Case Analysis Palliser Furniture LTD.

The China Question

For: Professor Minnie Kontkaren

By: Paul-Etienne Davier, p87786 Ivan Incov, p88156 Donald Jordan, n8651 !arole "a#e$a, p87856 %urelie &annineuse, p8785'

1 December 2006
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Table o Contents Pa!e Introduction and %ssess$ent of !ase )* +* ,* "* %nal-sis .eco$$endations %ction Plan ( 6 1/ 1

Palliser Furniture Com"any In 1'00, %1ra$ %l1ert De2e3r a .ussian i$$i4rant started #3at is no# kno#n as t3e Palliser 2urniture !o$pan- in +innipe4, !anada* "oda- it is one of 5ort3 %$erica6s leadin4 3o$e furniture $anufacturers* #ission $tatement "o 1e a co$$unit- of people dedicated to leaders3ip in desi4n, service, and custo$er value in t3e furniture industr-* %b&ecti'es an( )oals Palliser7s is a successful and 4ro#in4 furniture co$pan- t3at needs to e8pand its $anufacturin4 capacit- and to keep its leaders3ip in t3e 9) and ot3er 5ort3 %$erican $arkets* Its 4oals are: "o propose leat3er products #it3 t3e sa$e ;ualit- at 1etter prices to its consu$er "o reduce its production and lo4istical costs "o deliver annual value en3ance$ent to its custo$ers "o e8pand its position in t3e $otion furniture industr-* "o stren4t3en t3e co$pan-6s position in t3e 5ort3 %$erican $arketplace* "o successfull- rollout E<( internationall-* *ssues Palliser is a lar4e, successful fa$il--o#ned furniture $anufacturer in Manito1a, !anada t3at $ust respond to t3e increasin4l- 4lo1al nature of its 1usiness* Its current 1usiness strate4-, a product of international trade li1erali=ation, is clearl- centered on e8ports to t3e 9*)* >o#ever, $ana4e$ent perceives risks and li$itations to 4ro#t3 #it3 t3eir current product?$arket position

and $ust decide #3et3er and 3o# to c3an4e* Mana4e$ent is faced #it3 a forei4n entr- $ode decision in Me8ico and?or !3ina* Prior to '?11 Palliser6s cost leaders3ip strate4- #as to invest in Me8ico for its leat3er processin4 plants for t3e construction of its furniture pieces* "3e co$pan- ne4otiated a contract #it3 its @ra=ilian partners to deliver ra# leat3er fro$ @ra=il t3en fl- it ;uicklto t3e Me8ico processin4 plant for redistri1ution to t3e 9nited )tates and !anadian locations* Even t3ou43 $an- co$panies #ere openin4 up 1usinesses in !3ina it #as e8pedient and cost effect for Palliser to continue #it3 its strate4- focused on Me8ico and @ra=il* )epte$1er 11, //( A !3an4ed t3e #a- airlines conducted t3eir 1usiness, t3e t3reat of terroris$ 3ad canceled fli43t, securit- #as 4reatl- en3anced, and t3e costs of s3ippin4 1- fli43t rose dra$aticall-* +it3 t3ese c3an4es it 1eca$e $ore evident t3at t3eir ori4inal strate4- needed to c3an4e to recover t3e savin4 needed to sta- co$petitive in t3e leat3er furniture industr-* "3e savin4s no# evident in !3ina $ade it $ore feasi1le for t3e co$pan- to $ove its operation for t3e processin4 and $anufacturin4 of its leat3er furniture* "o face t3e !3inese co$petitiveness Bc3eap la1or and co$para1le product ;ualit- and desi4nC, Palliser $a- 3ave to find cost reduction solutions like an i$proved suppl- c3ain $ana4e$ent, or innovative leat3er products or 1est services Bdeliver-, fle8i1ilit-, c3oice, custo$ 1usinessDC Indeed, !3ina is t3e $ost co$petitive countr- in furniture industrt3anks to its c3eap 1ut ;ualified la1or B1est 3ouse3old e8porter in t3e 9) Market and 1est lo# cost producer of la1or intensive productsC* )o to keep its leaders3ip on leat3er furniture industr-, Palliser 3as to focus focus on #3ic3 differentiate 3i$ fro$ !3inese $anufacturer: E8perience on leat3er $anufacturin4, creativit- and innovation, custo$ services, sale efficienc Keepin4 a 3i43-;ualit- and varied production #3en 1usiness re;uires volu$e production and lo# cost sourcin4 solutions* "o $eet t3is re;uire$ent, Palliser $a- need to split its 1usiness and activities accordin4 to 3is factories 4eo4rap3ical situation its e$plo-ees7 skills, t3e 4lo1al cost of leat3er production Bra# $aterial cost, la1or cost, transportation

