Homework Title / No. : _________01_____________ _________01____________________Course _______Course Code : __MGN101_______ __MGN101_______ Course Instructor : ___
MEGHA MEHTA _________ Course Tutor (if applicable) :
____________
Date of Allotment : _27/08/12_______ _27/08/12_______ Date of submission : _____10/9/12______ _____10/9/12______ Student’s Roll No.______A81,A82,A84____ No.______A81,A82,A84_______________ ___________ Section No. : ____Q2206______________ ____Q2206______________ Declaration: I declare that this assignment is my individual work. I have not copied from any other student’s work or from any other source except where due acknowledgment is made explicitly in the text, nor has any part been written for me by another person.
Student’s Signature : _Nishant_kumar______ Evaluator’s comments: __________________________ _______________________________________ __________________________ __________________________ _________________ ____
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OBJECTIVE
The purpose of this report is to analyze the daunting challenges faced by Clayton SpA,the Italian subsidiary of US based Clayton Industries Inc. Peter Arnell has just taken charge of the Clayton SpA to turn around the current loss making status of the company losing around $1 million a month after decades of solid returns.
A brief introduction of Clayton Industries and their business operations............................................................................................................................ operations................................................................. ........................................................... 3 Description of Proble.......................................................................................................... 3 Evaluation of alternatives .................................................................................................. 4 Alternative I - Revive the compression chiller line ........................................................... 4 Alternative II – Changing the product line by shifting from f rom compressor chillers……………………………………………………………… .….………………....6 Alternative III – In depth study of the overall business processes for a period of 6 months................................................................................................................................10 Final Evaluation Matrix between Alternative 1 and Alternative 2 ...................................12 Current Ratio Analysis ………………………................................................................. 12 References .......................................................................................................................13
Introduction Clayton Industries was founded in Milwaukee in 1938 and with the passage of time had built a core competency in the manufacturing of window mounted Air conditioners for residential and light commercial enterprises. In the early 1980s the management envisaged a lucrative market in Europe and consequently acquired four European companies, one each in UK, Belgium, Spain and Italy, to exploit the growth opportunities there. The Italian company was a manufacturer of compression chillers for large commercial, public, and institutional installations. However, initial progress in the European markets was slow. National brand preferences, non compliance of design to European homes, competition from Asian producers and the recalcitrant behavior of the average European consumer meant that initial sales were going to be very sluggish. The situation was all the more alarming for Italy as sales outside this country accounted for only 12% of the total sales. However, due to improvement in operational efficiency, reduction in costs costs and country managers managers being made to shoulder greater responsibility, the company was able to turn the tide. For the period commencing from 2000 to 2009 Clayton Europe became a major contributory factor for the growth of the company with revenues accounting for 45% of the global revenue. This was a marked increase from the 33% share in the year 2000. However, in 2008-09, European growth was stalled by the recession as a result of which profit margins were badly hit (Refer Exhibit 1. below). Hence it was imperative for the management to activity come up the strategy to regain the market share and its revenue growth after recession.
Description of Problem Problem The company faces many challenges while operating in Europe. The market for air conditioners is well developed as consumers view Air conditioners as a symbol of American extravagance. However, the company did reasonably well through local brands Corliss and Fontaire. Simonne Buis took over the reins of Clayton in 2001 and immediately adopted a two pronged approach to gain competitive advantage. The focus was either to slash costs or build scales or both. Clayton started finding going tough post 2008-09 because of the global recession. Its sales declined and quite markedly in Ital y By 2009 the revenue of the company had fell over 19 % which was not as per the intended plan of the company. In wake of such a performance the country CEO of Italy, Arnell decided to close down some of the facilities as well as reducing the labour force. Apart from recession there are several other factors that are adding to the company’s troubles. The company due to its uncompetitive product profile found itself struggling in markets outside Italy. The poor sales and rising input costs hurt both the bottom line as
well as the top line of the company. The company faced labour union problems, and it was very difficult to fire anyone owing to the norms of Italy. To top it the company also has a high wage bill and a very limited customer base in Italy. Ital y. The company also faced stiff competition from Asian firms in other markets of Europe, which provided better value for money products to the customers. Overall the company faces a problem of high prices of its products with no tangible or intangible value associated. The company is thus confronted by the upward task of restructuring its product line, reducing costs and build scale.
Evaluation of alternatives alternatives Target a. To increase the market share of Clayton SpA from 7% to 15% within 4 years (“Four in Four” objective). b. To reduce Days Receivables, Days Inventory by 10 days and Headcount by 10% (“10/10/10” objective).
Alternative I - Revive the the compression chiller chiller line Key Steps involved
Manufacturing planplan1. $5 million investment in the next 12 months in the existing manufacturing facility 2. Addition of new features in compression chiller which would bring them at par with other Asian counterparts. 3. Technological improvement resulting in higher efficiency for the compressor. 4. Utilize Economies of scale to reduce Average Cost. 5. Increased substitution of labor by capital to utilize lower marginal cost of capital versus higher marginal cost of labor. Sales and Marketing plan1. Brand Diversification Diversification - Collaboration with local European brands to improve Brand perception. 2. Market Expansion - Leverage sales and distribution channels of other European arms of Clayton industries to explore newer markets. 3. Market Penetration - Increased spending in Advertising to improve customer awareness about the new features and reduced carbon foot-print of the product.
