The following case and the answers to the questions at the end describe the stringent criteria this disguised but well-known firm uses to select among projects that offer major profit opportunities for the firm. In addition, the firm intentionally ties the criteria to their strategic goals so that each adopted project moves the organization farther in the competitive direction they have chosen by adding to their core competencies. The case also illustrates how the firm integrates their marketing, operations, engineering, and finance functions to forge a competitive advantage for the firm in the marketplace.
It was a cold, gray October day as Jim Wickes pulled his car into ABI’s corporate offices parking lot in suburban Detroit. The leaves, in yellows and browns, swirled around his feet as he walked into the wind toward the lobby. “Good morning, Mr. Wickes,” said his secretary as he came into the office. “That proposal on the Stanhope project just arrived a minute ago. It’s on your desk.” “Good morning, Debbie. Thanks. I’ve been anxious to see it.”
This was the day Jim had scheduled to review the 1986 supplemental capital request and he didn’t want any interruptions as he scrutinized the details of the flexible manufacturing project planned for Stanhope, Iowa. The Stanhope proposal, compiled by Ann Williamson, PM and managerial “champion” of this effort, looked like just the type of project to fit ABI’s new strategic plan, but there was a large element of risk in the project. Before recommending the project to Steve White, executive vice president of ABI, Jim wanted to review all the details one more time.
History of ABI
ABI started operations as the Farm Equipment Company just after the First World War. Employing new technology to produce diesel engine parts for tractors, the firm flourished with the growth of farming and became a multimillion dollar company by 1940.
During the Second World War, the firm switched to producing tank and truck parts in volume for the military. At the war’s end, the firm converted its equipment to the production of automotive parts for the expanding automobile industry. To reflect this major change in their product line, the company was renamed Automotive Builders, Inc. (ABI), though they remained a major supplier to the farm equipment market.
A Major Capital Project
The farm equipment industry in the 1970s had been doing well, but there were some disturbing trends. Japanese manufacturers had entered the industry and were beginning to take a significant share of the domestic market. More significantly, domestic labor costs were significantly higher than overseas and resulted in price disadvantages that couldn’t be ignored any longer. Perhaps most important of all, quality differences between American and Japanese farm equipment, including tractors, were becoming quite noticeable.
To improve the quality and costs of their incoming materials, many of the domestic tractor manufacturers were beginning to single-source a number of their tractor components. This allowed them better control over both quality and cost, and made it easier to coordinate delivery schedules at the same time.
In this vein, one of the major tractor engine manufacturers, code-named “Big Red” within ABI, let its suppliers know that it was interested in negotiating a contract for a possible 100 percent sourcing of 17 versions of special piston heads destined for a new line of high-efficiency tractor engines expected to replace the current conventional engines in both new and existing tractors. These were all six-cylinder diesel engines and thus would require six pistons each.
This put ABI in an interesting situation. If they failed to bid on this contract, they would be inviting competition into their very successful and profitable diesel engine parts business. Thus, to protect...