Intangible Specialisation and Product Mix Optimisation in Fiats - Case Study Example

Operation Management: Intangible Specialization and Product Mix Optimization in Fiat’s Case Study Introduction Operations management is currently dealing with manufacturing and service issues of categories of organizational operations with a keen sensitivity than ever before. Both categories of organizational operations have their different implications on the general production strategies employed by the organization. Each category has inherent characteristics which direct the strategic decisions that the management should concentrate in to deliver within the specific conditions presented by each scenario. On an informed operations management practice, two important perspectives are highlighted namely the systems view as well as the process view of the organization. Based on the specific perspective oriented approach that the operations management makes regarding productivity agenda of an organization, strategic management can be used to formulate policies to enable balancing of availed options in operations (Schiavone, 2004, p7). In this study, Fiat’s case study has been used to demonstrate the importance of understanding operations management from a systems approach in withstanding market conditions. Intangible Specialization Perhaps defining the term intangible within the context of organization operations will assist in making a conclusive perspective eon the topic. The term intangible denotes assets, capital or factors that an organization works with but they are not immediately visible. On the other hand, tangible assets are the physically visible factors which the company uses in production. Both tangible and intangible factors contribute to the overall operation of the company. Economic evolution of organizations and other production entities is characterized by the accumulation of assets both. Intangible assets also represent relevant knowledge and technologies that the organization needs to remain in a specified production line. Intangible specialization is the concentration of accumulation of assets that are intangible in nature such as technology, with little emphasis being made to accumulation of tangible assets. Since there is some need to balance the control of accumulation of these two sets of assets, it becomes detrimental in the long run when the organization is unable to achieve the balance. Intangible specialization entails the concept of management decision making that tends to lean to and favor the dominance of a service intensive approach in production operations. The most dominant characteristic of intangible specialization is heavy reliance on routines as well as dependence in rigid production paths. Inappropriate market targeting leads to a poor market positioning and loss of dominance in the upper and profitable market segment. Specific set of routines followed dictate operations where a high level of reliance and dependence is placed in technicalities as observed in Fiat. Whereas the company was capable of building its technical muscle within its production, it was not capable of reflecting its might in the market segments in a balanced manner. Expansion into the market segments to cover at least the medium and upper market in the same stretch of time did not happen making it to lose ground in this respect. Loss of competitiveness can be traced to the misplaced attempts to design an appropriate output mix to take care of all the market segments (Ciravegna and Maielli, 2009, p7). 1970s’ Effects of Intangible Specialization on Strategy and Output-Mix Optimization for Fiat Prior to this period of operations, Fiat had been in mass production for around two decades during which the bulk of their products comprised of small and economical cars. Over the said period, a process oriented culture of production was perfected and moving out of it was never contemplated, fixating the company in the lower end of market segment. It was not until the 1960s that the company made attempts to move to a higher market segment but failed which prompted another tragic attempt in the 1970s. One of the effects of intangible specialization to strategy was that the company process oriented operation was infiltrated up to the management level where decisions made favored the apparent limited scope of production. It therefore remained that both the technical and managerial sectors of the company remained contented at the operation level of the company, which limited the expansion capacity of the company. Perfection of the lower level of operation could not enable the company compete in higher market segments. The market was exposed to declining disposable income from 1920s to 1960s hence reduced propensity to expend on motor vehicles on one hand. On the other hand, there was inequality in income and resource distribution and allocation. Alternatively, it became increasingly difficult to support production due to high costs of raw materials. The initial over-reliance of a rigid process as restricted by the accumulated intangible assets at Fiat in the 1970s captured the long-term decision making processes of the company (Clark, Maielli and Blundel, 2006, p1). The effects of intangible specialization during this time resulted in apparent concentration and heavy investment in production of small cars. This meant that the product mix targeted the lower market segment, leaving loopholes in operations at the medium and upper targets. This resulted in loss of benefits of upper market segment exploitation. Fixation in the lower end of the market was a reality that Fiat had to come to terms with by the end of 1970s since demand structure had significantly changed. Upon realization of the skewed market targeting as illustrated by the low end products, the management attempted to raise the company’s market segment coverage. This happened in 1970s but it failed1. There was huge efficiency disparity in the product design in as far as what Fiat produced and the specific market segments demanded are concerned. Little change was implemented at Fiat by 1970s but inconsequential to change the operation level of the company. For instance, it had been decided that revenue calculation which was initially being undertaken on the basis of weight was disbanded and replaced. However, some of the most defining practices such as production based on a technical creativity intensive basis and a predominant techno structure were still pulling down the company in attempts to jump out of intangible specialization. Engineering mentality and deep founded culture remained within the operations of the company to influence employment and other internal career plans. Cost reductions as was the objective of the company leading to introduction of adjustments that could ensure that such costs as direct raw