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ELDOR: A STRUCTURAL DILEMMA

Giuseppe Soda

(protocollo n 3680)

Copyright 2005 SDA Bocconi, Milano


Eventuale nota

SDA Bocconi School of Management

Eldor: a structural dilemma


(protocollo n 3680)

Giuseppe Soda

Eldor: a structural dilemma

1. The company, its strategy, its products


Eldor Spa has grown rapidly during the past years. Geographic diversification began based on the companys
core competencies; the concentration on and valorisation of the core competencies favoured the growth of
business volume. This then led to the companys entrance in adjacent sectors by the innovative application
of its core competencies in new products and sectors.
In the future, this competitive advantage must be maintained in two areas: first, areas of more recent entrance
must be strengthened, identifying the most effective management politics; second, traditional areas must be
revitalised and made more efficient.
The history of Eldors success can be explained by Resource-Based Theory, according to which the source
of a companys long run competitive advantage must be sought in its internal resources. Many years ago Eldor succeeded in identifying a precise competence that distinguishes the company from its competitors -- the
wrapping competence. Eldor focused its efforts and its investments on this competence with continuity
and determination. The result of that is represented by the current group of successful products.
It is possible to represent the company through its competencies tree and to identify the real source of its
competitive advantage: the trunk and the biggest branches are the basic products, the smallest branches are
the business units, the leaves, flowers and fruits are the final products.
Roots that offer nourishment, substance and stability are the basic competencies. If one looks only at the final products, one may fail to see the competitors strength, just as one may fail to see the trees strength by
looking only at its leaves.

Copyright 2005 SDA Bocconi, Milano

SDA Bocconi School of Management

Eldor: a structural dilemma


(protocollo n 3680)

Final Products
FBT

DY

SMT

Ignition coil

Consumer Electronic
Components
Basic
Products
Automotive
Components

Wrapping competence

Figure: Eldors competences tree


Source: adapted from Prahalad e Hamel, 1990.
At Eldors roots there is the original wrapping technical competence (supported by important, but less
strategic, competencies, such as the process technical competence and the marketing competence).
The most important problem arises form the companys double soul, that may be ascribed to the diversity
of the two business in which the company operates: Consumer Electronics and Automotive (where it operates as a supplier for the assemblers). The first business requires consolidation and production efficiency, the
second one requires a greater emphasis on innovation and efficacy in research and products development .
Eldor, in fact, is at the present time in a pretty complicated situation: it has a family of key products on which
it has built its success, but these are sold in the Consumer Electronic market, which is characterised by intense competition. These products are bound to be completely obsolete in about ten years because of a radical technological change (e.g., the diffusion of liquid crystal technology). At the same time, Eldor succeeded
in entering the Automotive business that looks promising but needs enormous and continuous investments in
research (exhibit 1, figure 1). The main source of financial resources needed in order to afford investments
in the Automotive sector is today represented by the Consumer Electronics sector, which accounts for 90%
of the companys total sales.
At the same time, in order to keep the Consumer Electronics business profitable during years of high price
competition, the company must minimise its costs. The need to minimise costs partially explains the choice
to expand abroad, today to Turkey and, in the future, to countries where labour costs are even lower. This
choice, though, today causes problems with no clear and evident solution. Deciding to produce in China or
in Mexico, for instance, also means deciding how to expand in these countries: either alone or with local
partners. Expanding alone causes problems due to a poor knowledge of the countries, their cultures, their
laws and their way of operating; expanding with local partners means the risk that the partners will expropriate Eldors know-how.
Copyright 2005 SDA Bocconi, Milano

SDA Bocconi School of Management

Eldor: a structural dilemma


(protocollo n 3680)

2. The organisational problem


The company has today a pure functional structure.

