With increasing competition and globalization, the environment in which a business operates has become more dynamic and uncertain. Every company should be watchful of changes in the conditions and adapt to changes in the environment to be successful. This paper discusses the strategies followed by A.O Smith Corporation in response to changes in the external and general conditions.
A.O Smith Corporation is a leading manufacturer of water heaters and boilers for commercial and industrial use. The company continues to grow by expanding into new territories and expanding their customer base. The company caters to customer’s needs by continuously scanning the environment and determine what is trending with the customers and providing products suitable for the customers. The company is also able to identify the changes within the industry by scanning. “Through scanning, firms identify early signals of potential changes in the general environment and detect changes that are already under way.” (Hitt, M., Ireland, R., & Hoskisson, R., 2015, pg. xxvi).
By analyzing the trends and environmental changes, A.O. Smith can make changes to its strategies. “Environmental scanning makes for better industry analysis and understanding of markets, and better strategic planning efforts, developing greater understanding of environmental changes.” (Jehad S. A, 2015, p. 461).
A.O. Smith can stay competitive by capitalizing early on opportunities. By identifying trends in the market, the company can create value for its customers by providing products tailored to their needs. By scanning, A.O Smith can detect changes in supply and identify problems in manufacturing at an early stage.
A.O. Smith – External Environment
The external environment consists of factors that the company cannot control. A.O. Smith can capitalize on various opportunities that are provided by external environment analysis. Based on the study, “firms take actions, such as building new capabilities and core competencies, in hopes of buffering themselves from any negative environmental effects and to pursue opportunities as the basis for better serving their stakeholders’ needs.” (Hitt, M., Ireland, R., & Hoskisson, R., 2015, pg. xxvi).
One of the trends in today’s market is the development of tankless energy efficient water heaters. The water heater manufacturers are focusing their R&D efforts on developing energy efficient water heaters that consume less power than conventional models. The company has a dominant market position and has a robust R&D capability. There is a higher demand for tankless water heaters. These water heaters require less space than conventional ones and hence are preferred by the customers. A.O Smith has developed a range of tankless and hybrid electric heaters, which is an opportunity for the company.
The demand for water heaters is increasing with the increase in the number of houses in the USA. According to Marketline on the US Housing market, “the performance of the sector is forecast to accelerate, with an anticipated CAGR of 8% for the 2016–18 period, which is expected to drive the sector to a value of $340.1 billion by the end of 2018.” (Marketline, 2017, p.24). The increase in housing market provides a higher opportunity for A.O. Smith to grow.
A.O Smith – General Environment
“The general environment is composed of dimensions in the broader society that influence an industry and the firms within it.” (Hitt, M., Ireland, R., & Hoskisson, R., 2015, pg. xxvi). The external environment consists of factors such as social, economic, political, legal and technological factors. By analyzing the general environmental factors, A.O. Smith can identify various threats that affect the company.
A.O Smith operates in a highly competitive environment both in the US market and abroad. The constant competition forces A.O Smith to reduce their price to stay competitive. The continued downward trend in price causes a financial strain on the company and is a threat to the business.
The company’s products are subject to various government regulations both in the US and overseas market. Several rules, ranging from environmental, safety, energy efficiency and a range of statuary requirements. Any violation of these regulations can result in penalties and sanctions, which in turn causes adverse publicity and adversely impacts the company.
Steel is the primary raw material for A.O. The steel industry can be affected by conditions such as economic conditions, labor costs, higher raw material costs, and sales levels. The changes in steel prices affect the operational ability of A.O. Smith and affects its performance adversely.
Industry’s Operating Environment
The industry consists of all the companies that produce similar products. The changes within the industry affect the performance of the individual business. “Compared with the general environment, the industry environment (measured primarily in the form of its characteristics) has a more direct effect on the competitive actions and responses a firm takes to succeed.” (Hitt, M., Ireland, R., & Hoskisson, R., 2015, pg. xxvi).
The following five factors should be examined to determine the industry’s environment. “Five forces are: the threats posed by new entrants, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors.” (Hitt, M., Ireland, R., & Hoskisson, R., 2015, pg. xxvi).
According to IBIS, the industry is projected to grow until 2022. The annual growth rate is expected to be 4.1%. The sector is matured in the US and relatively mature globally. Hence innovation is the strategy that will help businesses to survive. The water heater manufacturing industry requires a medium level of capital investment. The expenditures in the company are focused on equipment and machinery. According to IBIS, for every dollar spent on wages, 0.15 dollar is spent on capital. Because of high capital investment required, the threat of new entrant is relatively low.
According to A.O. Smith’s annual report for the year 2016, the company relies on few critical suppliers for its raw materials. If any of the suppliers terminate their service, the company risks a loss of sales and reduced profit. Hence the bargaining power of suppliers is higher. Customers are the key to the success of every business. Customers can choose to buy competitors’ products if there is an increase in price or due to other factors such as poor-quality product or if competitors offer innovative products.
Environmental scanning and evaluation of the company’s external and internal environment are essential to the success of a business. Firms can survive by studying their environment and adapting to changes. SWOT analysis is a standard tool used by companies to identify their strengths and weaknesses. The information obtained will be useful for the business in their strategic planning.