cost, ta8esDC* 2or e8a$ple: Eeat3er se#in4 and cuttin4 and intensive la1or products could 1e $ade in !3ina , t3e Me8ican factor- could 1e focused on sout3ern 9) Market #3en t3e !anadian 2actor- #ould 1e involved in desi4nin4 leat3er products , creatin4 ne# trends like E<( developin4 ne# $arket and $anufacturin4 capital intensive products* "o #3oll- o#n a 1usiness in !3ina or 1uild lon4 ter$ and stron4 partners3ip #it3 !3inese factories* Palliser needs to control its 1usiness and its 1rand *)o Joint &enture is not t3e 1est contractual entr- $ode in !3ina* If Palliser decides to e8pand its relations3ips #it3 !3ina, it $a- conclude franc3isin4 or increase su1contractin4 a4ree$ent #it3 !3inese 2actories* If !3ina #as not t3e 1est c3oice to set up a leat3er furniture $anufacturin4 in 1''7, 5o# !3ina6s leat3er furniture sector is $ore e8perienced and !3inese leat3er $anufacturer and even Palliser !anadian co$petitor, Dorel Inds can 1eco$e 1i4 and a44ressive co$petitors 1- offerin4 4ood products at lo#er prices* In an e8pansion and 1usiness 4ro#t3 lo4ical, Palliser $a- 3ave to e8pand its $arket to ot3er countries* !ost reduction t3rou43 outsourcin4 and an opti$al suppl- c3ain $ana4e$ent could 1e necessar- and t3e ke- to keep ones co$petitiveness* )o !3ina or an %sian !ountr- #it3 lo# cost producin4 advanta4es could 1e profita1le for Palliser in a lon4 ter$ strate4-*

All Household Imports by Significant Countries in the US Market (US $ millions)

6000 5000 US $ millions 4000 3000 2000 1000 0 1998 1999 2000 ear 2001 2002 China Canada Italy Mexico Indonesia Taiwan Malaysia Thailand Philippines Bra il

The $.+.%.T. Analysis )tren4t3s

Me8ico: Eocation, near "e8as and 9)% 1oundarEo# distri1ution costs co$pared to !anada for ser'in! $outh American mar,et Bfrei43t and s3ippin4 costsC More industr- skills t3an in %sia #3en Palliser #anted to settle* Me8ico $ade products #ell accepted 1- 5ort3ern consu$ers 2or 1asic tasks as cuttin4 and se#in4, t3erefore it #as ver- profita1le Part of -AFTA free-trade area More $ana4ea1le t3an ot3ers offs3ore sites 5ot $an- co$petitors on leat3er furniture 1usiness in Me8ico Eas- to #3oll- o#n a 1usiness, and 3ave $ore control on it, rat3er t3an concludin4 a Fointventure in !3ina Easier to 4et co$petitive advanta4e for sure in Me8ico, #3en !3ina in co$parison at t3is ti$e #as less relia1le

!3ina: $tron! com"etiti'e "osition no#ada-s 1ecause of an undervalued currenc- Btied to t3e 9) DollarC, favoura1le e8c3an4e rates, lo# la1our costs* 5o inco$e ta8es, no environ$ental and social B3ealt3C concerns Eots of #orked 3ours, and providin4 a !oo( .uality no# Leather is ver- chea" and even com"onents as #ellG suc3 as #ood for t3e fra$e, t3e foa$ and t3e packa4in4 $aterial !anada: )3orter suppl- c3ain 5%2"% and $arket #ore mana!eable t3an ot3er offs3ore sites and less 4overnance pro1le$s to 4ive orders $ore suita1le rat3er t3an #it3 Me8ico* "3e !anadian furniture $arket is 4ro#in4 1i44er and 1i44er eac3 -ear: record of H0,76 in // "ec3nolo4- considerations Bmotion business: reclinersDC

