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Case Study on A123 Company

Essay by   •  October 29, 2015  •  Coursework  •  2,712 Words (11 Pages)  •  2,050 Views

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Case Analysis Identification

A123 Company Vision Statement: “to combine its portfolio of products that use manophosphate technology with strategic partner relationships in order to address the next generation energy” (Wheelen, Hunger, Hoffman, & Bamford,p. 6.2 2014)

Key Elements of A123 Company Vision Statement:

        The main goal of the company is to become the leader of energy in tomorrow’s world. Considering their expertise in manospahte technology and key partnerships in business, the company seeks to become the global leader in this technology delivering cheaper and more efficient systems. Every day, they focus on delivering better battery systems that will lead to a decreased dependency in fuel and other traditional sources of energy.

        While A123 business model and idea seemed extremely promising at the time the text was written, it struggled significantly in important areas such as operations and financials.

Our group has identified a very important challenge to the company in plant building. As stated on the text, the company strongly depends on government issued money incentives to build plants in the U.S.A., therefore scarcity of this will lead to the company been unable to manufacture domestically (Wheelen, Hunger, Hoffman, & Bamford,p. 6.12 2014). A direct consequence of this is that the company “will have to look to cash reserves or other sources of funding that may decrease company value” (Wheelen, Hunger, Hoffman, & Bamford,p. 6.2 2014). In addition to these issues, the company also faces harsh situations in Asia where it has many of its manufacturing plants. Because of the associated risks known to the Asian market, this can lead to “higher raw materials prices, changing employee conditions, difficulties in protecting intellectual property, trouble enforcing agreements or partnerships, and delays in overall operations”( Wheelen, Hunger, Hoffman, & Bamford,p. 6.12 2014).

        A123 centralizes its business around its core product, batteries. It entirely depends on its success to stay in business. While it is important for the company to want to focus on this niche market, our group believes A123 should also widen their product line as to offer more than just batteries. This product centric approach is a dangerous strategy since “it could potentially only take one advance in battery or fuel cell technology to render its products obsolete (Wheelen, Hunger, Hoffman, & Bamford,p. 6.13 2014). Besides this key operational challenge, A123 also faces a huge issue with large expensive inventories in hand since they are unable to properly forecast demand (p. 6-13). Even worse, the company faces serious competition from Asian markets such as Korea and China that are “producing comparable battery solutions at a lower cost” (p. 6-13). This can worsen A123’s inventory issue since Asian markets threat to produce perhaps the same product at a lower cost, making their product less demanded because of the high price.

Besides these operational issues, A123 also faces essential financial issues that jeopardize their future. Recent financial statements reflect “increasing costs and negative cash flows” (Wheelen, Hunger, Hoffman, & Bamford,p. 6.13 2014). Our group has determined that the core of this issue is mainly due to high inventory levels due to slow demand and high production costs. A necessary step for A123 is to get back on track on the revenues so it can meet investor demands.

Case Analysis: Competition

A123 systems is a lithium-ion battery system for Electric and Hybrid Cars that was founded in 2001. According to the text, in 2005 A123 transformed its business by developing a new, high-powered, faster-charging lithium-ion battery system using the nanophosphate technology. The year 2005 when they transformed their business their main business focus was the commercial market for their batteries. A123 competes in three markets which includes the transportation industry, the electric grid industry, and the consumer market. The company has a lot of competitors in the transportation industry; which are Panasonic, LiMotive (Bosch and Samsung), Automotive Energy Supply Corporation, Johnson Controls-Saft Advanced Powers Solutions, Toshiba, Hitachi,Ltd.,Kokam,GS Yuasa,Sony,Lithium Energy Japan,EnterDel Inc., Valence and MHS-DEA S.A. .Having many competitors in the technology industry from Asian countries like China and Korea puts their relevance within the lithium-ion industry in jeopardy because the Asian countries are producing comparable battery solutions at a lower cost than A123 systems. We suggest that they consider research and design that focus on producing cheaper battery solutions so that they can better compete with their Asian competitors.

According to A123 Systems 10k Report, the company’s biggest competitors in the electric grid industry are “ Saft, Altairnano, NGK Insulators Ltd., Prudent Energy,Beacon Power Corp.” (p 23). According to Kaplan, “an electrical grid is an interconnected network for delivering electricity from suppliers to consumers.” (2009). The barriers to entry are high for the electric grid industry because a lot of resources are needed to supply the electricity needed to participate in the electric grid network and it requires a lot of resources and money to run power plants that are used. Thus, the company does not have many competitors however the competition is still stiff in this particular market. Their competitors in the consumer market are Panasonic, Sony, Samsung, LG, Valence, and E-One Moli Energy Corp. majority of their competitors in the consumer markets are large successful companies that has access to resources and has a large national brand recognition advantage. According to Hoffman, “A123 systems faces stiff competition for all of its products lines. In fact, if some of the larger competitors were to merge through an acquisition or takeover, this could change the competitive landscape and make it very difficult for A123 to compete” (Hoffman).

The barriers of entry for the lithium-ion battery market is high. One factor that makes it difficult to enter this industry is the access to distribution networks or electric grid networks. Having access to these networks and distributors requires a lot of financial resources. According to A123 Systems Report, “A123 Systems is very dependent on transportation manufacturers and electric grid providers. There are multiple lithium-ion battery solutions for their products and if A123 does not meet their demands, they could switch to another provider. There are also a limited number of customers who make up a significant position of A123’s revenue, and the loss of one of those customers could be crippling to their business” (p 30). Another factor that makes it difficult to enter lithium-ion battery market is brand recognition, and economies of scale in manufacturing. For instance, A123 Systems designs, develops, manufactures, and sells rechargeable lithium-ion batteries and battery systems for all three of their markets, which is a competitive advantage. The largest barrier to enter in the lithium-ion battery market is the proprietary knowledge needed to develop and manufacture this type of technology. “Every company in this industry has protected their intellectual property and manufacturing processes with patents, trademarks, and keeping their knowledge as trade secrets” (A123 Systems 10k Report).

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