Revise strategy – My final recommendation would be for First Solar to revise its company strategy. While expanding to underserved markets would be a quick solution to declining revenues, a revision of overall company strategy would reposition the company for long-term sustained success in its current locations and allow for growth and expansion more sustainably in the future.
Expand to new markets – First Solar should seek underserved markets elsewhere in the world. While a short-term solution to declining revenues, the company would be able to once again operate its factories at full capacity and benefit from economies of scale and the increased revenue from more sources. The company would be able to realize location economies by performing certain value creation activities where it would be most efficient and realize cost economies by moving rapidly down the experience curve. It would also be able to leverage skills developed in foreign markets throughout its global network (Hill and Hult 2011). The cons of this option would be the large required capital investment required in researching locations and entering new markets, transportation costs and potential trade barriers. The company may also face foreign exchange risk.
Revise strategy – First Solar should revise its strategy to emphasize R&D and to market the value and benefits of thin-film cadmium telluride solar panels. R&D will be important for the company as it will need to overcome technological barriers of cadmium telluride to continually increase efficiency and find ways of lowering its unit cost to maintain a price that mainstream customers are willing to pay. The company then needs to communicate this value to customers through effective marketing campaigns. In general, consumers would be more willing to pay a premium for superior products as they perceive higher value.
I think the two biggest threats to First Solar’s strategy are the threat of new entrants and bargaining power of buyers. Threat of new entrants to the PV industry is high due to continually decreasing silicone prices and large-scale entry of Chinese PV manufacturers to the market with low priced crystalline-silicon (c-Si) solar panels. The case states that while the solar industry was affected by changes in government subsidies and the global financial crisis, “the biggest change in solar production was the large-scale entry of Chinese producers” (Thompson and Ballen 2017, 5).
This threat can affect First Solar by decreasing market share, driving down prices, reducing revenue, net profit, shareholder value and overall value of the company. As a result of Chinese PV manufacturers flooding the market with low priced crystalline-silicon solar panels as an alternative to First Solar’s panels, the bargaining power of buyers has increased and become a threat. Buyers are more price sensitive and buyers in the residential market segment in particular are concerned most about cost and would shop around for lower cost alternatives. Similar to the threat of new entrants, increased bargaining power of buyers can drive down prices, reducing revenue, net profit, shareholder value and overall value of the company. First Solar will need to continually innovate and better communicate its value to buyers in order to differentiate itself from the low priced alternative solar panels.
Value – The low-leverage strategy is valuable in protecting the company against downturns in the global economy. It gives the company a strong balance sheet and also communicates value to customers. The conservative financial strategy allows the firm to sustain tangible assets such as cash and to investment in progressive solar projects.
Rareness – A conservative financial strategy is something that competitors have not achieved. Between 2007 and 2011, First Solar had $411 million less debt than SunPower, $1,424,000,000 less than Suntech and $824,000,000 less than Yingli Solar. Imitability - A conservative financial strategy can be imitated but would be difficult to imitate given the large amount of capital and financial management ability required.
Organization – The firm is organized to maintain the strategy. Vertical integration Value - Vertical integration allows First solar to control all stages of production and value chain, which provides competitive advantage and customer value. Expanding into the systems business allowed First Solar to control engineering, Procurement, construction, operations, maintenance, development of solar plants, and in some cases, project finance (Thompson and Ballen 2017, 7). This adds value by allowing First Solar to better control costs, guarantee access to raw materials and distribution.
Rareness – Few other competitors possess it. Chinese manufacturers were largely absent from the systems business (Thompson and Ballen 2017, 9).
Imitability – It is costly for others to imitate.
Organization – The firm is organized to exploit it. Presence in foreign markets
Value – First Solar increased its market presence through its systems business and acquisitions. The company’s presence in the global market brought the company closer to consumers, provides customer value and competitive advantage.
Rareness – Other competitors do not possess it to the same degree.
