Electro Scientific Industries, Inc - Market Environment - Case Study Example

Electro Scientific Industries, Inc. Auditing is a fundamental tool for ensuring the reported information contained in thefinancial statements of a company gives a clear, true and fair view of an organization’s prospects. Electro Scientific Industries, Inc. faces a couple of strategic issues that are likely going to affect its going concern. The company faces a threat of poor management in its top executive including the chief executive officer (Lawrence 137-138). Electro Scientific Industries, Inc. faces a threat of declining revenues and financial downturns (139). Conversely, the organization faces the challenges of unethical business practices and financial reporting, which is likely to result in legal litigation. The company faces a threat of escalating operational expenses that has resulted in the increase of accrued liabilities owed to the stakeholders of the organization (137). Employee harassment and intimidation was the other strategic issue the company faced that resulted from the fear of the CEO. Finally, the company faces the challenge of legal litigation emanating from its unethical financial reporting of its financial information to the stakeholders. Nature of the Industry and Market Environment The laser based manufacturing industry operates in is a highly competitive, dynamic and cyclical market that requires players to develop some competitive advantages to insulate themselves from the rival firms. Electro Scientific Industries, Inc. faces challenges of competition from other rival well-established firms such as the Disco Corporation, Laser solutions and JP Sercel Associates Inc. for its light-emitting diodes (LEDs); GSI Group Inc. for its semi-conductor; Hoya Corporation and Big Sky Laser Tech. Inc. for its LCD repairs among many other rivals including the Korean and Chinese firms that manufacture similar components in the industry both locally and globally because ESI is a global player in the lased based manufacturing industry (“What is the History”, 2015). However, being a technological based industry and given the nature of shifts and advancements taking place in the technological platform, it is imperative to note that the companies mainly compete on the level of innovativeness and ability to adapt to the changing technological climate. Thus, to understand the nature of industry ESI operates, it important to carry out an internal and external examination of the company of the company’s environment using the Porter’s five forces and the SWOT analysis. Porter’s Five Forces Analysis The Threat of Substitutes The threat of substitutes in the laser based manufacturing industry is high because many of the rival firms manufacture similar components that are only differentiated based on the level of innovativeness. For instance, there is a high of substitutability between Disco Corporation’s LEDs and ESI’s products. Threat of Competition As already noted above, the threat of rivalry between firms in the industry is high, contributes to the high level of product substitutability and thus intensifies the competition as the firms fight for the available market share (“ESI, a Laser-Based”). Some of the major competitors include Disco, Big Sky among many others. For this reason, rival firms compete on factors such as product performance, cost of ownership, ease of use, technical support and reliability (ESIO, 2009). Moreover, according to ESIO (2009), some of the competitors have larger distribution networks, engineering and manufacturing resources and financial capabilities. Threat of Entry The threat of entry into the industry is low because of the large amounts of capital involved. The manufacture of micro technology requires high power technology equipment to arrange and re-arrange micro and sub-micro elements in the manufacture of products. These equipment are costly and thus becomes a hindrance for small firms joining the industry. Moreover, companies such as ESIO have existed in the industry since 1944 and have been able to grow and diversify in products such that they are enjoying economies of scale. For this reason, they are able to operate at lower costs and thus creating a hindrance for start-ups. The Bargaining Buyer of Suppliers The power of suppliers in the industry is relatively high. The materials sourced by the company are technical in nature and given that the competition is high, this gives the suppliers relative power in the industry. The Bargaining Buyer of Customer The customer in the industry have a higher power. According to ESIO (2009), “Some of our customers develop, or have the ability to develop, manufacturing equipment similar to our products”. This is an indication that the customer can opt to in-house production of their products lieu of sourcing them from ESIO and this gives them the power over the manufacturers as they can opt to making the components. Moreover, there are many players in the industry who offer similar products to the consumers and, therefore, provides them with alternative products to purchase from, giving them power of manufacturers. SWOT Analysis Strengths Consolidated profitable businesses during the fiscal year 2002 by divesting and closing its Escondido facilities. The company invested and formed partnerships and acquisition of other business during the fiscal year 2002. Moreover, it merged with another company in Southern California after its revenues started declining (Lawrence 140). Strong capital resources and other assets for the manufacture of laser based products and human resources, which although was not engaged and motivated by the company. Better CFO, Okumoto that was able to detect the mid-night journal entries that over-stated the company’s net income (138) Weaknesses Weak financial position evidenced by a reduction in sales revenue from $437 in 2001 to $167 million in the year 2002 because of the financial downturn of the period. Moreover, this decline continued for a better part of 2003 half year (Lawrence 139). Fluctuating revenues and net profits is another weakness facing the company. This evident from the fluctuations of the period 1998-2002. For instance, net income decline from $22,347 in 1998 to -$15,961 in 2002 while net income decline from 0.89 to -0.58 during the same period (139). Poor management is yet another weakness that was facing the company. The CEO and other top executive members conspired to conceal some the employee accrual expense to report positive profits not knowing litigation that was glaring at the company (139-143). Skyrocketing expenses and liabilities was the other weakness. The company each concealed it accrual liability of $977,000 