GN Nord is one of the leading manufacturers of hearing aids and headsets in the world. Headquartered in Denmark, the company was set up in 1869 as a telegraph company, but later diversified into other areas which form its core business today. With its mission being “to help people connect”, GN Nord comprises of two distinct businesses – GN ReSound and GN Netcom and is listed on the NASDAQ OMX Copenhagen (GN, 2009, p. 1). While the former specializes in the design, development, and manufacture of headsets; the latter deals with the manufacture of “audiological diagnostic equipment” (Thomson Reuters, 2009; GN website, 2009; GN, 2008, p.1).
Apart from the headsets and speakerphones for cell phones manufactured by GE Netcom, it is also an original equipment manufacturer for firms that specialize in the manufacture of PDA’s, cell phones and PCs. The bulk of GN ReSound’s manufacturing activities are based in China (GN, 2008). According to GN Nord’s Annual Report (2008, p. 2), GN ReSound also has a subsidiary known as GN Otometrics, which “manufactures and markets audiological diagnostics equipment under the Madsen, Aurical and ICS brands.
” The company’s headsets are marketed under the Jabra brand, while the hearing aids are marketed in three different brands that include the ReSound, Beltone and Interton brands. As at the start of this year, GN Nord had a total of about 4,000 employees, 1,000 of whom were based in Denmark (GN Website, 2009). Purpose of paper GN Nord pursues a grand strategy of growth. However, in recent years it has not been able to achieve its growth objectives, with its profitability declining year after year, and in the process posting negative cash flows.
The aim of this paper is to examine strategic options which GN Nord can deploy to turn around its fortunes and achieve its growth objectives. These strategic options will be identified in the light of the firm’s external environment and its quality practices, while also taking into consideration its internal strengths and weaknesses and the industry’s attractiveness as evaluated through Porter’s Five Forces Framework. It will culminate in a series of recommendations which if followed, have the potential of turning around the business back to profitability. Problem Identification
In spite of being one of the largest players in the hearing aids and headsets industry, GN Nord has in recent times been going through a lean patch, characterized by falling profitability and suboptimal financial indicators (Thomson Reuters, 2009). While the company made profits worth some 35 million Danish Crowns in 2007, last year it experienced dwindling earnings with its profits falling downwards to just 27 million Danish Crowns (about $4. 61 million). This year, the company has projected a 17% decline in sales revenues to $2. 8 billion, leading to a loss of 100 million crowns (Thomson Reuters, 2009).
Other key figures adduced by the company’s annual report (2008) also point to a deteriorating financial performance by the company. The report states that the company’s revenues fell from the 2007 levels of 5,981 million to 5, 624 million in 2008. While its rate of organic growth showed some improvement, it still remained in negative territory in 2008 (negative 2%, up from negative 7% a year earlier). Its EBITA (Earnings before interest and tax) also reduced from 294 in 2007 to just 65 in 2008, with EBITA margins declining from 4. 9% to 1. 2%. At the same time, the company had a negative cash flow for the year ended 2008 (GN, 2009).
With the rate of market growth of the industry remaining largely subdued in part because of the deteriorating economic conditions, GN Nord’s financial position remains precarious, given that its key financials also lag behind industry averages. According to Hoovers, its price/sales earnings ratio stands at just 0. 75, compared to the industry median of 2. 23 and the market median of 5. 93. While its price / earnings ratio is negative 76. 92, the industry median is 27. 10 while the market median stands at 21. 55. Additionally, the company’s price book ratio of 0. 96 compares unfavourably to the industry median of 2. 64, and market median of 5.
70. GN Nord’s price / Cash Flow Ratio of 8. 27, also lags behind the industry median of 14. 77 and market median of 36. 90 (Hoovers, 2009). The challenge faced by the company is to grow its earnings and boost its financial position even in a market that is flattish and where harsh economic conditions predominate. Strategic Management of GN Nord There are three strategic levels in any organization: the corporate level, business level, and functional level. At the corporate level, there are three possible strategies which a firm can pursue. These include the grand strategies of growth, maintenance / stability, and retrenchment.
At the corporate level, GN Nord pursues a grand strategy of growth, with key objectives being profit maximization and growth in sales revenues and market share (Plunkett and Attner, 1997; GN, 2008). At the generic level, three possible strategies include the generic strategies of overall low cost leadership, differentiation, or focus / niche. At the generic level, GN Nord pursues a mix of differentiation and low cost leadership strategies, which are underpinned at the functional level by strategies such as premium and low cost pricing for various product bands.
