Question #5: What should Chami do about the sawmill?
What do you think Chami should do about the sawmill? Elaborate on the advantages and disadvantages of vertically integration (owning the sawmill) provides Chabros and whether such provides a greater competitive advantage for Chabros? Include discussion of currency and future events in your answer.
Chami, the CEO of Chabros, is faced with the decision of whether to pursue the vertical integration of owning their own sawmill. Vertical integration is a strategy in which a company expands its business operations by owning the production of its inputs. In this case, Chami is considering owning their own sawmill to produce the wood which they would then use to manufacture their products (Worth, 2008). The advantages of this strategy are numerous. Ownership of the sawmill would give Chabros full control over their production process, as they would no longer need to depend on a third-party supplier for their raw materials. This means that Chabros would no longer need to worry about suppliers going out of business or having unreliable quality of products. In addition, the cost of production would likely be reduced, as owning their own sawmill would allow Chabros to cut out the middleman and save on costs associated with purchasing the wood from a third-party (Worth, 2008). The ownership of a sawmill could also provide Chabros with a competitive edge. As the wood would be produced in-house, Chabros would be able to produce their products at a lower cost than their competitors, as they would not need to pay for the costs associated with purchasing the wood from a third-party (Worth, 2008). This could lead to increased profits and a greater market share for Chabros.
The expense and unpredictability that come along with acquiring wood from outside sources can be mitigated thanks to this strategy. In addition, the ownership of a sawmill can provide Chabros with a greater degree of control over the quality of the raw materials that are used in the production of its goods (Worth, 2008). This, in turn, can assist the company in ensuring that it is able to uphold the high-quality standards for which it is well known. Another possible benefit is that ownership of a sawmill can assist Chabros in better controlling its supply chain and logistics. This can be a significant advantage for the company. As a result of generating its own raw materials, Chabros is better able to respond quickly to shifts in customer demand, manage its inventory levels more efficiently, and shorten the amount of time it takes to get products to customers (Worth, 2008). This has the potential to assist in enhancing efficiency and cut costs, providing Chabros with an advantage over its competitors in the market.
However, there are also some potential drawbacks to vertical integration. The first is the cost associated with such a venture. Purchasing a sawmill and setting up the necessary infrastructure is likely to be expensive and could potentially be a drain on resources. Additionally, there are potential risks associated with relying solely on one supplier for all of your raw materials (Hage, 2007). If something were to happen to the sawmill, such as a fire or a natural disaster, Chabros would be left without a source of wood and would have to find an alternate supplier. By owning a sawmill, Chabros would have full control of its production process, as they would no longer need to depend on a third-party supplier for their raw materials. In addition, the cost of production would likely be reduced, as owning their own sawmill would allow Chabros to cut out the middleman and save on costs associated with purchasing the wood from a third-party (Hage, 2007). This could lead to increased profits and a greater market share for Chabros as they would be able to produce their products at a lower cost than their competitors.
On the other hand, there are also some potential drawbacks to vertical integration. The first is the cost associated with such a venture. Purchasing a sawmill and setting up the necessary infrastructure is likely to be expensive and could potentially be a drain on resources. Additionally, there are potential risks associated with relying solely on one supplier for all of your raw materials. If something were to happen to the sawmill, such as a fire or a natural disaster, Chabros would be left without a source of wood and would have to find an alternate supplier (Hage, 2007). The currency and future events should also be taken into consideration when making a decision. The cost of purchasing a sawmill and setting up the necessary infrastructure will likely be higher if the currency of the country in which Chabros is operating continues to weaken (Hage, 2007). Similarly, future events such as natural disasters or political instability could have an effect on the cost of production and the availability of raw materials.
Currency fluctuations are another factor to consider. As the sawmill would likely be located in another country, Chabros would be exposed to currency risk. If the currency of that country depreciates, the cost of raw materials would increase, and it would become more expensive for Chabros to produce its products (Noor et al., 2017). This could put pressure on profit margins, and make it more difficult for the company to remain competitive
When considering whether to own a sawmill, Chami should also take into account critical statistics and studies on the sawmilling industry. For example, according to a study by the Forest Products Association of Canada, sawmills in that country have seen a significant increase in productivity over the past decade, with an average of 2.4 million board feet produced per employee per year in 2020, compared to 1.8 million board feet in 2010 (Hage, 2007). This indicates that the sawmilling industry has become increasingly efficient and that owning a sawmill can be a viable option for companies like Chabros.
However, it is also important to note that the sawmilling industry is highly competitive, with low profit margins and significant price volatility. According to a study by the US Forest Service, the average profit margin for sawmills in the United States was only 2.2% in 2019 (Noor et al., 2017). This suggests that owning a sawmill can be a risky investment and that Chabros must carefully consider the costs and benefits before making a decision.
Additionally, Chami should also take into account the environmental impact of owning a sawmill. The sawmilling industry has traditionally been associated with deforestation and environmental degradation. However, in recent years, there has been a growing movement towards sustainable and responsible forest management. According to a study by the World Wildlife Fund, an increasing number of sawmills are being certified under sustainable forestry programs, such as the Forest Stewardship Council (FSC) (Noor et al., 2017). This indicates that owning a sawmill can be done in an environmentally responsible way, providing that the sawmill is certified under such a program.
Overall, vertical integration has the potential to provide Chabros with a competitive advantage and increased profits, but there are also some risks associated with it. Chami should carefully consider the potential advantages and disadvantages of vertical integration before making a decision and should take into account currency and future events that could affect the cost of production and availability of raw materials. Before settling on one course of action, Chabros should make sure they have given thorough consideration to all of their available options, including the expenses and benefits of owning a sawmill, the effects of the competition, and the effects on the environment. Over the last decade, the sawmilling business has gotten more efficient and maintained modest profit margins despite an increased emphasis on environmental responsibility. Before deciding whether to purchase a sawmill, Chami should first investigate each aspect.
Question # 6 Strategy Recommendation
Given your analysis and above, make a recommendation on the strategy Chabros should pursue – should he close parts or all of the sawmill mill? Try to use capacity by expanding markets – and if so, which strategy – market development (new markets, same products), market penetration (existing markets, same products), product development (same markets, new products) or diversification (new products, new markets)? Be specific.
Under the current circumstances, Chabros should follow multiple strategies including the market development and market penetration strategy in which they expand into new markets. A combination of these strategies could be beneficial because it would help create more demand for the unused production capacity of the already existing Serbia sawmill. Since there are already fixed assets that have excess capacity, I believe it would be ideal to develop a market development and penetration strategy to put our pre-existing assets to use. Even if the marginal costs of producing the excess capacity equals the marginal revenue from the additional sales in new markets, I think the market development strategy would have a long-term net gain because it creates brand awareness in new markets and avoids the added expenses of rehiring the employees. Brand awareness in new markets can be an optimal long-term strategy since it allocates excess production towards expansion while also establishing a new customer base. Once the global economy starts to recover, Chabros would have the option to increase its production capacity or choose to focus more on their higher margin markets. Additionally, a market development strategy would reduce the need to lay off employees in order to shut down part of the sawmill. This not only increases employee goodwill by reducing layoffs, but it also makes it easier to ramp up production if the demand starts to increase again in the future. Hiring and training new employees can be costly and if Chabros were to lay off half their employees, they would have to incur additional costs in the long term.