Financial Analysis and Forecasting Debt-to-Equity (D/E) ratio
As per the balance sheet of Clayton SpA for the period 2004-2009 we observe that there has been a huge erosion in shareholder’s equity. This can be mainly attributed to poor financial performance of the company during recession which has resulted in huge losses. This erosion in the equity in the period of time has been compensated by increase in longterm debts and current liabilities of the company. The D/E ratio for the year 2004 was 1.16 which was comparable to the industry average of 1.17. The current D/E ratio is -4.89 since the equity has turned negative. This is an alarming situation for the company.By implementing Alternative 1, initially the D/E ratio will be adversely affected but in the long run the profitability of the company will improve resulting in improved D/E ratio. This situation would result in high risk aversion of banks to finance the expansionary plans of the company. Raising money from shareholders
Return on Equity (Sales/Total Shareholder Equity)
As per the balance sheet of Clayton SpA for the period 2004-2009 we observe that the return of equity has gradually withered to negative values. This is a grave matter of concern for the company as the company will face difficulties in raising debt and also in raising money through shareholder equity.By implementing Alternative 1, we expect to reap high profits by the second year of operations onwards which will gradually improve the retained earnings of the company. These will in-turn improves the Return on Equity.
Alternative II – Changing the product line by shifting from compressor chillers to absorption chillers.
Key Steps involved Manufacturing plan plan 1. Changing the plant setup to manufacture absorption chillers. 2. Transfer of technology from Spain to Italy which would boost the overall capability of Clayton Industries. 3. Lower involvement of labour would ensure substitution of labour by capital as per the isocost line. 4. Company would reduce it carbon foot prints by manufacturing these chillers, and gain on the carbon credits due to such chillers. 5. The company would reduce its overall cost due to lower manufacturing expenses, and also hedge against adverse commodity cycles.
Sales and Marketing plan 1. Brand Diversification Diversification – The Company can get into product distribution pacts with various other companies in the same niche market. 2. Market Expansion - The sales channel can improve by deriving synergies between the associated companies. 3. Market Penetration - No new marketing expenditure would be required as this product would be a part of the successful range of product line, manufactured in Spain.
Financial Analysis and Forecasting EBIDTA and EBIDTA Margin:
As per the balance sheet of Clayton SpA for the period 2004-2009 we observe that, there had been a huge decline in the Overall EBIDTA and the EBDITA margins. The overall EBIDTA margins of the company have shrunk from a healthy 20 % to a negative figure. Whereas the Spanish business of absorption chillers maintaining an EBIDTA of around 10 % even during the recessionary phase. Severe oligopoly ensures that the company would face continued pressures on both top line and bottom-line. This makes the opportunity cost of diversifying into absorption chillers, adversely lucrative.
Current Ratio (Current Asset/Current Liability): Liability): The ratio is a good indicator of the liquidity concerns of the company. Higher values of the current ratios are favorable for the organization. We find a continuous decline in the current ratio of the company. This can be mainly attributed to the shrinking EBIDTA which is reducing then assets. Whereas the company is forced to increase its debts on
account of its poor financial performance in recent years. Whereas we find the current ratio is constant at 1.3 for the Spanish subsidiary of Clayton industries.
Figure 5 - Comparison of Current Ratios of Spanish and Italian
Subsidiaries Asset Turnover ratio : The asset turnover ratio has moved in line with the industry
benchmark, but since the company has not been able to transform a good asset turnover ratio into consistent profits, the company needs to change the product line it is operating in. Changing over to absorption chillers seems to be an obvious option.
Alternative III – In depth study of the overall business processes for a period of 6 months, for coming to a well informed decision. This option requires more in-depth analysis of the business processes by waiting for a period of 6 months, but this proposal seems to be impractical because of the fact that company is facing current issues of stagnant cash flows along with huge debts on the balance sheet doesn’t seem to be a logical step to undertake. The company co mpany has also taken steps to postpone the debt payments. Moreover taking this extra time doesn’t guarantee the company of anything concrete or different in terms of the options that company has. If there are possibilities of internal improvement i mprovement these can be looked into, simultaneously with other improvement initiatives. Waiting would further lower investor confidence and worsen the current situation
Final Evaluation Matrix between Alternative 1 and Alternative 2
Current Ratio Analysis The long term debt analysis and the current ratio analysis clearly gives an indication that the company should not invest immediately in manufacturing absorption type chillers.Investing in a new absorption chillers plant will require significant cost in layoffs and restructuring with a gradual phased changeover process. But the absorption chillers is not only eco-friendly but also it has growing market in Europe. This will increase company’s chances to increase its market share across the region. Also due to economic crisis it is not a wise decision to concentrically diversify now in the European Eur opean market. Hence it would be a good strategy to focus on investments only in the long run .
CONCLUSION: The company should focus on sustaining the market losses in the short term and wait for the economic recession to change to better conditions. The company should formulate the growth strategies for the long term to capture the phenomenal amount of market share in the long run in absorption type chillers and conditioners that connect with the people of Italy.
References 1. www.wikipedia.com accessed on 20th November, 2010 2. www.hbr.org accessed on 20th November, 2010 3. www.claytonindustries.com accessed on 20th November, 2010 4. Philip Kotler and Kevin Kelly. Marketing Management, Pearson Publishing, 13th Edition, 2009 5. Anthony, Financial Accounting, Tata McGraw hills, 10th Edition, 2009
