Brief comment for WSJ Critique

FratBro23
Category:
Management
Price: $10 USD

Question description

Read the critique provided below and provide feedback around 120 words. You are expected to include a new perspective, idea, experience, real world examples, and the course learning activities to support your assertions. You will  be grated on the quality of your posts.


WSJ Critique

When the 2015 Ford F-150 was released in January 2014, one of the technical revelations was the extensive use of aluminum in the body structure.  Many people, like me, thought that this increased amount of aluminum in the best-selling passenger vehicle in the US would lead to a windfall for the aluminum supplier, Alcoa.  Indeed, Alcoa’s stock price increased from $11/share in Jan ’14 to over $17/share in Sept ’14.  Recently however, Alcoa’s stock price has fallen back below $11/share, is down 30% this year alone, and the most recent quarterly report indicates potential further struggles.  This slowdown is a result of a few different economic conditions.  First, the price of aluminum is down 14% based on China’s reduced demand as well as shrinking profit margins in the smelting business, which is the process of making raw aluminum.  In addition to the potentially lucrative automotive products market, Alcoa has also been expanding into newer, higher technology alloys to supply the aerospace industry.  In response to these two diverging futures for its aluminum producing vs finished product operations, Alcoa announced two weeks ago that it would split into 2 separate companies.  One company would be responsible for raw materials, including bauxite mining, aluminum refining, and aluminum production.  This company reflects Alcoa’s historical competencies, and will continue to be called Alcoa.  The other, yet to be named company, will include rolled, engineered, and transportation products.  Interestingly, Alcoa’s CEO since 2008 and former CEO of Siemens, Klaus Klinefield will take over as head of this new spin-of, leaving the historical business unit to a new leader.

  The dramatic differences in performance between Alcoa’s two business units, and the resulting split creates an interesting scenario in an industry that only expects to grow based on future demand for lightweight and high-tech raw materials and finished goods.  Despite the reduced demand and dropping prices for raw aluminum, the divestment of additional value-adding units could provide some new strength to the historic company.  Founded in 1888, Alcoa’s core competency and capability has always been the creation of useable aluminum alloys for industrial and consumer product applications.  This divestment means that Alcoa’s resources and management can refocus on that core competency, and not be distracted by the high-tech, R&D heavy, engineered and finished products divisions.  Unfortunately, this strength does not come without major tradeoffs.  With this new corporate-level strategy, Alcoa is giving up an envious position of vertical integration.  By controlling the raw material mining, smelting, and refining, Alcoa is able to directly influence and control the input costs to its value-added divisions such as transportation and engineered products.  Without more information on the divestment, it is difficult to predict what relationship the new companies will maintain.  In a worst case scenario, the companies will begin to operate completely independent of each other.  This means that these new companies will have to pay market prices for raw materials, and will not be able to internally feedback long-term demand forecasts. 

  The divestment of value-adding units from its raw aluminum producing business does create additional opportunities for both future companies to take advantage of.  With its more direct focus on aluminum production, Alcoa will be able to focus its R&D capabilities into the improvement of that process, rather than the development of finished goods.  In addition, without the internal pressure to supply its downstream divisions, Alcoa can reach out to other raw aluminum consumers and sell its products at a higher profit.  For the high-tech, engineering intense, spinoff there are also additional potential opportunities.  Without the drag of a raw material manufacture weighing it down, the new company will be able to spend a higher percentage of its profits into long-term R&D, rather than investing in expensive aluminum smelting and mining.  Finally, this new corporate strategy will introduce some new threats, specifically to the spun off finished products business.  Without the intrinsic advantage of vertical integration, the door is opened to other aluminum finished goods manufacturers to step up and become a stronger competition in the finished goods markets.  With this decision, Alcoa is essentially reducing key barriers to entry in this industry.

  Ultimately, it is very difficult to understand Alcoa’s decision to implement this new corporate-level strategy, even in the context of the current raw aluminum market.  Essentially, Alcoa appears to be announcing that its high-value finished goods and engineered products business units will be more valuable under someone else’s management rather than its own.  This decision could reasonably be linked to the current CEO’s background in Seimens, a technology-based company rather than a mining and raw material manufacturing company.  It might even appear that Klaus Klienfield has cherry-picked his pet business divisions to split out on its own, while leaving the historical business units to be managed by the old guard.  It is yet to be seen what the strategic relationship between the two separate companies will be.  My recommendation would be for the new spin off to maintain a close contractual relationship with Alcoa in order to retain some level of vertical integration benefit, while also minimizing the benefit to competitors in the market. 



Tutor Answer

(Top Tutor) Daniel C.
(997)
School: UC Berkeley
PREMIUM TUTOR
Studypool has helped 1,244,100 students
Ask your homework questions. Receive quality answers!

Type your question here (or upload an image)

1819 tutors are online

Brown University





1271 Tutors

California Institute of Technology




2131 Tutors

Carnegie Mellon University




982 Tutors

Columbia University





1256 Tutors

Dartmouth University





2113 Tutors

Emory University





2279 Tutors

Harvard University





599 Tutors

Massachusetts Institute of Technology



2319 Tutors

New York University





1645 Tutors

Notre Dam University





1911 Tutors

Oklahoma University





2122 Tutors

Pennsylvania State University





932 Tutors

Princeton University





1211 Tutors

Stanford University





983 Tutors

University of California





1282 Tutors

Oxford University





123 Tutors

Yale University





2325 Tutors