+eaknesses
Me8ico: 9nclear ta8ation polic-, pro1le$s #it3 local authorities *n lation adFust$ent )o$e difficulties for receivin4 a""ro"riate or(ers fro$ t3e !anadian 3ead;uarter at t3e 1e4innin4 !3ina: It6s #as a 1i44er 1et t3an Me8ico or even Indonesia a fe# -ears a4o* % $ove to !3ina #ould 3ave appeared as a proactive uncertain $ove co$pared to t3e o1Fectives and t3e preferences of t3e fir$ to 1uild t3ere o#n facilit- t3ere )till a co$$unist countr- recentl- opened on Market Econo$- 1ut still resilient to dive into Difficulties to o#n a co$pan- 1ecause of culture differences and 4overn$ent &er- stron4 co$petition on t3e $arket, and presence of lots of rivals t3ere alread-

Lon! (eli'ery time, less fle8i1le in ti$e and variet-

!anada: +ei43t of co$petitive pressure BE83i1it 7: Manito1a 1ut decrease in s3are parts and sales 15*1IC /i!h o'erall costs neit3er co$pensated 1- a 1etter ;ualit- of t3e products nor 1- t3e pro8i$it- and lo#er lo4istic costs

,pportunities
Me8ico: !3ina: "3e value -ou 4et fro$ !3ina is one o the best 0orl(0i(e and resources t3ere are p3eno$enal Bla1our in ;uantit- and ;ualit-C Eo# cost %sian furniture $anufacturin4 sector "3e rise of !3ina since // * "otal furniture output #as /MH* E8port 4ro#t3s over (/I eac3 -ear "op $ana4e$ent6s %sian e8perience Jeo4rap3ical advanta4e for lo4istics for t3e 9) $arket*

!anada: .ecruited ne# $ana4ers* Marketin4 for $ore attractive and trend- products to reac3 ne# needs and ne# consu$ers in 1$A mar,et that remain the "riority of Palliser Automation an( ca"ital intensi'e "ro(uction to en3ance value* 2alue im"ro'ements: #ood: sa$e price ever-#3ere: ,ak for e8a$ple

"3reats
Me8ico: Loss o .uic, (eli'ery a('anta!e o'er China because o 3411. %$erican, Japanese and Italian fir$s 3ad esta1lis3ed factories in !3ina to prospect for c3eaper la1our and 3i43-;ualit- #orkers to educate B1enc3$arkin4C

!3ina: Eess percenta4e of successfull- set up plants Difficulties for findin4 lon4-ter$ ,EM suppliers .isk of 1eco$in4 co$petitors after

!anada: '?11 and increase in frei43t cost fro$ @ra=il to Me8ico 1- plane Bto provide ra# leat3erC

Dia4nostic:
Quic, (eli'ery strate!y must be re'isite(* )3ippin4 is not fast enou43 and plane is 1eco$in4 to e8pensive 5eed to a(( 'alue to &usti y hi!her "rices "3e !3inese dile$$a: China for profit $a8i$i=ation 2riction costs, sink costs, lon4er t3an planned to recover t3e initial invest$ent Be8tra tariff fees, s3ippin4 cost 3i43er t3an e8pected like for Me8ican e8perienceC

'

5ecommen(ations
>ere1-, #e are 4oin4 to 4ive five alternatives and?or a co$1ination of eac3 as a solution a1out #3at #e t3ink #3at t3e co$pan- s3ould do concernin4 t3e !3ina ;uestion and #3ere t3e co$pans3ould $anufacture its furniture internationall-* 2irstl-, #e t3ink t3at in order to sta- co$petitive t3e co$pan- needs to deal #it3 !3ina eit3er Fust for t3e suppl- or in order to i$plant our factories for t3e production of t3e furniture and?or even to 4et ne# custo$ers* )econdl-, if Palliser 2urniture does not 4o to !3ina t3e- #ill 3ave to focus on increasin4 t3e value of t3e product and $a-1e t3e standin4 i$a4e of t3e 1rand* EetKs 4ive t3e e8a$ple #it3 E<( #3ic3 is openin4 a ne# c3annel for sellin4 1ut also it creates a ne# se4$ent for custo$ers #3ic3 is an upscale -oun4 professional $arket* "3e- #ill need to i$prove t3e 1rand i$a4e and increase t3e price to capture t3e upscale $arket in order to increase t3e profit $ar4ins* "3irdl-, t3e- s3ould anal-=e t3e deliver- c3annel and $a-1e t3ink a1out creatin4 t3eir o#n distri1ution c3annel to deliver t3eir products t3rou43 a purc3ase of infrastructure of trucks and #are3ouses* "3e co$pan- could enter into a Foint venture, a strate4ic partners3ip, and?or a purc3ase of an esta1lis3ed lo4istics su1sidiar- in 5ort3 %$erica*

