Intangible Specialization and Product-Mix Optimization - Term Paper Example

 Intangible Specialization And Product-Mix Optimization intangible specialization (is) Intangible specialization is the concept comprising of relationship between path dependence, set of routines (i.e. intangible capital accumulation), and level of uncertainty in competition among automobile manufacturers (Maeilli, 2005, p.249). The term (IS) is associated broadly with planning, designing, and ethics of business under new set of rules and procedures. New set of routines are appreciated in business environment but they are usually unstable and uncertain. Intangible capital encompasses “identifiable non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset” (Bratianu & Dinca, 2010, pp.212). These assets include technical and managerial knowledge present within the organization structure and the decision oriented or operational routines required for strategic planning (Nelson & Winter, 1982). Clark, Maielli & Blundell (2006) stated that such intangible features in a firm affect “order-winning factors” of a product and ultimately “product appeal”. These features can facilitate the development of typologies for small cars making way for the alternate typologies (large cars). Maielli (2005) applied the intangible specialization concept to case study of Italian automobile company Fiat in order to elucidate how the company could not succeed in shifting upmarket when repeated attempts were made in the year 1970 and in the beginning of 1990s. Findings revealed that output mix of Fiat could not accelerate and remain limited to down-market position due to inflexible accumulation of intangible capital by the management and technological sector of the company for forty long years, practicing no significant change between the periods of 1920 and 1960s (Maielli, 2006, p.351). Across varied market levels, efficiency differential in the design of products was also deemed as a prime reason for failure (Clark, Maielli & Blundell, 2006, p. 5). It was not long ago that the innovative inclusive idea of IS in the business ethos started facing hurdles. Intangible specialization has a long solidarity relationship with the Fiat car industry. It was about to be treated as an evolution in the history of economics. The cultural framework for the car company revolved around better engineering tactics having all mandatory skills and creativity for technical design leading to the manufacturing of light weight automobiles that are also cost affective. Having such ambitions, inflexibility associated with intangible asset suggested that manufacturers and design engineers excelled in the small car design field but intermediate and “upper range units” could not be reached to a noticeable extent. Due to which the company stayed “intangibly specialized” in the lower market sector constricting the strategic marketing perspective (Maielli, 2006, p.315). Intangible Specialization Affecting Fiat’s Strategy & Output-Mix Optimization In Era Of The 70’s In case of Fiat, ‘intangible specialization” in the product design limited company’s access only to the lower end market, also lessening its “output mix flexibility “even when it possessed technical suppleness in the production sector (Maeilli, 2005, p.249). Looking at the era of 1960 after the term was coined; engineers were struggling to keep up with the domestic demand and sweating with ideas to produce light weight cars but in bulk amount. As engineers were working efficiently for retaining more customers, the sole application of this strategy was indirectly locking the Fiat business in the lower sector. This process continued and intangible specialization found its nesting place in business ethics. Life time employment and promotions were involved in the painted picture of Intangible specialization. For confining costs, strict routines were developed by Fiat in 1960s, because costs of materials being used were high as compared to sales. Domestic market was adversely affected by the low and unjust income distribution. To compensate such losses, product design was further enhanced to lessen weight of the vehicle. Through this innovation material costs were likely to be saved. Alterations were also made in the design process by reducing task duration and manufacturing life cycle time (Clark, Maielli & Blundell, 2006, p. 5). But still the global strategic position of Fiat did not look promising. Required changes were not distinctively seen because of the conflict between marketing managers that wished to expand output-mix flexibility in the attempt to the ongoing changes in demand, and the technical team seeking ways to maximize its specialization in small family cars production sector (Maielli, 2007). The developers of Fiat though inspired by American mass production strategy selected areas that suited Fiat policy alone. They kept their focus minimal on two drivers: (1) emphasis on weight of the car (2) simplification of managerial tasks towards cycle-time reduction This particular planned work till 1960. Inspired by American strategy, cars like Fiat 500 and 600 were not suitable for other European countries as those users were used to high quality and technically advanced cars. Fiat however failed to provide the desired capacity and size to the European natives. This eventually led to the failure of Fiat’s strategy as the progress in its upper segment was dormant. A surviving strategy was established to gain new strength on the same dwindling ground by providing production managers with power instead of technical engineers. The entire plan and company’s benefited decision was relying on production team. What costs to go with? What specific or innovative designs would be selected? Analysts were of the view that for maintaining firm position in the market, Fiat should adopt strategies to optimize its output mix towards upmarket sectors through practicing increased design flexibility and production. Political and behavioral factor also played their part but most probing question faced was, assigning of power to the right and skillful personnel. Retail market condition in the year of 1970 was not in favor of automobile industry. One of the prime reasons being saturation of European markets when potential demand placed heavy reliance on substituting vehicles already in existence instead of manufacturing new models per inhabitant which caused less customer retention and overall decline in sales (Dunford, 2006, p.6). The above stated decision at different points survived to certain extent. But conflicts with higher parties could not be resolved. In the late 1970’s robotics was involved in production, control timing factors and small cars were introduced yet disagreements still remained and no fruitful solution was seen by the end of the year. Time cycle and cost reduction factors shaped the technical and managerial sector of Fiat. Until eight years, production managers enjoyed the company’s strength and tried to gain confidence back in retail market but the consequences of 1970s failure could not be reprimanded as there was emerging need for product design renewal even while Fiat was facing financial deficit. To retain market share, decision power related to output mix was handed over again to production engineers (Maielli, 2005, p. 264). Fiat’s up market strategy was a deemed failure in 1970 as explained in the following figure. Figure: Fiat production per car model from 1967 to 1997 As far as the 1970s shift in up market is concerned, Fiat showed variation in strategy and product regeneration in upcoming years. In terms of company growth, Fiat took over the up market in a different product Lancia in 1969. Fiat showed featuring of up market during the 1970s, whereas it moved back to down-market during the 1980s. Another up market shift in 1988 can be seen or noticed from the given figure. Until the late 1970s Fiat’s output mix was persistent showing down-market, whereas it showed a revival in flexibility in 1980s, which in turn enabled Fiat to plan the adjustment of the output mix towards up market units in the 1990s. Fiat’s entire output-mix strategy between the period of 1970s and 1990s has been misinterpreted, which could be the case of its failure. The upper end of the market in the 1990s has not yet been successfully investigated. Furthermore, Segment A includes vehicles from 500 to 850 cc, segment B includes vehicles from 850 to 1100 cc, segment C includes vehicles from 1100 to 1300 cc, segment D includes vehicles from 1300 to 1600 cc, and segment E includes vehicles from 1600 to 2200 cc. Segment share of total output (percentage), (A+B; C+D+E), 1968–1997 (Maielli, 2005). However 1979 was another deadlock. Even though power was allotted to production managers the process of decentralization was completed, yet some major decisions like allotting of resources to Panda and Uno were made. Lancia got involved too and joint collaboration was proving profitable but later on technical expertise and manufacturing quality dwindled away instead of persisting for a longer while (Maielli, 2005). intangible specialization affecting fiat’s strategy in the 1980’s and 1990’s 1980s Italian market was in its infantry phase. Fiat worked with newer models, in late 1970 Ritmo was introduced before oil crisis hit the automobile economy. It worked with product regenerating strategies of Panda in 1980 and Uno in 1982. Table: Output by segment, 1988-1997, Fiat, Lancia, Alfa Romeo (Maielli, 2005, p.260) After the products vital movement from 1970 to 1980s which was also strategically driven, 1990s attempt was more consistent and flexible and aligned with the terminologies of product based strategies. This point is illustrated in the above mentioned table. It can be clearly seen that shifts in upmarket from 1988 faced recession. The readjustment is evident only in the year of 1988, 1989 and 1990s, as a result of