International business environment imposes more challenges on contemporary corporations, driven by the complexity of global business, supply chain and the variety of external pressures, which shape and determine the direction in which the organizations develop. The case dwells upon the development and current strategic issues, which are set in front of the Chabros International Group management, looking at the future development of the organization on the edge of global financial crisis and drastically droppings sales. The company´s owner and the president, Antoine Chami, is to take a strategic decision whether to close part of the Serbian sawmill, re-boost the sales, choose market penetration or market growth strategy. The objective of this document is to identify the issues, surrounding the company´s strategy, determine the core challenges and look at the available strategic options for the Chabros International Group. The outcome of the report will be a specific recommendation for the president of the company on the most appropriate strategic direction, which should be pursued to respond to the changing market environment and avoid the crisis. Additionally, the author will outline the learning outcomes and take aways from this case, which can be useful for the application in future assignments.
Chabros International Group has been pursuing aggressive growth strategy through new market entries. This strategy was supported by an asset-heavy structure, where the company acquired Serbian sawmill to support its growth and supply primarily United Arab Emirates (UAE) market in Dubai. In 2007, when Chabros International started to develop the UAE trade, the market soon became the biggest for the company´s business. The fact is that the decisions, taken with regards to the asset acquisitions in Serbia, is based on the actual volume of sales at the time, but it is not backed up by the market research and risk management practices. Serbia could overall support the organizational needs for growth, but, at the same time, it became a USD$ 1.4 worth asset, profitability of which fully depended on the unique market. Current situation illustrates the downsides of the inorganic growth strategies and asset-heavy operations. The challenge of dealing with idle capacity and access supply, which was released due to the sales drop in Dubai, is one of the two biggest strategic issues of the company.
Second strategic issue is the sourcing and supply chain operations. The case provides evidence to the argument that the company benefits from the dual strategy, which makes Chabros International group lumber manufacturing and veneer wholesaler at the same time. The problem is that, at the times of economic stability, the organization enjoys its economies of scale and the ability to control the cost of the production process. With that, it gains strategic advantage over the competition, which re-sells the products and, thus, depends on the prices of their upstream suppliers. At the same time, being a producer of lumber, Chabros becomes more vulnerable to the external pressures, once the economy is in a downturn. The cost of production, labor and distribution build on the significant part of the product price composition (Monczka, Handfield, Giunipero, and Patterson, 2011). In spite of the fact that logistics expenses only account for 14% of the total costs, the cost of operations, such as staffing, material supply, storage and other elements create additional costs, which become a burden at the times of crisis. As such, the potential saving of USD$ 400,000, which can be achieved through employee lay off at the Serbian sawmill, supports this argument.
Motivation and Drivers Behind the Expansion
Chabros International Group operates in several states in the MENA region with a strong focus on UAE market, where the company has sales representation in both, Abu Dhabi and Dubai. The case study allows concluding that the company has chosen the multi-domestic or multinational strategy to pursue its regional growth. These conclusions are supported by several findings. First of all, given the preferences of the clients for European wood, the company uses the economies of scales through its shared overheads on the Serbian sawmill and enjoys relatively concentrated office structure, where Dubai is the only exception. Secondly, market offer of the company is customized and specific, based on the customers´ expectations and preferences. The company considers product variety as one of its strategic capabilities and, thus, local management and office representation are critical for the successful operation. Chabros International Group has the majority of Lebanese origin employees, though it is evident that it also uses local recruiting to bring in the expertise relevant for the local markets.
Looking at the major drivers and motivation behind the expansion, the attractiveness of the Dubai market comes to play. It is evident that the growth and decision to expand own production in Serbia is driven by the opportunities emerged in United Arab Emirates, and Chabros International Group decided to capture this market by bringing forward its major product as manufacturer and wholesales – lumber and veneer. As the company started its operations in Europe, it was further able to utilize on the customers regional preferences for the European product. Additionally, the company was competing on the market, where the rivalry was built of small and medium size local producers and distributors. The cost of production and, consequently, price advantage over these competitors became a motivation factor, which drove further expansion in the region.
The facts of the case illustrate that the concentration of the clients’ base and over reliance on the UAE market placed Chabros International Group in a dangerous position. With the economic downturn the organization experienced over USD$ 10 million drop in global sales, majorly resulting from the reduction of the Dubai market. When the decision to expand was made back in 2007, the company relied on the opinion of the sales executive, sent to the country, which suggested opening an own representation in Dubai and expand the production to meet local demand.
An analysis of the situation from the current perspective allows outlining several strategic options available to the company and recognized by its president. First of all, the organization may try to review current capacity at the Serbian sawmill and close part of the operations to meet the reality of the reduced demand. This will allow significant cost reduction due to headcount cut and operational efficiency. At the same time, this option will take out the opportunity to react efficiently to the market growth in case of economic recovery and will involve additional costs to reestablish the operations.
