The Background of Otis, it was a landmark Toy Train Company in early 20th century. In 1950’s gained major popularity among children, 1960’s-1980’s was the company’s peak. In 1990’s customer preference changed to gaming consuls, so Otis Trains had to change their target market. In response changed their product. Otis faced some problems, for instance, they didn’t adapt to advancements in technology: as a result the business suffered. Radical change due to disruptive innovation and electronic gaming, which led to changing their product and target market. At first it was not successful and then they made their product much more detailed, creating a niche market and plus increasing labor costs. In addition, they were in situation where they only approached by one company JLPTC. They were offered a lower cost of manufacturing by 40 to 60 percent per unit. Moreover JLPTC would work closely with Otis designers. And because of increased labor costs this is the practical solution, I would suggest that the company does decide to go but needs to take certain precautions.
Of course there are risks, for example, costs would be risky in the customs, taxes, duties, hiring a third party, freight, damaged goods, logistics. Also the risk would be shared in quality control: appealing, packaging, durability, originality. Reliability and communication would be in risky in that situation, reliability: trust , design security, work ethic, contracts, long term relationship, as for communication: lack of transparency due to distance and new relationship.
In recommendation, for costs, I would recommend hiring 3PL to handle transportation of products from JPLTC to Otis. Quality, probably create a branch office in china to maintain standard. Reliability, through contracts and legal terms JPLTC must abide to Otis standards. Also in communication, will be creating an outpost branch office in china to maintain standards. Using porter’s five forces model of competition:
Ease of Entry: Can JLPTC be trusted with the design protection? Intellectual property rights? Buyer power: How many customers will this new business attract? What is the new price? Is there a close substitute of the train? Supplier power: # suppliers, scarcity of supply (is JLPTC the only supplier? Will JLPTC be flexible in changing suppliers? Threat of substitutes: Technology change (Are similar products cheaply priced? Do competitors have a higher quality at a lower price?) Industry of rivalry: Number of competitors, diversity, and product differentiation Nature/characteristics of the product(s) and the customer:
Products: Transformers, Elmo, and G.I. Joe.
Innovation: T.V. shows, Movies, Games (ex: Train simulator, innovative computer game)
In conclusion, Otis needs to thoroughly evaluate its position in the market. It needs to keep in mind its value proposition. It must consider their completion; gaming systems are more advanced then even before. Lastly, without full evaluation of the risks, the answer is no, despite how lucrative the offer is.