Otis Toy Trains is faced with the challenge of dealing with increasing labor costs. Until this point, Otis has been able to deliver a detailed and refined train series at a price customers are satisfied with. Chinese company JLPTC has announced its ability to produce the same train and cut manufacturing costs up to 60 percent. In order to survive, Otis needs to cut costs and evaluate the potential success of its strategic options.
Otis could accept the proposal in its entirety. By doing this, Otis would be able offset the increasing labor costs within the U.S and additionally has the potential to make more profit on every unit sold. Otis would need enough information to ensure that cutting costs is not offset by additional expenses including logistics, customs fees, and JLPTC’s fees. Otis would also need to ensure that quality is maintained and can do so by setting quality standards that have to be met and will be continually tested. But accepting the proposal as presented by JLPTC would also mean outsourcing Otis’ design to a company who has stated they can produce it cheaper. Otis would be allowing a potential competitor control over the production of their product, but also access to their core competency, the unique, detailed, and accurate design skills. In doing so Otis is essentially giving away the unique capability that make customers chose them.
Another option would be not accepting the proposal at all. Otis would need to analyze and investigate options to reduce their costs by up to 60 percent. Otis could set up a meeting with JLPTC and see the methods in which they are cutting costs i.e. if there is a cheaper material they could be using, if there is a manner in which production could be more efficient etc. Otis could then figure out if what JLPTC is proposing is actually possible, if so, Otis could take ideas to be able to cut their own costs. Otis could also figure out if their production facility In Minnesota is too expensive and if there is an alternative such as outsourcing parts of their production to companies that could make it cheaper due to economies of scale; the production of train tracks could be outsourced to a tin can company. In order to survive in this industry and not join JLPTC Otis needs to find a way to cut costs or they are out.
I propose a balance of the two options presented. I recommend Otis adjust the proposal. Otis should still set up the preliminary meeting to get more information on JLPTC and their methods to cut costs, and the validity of their proposal. Otis’ core competency is the “skill of …designing products that were detailed, attractive, accurate”. The text states that JLPTC wants to work with the designers of the trains but I suggest Otis outsource only the production of the engines and the tracks to China. In doing so Otis keeps the possession of the designs and maintains the production of this aspect in its Minnesota production facility. Major costs will still be cut because a major component is being outsourced, but the unique design ability that Otis possesses remains in their control. To further win over a contract like this, Otis could suggest outsourcing the production of the engines for all of its train lines to China. In doing so JLPTC gets more business while Otis also reduces costs across its product line. Otis would still need to implement quality standards, and to maintain its’ “all American” image can say the product is of “true American quality”.
To stay in the game in this industry there is no question that Otis needs to cut costs. Although it seems Otis can either accept the proposal or not, if Otis takes the best aspects of both decisions it can come to a plan that is mutually beneficial for both companies.