product renewal. In 1990s European Union was stable and mature and believed that even after rebuilding and redesigning Fiat’s strategy the output mix of the company still lacked the kind of representation what its awaited customers were looking for. The decision of producing small cars also proved fatal as the expected shift in market was not seen. But still it was not a total failure. Last two columns of table enable the comparison between Fiat’s output per segment averaged over the whole period and the minimum competitive output per segment, as calculated by European generalist manufacturers. The comparison suggests that Fiat remained competitive only “in the lower segment of the market” (Maeilli, 2007). Fiat’s shift in the up market in the decade of 21st century: Figure: Structure of demand in the Italian Market 1960-1990 (Maielli, 2005). The above figure describes that by the end of 1990’s Fiat were closer to maturity, more at a neo infant phase rather than being absolutely mature. Market competition again caused Fiat to remain in crisis situation in late 1990s. To gain recognition in the global market, the company combated by expanding its products internationally, contributing to maintain a brand name among the world’s greatest automobile manufactures offering cars at affordable costs. Since then, the company has retained global recognition by making up to sixty percent sales in the international export sector. Fiat provided Alfa Romeo with greater production as well as quality based cars for producing five hundred thousand units per annum keeping in mind the level of demanded quality as well as considering the price factor that would be somewhat close and equally competitive to BMW. Progress of Fiat continues to pave its way in the twenty first century with massive technical expertise as new engines and car models are being introduced. Overall Fiat is improving its market share and future can be more promising for the given company (Fiat History, 2010). Intangible specialization gives a rational “ex-post” description of the company’s repeated failure in the upper market segment from 1970-1990s. The concept of IS was launched because Fiat showed an interest in the lower market rather than working with medium and upper segments of market, the strategy implemented by other competitive car industries. The idea was new, innovative and had consequences. Fiat overlooking competition got rightly involved with building of light weighted cars. But consequences were crucial and not in the favor of decision (Clark, Maielli & Blundell, 2006, p. 5). But still argument remains that Fiat’s strategic developers could have figured out the probability that the company’s IS would prohibit its expansion in the medium and upper market share due to competition emerging from Japan. After analyzing such negating heuristics, the most suitable solution to the prevalent issue would have been to maintain its stature in the manufacturing of small car design category instead of wasting valuable material resources to meet with the upper and middle global market competitors (Maielli, 2006, p.351). Strategy that was prior considered valid was mass production which proposed that fluctuations in market segments must be coped by utilizing stocks according to the aggregate demand and need for particular car models whereas new successful approach “lean production” focuses on improving the economic efficiency by reducing stocks through optimizing capacity usage. Marketing strategies like “Just in Time Supply” and flexibility could make Fiat car producers apt at manufacturing random variety of cars utilizing same tools for every model. The tendency of randomly manufacturing a variety of automobiles using similar production line is termed as “product-mix flexibility”. This technique will help Fiat to eliminate stocks and enhance lean production even when market conditions are unstable or whenever the need arises to adjust upper “output mix” market (Maielli, 2005, p.251). References: Clark.,P., Maielli, G., & Blundel, R., 2006.The limits to universalism in OLKC: National Cultural Repertoires, Intangible specialization & Penrosian Learning Dunford, M., 2006. Globalization failures in a neo-liberal world: the case of FIAT Auto in the 1990s. School of social sciences and cultural studies. University of Sussex, United Kingdom  Maielli, G., 2005. ‘The Machine that Never Change: Intangible Specialization and Output-mix Optimization at Fiat, 1960s - 1990s Competition & Change’, Vol. 9 (3), pp. 249 – 276 Maielli, G. 2006. History Under Cover: The Problematic Relationship Between Business Management and the Past. Competition & Change, Vol. 10 (4), pp. 341-356 Maielli, G., 2007. ‘Counterfactuals, Super factual and the Problematic Relationship between Business Management and the Past, Management and Organizational History’, Vol. 2(4), pp. 275 – 295 Fiat History, 2010. Life in Italy. Retrieved at: [Accessed: 30 December 2010] Read More