BOMBARDIER LTD.
Case Report
Strategic Management
California State University, Hayward
Spring 1997

 I.  Findings

In order to achieve the mission of keeping the company continually to flow and not affected by the fluctuation of any business units, Bombardier worked very hard to develop the equilibrium between its business units. The firm achieved the equilibrium by using the strategies of conglomerate diversification, concentric diversification, acquisition, vertical integration, synergy within the corporation, and global expansion. As shown in Figure 1 and 2, the company’s overall performance was stable.

Bombardier used concentric diversification strategy to keep the company growing.  By 1942, the company had produced custom-made snowmobiles containing 5 to 25 passengers.  During World War II, it manufactured armored carrier for Canadian troops.  At the same time, it also made vehicles for use in swamps and forests.  In 1959, the company designed the first snowmobile for individual users in the world, called Ski-Doo.  After Laurent Beaudoin had become the president in 1964, the company developed the Ski-Doo for recreation and sport use, invested heavily in R&D and advertising, and established a dealership network.  These efforts had resulted in the trademark of Ski-Doo to be the generic term for snowmobiles.

Bombardier used conglomerate diversification strategy to expand into various industries.  Bombardier had already controlled 50% of the snowmobile market by 1960.  Acknowledging the uncertainties of snowmobile market, the company sought to enter other markets.  By 1970, the company had successfully diversified itself into the  market of fiberglass sailboat, sportswear, Sea-Doo snowmobile, Can-Am  motorcycle, commuter cars, and subway cars.  Since the future of mass transit business was uncertain too, the company, again, looked for small car and aerospace market in 1980s.

Bombardier also used acquisition to obtain new technologies to facilitate its conglomerate diversification strategy.  The company bought out Pullman and Budd Company to gain its knowledge in designing the mass transit.  In 1988, the company acquired a Belgian mass transit company for accessing the technologies of building street cars.  In order to introduce snowmobile clothing, it acquired an apparel manufacturer.  Since this manufacturer was already in the sportswear market, that led Bombardier to the sportswear market as well.

By using vertical integration strategy, Bombardier acquired its suppliers and competitors to expand its control in the markets.  In order to secure the company from the growing competitions, it had acquired almost all suppliers of Ski-Doo.  By 1970, its own subsidiaries and facilities supplied over 90% of component parts for Ski-Doo.  It also bought its largest competitor Moto-Ski to consolidate its dominant position in snowmobile market.  This made it one of the 200 most profitable public companies in Canada in 1970.

Bombardier also used acquisition to accomplish its global expansion.  Its acquired firm, BN Constructions Ferroviares et Mealliques S.A., had factories in Belgium, England, and France.  In Mexico, the company had acquired Contrail.  Rotax-Werk, its major engine factory, was based in Austria.  Included its subsidiaries in the United States and Canada, Bombardier had factories in seven countries and a labor forces of over 34,000 people.  This strategy not only helped Bombardier to expand its overseas markets and acquire new technologies from other countries, but also avoided trade barriers imposed by local governments.

Bombardier used synergy within the corporation.  For example, Rotax-Werk was first acquired for providing engines for Sea-Boo.  The company also used it to manufacture engines for boats and motorcycles.  In addition, the company also gained synergy through using present snowmobile dealers to promote the sale of its small cars.  It bought Lohner-Werke along with Rotex-Werke.  Lohner helped Bombardier enter rail transportation market and learn how to operate a company abroad.  Bombardier found synergy not only within the company but also within a country.  It entered the businesses protected by government.  Government’s funds financed its major businesses.  For instance, It had received $300 million development subsidy from Canadian government for Canadair.

Acquisition was one of its best strength; however, it was one of its weaknesses as well.  As reflected in Figure 3, the company’s time-interest-earned had dropped below 4 in 1993.  Its debt-to-total-assets ratio and debt-to-total-revenue ratio were increased almost double from 1989 to 1993 (see Figure 4), and the debt-to-equity ratio in 1989 was 3 times higher than in 1993 (see Figure 5).  These figures show the potential problem for the future.  Figure 6 shows that the company’s net profit margin was decreasing steadily from 5% to 3.5%.  It was resulted from the inconsistent performance of each segment.

Bombardier used acquisitions and licensing agreements to obtain new technologies.  The company lacked the vision of concentrating on a single area and developing new technologies to facilitate its outgrowth in the future.   After Laurent Beaudoin had become the president, the company once established an R&D section and successfully created the Ski-Doo.   However, it was only one of the few cases that showed the company being aware of  the importance of developing R&D itself.  It didn’t benefit from its acquisition all the time. For instance, it spent $30 million to acquire Alco Power for providing greater horsepower to the Montreal Locomotive Work.  Since Alco could only offer lighter power, the company had to turn to its existing competitors, GE and Kawasaki, to access the technology.   It failed, and the MLW was sold to GE later.

Bombardier involved itself in the business protected and subsidized by government.  Those industries were not as stable as consumer goods industries.  It was normally hard to operate.  Over protection also made the company lose its competitiveness.  For instance, its aerospace sector had faced the problem of getting sufficient orders for its excess capacity.  Therefore, the operation of its commuter aircraft Dash 8 was shut down, and 2,000 of its 2,800 employees were laid off.  Other than that, the airline industry also faced its problems of fare wars and record losses that made the aerospace even more difficult to sustain its present condition in the future.  Its purchase of Concarril from the Mexican government in 1992 had also lost on two important subway contracts in 1993.

