Harvard Case - Skutis: Negotiating Production in China
"Skutis: Negotiating Production in China" Harvard business case study is written by Stephen Grainger. It deals with the challenges in the field of International Business. The case study is 6 page(s) long and it was first published on : May 1, 2018
At Fern Fort University, we recommend that Skutis proceed with the negotiation for production in China, but with a strong focus on mitigating risks and ensuring a sustainable and ethical partnership. This recommendation is based on a comprehensive analysis of the company's current situation, the opportunities presented by the Chinese market, and the potential challenges associated with operating in a new and complex environment.
2. Background
Skutis, a US-based manufacturer of high-quality, handcrafted wooden furniture, is facing increasing pressure to reduce production costs and expand its market reach. The company's founder, John Skutis, has identified China as a potential location for manufacturing due to its lower labor costs and access to a large and growing market. However, John is apprehensive about the risks associated with operating in China, including potential quality control issues, intellectual property theft, and cultural differences.
The case study focuses on John's decision-making process as he navigates the complex landscape of international business. He must weigh the potential benefits of manufacturing in China against the risks and challenges involved.
3. Analysis of the Case Study
This case study can be analyzed through the lens of several frameworks, including:
- Porter's Five Forces: This framework helps assess the competitive landscape in China's furniture industry. The analysis reveals strong competitive forces, including the presence of numerous local manufacturers, low barriers to entry, and the potential for price wars.
- Value Chain Analysis: This framework helps understand the different activities involved in furniture production and identify potential areas for cost reduction or value enhancement through outsourcing to China.
- Cultural Dimensions Theory (Hofstede): This framework helps understand the cultural differences between the US and China, particularly in terms of communication styles, negotiation tactics, and business ethics.
Key Issues:
- Cost Reduction: Skutis needs to find ways to reduce production costs to remain competitive. China offers a potential solution with its lower labor costs.
- Market Expansion: Expanding into the Chinese market offers significant growth potential for Skutis, given the country's large and rapidly growing middle class.
- Risk Mitigation: John needs to carefully assess and mitigate the risks associated with operating in China, including quality control, intellectual property protection, and cultural differences.
- Sustainability and Ethics: Skutis needs to ensure its operations in China adhere to ethical and sustainable practices, including fair labor standards, environmental protection, and responsible sourcing of materials.
4. Recommendations
- Proceed with Negotiation: Skutis should proceed with negotiating a production agreement with a reputable Chinese manufacturer. This manufacturer should have a proven track record of quality, a strong understanding of Skutis's design and manufacturing standards, and a commitment to ethical and sustainable practices.
- Establish a Strong Contract: The contract should clearly define all aspects of the production process, including quality control standards, intellectual property protection, payment terms, and dispute resolution mechanisms.
- Develop a Robust Quality Control System: Skutis should implement a rigorous quality control system that includes regular inspections at the Chinese manufacturing facility and random sampling of finished products. This system should be designed to ensure that the quality of products manufactured in China meets Skutis's high standards.
- Invest in Cultural Intelligence: John and his team should invest in building cultural intelligence to navigate the complexities of doing business in China. This includes understanding Chinese business etiquette, negotiation styles, and cultural values.
- Build a Strong Partnership: Skutis should strive to build a strong and mutually beneficial partnership with the Chinese manufacturer. This includes open communication, transparency, and a shared commitment to achieving success.
- Develop a Long-Term Strategy: Skutis should develop a long-term strategy for its operations in China, considering factors such as market trends, government regulations, and potential risks.
- Embrace Sustainability: Skutis should integrate sustainability principles into its operations in China, including sourcing sustainable materials, reducing waste, and promoting fair labor practices.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations align with Skutis's core competencies in furniture design and manufacturing while also expanding its market reach and achieving cost reduction goals.
- External Customers and Internal Clients: The recommendations aim to satisfy both external customers by offering high-quality products at competitive prices and internal clients by ensuring a smooth and efficient production process.
- Competitors: The recommendations help Skutis stay ahead of the competition by leveraging the cost advantages of manufacturing in China while maintaining its commitment to quality and sustainability.
- Attractiveness: The potential benefits of manufacturing in China, including cost reduction and market expansion, outweigh the risks, making this a strategic move for Skutis.
6. Conclusion
Skutis has a significant opportunity to expand its business and achieve sustainable growth by strategically leveraging the Chinese market. By carefully navigating the challenges and risks associated with operating in a new and complex environment, Skutis can establish a successful and sustainable manufacturing presence in China.
7. Discussion
Alternatives:
- Maintain current production in the US: This option would avoid the risks associated with international expansion but would limit Skutis's growth potential and cost-reduction opportunities.
- Partner with a US-based manufacturer: This option would offer some cost savings but might not provide the same level of cost reduction as manufacturing in China.
Risks and Key Assumptions:
- Quality Control: A key risk is maintaining consistent quality standards in a new manufacturing environment. This risk can be mitigated through rigorous quality control processes and close collaboration with the Chinese manufacturer.
- Intellectual Property Protection: Protecting intellectual property in China is a major concern. Skutis should carefully review the legal framework and consider incorporating robust intellectual property protection clauses in its contract.
- Cultural Differences: Misunderstandings and communication breakdowns can arise due to cultural differences. Investing in cultural intelligence and building strong relationships with the Chinese manufacturer can help mitigate this risk.
- Political and Economic Instability: China's political and economic landscape can be volatile. Skutis should monitor these factors and develop contingency plans to address potential disruptions.
8. Next Steps
- Due Diligence: Conduct thorough due diligence on potential Chinese manufacturers, including site visits, financial audits, and interviews with key personnel.
- Negotiate Contract: Negotiate a comprehensive contract that addresses all aspects of the production process, including quality control, intellectual property protection, payment terms, and dispute resolution mechanisms.
- Pilot Production Run: Conduct a pilot production run to test the manufacturing process and ensure that the quality of products meets Skutis's standards.
- Establish Communication Channels: Develop clear and effective communication channels with the Chinese manufacturer to facilitate collaboration and address any issues that may arise.
- Monitor and Evaluate: Continuously monitor the production process and evaluate the effectiveness of the partnership. Make adjustments as needed to ensure a successful and sustainable operation.
By following these recommendations and taking a proactive approach to risk management, Skutis can successfully navigate the challenges of international business and achieve its strategic goals in the Chinese market.
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Case Description
In August 2015, a law student in Singapore came up with the idea for his first scooter when he needed a simple and economical mode of transport to get from his apartment to university. The student, who was Norwegian, and his Singaporean partner registered and incorporated Skutis Corporation Pte Ltd (Skutis) within only five days. The Skutis e-scooter emitted no fumes or noise and featured a quick folding design for easy storage. As new entrants in the industry, they felt confident that their combined study skills (law and business) would help them design and produce a more durable and dynamic scooter than those currently available. However, by April 2017, Skutis had already encountered major difficulties dealing with a Chinese manufacturer of its products. After 20 months of experience in the market, the two entrepreneurs were planning their company's strategy for the future. Having experienced the lows and highs of the Chinese production market, they were searching for ways to make their business more profitable and develop a long-term trustworthy relationship with a reliable manufacturer who would produce their designs.
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