Imitability – It is possible for others to imitate, but it would be costly for others to imitate.
Organization – The firm is organized to exploit profit opportunities in foreign markets.
Research and Development on thin film technology
Value – First Solar’s research and development and accompanying intellectual property rights on the thin film technology provides customer value and competitive advantage. It allows the firm to exploit opportunities and defend against threats in the PV industry using thin-film cadmium telluride (CdTe) technology.
Rareness – Other competitors do not possess the technical knowledge of how to use cadmium telluride for a product as efficient as First Solar’s.
Imitability – Imitability is low. To figure out the thin film cadmium telluride (CdTe) technology would be costly for others to imitate. Tymen deJong commented that if would take hundreds of millions of dollars to imitate and years of R&D.
Organization – The firm is organized to exploit the technical knowledge. Research and development with intellectual property (IP) rights on thin film technology – First Solar’s intellectual property rights on thin film technology protects its large investment in research and development, acts as a barrier to entry in this sector of the industry and reduces the threat of new entrants.
Conservative financial strategy – First Solar maintained the least debt and more cash on hand compared to its competitors. Capacity expansions were funded with cash and equity, rather than debt. The lower leverage protected the company against defaulting, made for a strong balance sheet and inspired confidence in the company by customers. According to the case, First Solar had an average annual debt of $276 million, while SunPower had $687 million, Suntech had $1.7 billion and Yingli Solar had $1.1 billion.
Vertical integration – First Solar began by producing solar modules, but forward integrated into systems. While, its center of gravity and core competency was in the manufacturing of cadmium telluride solar cells and modules, forward integration into systems allowed the company to scale production faster than systems integrators and grow the business faster by doubling the shipment rate and increasing volume during intense competition. Vertically integrating also allowed the company to optimize the overall system design and deliver a higher performing product than competitors by 5%.
Presence in expanded, foreign markets – First Solar’s presence in high demand markets of Europe and diversification into direct sales in high sunshine markets of Africa, the Middle East and the Americas allowed it to expand the size of its market and enable it to achieve economies of scale, lowering its unit costs. Its acquisitions allowed for expanded presence in the systems market. As a result, overall utility sales increased and narrowed the gap between First Solar and leading competitor, SunPower. I think the solar industry is an attractive industry even though the First Solar company is challenged in the industry due to its current position in the market and manufacturing method.
Based on Porter’s five forces analysis of the photovoltaic industry, the solar industry is attractive for silicon-based panels at this time and less for thin film cadmium telluride-based panels. Making the industry attractive over the past decade have been changing economic forces, technological forces, political-legal forces, and sociocultural forces. Economic forces including the decreasing cost of silicone, technological forces include advancing photovoltaic technology (continued investments in R&D can maintain a competitive advantage), political-legal forces include government sustainability initiatives (though decreased during the financial crisis, but are likely to increase again), and sociocultural forces including changing societal values to be more environmentally friendly and sustainable in energy consumption by reducing carbon footprint. Furthermore, environmental groups have increasing affect in lobbying governments to take sustainable actions. Research confirms also that environmentally friendly products or processes positively influence a firm’s performance (Wheelen and Hunger 2012, 99).
The solar industry, while experiencing growing pains currently, with continued advances in technology and investment in research, will continue to grow and gain momentum in the future and see more returns. I think the threat of new entrants to the PV industry is the most influential in the industry. The case states that while the solar industry was affected by changes in government subsidies and the global financial crisis, “the biggest change in solar production was the large-scale entry of Chinese producers” (Thompson and Ballen 2017, 5).