However, its current structure has a lot of inefficiencies and cost disadvantages that do not support the low cost strategy (Dess, Lumpkin and Taylor, 2004; GN, 2008; Grant, 2004). SWOT Analysis of GN Nord – Michael Porter’s Five Forces: As is the case in many other industries, the attractiveness of the hearing aids and headset market is determined by five forces which include industry rivalry, the bargaining power of buyers, bargaining power of suppliers, the threat of new entrants, and the threat of substitutes (Grimm, Lee, and Smith, 2006; Harvard Business School, 2005).
In the hearing aids industry, a high concentration ratio (90% of the market is controlled by just five buyers who include Phonak, William Demant, Siemens and GN Nord) suggests a low intensity of industry rivalry. The small number of competitors in the industry, estimated by Lotz (1998) to be just 200 worldwide with most of them being small also points to a low intensity of industry rivalry. However, the slow growth in the market means that the firms in the industry have to fight for market share, somewhat raising the levels of industry rivalry (Koncept Analytics, 2008; Porter, 2008).
Given that the majority of hearing aids buyers are individuals, these are many and fragmented thereby pointing to a low buyer bargaining power (Koncept Analytics, 2008). According to Penteado and Bento (2008), there are just three major suppliers of raw materials to the industry, which include Knowles, Sonion and Tibbetts. Lotz (1998) estimates that Knowles alone supplies 80% of the industry requirements. The fact that suppliers are few and concentrated points to a high supplier bargaining power.
Additionally, Lotz (1998) writes that backward integration is limited, and that supplier switching costs are high, all of which point to high supplier bargaining power. According to Lotz (1998), the threat of new entrants is low (given factors such as high asset specificity, specialized knowledge required and the extremely high levels of brand recognition commanded by the established players). Even though many variations of the hearing device now exist, there is practically no substitute to the hearing device for those hard of hearing.
– Internal Environment Analysis – Strengths and Weaknesses: GN Nord has several weaknesses as well as strengths. Some of its strengths include a highly recognized brand name, a culture of innovation (characterized by award-winning designs such as the “be by ReSound™”), market leadership position in the mobile headset market (with a 20% share) and the fourth largest player in the hearing aid industry (with a share of 17%), and superior service as well as an extensive distribution network (GN, 2008). As outlined, the firm has a major weakness in as far as its financial position is concerned.
Its price/sales earnings ratio, price / earnings ratio, price book ratio and price / Cash Flow Ratio all fall below industry averages. It also has a negative cash flow. Another major weakness is that the firm relies on Europe and North America for 92% of all its sales. Any downturn in these markets, as evidenced by the ongoing financial crisis, would be disastrous for GN Nord. It also has some structural inefficiencies and high cost operations (GN, 2008; Amlani and DeSilva, 2005). – External Environment Analysis – Opportunities and Threats:
Koncept Analytics (2008) identifies various opportunities that GN Nord can exploit. The increasing numbers of people with hearing impairments provides an opportunity for the firm to increase demand and sales of its products. Additionally, there have been rapid developments in technology (with new technologies facilitating miniaturization, hearing assistive technologies (HATS), wireless technology such as the bluetoooth, mobile VOIP, etc) which provide the company with an opportunity to introduce new products and enhance its market penetration.
Since most of the people who buy hearing aid devices are typically aged over 65, the rapid greying of the population in the industrialized world provides significant opportunities for growth. The low levels of penetration especially in the segment of those with mild-to-moderate hearing impairments, also presents a potential growth area for the company. Low penetration rates (with only one in five of the hearing impaired having the devices), as well as the rise of younger, first time users, also present strong growth opportunities.
The introduction of hands-free legislation driving in certain US states also provides opportunity for sales growth (GN, 2008; Koncept Analytics, 2008). Several threats also exist. According to Koncept Analytics (2008), the industy faces high R&D costs (with Lotz (1998) estimating that up to 12% of all costs are taken up by such expenses). In addition, product life cycles are rapidly shortening, meaning that many products are likely to become obsolescent faster (leading to losses), as well as a higher rate of new product development with its associated costs.
These are likely to raise costs for GN Nord and reduce its profitability even further. With a slow growth in the market, competition from the major players that include Siemens (the market leader), Phonak, and William Demant (with its Orticon and Bernafon brands) has intensified and may eat further into the firm’s sales revenues. The deteriorating economic environment also poses significant threats to the firm’s profitability, since a recessionary economy has the effect of slowing down demand in the industry. As a result, industry growth slowed down from 6% to about 3%.