General
Manager
Personnel &
Organization

Finance &
Control

Administration

General
Services

Production

Sales

Production
Engineering

Purchasing

Production
Planning

Research

Area 1

Area 2

Plant
Italy
Quality

Logistics

Area 3

Plant
Turkey
Plant
Slovakia

There are many elements that Eldor must maintain control over:
the process and functional dimension, in order to maintain and strengthen its identity and historic reputation for technical excellence;
the products dimension, in order to consider the specific needs and characteristics of both business areas;
the geographic dimension, in order to continue to pursue internationalisation policies effectively;
the customers dimension, because it is on the customers needs that the product is conceived.
To the different relevant dimensions considered above, must be added the plurality and the heterogeneity of
the variables that characterise some of these dimensions.
In particular, families of products are different from one another -- the Automotive sector is in an early
phase compared to the traditional Consumer Electronic sector, where high volumes must be produced in order to take advantage of economies of scale. European and Asian markets show relevant differences in culture, customers requests, ways of working, laws, and so on. Customers (at least the most important ones)
require customisation of products and different types of relationships (e.g., some of them have a more traditional style and are interested only in the product adaptation and development, other ones are proper partners
and are involved since the research phase).
Eldors General Manager, when asked which was the most important dimension in the companys strategies,
answered:
Weve thought for a long time about this problem and we can now affirm that a hierarchy of importance
does exist for the dimensions: the most important for us is the dimension of products. My organisational
problem is that Im not sure that the decision of transforming the organisation structure through a divisionalisation is the best one for solving the problem of an effective defence of our products. A consultant told me
Copyright 2005 SDA Bocconi, Milano

SDA Bocconi School of Management

Eldor: a structural dilemma


(protocollo n 3680)

that if we choose the product as the most important dimension, then we must move to a divisional form. Im
not convinced, I think its too expensive. (exhibit 2: Products)
Considering functions and activities, the two business areas show some links.
Comments made by the Directors of the different functions are reported in the following interviews:
1.

Director of Purchasing : In the purchasing of raw materials, the link between the two products
can clearly be observed. The reason for this is simple: final markets are different, but the two products
come from the same basic technical competence and the raw materials needed for producing them are,
for a great portion, similar. 80% of suppliers sell materials used in both families of products. From
the point of view of the purchasing process, the real difference between suppliers doesnt concern products but the nature of the raw material to be purchased (mechanical, electronic, etc.)

2.

Director of Production Planning : Because the manufacturing equipment is the same, with
the exception of a small phase of the process, when I plan I must obviously input the orders coming from
both families of products. Very often conflicts arise, especially when the Automotive Sales Director, who
has low bargaining power over the assemblers (i.e., is dependent on them), asks for a sudden change for
tomorrows production plan.

3.

Director of Production Engineering : In Engineering, we manage the process innovation.


Technologies we deal with are the same for the manufacturing equipment used by Automotive and for
that used by Consumer Electronics. This allows 90% of the technicians to work on either line. We prepare development projects for the technological platforms which are inside our equipment; 95% of these
innovations are useful for both the Automotive and the Electronic Consumer.

4.

Director of Plant : All our plants, with the exception of the one in Turkey, produce simultaneously
for Consumer Electronics and Automotive. When I plan workers shifts, at least in Italy, I make sure
that the best technicians and workers are assigned to the Automotive production process, because thats
where the greatest quality problems arise. Logistics and plant quality are the same for the two families
of products. To test product quality (a conformity test), we have technicians who operate under my control and are specialised either in Automotive or Consumer Electronics. This happens also because
Automotive customers have asked for direct monitoring. Today, if we decided to produce for the Automotive sector only in Italy, we wouldnt be able to take advantage of the whole production capacity. Besides, a reduction of the production capacity would lead to unavoidable layoffs, which would be damaging for the company and wouldnt allow us to amortise the profitable investments we have made in the
past.

5.

Director of Sales : It is our task to ensure the efficacy of sales activities through product, market
and customer management. Now that Ive made this introduction, I would divide our activity in some
sub-processes:
Customer contact and area marketing: Customers for the two families of products are different. Usually the Automotive customers are a few assemblers. The problem that we wanted to solve was how to
approach a potential customer. We decided to assign this task -- lets call it an intelligence activity -to the person in that country who was already in charge of Consumer Electronics products. The reasons
were their knowledge of the country and their existing contacts there. So we now make customer contact
and area marketing (especially marketing researches) jointly for the two products. When a contact is
created in the area, we put a Research and Development technician specialised in Automotive at the
side of the salesperson.
Customers management: Sales (strictly speaking) are at the moment assigned to the same salespeople
for the two families of products. Now the problem is that customers are totally different and the logic by
which they must be managed are exactly the opposite from one another. Besides, I have to co-ordinate
ten different geographical areas in which salespeople specialised in both products must operate. Sometimes I feel like Im losing control.