1/

2ourt3l-, #e #ould su44est a little $ore diversification* +e $ean t3at t3e- s3ould keep t3eir first se4$ent #it3 t3e 3i43 value products, 1ut t3e- could t3ink a1out a c3eaper line of products for -oun4er people suc3 as universit- students #3o $a- not 1e a1le to afford t3e custo$ $ade leat3er furniture* +e are t3inkin4 a1out products t3at are not custo$i=ed and $a- 1e $ore $odels orientated* "3ere $a- 1e roo$ for $otion furniture in t3is particular se4$ent* "3e fift3 and last part is $eant to su44est a partners3ip in !3ina* % Foint venture in particular* % Foint venture #ill 1e i$portant 1ecause it #ill 1rin4 t3e e8perience of a local partner into t3e venture t3at #ill 3elp #it3 t3e issues t3at arise in t3is particular entr- $ode* )ince Palliser is co$in4 into t3e !3inese $arket later t3an t3e ot3ers it #ill need t3e e8perience of a native partner in order to catc3 up #it3 its co$petitors alread- esta1lis3ed in !3ina* Palliser can structure t3e a4ree$ent for duration B6/I Palliser and 0/I for t3e !3inese partnerC and cas3 out of stocks so t3e- can recover full o#ners3ip in t3e future 1- t3e repurc3ase of t3e s3ares and finall- 4et t3at 1usiness 1ack in #3ole* "3is can 1e co$pared to t3e "roFan 3orse $et3odG it is safer t3an t3e forei4n direct invest$ent entr- $ode fro$ #3ic3 #ould $ean a 3u4e financial co$$it$ent 1Palliser and $ore risk*

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Action "lan
%fter serious consideration of all t3e reco$$endations and t3e co$1ination of eac3 #e decided t3at t3e last #as t3e 1est for Palliser 2urniture Etd* "o restate #3at #e said under our reco$$endations t3at #e decided t3at a Foint venture #ill 1e i$portant 1ecause it #ill 1rin4 t3e e8perience of a local partner into t3e venture t3at #ill 3elp #it3 t3e issues t3at arise in t3is particular entr- $ode* )ince Palliser is co$in4 into t3e !3inese $arket later t3an t3e ot3ers it #ill need t3e e8perience of a native partner in order to catc3 up #it3 its co$petitors alread- esta1lis3ed in !3ina* Palliser can structure t3e a4ree$ent for duration B6/I Palliser and 0/I for t3e !3inese partnerC and cas3 out of stocks so t3e- can recover full o#ners3ip in t3e future 1- t3e repurc3ase of t3e s3ares and finall4et t3at 1usiness 1ack in #3ole* "3is can 1e co$pared to t3e "roFan 3orse $et3odG it is safer t3an t3e forei4n direct invest$ent entr- $ode fro$ #3ic3 #ould $ean a 3u4e financial co$$it$ent 1Palliser and $ore risk* Palliser needs to $ake an i$pact in !3ina 1ecause of t3e value t3e !3inese $anufacturin4 lo# costs t3at its co$petitors 3ave recentl- 1enefited 1- and no# Palliser #ill 1e involved in "3anks to t3at, t3e co$pan- #ill 1e a1le to reduce t3e costs of production 1ut #ill 3ave to 1e a#are of t3e s3ip$entKs costs* "3anks to t3at reduction t3e co$pan- #ill 1e a1le to increase t3e ;ualit1ut also t3e desi4n and t3e $arketin4 dedicated to t3e products* It #ill also allo# t3e co$pan- to sta- $ore co$petitive internationall- and keeps it lead in 5ort3 %$erica in its particular nic3e $arket*

+e concur t3at a t#o -ear ti$e ta1le #ill 1e ;uite possi1le in enactin4 t3is ne# strate4- and place$ent for Palliser 2urniture Etd* +e also concur t3at t3is is t3e 1est possi1le c3oice for t3e future 4ro#t3 of Palliser*

1(