IntroductionTerror tubes is a company that makes custom automotive exhaust systems s that are used by high performing vehicles especially in the motor acing industry in Australia. The original intention of the company was to serve the motor racing industry however, its reputation created demand from other industries and even the private motorists that wanted to improve the performance of their cars. This is what led the company to undergo its first transformation process in production. This forced the company to create new inputs in the batch production process because the original inputs were only meant for making V8 systems for Holden and Ford.
After the success of the transformation, the company signed a contract with super car which saw its fortunes go high before operation problems crept in as the demand caused by the new agreement took a toll on terror tubes. This paper will address the current production processes used by terror tubes, the effect of the new contract with Super Car on Terror Tube’s operations, the daily operational decisions required under current operating conditions for the company’s operations to run effectively and the effect the move to producing standard systems has had on the company’s financial structure. Current production processes used by Terror Tubes This shift to batch production is the one that led to the transformation that enabled the company to develop skills in designing systems for most of the automobiles that are found in Australia.
Through this transformational process, the company was able to meet the existing demand. In fact there were diverse ranges of market demands leading to market segmentation so that the company could give each segment the services that it was able to afford.
The transformation this created a solid base for the company, supplying different sectors of the motor market. The second transformation process came when the company stopped relying on the custom built systems only, because its increasing popularity and increased sales created more demands form many quarters. This forced the company to create more inputs and stock more items crating a buffer for its inventory in a way it was able to smooth the demand variety for the exhaust systems. These new inputs helped to transform the production process to a more standardized line of exhaust pipes; however the problem was that this new market segment created by the standardization brought by the production transformation had buyers that were very market sensitive, as compared to the people who bought the custom made ones.
This is what created the first problem for the company because the more the demand went high, the more the consumers became sensitive to pricing forcing the company to resort to other options so as to satsfy the sensitive customers in the new segment.
To succeed in this, the company used a business level strategy called differentiation strategy. The differentiation strategy is a set of actions that are structured by a company to deliver services and goods at a cost that is acceptable in that the customers see as if something different has been done to guarantee satisfaction (Menon, etal, 1999.pg34). This is what terror tubes did when the demand went high so as to create variety that would satisfy different levels of consumers. The main tenet of differentiation is innovation.
For terror tubes to create exhaust systems that would constantly appeal to the mass market without losing its luster, it had to be enhanced the systems through differentiation. At some times, the price of the goods and services can be more that what the clients are willing to pay so long as the differentiation creates value that was not there in the fist place (Scott, 1982.pg211). This is because the customers are known to have a knack for features that are differentiated than they value a lower cost.
This was the mainstay of the production process of the terror tubes because most of the consumers were looking for differentiated custom made exhaust systems regardless of the price, until the price sensitive segment came in. A customer could go for a unique system that is more expensive that the ordinary version of the exhaust system because they expect more value from the different exhaust system. This meant that the business level strategies of terror tubes had to adopt differentiation strategies that offer the customers unique products even if it means at a higher price.
This is what boosted the sales margins of terror tubes because the unique differentiated products at a higher price fetched more revenue than ordinary ones at a lower price and this is a factor that gave the company an edge in the market that drove up its popularity pushing demand for the products with special features to unprecedented heights. It has been documented that terror tubes used the differentiation strategy in its transformed production process. What are the advantages of the differentiation strategy to any company?
To start with, the value that is provided by the unique products and service features usually attract a premium price and give the customers a higher level of satisfaction. This is because the products and the services have superior quality; they are exclusive and more prestigious. For a firm to succeed through this strategy, it must design new ways of doing things and develop new systems. This is exactly what the transformed production process of terror tubes did in order to serve the emerging customer segments.
The firm must also focus on the enhancement of quality that will make the product exclusive and prestigious. The porter five strategies can fault the transformational production process that terror tubes adopted but there are some defenses that can be made for the differentiation strategy against the porters five forces strategy. To start with, there will come a time when terror tubes will face stiff competition in the exhaust market, meaning that the monopoly that it is enjoying will go. However, when it comes to competitors, the rivalry may decrease if the firm manages to create a brand that the customers will remain loyal to (Fahey, 2000.pg 78).
This will create a lower sensitivity to the cost of products and services meaning that increase in the cost of the products and services will not make the customers switch to the competition. When it comes to the suppliers, if there is an allowance of an increase of the margin of the prices, the customers can manage to tolerate the supplier price dynamics without affecting the firm’s operations. This is one advantage of the transformational production process that the terror tubes have adopted.
In the case of the buyers, the differentiation strategy removes the purchasing power element when it diffuses the alternatives that are comparative. For example, the terror tubes used to focus on custom made products but new market segments have emerged pushing the demand for the exhaust systems up. For the force of the new entrants and availability of substitutes, the differentiation strategy creates a situation where the competitors have to overcome the loyalty of the consumers to a firm and the uniqueness of the products crated through the differentiation.
If a company operating in the area that the terror tubes has already carved a niche comes to crate competition, it may take years for it to be able to transform its production process in a way that will give terror tubes stiff competition. However, there are some competitive risks that may be associated with the differentiation strategy. Terror tubes should be able to understand this risk to ensure that is transformational production process is not affected in a way that the demand for its products can go down or market segments are adversely affected (Porter, 1988.pg 50).
To start with, the price can go a level where it becomes sensitive to the customers where despite their loyalty and the uniqueness of the product, the feel that they can no longer afford that product. This means that if the difference between the standard price and the differentiated price is so high, it might force the customers to look for alternatives and substitutes and the firm will be at a competitive disadvantage. This means that the differentiated exhaust systems should remain within affordable limits despite the additional value adding features that they come with. The second issue is that buyers may decide that they don’t want unique features that have been brought through differentiation.
If they find that the special features do not add value to their vehicles they may opt to buy the standard product meaning that the competitive advantage that the company wanted to gain through the process of differentiation may not be achieved despite the additional costs incurred and the resources used (Sharp, 200.pg759).
This may affect the transformed production process because the inputs that had been put in place for the manufacture of the differentiated exhaust systems may be rendered redundant by the new customer preference and this shift in the production process can lead to fall in sales, revenue and even led to massive losses. The third competitive risk that a firm undertaking a differentiation strategy may pose is the imitation of the uniqueness of the product by rival firms. This imitation may dilute the uniqueness thus making the product standard, meaning that the competitive advantage that may have been gained through differentiation will be missed (Dess, 2006.pg23).
For a terror tubes to take an advantageous position in the market it must make a decision whether it will carry out its operations in a different manner or it will carry out its operations relative to the rivals in future should competition emerge.