Second option, which Chabros International Group could consider, is re-evaluation of its marketing strategy and an attempt to boost sales in the region. This option will involve significant immediate investment into the sales force development and marketing strategy, but may provide a significant return in the medium term future and preserve operating capacity of the sawmill.
Finally, a major issue, resulting from the sales drop, is the idle capacity and costs, which the company encounters in Serbia. In this situation, one of the viable options would be to find new market and leverage the dependency on MENA region and the UAE specifically. The company considers various options and the decision should be made on the basis of a solid external and internal review and strategic alignment.
What Markets Should be Targeted under Market Penetration Strategy
Under the market development strategy, the company will be bound to consider existing markets and grow through increasing its market share. Currently, the scope of the Group is MENA region and the top three markets being UAE, Saudi Arabia e Qatar. Given the statistical indicators, UAE and Qatar already account for a significant volume of sales and the market share of 20% and 50% for lumber and veneer respectively. These countries have a mature market, and there is little possibility to expand significantly and gain strategic advantage. Such market, as Lebanon, on the other hand, still demonstrates significant potential for growth in lumber products, which is within the strategic targets of Chabros International Group, due to the Serbian idle capacity. Additionally, the vast majority of the employees within the group are of Lebanese origin and, thus, the company counts with strong in-house expertise and market knowledge. Based on the organizational goal to build strategic affiliation between the Group and its customers and the philosophy of trust relationships without letter of Credit, Lebanese market presents an interesting opportunity. The company in this situation will penetrate the market, where it already has connections and customer knowledge. Organizational staffing policy in this case can help the company gain customers´ trust, due to cultural proximity and shared values of Lebanese environment (Boxall and Purcell, 2011).
What Markets Should be Targeted under Market Growth Strategy
Market growth strategy is based on entering new countries with an existing product. Chabros International Group is differentiating itself from the competition by offering not only high quality, but also varied product line. Based on the facts of the case, while competition offers twenty varieties of lumber and on average two varieties of veneer, Chabros International Group competes with the product line of forty and three-four for lumber and veneer respectively. The company realized that the key to successful sales strategy is being able to understand customers´ “desires”, as they are not looking at the quality, but at the texture characteristics of the product (Armstrong and Kottler, 2012). With that in mind, Chabros gained additional competitive advantage by providing a one-stop-shopping solution to the client. Such market offer and cost advantage allow the company taking reasonable risks and entering markets, which previously were outside of their core. As such, Turkey can provide an interesting alterative due to its strategic location and transportation cost advantage from Serbia, as well as its cultural proximity with the Chabros International Group´s core markets. Based on the analysis of the Moroccan market, provided in the case, the country has good growth potential, and there is no significant cultural or economic barrier, which should become a driver for eliminating this country from the target market list (Sadler, 2003). One of the considerations of the company is the Letter of Credit relationships and the lack of knowledge about local Moroccan customers. This challenge, however, will accompany any market penetration strategy and the risk should be leveraged by bringing in in-house expertise and sales database.
Learning Points, Take Aways and Insights
Contemporary business environment is determined by increased cultural and social diversity. Multinational organizations have to deal with a wider range of cultural elements, when it comes to international business, sourcing and sales relationships. The case illustrates the impact of culture on relationship management and the role, which understanding of the cultural background can play in building on trust and long-term commitment. An example of a partnership between Chabros and Italian Supplier to enter Saudi Arabia market demonstrates the importance of the cultural distance, masculinity and femininity dimensions in the European and Arab worlds (Hofstede, 2001). One of the important learnings is the fact that quality and service often will not be the only dimensions, which are incorporated in the decision-making process of the companies. Cultural elements and traditions play a special role in Arab and Asian worlds and pragmatism, which Europeans do business at times, can negatively affect the business in these regions.
The learning, which I will take with me for the future assignment is multifaceted. The major finding is the diversity of elements, which must be considered in view of the organizational development. There are numerous issues, which can face the company and affect its business decisions and strategic directions. Some of the major decisions with regards to the growing business are related to the options of expansion, such as market growth, penetration, product development and diversification. The choice, which the company makes, should be based upon fourfold strategy: cultural fit, economic appropriateness, strategic alignment and rivalry situation. Often, companies ignore the role of the cultural element and, in spite of all other constructs being the right fit for the determined strategic option, they fail.
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Monczka R., Handfield R., Giunipero L., and Patterson J. (2011). Purchasing and Supply Chain Management. London: South-Western Cangage Learning. Print.
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