The decrease in silicone prices has led to many new entrants to the industry and the prices are predicted to continue decreasing, which will continue to increase competition. As a result, Chinese PV manufacturers have flooded the PV market with low priced crystalline-silicon solar panels, undercut American solar manufacturers and forced the closure of many plants and bankruptcy of many solar manufacturing firms. Silicone prices have decreased to become less costly than cadmium telluride, which is particularly detrimental to First Solar. To mitigate this threat, First Solar will need to differentiate itself from the competition, and communicate its value to the consumer, and affordably price its products to maintain a competitive advantage. However, this will require First Solar to continually invest heavily in R&D and marketing.Threat of new entrants to the photovoltaic industry is high due to the decrease in silicone prices and surge of Chinese PV manufacturers into the market with low priced crystalline-silicon (c-Si) solar panels.
While barriers to entry exist for the photovoltaic method that First Solar uses, new entrants are using cheaper methods (low priced crystalline-silicon) and eroding First Solar’s market share. Furthermore, industry experts predict that silicon prices will continue to decline. However, barriers to entry using silicone-based panels appear to be low. It is possible for First Solar to diversify to also produce silicon-based panels in the future. Barriers to entry using thin-film and cadmium telluride are high due to First Solar’s intellectual property rights around how to use the technology, and the large capital requirement and time investment needed to figure out the technology. The case states that years of research and development (R&D) would be necessary in addition to hundreds of millions of dollars. To mitigate the threat of new entrants, First Solar will need to differentiate itself from the competition, and communicate its value to the consumer through effective marketing, and affordably price its products to maintain a competitive advantage. Bargaining power of buyers in the industry is high because alternative suppliers have increased, and market demand has decreased due to the global financial crisis, shrinking government subsidies and banks not being willing to finance solar projects. Buyers are more price sensitive and have more lower cost alternatives.
To mitigate this threat, First Solar can invest in marketing to differentiate its product from others on the market, communicate the advantages of thin-film and cadmium telluride, and keep its product at an affordable price. Bargaining power of suppliers is low for First Solar because historically First Solar has controlled all stages of the production process and the company remains in control of much of their value chain. It has also established intellectual property rights around its technology. Threat of substitute products or services is high because the prices of silicon raw material are falling, which helps First Solar’s competitors who produce silicon-based panels. This does not help First Solar as they produce cadmium telluride-based solar panels.
First Solar can mitigate this threat by investing in R&D that would improve the performance of their cadmium telluride-based solar panels and make them more competitive on the market. Rivalry among existing PV firms is high for First Solar because there is a small number of other manufacturers in the industry and even less using the thin film cadmium telluride (CdTe) technology. There are currently ten solar panel manufacturers in the United States (EnergySage 2018). Given that Chinese PV manufacturers are entering the market with low priced crystalline-silicon (c-Si) solar panels, First Solar will need to differentiate itself and communicate its value to the consumer to maintain a competitive advantage. Porter’s Five Forces Analysis assesses intensity of competition in an industry and takes into consideration five forces that affect a company’s long-run return on invested capital (Wheelen and Hunger 2012, 110). The following is an analysis of First Solar in the photovoltaic solar industry using Porter’s five forces.
First Solar competes in the photovoltaic solar industry. Photovoltaic solar energy has been growing in the global market over the past decade largely as a result of regulatory policies. The company produces solar cells (second and third generation cells), modules and panels using thin-film cadmium telluride technology, and systems. First Solar markets its photovoltaic product to three broad markets. They are residential home-owners, commercial businesses and utilities. The residential market segment represents 29% of the total market and includes third party system integrators, installers, and distributors. This customer segment focused on the total costs and benefits of the system, considering the cost of electricity, installation and distribution costs, watts per unit area, and aesthetics. The commercial businesses represent 40% of the total market and includes commercial and industrial businesses through third party integrators and distributors. This segment of the market is interested in reducing operating expenses and carbon footprint. Utilities represent 31% of the total market and include direct sale from PV manufacturers and sale to consumers through system integrators and installers.
The key decision factors for this segment depended on placement, vendor history of successful and timely installation, proven technology and anticipated reliability. Utilities with much space were more likely to purchase less efficient panels with a lower cost per kilowatt-hour, while space constrained utilities were more likely to need more watts per square meter.