materials were considerably reduced. Operations of the company had to be streamlined with the inspiration of avoiding excessive costs. The low end line of production with regard to production costs was preferred. Intangible specialization led to establishment of technical creativity within the engineering circles of the company (Clark, Maielli and Blundel, 2006, p1). The main objective of this approach was to ensure that the company contained production costs by taking care of a limited demand within the domestic market alone. Vehicle weight at all Fiat’s models was limited with an aim of making reductions in material costs in light to the prevailing economic conditions. While European countries continued with integration and innovations, inevitable market integration brought in to the Italian market more competitive models belonging to the higher market segments which particularly affected the opportunities availed by the domestic market. Competition was adversely affecting the chances of remaining in market and continuing with operations. 1980s’ and 1990s’ Effects of Intangible Specialization on Strategy and Output-Mix Optimization for Fiat In the period between 1980s and 1990s, Fiat management was still hooked and linked to the concept of intangible specialization. The failed attempts to graduate to a higher market segment in the 1970s prompted the second attempt in 1989. The company attempted to make adjustments on product with renewal being targeted while still maintaining production at the lower segment. This was the effect of intangible specialization since the cost limited approach could not allow much shifting to embrace the higher market segment. Lancia deal was to be followed but within the renewal strategy during this second attempt2. Learning from the past failures, the management was better equipped to handle output design mix presented to the market. On the agenda for improvements, flexible production practices were to be formulated in the 1980s. The failure of the up-market adjustment in 1980s paved the 1990s on a low note. The limitation of intangible specialization on which the company based its operations affected its share of the motor vehicle market for a long time in the European market. It is however important to that the company receded ground in 1980 from the up-market adjustments made before and reverted to the narrow market segment. At the time, it occurred that in the period between 1973 and 1979, Fiat lost ground in domestic market. It was difficult for the company to come to terms with loss of ground on both ends of the market and reversing to the domestic market appeared a better idea than remain in the poor expansive market. Loss of domestic market occurred due to competition from foreign car producers. When Fiat realized the extent of the damage, underutilization of the plants and diminishing demand due to foreign invasion of the market was already too threatening. However, from 1980, market shares returned back to normal creating capacity utilization and favorable domestic demand. Fiat decided to revert to down-market operation to seek better fortunes. This is the reason why the second up-market adjustment in 1989 was necessitated after mixed market reactions resulted in worse results as stated earlier (Maielli, 2005, p258). In 1990s, Fiat lost much operational ground to competitors since after up-market adjustments were made, the company got fixated in the middle of market segments instead of clearly cutting out its position. Decreasing market shares for Fiat in 1990s is evidence to the adverse competition that the company faced. Fiat performed poorly in the middle segment and the lack of cutting edge threatened its market positioning. Justified Suggestions on Whether Fiat Should Shift Up-Market in the Second Decade of 21st Century? In the early 21st century Fiat still struggled with the effects of intangible specialization, which contributed to its marginal performance. Output-mix factors follow the company’s unpleasant results having failed to establish a clear position by then. Concerning whether the company should consider an up-market strategy in the second decade of 21st century, it is practical to assess the cause of its predicaments. It is possible for Fiat to gain a better market positioning if it first establishes a balance of its assets for a comprehensive shift to be effective. Fiat’s market positioning should address several factors including brand and technological strength before rolling out possible adjustments. Technical management at Fiat carries the fate of its survival (Maielli, 2005, p271). Fiat should therefore shift up-market if operation shift is going to be sustainable. Based on superfactual scenario of cashing in by sale of some of its operations and strengthen lower market specialization Fiat could be better off. This is because the capacity of the company as it is could be overstretched if it continues to bear the risk. Successful companies in the upper-market could offer a solution to Fiat’s challenge. Alternatively, increasing output with an intention of combining high quality and large scale production strategies could offer an escape route for Fiat. Concentrating efforts to an area well versed in could pay returns if well exploited. Future up-market adjustments should be on an informed perspective having performed an ex-ante survey concerning economic evolution (Maielli, 2007, p292). Fiat should not attempt to enter upper-market operations with all the complications that intangible specialization brings. References Ciravegna, L. & Maielli, G., (2009) “Can Outsourcing Erode Intangible Capabilities? Evidence from the Fiat Case.” [online] GERPISA Conference, London. Available from: http://www.gerpisa.univ-evry.fr/rencontre/17.rencontre/GERPISAJune2009/Colloquium/Papers/S.15_Ciravegna.pdf [Accessed 13 January 2011] Clark, P., Maielli, G. & Blundel, R. (2006) “The Limits to Universalism in OLKC: National Cultural Repertoires Intangible Specialization & Penrosian Learning .” [online] OLKC, Coventry. Available from: http://www2.warwick.ac.uk/fac/soc/wbs/conf/olkc/archive/olkc1/papers/272_clark.pdf [Accessed 13 January 2011] Maielli, G. (2005) The Machine that Never Changed: Intangible Specialization and Output-mix Optimization at Fiat, 1960s-1990s, Competition & Change, vol. 9, no. 3 pp. 249-276 (September) Maielli, G. (2007) Counterfactuals, Superfactuals and the Problematic Relationship between Business Management and the Past, Management and Organizational History, vol. 2 no. 4, pp. 275-295 (November) Schiavone, F. (2004) “Division of Labor, Social Networks and Intangible Resources: The Italian Case of Network Business Creation.” [online] High Technology Small Firms Conference, Enschede. Available from: http://129.3.20.41/eps/io/papers/0406/0406007.pdf [Accessed 13 January 2011] Read More