Although the conglomerate diversification strategy kept Bombardier flow continually, it also made the company lose its focus and synergy.  The company allowed each division to work autonomously and not closely operated with company management team.  Therefore, except for its aerospace segment, every division had experienced loss and their operating profit margins were inconsistent and decreased dramatically from 1989 to 1993 (see Figure 7 and 8).  As Figure 9 shows, its low return on total assets and return on stockholders’ equity indicate the company didn’t fully utilize its resources.

The company lacked the overall future direction.  According to Laurent Beaudoin, the company’s development was only in the mind of the chairman, Joseph-Armand Bombardier.   Although keeping a firm continually to flow is not easy, but Bombardier could have accomplished more.  Knowing the uncertainties of snowmobile market, the company jumped into subway transit business even without too much experience of this field.  In fact, it entered most of the new businesses without much knowledge of that industries; therefore, the only cost-saving strategy it could use was acquisition of some manufactures that already existed in that industries.

Bombardier is facing various threats from its competitors, the changing economic condition, and natural condition.  Since early 1970s, the company had started to compete with American, Swedish, Italian, Japanese, and other Canadian manufacturers.  Economic factors will influence the company’s sales in recreational products.  When the economy is good, people spend more money on recreations, such as buying a snowmobile, sea boat, or flying to other cities for vacation.  In order words, while the economy turns bad, the revenue of Bombardier would probably decrease too.  The natural factors such as late snow and low precipitation will also be the threat for Bombardier in its snowmobile business.

New technologies, government regulations, and social and life style changes are other threats to Bombardier.  Bombardier’s businesses are highly technology-oriented.  Successfully assessing new technologies assures the company’s opportunities in the further.  However, new technologies are hard to catch up all the time.  Most of the Bombardier’s products are sold to government so it needs to deal with complicated political issues.  Therefore, the uncertainty of  government regulations has become a threat for Bombardier.  The social and life style changes influence the sales of its products too.  For instance, the environmentalists’ concern of the noise made by snowmobiles will influence snowmobiles’ sales.

Bombardier still has good potential in the future.  A Stanford University study forecast that there would be demand for the aircraft of 20 to 90 passengers.  Few aerospace companies produce aircraft in this category.  The newly developed Global Express high-speed business jet, which can fly for long distance without refueling, has great potential in the international market.  Eastern European market had great demand for its transportation product too.

Having acquired transportation firms in Belgium, France, and England, Bombardier had good opportunities to access European market.  The North American Free-Trade Agreement would open the opportunities for Concarril, its Mexican transportation manufacturer.  The new technology that improves the features of its products and the upward trend of the economic cycle would all help the growth of its business.
 

Conclusion

Bombardier used acquisition to achieve its vertical integration, concentric diversification, and conglomerate diversification strategy.  Acquisition helped the company access new technologies and expand into global markets.  However, since the company does not plan to become an industrial leader, it hasn’t invested much on R&D to develop new technologies.  It also suffered from a lack of synergy between business units and from having high debt, as a result of its acquisitions.  Moreover, it is also faces challenges from competitors in different countries, and threats from a changing environment and life styles.  Nonetheless, new technologies and growth potential in aerospace market and Europe still provide good opportunities for Bombardier.
 

III.  Alternatives

Status Quo:  Bombardier remains in its present condition.

Concentric Diversification:  Bombardier studies future market trends and carries more product lines within each industry.

Vertical Integration and Horizontal Merge:  In order to gain control within the industries, Bombardier can acquire its manufacturer or merge with competitors.

Focus Strategies:  Bombardier can divest some of its unprofitable business and concentrate on the sectors which have greater market potential.

Conglomerate diversification:  Bombardier can diverse itself to a consumer-goods industry, which has more stable market demand.
 

IV. Recommendation

In order to continually make its business flow and have constant performance in each division, Bombardier should use a combination strategy.  It needs to divest some of its unprofitable businesses, enter an industry less influenced by economics and more focused on its business in fewer sectors.  The company should also set a higher goal, such as to dominate medium sized aircraft within a certain year.

The 1st phase is to divest some of its subsidiaries which have not brought in much profit but provide excess capacity for company.  Bombardier can also terminate its involvement in some unprofitable sectors, such as transportation equipment.  It would help Bombardier to finance its debt to have more funds to focus on more profitable areas.

The 2nd phase is to diverse itself to an industry less fluctuated by economic cycle.  Bombardier can acquire or invest in the consumer product industry.  Since this sector normally can’t be financed by government, Bombardier needs to put more effort on R&D and marketing, what it has done successfully for Ski-Doo.

The 3rd phase is to switch its strategy to become more focus and have  a goal to dominate an industry within a certain year.  Bombardier should make long-term plans and develop technologies itself under the goal of dominating the market.  It should not enter an industry just because that industry has government financing, or its an inexpensive deal.  The company should also focus on using the synergy within the corporation to increase its competitiveness.
 


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Figure 5

 

Figure 6

 

 

Figure 7

 

Figure 8

 

Figure 9