The Goodyear Tire & Rubber Company
By the end of 1992 Goodyear Tire and Rubber, the largest tire manufacturer in the United States, posted a profit of more than US $340 million on record sales of more than $11 billion. This was a far cry from the situation in 1991, when the company had a record loss. For a while it looked as if Goodyear, languishing under a debt of more than $3.7 billion, might go bankrupt.
What altered its fortunes was a combination of a new CEO, who restored the company’s competitive advantage, and a change in the nature of competition within the industry. Throughout the 1980s Goodyear’s sales had fallen as the company lost market share to its two main competitors, Michelin of France and Bridgestone of Japan. These companies had expanded rapidly into the United States, launching an aggressive strategy to build market share and penetrate the market. Their entry started a price war in the U.S. tire market, which especially hurt Goodyear because of the company’s high costs. Goodyear also had a poor record in product innovation and had been slow to bring out new products that would attract its customers back. After the company’s huge losses in 1991, its board of directors forced out the CEO, Tom Barrett, and replaced him with Stanley Gault, who had been the CEO of Rubbermaid.
Gault immediately began to change the way Goodyear operated to restore its competitive advantage. First, he embarked on a strategy of massively reducing operating costs. Gault’s predecessor, Barrett, had started this process by investing more than $4 billion in the 1980s in new, more efficient plant and equipment and by decreasing the size of the workforce by more than 20 percent. By 1991 output per worker had climbed 51 percent. However, Gault took this process much further and began to slash costs everywhere. By example, he showed managers how to reduce costs. He began by eliminating limousines for top executives and replacing them with family sedans. He sold off three of the corporate jets and eliminated the Goodyear airship, based in Houston, Texas. He even removed most of the light bulbs from his office to demonstrate his commitment to lower costs. The other Goodyear managers followed his lead and systematically began their cost-cutting efforts, with the spectacular results previously noted.
To increase market share, Gault also worked to increase innovation, quality, and the speed at which the company introduced new products. Goodyear had many tires in development for years, including one named the Aquatread, a tire that performed very well on wet road surfaces. However, it had been slow to bring them to the market. In 1991 Gaultdecided on a bold strategy: Goodyear would introduce four new tires at once, including the
Aquatread. Each tire was directed at a different market segment. For Example, the Aquatread was aimed at the safety-conscious consumers, whereas another tire was constructed to lower petrol consumption. These moves were very successful. Goodyear’s new tires, which had higher profit margins than its older tires, restored customers’ perceptions that the firm was a premium tire manufacturer, and sales of the new tires, particularly the Aquatread, surged. Indeed, Goodyear sold more than 1 million Aquatreads in one year, 20 percent more than its
forecast. Gault’s combined strategy of reducing costs and raising the differentiated appeal of the company’s products paid off in the form of a huge increase in profits. By 1991, the same year Goodyear recorded its record loss, U.S. tire manufacturers had grown weary of the rounds of price cutting and price wars that had plagued the industry and diminished their profits. Tire manufacturers started to support each other’s attempts to keep prices up and avoid price cutting. They also began searching for new ways to compete that did not reduce the industry’s profitability. One strategy they adopted was to develop new kinds of tires and aggressively market them to customers. Gault’s strategy of developing innovative products coincided with this change in the industry from price to non-price competition and helped promote Goodyear’s turnaround and increased sales. Goodyear and its competitors have all benefited from their new strategy of non-price competition, which has been maintained throughout the 1990s. In 1996 Goodyear introduced a new tire that has a lifetime warranty, and its profits continue to increase as it pioneers ever better kinds of tires.
Source: The Goodyear Tire & Rubber Company, closing Case, Pg 242, Chapter 7 Competitive Strategy
and the Industry Environment, Strategic Management: An Integrated Approach, 4th Ed. By Charles
W.L.Hill (University of Washington) and Gareth R. Jones (Texas AGM University), Houghton Mifflin
Company, Boston, New York. 1998.
Question 1
How did the nature of competition in the tire industry cause problems for Goodyear in the 1980s?
[10 marks]
Question 2
What strategies did Gault develop to turn the company around? Discuss.
[10 marks]
Question 3
Based on the four key components of competitive advantage: efficiency, quality, customer responsiveness, and innovation, to what extent has Gault successfully regained Goodyear’s competitive advantage? Explain.
[10 marks]
Question 4
In what ways was the U.S. tire industry in the 1990s different from that in 1980s? Discuss.
[10 marks]
[TOTAL: 40 MARKS]
Question 1
a. With the use of a diagram, critically examine Porter’s THREE (3) generic competitive strategies.
[10 marks]
b. In times of economic downturn, which type of strategic business decisions should companies make so as to survive and sustain their competitive advantage? Discuss.
[10 marks]
[TOTAL: 20 MARKS]
Question 2
a. What is strategic planning process? Critically examine its role in strategic management.
[10 marks]
b. Why has strategic management become so important to corporations today? Why have many corporations that implement strategic management ultimately failed?
[10 marks]
[TOTAL: 20 MARKS]
Question 3
a. To what extent organisational culture affects strategy formulating, implementing and evaluating?
[10 marks]
b. How is benchmarking used to evaluate corporate performance? Examine ONE (1) limitation of benchmarking in strategy evaluation.
[10 marks]
[TOTAL: 20 MARKS]
Question 4
a. What is the relationship between corporate governance and corporate social responsibility (CSR)?
[10 marks]
b. What is the role of board of directors in strategic management? What recommendations would you make to improve the effectiveness of board of directors today?
[10 marks]
[TOTAL: 20 MARKS]
Question 5
a. According to Porter, what determines the level of competitive intensity in an industry?
[10 marks]
b. Using Porter’s Five-Force Model, assess the intensity of competition within any local or
international industrial sector that you have known of.
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