Exchange rate fluctuations, which ate into 4% of the firm’s revenues in 2008, also continue to pose a big threat (GN, 2008; Koncept Analytics, 2008). Quality and Productivity Quality is one of the most important requirements for success in the hearing aids and headset industry, and GN Nord has put in place measures to ensure that it attains quality and minimizes defects. As far as contact center headsets are concerned, key success factors include “comfort, sound quality, acoustic shock protection and durability” and all quality efforts are geared towards achieving that.
For example, GN Nord has put in place measures to ensure that its contact center headsets conform to the EU noise regulations, an in particular “the recommended level of 85 dB (A) time-weighted average exposure. ” Rigorous testing to ensure durability is guaranteed is undertaken, as well as quality control that ensures high levels of noise cancellation (GN, 2008, p. 7). For office headsets, the main features that must be catered for include usability, comfort and sound quality.
To achieve these, the firm ensures the use of ergonomic designs that also allow for hands free operation and multitasking, as well as the use of noise cancellation microphones (GN, 2008). To ensure strict conformance to these quality requirements, GN Nord undertakes a careful and thorough vetting and selection of subcontractors. T continues to carry out visits to the factories of its subcontractors where their quality control systems and processes are reviewed. As the company’s annual report (2008, p.
13) states, “GN proactively applies preventive measures to make sure that the facilities meet the highest safety standards at all times… In order to ensure that the suppliers comply with GN’s high quality standards, GN conducts regular quality checks of all suppliers of finished products and of subcontractors of critical components. ” According to GN Nord’s annual report (2008), there is a quality control system known as the “Quality Factory Manufacturing System. ” Under this system, all the incoming materials are thoroughly vetted to ensure that they conform to the strict quality standards that have been established.
Additionally, this system has mechanisms for ensuring strict quality control of finished items rolling off the production facilities, the aim being to reduce the error margin to the bare minimum, enhance the quality of the finished products, and ensure that the products are taken to the market in the most efficient manner possible. At GN ReSound, the company has established a “global process including a web based workflow system for gathering and resolving quality issues…to nearly all manufacturing sites and subsidiaries in order to increase the efficiency and coordination in resolving globally reported issues” (GN, 2008, p.
19). International Strategy Although it is the fourth largest hearing aid manufacturing company’s in the world with a market share of 17%, GN Nord’s products are primarily sold in North America (where the US market is the most important) and Europe, and to a lesser extent Asia. Over 47% of all GN Netcom’s revenues come from the European market. The North American market contributes 45% of all GN Netcom revenues. In total therefore, the North American and European markets account for 92% of GN Netcom’s revenues, with Asia making up the remaining 8% (GN, 2008).
For GN ReSound, Europe accounts for 45% of all revenues, the North American market for 36%, while Asia makes up the remaining 19% (Annual Report, 2008). This is diagrammatically depicted as follows: Source: Annual Report, 2008, p. 18. Even though the American and European markets have higher adoption rates and contribute most of the company’s revenues, growth in these two markets has slowed down from an annual rate of 5-6% to just between 2-3%. In contrast, the Asian market which has lower penetration rates is experiencing a market growth rate that is higher than the European and North American markets.
Other areas the company may consider venturing into include the Middle East and South American markets (GN, 2008). Apart from product sales in the European, North American and Asian markets, the Denmark-based GN Nord also has cited some of its production facilities internationally. For example, apart from its production facility in Pr? sto, Denmark, GN Nord also has a manufacturing facility in Xiamen, China. The company also sources most of its components from the Asian region, and largely from China (GN, 2008). Solution to problem, conclusion and Recommendation
As detailed in the preceding section, GN Nord pursues a grand strategy of growth, where it aims to maximize profits by helping people to connect. However, in recent years, it has not been able to achieve this objective, with its profit declining from year to year and its cash flow declining to negative levels. This problem can be resolved through a strategic shift by the company. As stated, the hearing aid and headsets industry are highly sensitive to changes in economic conditions. With the global economic conditions, the rate of market growth has slowed down from 6% to 3%.
The company’s annual report (2008) states that “the global recession is shifting the demand pattern, skewing it more towards the lower-priced product segments. ” While GN Nord has typically offered its products in four price bands (reflecting a mix of premium and low cost pricing strategies that underpin a mix of generic and overall low cost leadership generic strategies), the current economic conditions dictate that greater emphasis must be placed on the downscale segment if the company is to grow sales and improve its profitability.
