SUMMARY:

A123 Systems, founded in 2001, is a company built on green energy storage technology, using proprietary Nanophosphate technology to produce lithium-ion batteries for use in portable tools, electric cars, and electric grids. The companys main competitive advantages lie in its access to proprietary technology licensing from MIT, production facilities located in or close to potentially vast markets (the U.S. and China), joint venture agreements, partnerships and alliances with main players in the automotive market, and access to lucrative government grants and loans in the U.S.

The companys short ten-year history exemplifies both the benefits and risks inherent in nascent industries. Strategically, A123 must balance overhead, production, and development costs against revenues received within an undeveloped market. While government incentives abound within this newly emerging industry, the company must align strategy and operations with the realization that these incentives will not always be available to subsidize its operations. In addition, A123 will have to make important decisions with respect to utilizing and diversifying the application of specialized advanced technology in order to minimize or forestall many of the risks it may face in the future.

The leading green energy storage company, A123 Systems, had to balance overhead, production, and development costs against revenues received within an undeveloped market.

The three challenges facing A123 are:

(1) Depleting cash reserves: Until revenues begin to pick up significantly and meet the growth the company expects, capital needs will continue to put a

strain on the company, as we have seen in their short history an increase in

costs as accompanied by negative cash flows.

(2) Product-centric approach: A123 focuses its entire strategic philosophy and rests its livelihood on the fortunes of its product as opposed to

taking a wider view of how it can meet its customers energy requirements through more than just batteries. Having such a narrowly defined scope is a

dangerous path, especially since it could take potentially only one advance in battery or fuel cell technology to render its products obsolete.

(3) Order timing and overseas competition: Owing to the fact that the long anticipated electric car market has yet to fully arrive, it is difficult for A123 to

accurately time future demands. This makes it nearly impossible for A123 to efficiently and effectively manage inventories and production and has left them

with large, expensive inventories on hand and with little current demand. Considering the fact that countries like Korea and China are producing

comparable battery solutions at a lower cost, the traction they have within the industry may be in jeopardy

QUESTION:

How should A123 Systems diversify its business strategy to minimize the risks caused by the potential market development and government policy change regarding subsidies? Please name the relevant business strategies used to address each of the three issues above in your answer.