets. Customer brand loyalty can also create large barriers to entry, since there is little incentive for a reader to switch newspapers when he or she has been reading it for the last 20 years. High barriers to entry deter competition, and in turn help to maintain abnormal profits associated with lesser amounts of competition.

Conversely, an industry with low barriers to entry will invite competition, and companies in the industry will see any abnormal profits competed away rather quickly. For example, it is easy to set up a lemonade stall along the beach to sell drinks to passers by. Any abnormal profits, however, will quickly attract competitors who will rapidly compete away these profits. The lack of barriers to entry allows other enterprising individuals to quickly enter the lemonade market, and the lemonade stall owner can do little to keep them out.

Competitive Strategy: The Five Forces (Part 2)

Force 3: Threat from Substitute Products

The availability of multiple substitute products can decrease the profitability of an industry. This is because customers have more choice available to them and can switch to other products easily if the products of an industry are priced too highly. However, when a product is very unique in the market and there are few, if any, substitutes, this will mean that there are high switching costs involved for customers and that the company or industry producing the product can raise prices to earn abnormal profits.

One example of an industry with no substitutes is the water industry. There is no substitute for water, and utilities companies, if operating in a monopoly, have the potential to raise prices upwards. The lack of substitutes means that people do not have the choice to switch to other products, and water companies often exhibit strong pricing power. However, because there is a need for the provision of this basic resource to society at large, governments often regulate that water companies are not allowed to raise prices above a certain point, to prevent an abuse of industry power at the expense of society.

On the other hand, the t-shirt industry faces many substitutes. If a customer is looking to buy a new t-shirt, he will be very much spoilt for choice. He has at his disposal the option to purchase collared tees, short sleeved shirts, tank tops, or basically any other garment that clothes his upper body. This availability of multiple substitutes greatly diminishes the pricing power of any t-shirt producer, who often has to provide value in other ways, in the form of designs or brands.

In general, an industry that has few substitutes or potential substitutes is an attractive industry to operate in.

Force 4: Bargaining Power of Suppliers

The third force that determines the profitability of an industry is the bargaining power of the suppliers of inputs into the industry. The more consolidated the suppliers are, the more bargaining power they will have, and the higher the prices the suppliers will be able to charge to companies in the industry. The higher the prices of inputs, the higher the costs for the industry, and the less profitable the industry will be.

An example where a supplier has very strong bargaining power is the personal computer industry. Two of the key suppliers, Intel and Microsoft, dominate their industry and are able to exert strong bargaining power on their customers to push up the prices of their inputs: computer chips and operating system software. Because the PC assemblers are relatively fragmented, they do not collude to exert as much counter-bargaining power as they possibly could.

On the other hand, a global giant like Wal-Mart faces fragmented suppliers and thus is able to exert strong bargaining power on the products it needs to stock its shelves. This allows it to keep costs low and pass these savings on to its customers.

It should thus be apparent that, all other things equal, a favourable industry to be in is one which has suppliers that have relatively weak bargaining power.

Force 5: Bargaining Power of Customers

Just as strong suppliers can eat into an industry’s profits, so can strong customers. Conversely, an industry can exert pricing power against the weak bargaining power of numerous small customers. In this way, the bargaining power of customers relative to suppliers helps to determine the level of profitability of an industry.

A regional newspaper with a monopoly will be able to raise prices relatively easily because its customers are many and fragmented. It will also be able to charge a premium for advertising because it is the only platform available to advertisers to disseminate their messages. The customers of the newspaper have weak bargaining power, and the newspaper is able to profit accordingly.

On the other hand, a regional broadcast station with a monopoly will also be a strong buyer when it comes to negotiating for programming airtime. If the television producers are a fragmented bunch, their industry will have to suffer a loss of profits due to the fact that the customer of their products is in a very strong negotiating position because it is the only customer for the product.

Once again, the weaker the bargaining power of an industry’s customers, the more attractive the industry is.

Summary

Before investing in a company, it is necessary to understand the competitive environment it is operating in. A company in an industry that scores poorly on the five forces is likely to be vulnerable to competition and have its profits competed away. Such a company is likely to make an unattractive investment.

The astute investor is always on the look out for a company that is operating in a favourable competitive environment, or which has the ability to shape and mould the competitive dynamics of its industry so that the competitive forces are relatively benign. Such companies stand a much higher chance of not only maintaining their profits, but growing them far into the future.

For an example of an in-depth Five Forces Analysis of a company, peruse Blackmores - A Strategic Analysis (Part 2)