6.

Director of Research and Development : At the beginning, our research was dedicated
to the development of products that had the same scientific and technological soul. This allowed us to

Copyright 2005 SDA Bocconi, Milano

SDA Bocconi School of Management

Eldor: a structural dilemma


(protocollo n 3680)

enter the Automotive sector. The problem today is that we have technicians who are essentially, but not
officially, specialised in the two families of products. There is a sort of parallel management of research. When I choose the members of the teams, I try to optimise their competencies, but I dont always
succeed. To continue to be excellent, we must do better than now. Nowadays interdependencies between
products in research are weaker and weaker; I dont see many synergies

Copyright 2005 SDA Bocconi, Milano

SDA Bocconi School of Management

Eldor: a structural dilemma


(protocollo n 3680)

Questions for the case study:


Consultants have proposed to the General Manager four possible alternative solutions:
1. To maintain the present organisational structure as it is, while attempting to increase the operating efficiency of the plants.
2. To introduce Product Managers beside the functions, making them report to the
General Manager or to the Director of Sales.
3. To divisionalise the structure.
4. To divisionalise the structure while maintaining some central functions.

Question 1.
Analyse the problem and explain which one among the four alternatives solutions you think is the best
and why. Your discussion could also include a comparison between your choice and the other possible
ones.

Question 2.
Based on the choice youve made among the four possible solutions, make a proposal for the performance appraisal of one of the following roles:
The Director of Plant and Director of Research and Development (if you chose Alternative 1);
The Product Manager for Automotive and Product Manager for Consumer Electronic (if you
chose Alternative 2);
The Director of Automotive Division and Director of Consumer Electronic Division (if you chose
Alternative 3 or 4).

Copyright 2005 SDA Bocconi, Milano

SDA Bocconi School of Management

Eldor: a structural dilemma


(protocollo n 3680)

EXHIBIT 1: FIGURE 1
The two business areas

Development rate

Consumer
Electronic

Automotive

Efficiency
needs effii

Growth needs

Copyright 2005 SDA Bocconi, Milano

SDA Bocconi School of Management

Eldor: a structural dilemma


(protocollo n 3680)

EXHIBIT 2: Business areas


Consumer Electronic
The Consumer Electronics market is characterised by very intense competition; Asian competitors have
forced the focus essentially on price competition. It is necessary to operate having in mind the goal of minimising costs, even risking a poorer attention to customers. The product, in fact, is very mature, thereby it is
very difficult to keep customers loyal by customising it. Through the years, the product has evolved into a
commodity and customisation currently involves only the electrical part (and not the mechanical part anymore). The winning politics seems to be that of minimising costs (thanks to bigger volumes) and minimising
the time to respond to customer orders (through a greater standardisation). Eldor still has higher prices than
its competitors in Consumer Electronics, thanks to a greater added value in its services, but this price differential (as the one in services) seems to be bound to become narrower and narrower. Together with the greater
product standardisation, the response time to customers has shortened and at present it varies between six
months and one year. The goal, in this business, is to maintain (and, if possible, to strengthen) their market
share until the product is completely technologically obsolete. In about ten years, in fact, technology supporting the Consumer Electronics products is bound to be completely obsolete and then substituted. From these
considerations arises the need to take the maximum advantage of the present business to produce resources
to be reinvested in an emerging business. Experts in the sector preict that present technological standards
will dominate the market for at least ten more years, growth will be limited and concentrated especially in
developing countries.
Automotive
The Automotive market for this country, on the contrary, is in its initial development phase: entrance barriers
in the business are very high; nevertheless, once the market is entered, competition is less hard and it has to
do essentially with product quality and the satisfaction of specific customers needs. The product is strongly
customised and specific for one client: customisation involves also the mechanical part, to the point that,
for every customer of this business, specific moulds for the products manufacturing are created. The time
orientation necessarily becomes a long one ( with the time for response to customers varying between two
years and two and a half years). Customers are often involved even in the research phase. At present Eldor is
a new player in this business; to reach a significant market share it needs many slack resources.

Copyright 2005 SDA Bocconi, Milano