Clayton Industries Analysis - Case Study Example

Clayton Industries Case Study Analysis

Founded in 1938, Clayton industries specialized in the manufacture of window mounted air conditioners meant for use in both residential areas and light commercial areas. The company realized the potential in the European market and bought four companies in Italy, Belgium, Spain and the United Kingdom so as to capitalize on the fast growing European market. The Italian branch dealt mainly with production of compression chillers for use in large commercial places and public institutions. The growth was slow in Europe at the start. This was due to certain preference for national brands by the Europeans, designs that did not fit to European expectations, and stiff price competition from Asian competitors (Bartlett and Barlow 3). The situation was worse for the Italian subsidiary as their sales outside of the country only accounted for 12% of the total sales (Bartlett and Barlow 5). Clayton industry was however to turn their fortunes around as the company implemented measures to improve operational efficiency, reduce operational costs and the country managers allowed to take on more responsibilities. From its operations in Europe, the company was able to make significant profits from the period between 2000 and 2009. The economic depression that hit the whole globe in 2009 however had adverse effects on their profit margins. This made it imperative for the management to device a new strategy that would enable them get a larger market share and also spur revenue growth.

Although Clayton industries did relatively well in the air conditioners market in Europe, they face a challenge of convincing the consumers there that air conditioners are a necessity in their homes. After Simonne Bius, took over leadership, he came up with a plan meant to regain market share and also gain competitive advantage. This plan involved either cutting operational costs or building scales or even both. Over at the Italian branch of Clayton industries, the newly appointed country manager, Arnell saw a reduction employee numbers and shutting of the company’s facilities as the best approach to return the company to profitability. Other challenges for the company in Europe include an uncompetitive product profile that saw it struggle to make sales in markets outside of Italy, problems from the employee unions and a high wage bill while the customer was shrinking. Furthermore, Asian manufacturers of air conditioners in other European markets were proving to be tough competitors as they sold their products at much lower prices than Clayton industries. Most consumers felt that their products were too expensive while they offered little in terms of value. The company therefore had to face these challenges by restricting its product line, building scale and finding ways to reduce operational costs.

To achieve this, the company has two alternatives. The first alternative is to bring back the compression chiller line. They could attain this by implementing a manufacturing plan that includes; an investment of $5 million in the company’s existing facilities, try to outdo the Asian competitors by adding new features to the compression chiller, investing in improved technology that would see them attain higher efficiency, adopt a strategy of economies of scale hence reducing the average costs, and finally increasing labor substitution by capital. Another key step in this first alternative is developing a new sale and marketing plan. This would include; brand diversification by working in conjunction with European brands so as to change how the consumers perceive their brand, market penetration by investing more in advertising to attract new customers and also including new futures to the product design that reduce its carbon foot-print, and market expansion n that can be achieved by making use of the sales and distribution channels of the other branches of the parent company.

From the balance sheet provided in the case study, a huge erosion of shareholder equities can be observed. This is a result of the company’s poor financial performance brought about the hardships of the 20008/9 global recession that caused huge loses to Clayton industries in Europe. To compensate for the erosion in equity the company has had to increase the long term debts and their current liabilities. A calculation of the debt/equity ratio of the company for the year 2004 reveals that it is at 1.16 as compared to an industry average of 1.17 (Bartlett and Barlow 8). The debt/equity ratio currently stands at -4.89 because the company’s equity has turned negative. This is not a good position for the company to be in. however, if they were to implement this first alternative, the debt/equity would at first be affected negatively, but with time, it would improve as the company eventually returns to profitability. The high risk by banks would also be averted and they would be willing to lend the company money to implement their expansion plans. Consequently, enough money from the company stakeholders would be raised. As revealed by the balance sheet, the company’s return of equity has been going towards negative values. This first alternative aims to have the company realize huge profits within two years of operation and as the profits, improve, so do the company’s retained earnings. This also improves the returns on equity of the company.

A SWOT analysis of this alternative shows that it has strengths in the new leadership of Arnell and the introduction of technological changes in the product. A weakness of this plan is the initial high costs. Opportunities include the fact that the market of compressor chillers is estimated at $20 million and an opportunity in crisis for the company (Bartlett and Barlow 6). Threats to the success of this plan are the increase in the prices of raw materials and the stiff competition from Asian manufacturers of the same product.

The second alternative involves changing the product line by opting for absorption chillers in place of compressor chillers. the manufacturing plan for this alternative includes; a change of the setup of the plant such that it now produces absorption chillers, adoption of new technology from Spain, labor would be substituted by capital as the new technology requires low labor involvement, a reduction of the carbon foot print of their products hence attracting more customers, and finally lower overall costs for the company as a result of lower production costs. On sales and marketing, the company can achieve brand diversification by entering into pacts with other companies who are in the same niche market. Market expansion can be achieved by utilizing the sales channels of sister companies in Europe while market penetration would already have been enabled by the fact that the new product is already successful in the Spanish market.

The next step in this alternative is financial analysis and forecasting. A look of Clayton SPA’s balance sheet reveals that the overall Earnings Before Interest Depreciation Taxes and Amortization (EBIDTA) and the Earnings Before Depreciation Interest Taxes and Amortization EBDITA margins have declined. The EBITDA margins dropped from more than 19% to negative figures. On the other hand the EBIDTA for the Spanish arm that produces absorption chillers remained at 10% even during the depression period (Bartlett and Barlow 9). The lack of competition in this niche market makes it very lucrative to diversify into by adopting the manufacture of absorption chillers instead of the highly competitive compressor chillers. if a company has high current ratios, it means it has high liquidity and this is a favorable situation to be in. for Clayton SPA however, the current ratio is seen to be continuously declining. This has been caused by a reducing EBIDTA which also reduces their assets. The company therefore has no option but to increase their debts as a poor financial performance persists. For the Spanish arm however, the current ratio remains at a positive figure of 1.3 (Bartlett and Barlow 8). The asset turnover ratio is consistent with industry average ratios. The fact that they have not been able to convert this relatively good asset turnover ratio into profits for the company indicates that they need to have changes in the product line. The most obvious choice for them would be absorption chillers.

A SWOT analysis of this strategy reveals that it is likely to succeed because it has strengths in that there is already a proven success of the technology in the Spanish subsidiary of Clayton industries and it is also a good time for the company to enter this niche market. Weaknesses are that existing products would have to be completely abandoned and that the plan calls for investment in a plan that could fail. Opportunities include an advantage in that absorption chillers are considered to be more environmentally friendly and also the market for absorption chillers is projected to have a high growth. Threats for this plan lie in the strong opposition from the labor unions and the company’s market share for the absorption chillers product is only 15% of the European market (Bartlett and Barlow 10).

In conclusion in order for Clayton industries to survive in the European market, it is imperative that they focus their energies on getting through the economic recession for better economic conditions. In the meantime, they should aim to sustain market losses while formulating new growth strategies that can fully exploit the large Italian market for air conditioners. This essay has presented two alternatives where the first would see the company continue producing compressor chillers but invest heavily in new technology and facilities. The second alternative suggests a shift from compressor chillers to absorption chillers which have proven to be marketable in the Spanish market.

Work cited

Bartlett, Christopher A., and Benjamin H. Barlow. “Clayton Industries, Inc.: Peter Arnell, Country Manager for Italy.” Harvard Business School Brief Case 104-199, May 2010.