pertaining to employee retirement benefits. Opportunities The ESIO is a global player in the laser based manufacturing industry. Therefore, this is an opportunity for the company to diversify into other markets. The company manufactures a variety of products ranging from semi-conductors, LEDs, LCD repairs among many other products (many product lines). Thus, has wide market for its products and failure of one line of products can be offset by another. Growth and expansion opportunities. ESIO was in informal deliberations with a Southern California company for a possible (143). This would enable it expand its market share, lower operation costs and return to profitability. Threats Competition is one of the most significant threat posing challenges to ESIO. According to ESIO (2009), some of the competitors have larger distribution networks, engineering and manufacturing resources and financial capabilities. The customers also poses another threat to the ESI. ESIO (2009), states that “Some of our customers develop, or have the ability to develop, manufacturing equipment similar to our products”. Litigation liability for withdrawal of retirement benefits of Japanese, Koreans and Taiwanese. ESI faced the threat of regulatory regulations pertaining to work relations and working terms arising from the Japanese labor and employment laws (Lawrence 141-142). From the analysis, ESIO can continue with its merger discussions with the Southern California Company to revamp its shrinking market and revenues but after reconstituting and restructuring its board of directors and top executive. Lawrence states (Okumoto) “Jim told me that he had sent a financial packet to the board of directors prior to their meeting on September 13” (143). This is a clear manifestation that the entire management including the BoD of ESI was corrupt since the financial packet resulted in over statement of company’s profits with over a million dollars (143). Organizational Evaluation Organizational Capabilities Capital resources- One of the most significant resource capabilities possessed by ESIO is a large asset capital base used in the production of its products. The laser based manufacturing industry is a multi-billion dollar industry with specialized equipment used in production (Lawrence 137). Human Resources-The Company has a strong CFO (Okumoto) that was able to detect and discover the “Midnight Night Journal Entries” owing to his long time experience because he had worked before in a number of high tech businesses in the Silicon Valley (138). However, it is crucial to note that the company’s other top executive such as the CEO were inexperienced managers or they acted deliberately to conceal their dubious activities. The company’s workers were talented and skilled, even though, they were unsatisfied and demotivated due to intimidation from the manager and the decision to withdraw their retirement benefits. Organizational In-capabilities Financial Resources-As demonstrated by the company’s income statement for the period 1998-2002, the company’s revenues, net income and earnings per share fluctuated over the period resulting in negative figures in the fiscal year of 2002 (139). Therefore, this is a clear indication of poor financial performance and position of the company. Possible Causes of Action From the porters and the SWOT analysis it is evident that the company’s position and going concern is adverse if the revenues, net income and earnings per share is anything to go by. For instance, net income declined from $22,347 in 1998 to -$15,961 in 2002 while net income decline from 0.89 to -0.58 during the same period (139). However, the company’s strategy of product and market diversification, acquisition and partnership is favorable and can enable it provide precision equipment to its customers (139). To turn its weaknesses into strengths ESIO should; Create a HRM business unit concerned with employee motivation, engagement and involvement to train and develop employees; Reconstitute its board of directors and top executive; Continue with is current strategy of merging with the California based company, divesting and consolidation of profitable lines as well as diversifying into global market and product lines to turn around its fluctuating revenues and net income to continue growing constantly by To turn the threats facing the company into opportunities ESIO should; Establish a R&D business unit concerned with research of marketing and emerging trends as well as the strategies being employed by rival firms; Recognize that the laser based manufacturing industry is a competitive market and product and market diversification is an essential strategy to enable it increase its market share (138-142); Recognize that the customer is always the king and thus continue with its strategy of providing high precision equipment, which meets their needs and at affordable prices so that they do not manufacture them (139) Recommended Action and Possible Outcome ESIO should continue with its objective of providing high precision equipment to the customers by aiming at turning their threats into opportunities and weaknesses into strengths. ESIO’s main challenges are unethical business practices by management and BoD, financial capabilities and competition. Thus, to enable it focus on its mission statement and turn around its fluctuating revenues, net income and earnings per share into constant increasing figures, ESIO needs to create task force of board of directors or restructure an reconstitute its BoD and top management; create a HRM unit to investigate the unethical conduct of top management, train the workers, design motivating and better structure that involves and listens to employee grievances. Finally, ESIO should continue with its plans to form a merger with the Southern California Company (Lawrence 143). These recommendations will enable the company to increase its employees’ productivity and organization output because high production is a function of satisfied workers and other inputs. Moreover, this can enable the company to cut down on operational costs and increase its net income due to reduction in wastage as workers will be trained. Reconstitution of BoD and top management will enable the company focus on its objectives and formulate new strategies for operation. Formation of a merger will enable it increase its market share and cope with competition. Works Cited What is the history of Electro Scientific Industries and the latest information about Electro Scientific Industries?. 2015. Web. 18 April 2015. Lawrence, Anne T. The Midnight Journal Entry. 2012. New York Time. ESI Consolidates Facilities to Streamline Operations. 2015. Web. 18 April 2015. Read More