Harvard Case - The Larsen Company: A purchasing decision
"The Larsen Company: A purchasing decision" Harvard business case study is written by Manuel Velilla, Luis Palencia. It deals with the challenges in the field of Strategy. The case study is 2 page(s) long and it was first published on : Jul 13, 2023
At Fern Fort University, we recommend that Larsen Company pursue a strategic alliance with a reputable international supplier of high-quality, cost-effective components. This alliance will leverage the supplier's expertise in manufacturing processes, supply chain management, and global sourcing to enhance Larsen's competitive advantage in the market. This recommendation is based on a thorough analysis of Larsen's current situation, the industry landscape, and potential future scenarios.
2. Background
The Larsen Company is a manufacturer of high-quality, specialized industrial equipment. They are facing increasing pressure to reduce costs and improve efficiency in their procurement processes. This pressure stems from intense competition in the industry, rising raw material prices, and the need to remain competitive in a globalized market. The case study focuses on Larsen's decision to choose between two potential suppliers: a domestic supplier with a long-standing relationship and a new, international supplier offering lower prices and potentially better quality.
The main protagonists of the case study are:
- John Larsen: The CEO of Larsen Company, responsible for making the final decision.
- Peter Johnson: The purchasing manager, responsible for evaluating the suppliers and recommending a choice.
- Domestic Supplier: A long-standing partner with a proven track record but potentially higher costs.
- International Supplier: A new player offering lower prices and potentially higher quality, but with unknown risks.
3. Analysis of the Case Study
To analyze the situation, we utilize several frameworks:
a) Porter's Five Forces:
- Threat of New Entrants: High, due to low barriers to entry in the industrial equipment market.
- Bargaining Power of Buyers: Moderate, as Larsen's customers have some leverage due to the availability of substitutes.
- Bargaining Power of Suppliers: High, due to the specialized nature of the components and potential for supplier consolidation.
- Threat of Substitute Products: Moderate, as alternative technologies and solutions exist.
- Rivalry Among Existing Competitors: High, due to a large number of players and price competition.
b) SWOT Analysis:
Strengths:
- Strong brand reputation
- Experienced workforce
- Established customer base
- Strong financial position
Weaknesses:
- High production costs
- Limited global reach
- Reliance on a single supplier
- Lack of agility in adapting to changing market conditions
Opportunities:
- Expanding into new markets
- Leveraging technology for cost reduction
- Building strategic alliances
- Implementing lean manufacturing practices
Threats:
- Increasing competition from emerging markets
- Fluctuations in raw material prices
- Economic downturn
- Technological disruption
c) Value Chain Analysis:
The case study highlights the importance of the procurement function in Larsen's value chain. By optimizing procurement processes, Larsen can reduce costs and improve efficiency, impacting the overall value proposition to customers.
d) Business Model Innovation:
Larsen can consider business model innovation to address the challenges of cost reduction and competitiveness. This could involve:
- Outsourcing non-core functions
- Vertical integration to gain control over the supply chain
- Developing new product lines to tap into emerging markets
- Adopting a subscription-based model for equipment rental
4. Recommendations
Based on the analysis, we recommend the following:
Form a strategic alliance with the international supplier: This alliance should focus on:
- Joint product development: Leverage the supplier's expertise in component design and manufacturing to develop innovative and cost-effective solutions.
- Shared supply chain management: Establish a collaborative framework for sourcing raw materials and managing logistics, optimizing efficiency and reducing costs.
- Knowledge transfer: Facilitate knowledge exchange and best practices between the two companies, fostering continuous improvement and innovation.
Implement a robust risk mitigation strategy: This should include:
- Due diligence: Conduct thorough research on the international supplier, including their financial stability, manufacturing capabilities, and ethical practices.
- Contractual safeguards: Establish clear contractual terms and conditions to protect Larsen's interests.
- Contingency planning: Develop alternative sourcing options in case of unforeseen disruptions.
Invest in technology and analytics: Implement advanced information systems to track supplier performance, manage inventory levels, and optimize procurement processes.
Develop a comprehensive supplier management program: This should include:
- Performance monitoring: Regularly evaluate supplier performance based on key metrics such as quality, delivery, and cost.
- Supplier development: Provide support and training to suppliers to improve their capabilities and competitiveness.
- Supplier diversity: Promote diversity in the supply chain to reduce risk and access new markets.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The strategic alliance leverages the international supplier's core competencies in manufacturing and supply chain management, aligning with Larsen's mission to provide high-quality industrial equipment.
- External customers and internal clients: The alliance will enable Larsen to offer more competitive pricing and improved product quality, benefiting both external customers and internal stakeholders.
- Competitors: The alliance will enhance Larsen's competitiveness by reducing costs and improving efficiency, allowing them to better compete in the global market.
- Attractiveness ' quantitative measures: The potential cost savings and improved efficiency associated with the alliance are expected to generate a positive return on investment.
6. Conclusion
By forming a strategic alliance with a reputable international supplier, Larsen Company can enhance its competitive advantage, reduce costs, and improve its position in the global market. This approach will enable Larsen to navigate the challenges of a competitive industry and achieve sustainable growth.
7. Discussion
Alternative options considered include:
- Continuing with the domestic supplier: This would provide stability and familiarity but potentially lead to higher costs and limited opportunities for innovation.
- Developing internal manufacturing capabilities: This would require significant investment and potentially delay the company's response to market demands.
Key assumptions underlying the recommendation include:
- The international supplier is financially stable and possesses the necessary manufacturing capabilities.
- The alliance can be successfully implemented and managed.
- The potential cost savings and efficiency improvements outweigh the risks associated with the alliance.
8. Next Steps
To implement the recommended strategy, the following steps should be taken:
- Short-term:
- Conduct due diligence on the international supplier.
- Negotiate a strategic alliance agreement.
- Pilot test the collaboration on a small scale.
- Medium-term:
- Implement joint product development initiatives.
- Optimize the shared supply chain.
- Develop a comprehensive supplier management program.
- Long-term:
- Expand the scope of the alliance to include new markets and product lines.
- Continuously evaluate and adapt the alliance based on evolving market conditions.
By taking these steps, Larsen Company can successfully leverage the benefits of a strategic alliance to achieve its strategic goals and secure its position as a leading player in the industrial equipment market.
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Case Description
The Larsen Company is a small furniture manufacturing company in Norway. Its purchasing manager has to decide which one of two offers to accept, one from its traditional supplier (small and reliable but offering declining quality) or another from a larger supplier (2% more expensive, offering slightly higher quality, and able to serve higher volumes). Other factors are the incentive system of the purchasing manager, the relation between the owners of the Larsen Company and the small supplier, and a possible change of strategy of The Larsen company.
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