For this to happen, GN needs to develop a low cost structure. This should be achieved through replacing its current tall structure with one that is mean and lean. Management layers will have to be whittled down. Although the firm has outsourced some of its manufacturing operations to low cost producers in Asia (and particularly China where labor costs are very low), it should consider also shifting the bulk of its non-core functions from its Denmark plant to Asia to further lower its cost structure.
Outsourcing may lead to the retrenchment of employees, which will also help lower costs. Apart from lowering costs, this restructuring will also lead to an organization that is more flexible and agile, and which will be able to deploy some of its strengths such as its innovation capabilities to respond to emerging market trends. According to the Ansoff Matrix, companies pursuing a grand strategy of growth typically have four strategic options they can pursue. These include market development, product development, diversification, and market penetration strategies (Baker, 2003).
These are depicted in the diagram below: By pursuing these four growth strategies, GN Nord will be in a position to turn around its business and improve its dwindling profitability. Market development involves targeting the firm’s existing products at new markets. It can be achieved through geographical expansion to new markets (Baker, 2003). In our case, GN Nord derives the bulk of its revenues from the North American and European markets, whose rate of growth has significantly slowed and which markets have a higher rate of maturity.
Through this strategy, GN Nord should increase its presence in other markets, such as the Asian market, which is not only growing at a faster pace but which also has lower penetration rates and is not mature. For example, the company may consider expanding to countries such as India. Other markets which GN Nord can expand to include the South American market, and in particular countries such as Brazil and Mexico. GN Nord should also expand its sales by using new distribution channels.
One such channel which the company should deploy is direct selling through the internet, which will not only guarantee it a global reach, but which is also cheaper since it cuts out intermediation costs. This will help underpin its attempts to develop a low cost structure. The product development strategy involves the introduction of new products to existing markets (Baker, 2003). As stated, technological developments are bringing about new possibilities. For example, it is now possible to have wireless and hands free devices.
GN Nord should capitalize on this, exploiting its innovation capabilities, to introduce new products that will enable it attract more customers. This will also help the company protect itself against the effects of a rapidly shortening product lifecycle. Under market penetration, GN Nord should try to improve the uptake of its existing products among existing customers (Baker, 2003). This should be carried out using a combination of different techniques, which include enhancing its promotional activities and adopting more competitive pricing techniques.
Under the promotional activities, the company should dedicate more resources to advertising, sales promotion (such as offering price discounts), and personal selling. These will help increase product awareness and sales. Given the prevailing economic conditions that have reduced purchasing power and product demand, a more competitive pricing strategy that makes use of techniques such as discounts and rebates will help the company become more successful.
In line with the restructuring activity that GN Nord should adopt, GN Nord should put in place a change management plan that will handle any disruptions and help to successfully midwife the desired changes while minimizing resistance. For such a strategy to be successful, the company will have to ensure that the eight ingredients of a successful change management plan as outlined by Kotter (1996) are present. Accordingly, the organization needs to begin by creating a sense of urgency, that is, making key organizational stakeholders see the inevitability of the change.
The new strategic direction that the firm must embark upon should be clearly communicated to the stakeholders, with the stakeholders being made to understand the necessity for the change (Kotter, 1996). Secondly; the organization needs to build a guiding coalition, that is, a change management team that has sufficient authority and commitment to midwife the change. It should have top management support, and derive participation and involvement from all employees (Kotter, 1996). Thirdly, the organization must formulate a vision for the change and effectively communicate it to the stakeholders.
The vision must be engaging, simple, and memorable. The vision must be communicated frequently and consistently, and the leadership should model the vision through their behaviours (Kotter, 1996). In addition, GN Nord will need to empower its employees to be able to enact what the vision espouses. For example, the employees will need to be retrained in order to acquire any new skills which the paradigm shift will demand. They will also need to be motivated to carry through their roles in the fulfilment of the change process, and provided with all the resources required to fulfil their roles and responsibilities.
Where employees are affected by layoffs, they should be given support such as an attractive severance pay and life skills training (Kotter, 1996). GN Nord will in the process also have to create short-term wins, and reinforce the changes. The changes can be reinforced through for example, hiring practices that look for people with only the competencies or mindset which the new organization espouses (Kotter, 1996; Cameron and Green, 2004). References Amlani, AA and De Silva, DG. 2005. “Effects of Economy and FDA Intervention on the Hearing Aid Industry. ” American Journal of Audiology.
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