Atherley furniture company
John Atherley is the owner of Atherley Furniture Company located near Orillia, Ontario. In recent years the progression of his chair division has had mediocre results and profits have been declining steadily each year. From the years 1995 to 1998 Atherley Furniture’s total profits have suffered a 24% loss within that time span. In the company’s chair division there are three models of chairs that have quite the reputation the “Caledonia”, “Atherley”, and lastly the “Parkdale”.
Growing concern for the company’s performance led the executive team to analyze income statements for each model to determine the attributed expenses and revenues. With a decline in profits for the Atherley Company, it is crucial that they manage their chair line properly in order to increase profits and reduce costs and expenses. Problem Statement and Objectives Problem: How to achieve a more assertive sales growth to provide an increase in profitability as well as how to improve management of chair division for better success.
Atherley furniture company Essay Example
Objective: Upgrade manufacturing equipment and expand the company to keep up with the strong demand for the “Caledonia” and “Atherley” models. Objective: To manage chair division focus on the strengths of their bestselling model the “Caledonia”. Objective: Work on properly controlling cost-management for the “Atherley” model by cutting expenses and improving efficiency to increase profits. Objective: Completely remove the “Parkdale” model from the product line as its profits have been decreasing more and more each year.
Objective: Focus more on manufacturing “Caledonia” models in order to remove backorder and provide retailers the chairs without having them wait weeks. Situational Analysis Atherley Furniture Company belongs to the furniture manufacturing industry, which is very competitive but desirable. Atherley is established and well known but has been losing sales for the past three years. There are many opportunities for success and Atherley can benefit from changing its current strategy to modernize its chairs and manufacturing practices. Porters Five Forces The company is in the manufacturing industry of furniture products.
Buyers Power-The buyers are retail and department stores that carry chairs and furniture. They have high buying power because of their ability to purchase products from other manufacturers. Suppliers Power- Suppliers are raw material providers that supply wood, metal screws and fittings, and plastic. The raw materials are identical and there really is no differentiation so there are many suppliers willing to work with Atherley. Supplier power depends on the size of the suppliers, large suppliers exert power on Atherley while small suppliers have limited bargaining power.
Substitutes- Substitutes would be cushions, bean bags, bolsters, pillows, pads and even the plain floor depending on the cultural background. Potential Entrants- Potential entrants would be already well-established furniture retail stores (backward integration) as well as new entrants looking to set up manufacturing plants and foreign companies. There is a moderate to low level of threat, as it would require a large capital investment and good customer and supplier relations that many foreign and existing companies may have.
Industry Competition- The industry is very competitive with manufacturing companies both foreign and domestic as well retail stores who also manufacture themselves such as IKEA; there would be a high level of competition for products, which are not differentiated where as a moderate level for products that are differentiated. Conclusion- This is would be a fairly unattractive industry to be in as there is a moderate to high level of threat from potential entrants and industry completion, although there is low substitute threat and low to moderate level of buyers power there is high level of suppliers power
PEST Political- the main issues could be foreign competition legislations and environmental concerns like tariffs or import taxes, safety laws and manufacturing practices that are governed by the government. Economic- The value of Canadian dollar as well the economic condition of the market, if inflation is rising buyers might postpone purchases of expensive chairs and buy cheaper options. Social- the effects on the environment for manufacturing furniture products e. g. spillage concerns, deforestation etc.
Online shopping is taking over so buyers can now compare prices and order online which makes it very hard to increase prices Technological- Modern manufacturing techniques like robotic equipment can prove to be much more efficient than traditional methods. However it is expensive at $250,000. Strengths Well-established and enjoys a good reputation and good relationships with its retailers. A respectable name in the industry is very important when it comes to standing out from the competition and contracting with different retailers. Highly skilled, loyal workers that provide steady employment throughout the year.
Employees are the foundation of this firm and keeping them happy and loyal lowers the chances of disputes and improves production and efficiency. Manufactures three different types of chairs. Diversity is an essential key to success in the business world and Atherley manufactures three distinctive models of chairs targeting different buyers, which spreads the risk since profitability for one model can offset the loss of another. Atherley diversifies its productions methods depending on the model; some models are labour intensive while others are produced using machinery and equipment.
This strategy reduces risks that accompany labour intensive methods, which rely wholly on machinery and equipment. Weaknesses Artherley’s “Parkdale” model is outdated and not in demand as before causing loss in sales and higher inventory levels. If this situation continues then the Parkdale model must be eliminated because manufacturing it means putting resources to waste and losing potential profit from more successful models. Management cannot invest in equipment and expansion because of the heavy debt load and diminishing profits.
Inability to advance in technology will lower Atherley’s competitiveness and market share in the industry. Overall sales income and net profits in the chair department decreased during the past three years and may continue to do so in future years. The main objective of a business is to make money but apparently the chair division is becoming unprofitable and posing a threat to the overall success of the company, a major change must happen to reverse the current situation. Inability to match customer demand for the “Caledonia” model may cause customers to purchase from competitors.
Most customers can not wait for the “Caledonia” model to be delivered and are not willing to wait if they can buy a similar product immediately from other companies, this will severely affect sales of not only the “Caledonia” model but of other models and products since customers often buy matching furniture. Opportunities Modify the “Parkdale” model to meet evolving consumer preferences and taste. With a few changes here and there the “Parkdale” model may prove to be successful if buyers demands are kept in mind.
Discontinue the “Parkdale” model to avoid further losses and use the resources to produce the other successful models. This is an excellent opportunity to not only lower expenses but also to use resources and labour for their other models or innovate a new design altogether. Several furniture manufacturers closed down and that provided an opportunity for Atherley to increase its customer base. Threats Market share and customer base is threatened in a competitive industry such as furniture manufacture, which is abundant in foreign and domestic varieties.
Atherley cannot price it’s products the way it wants since this is a very competitive industry the market is flooded with furniture it should price its products according to demand and supply and focus on becoming more efficient to lower costs. Consumer buying preferences and taste are evolving rapidly to the point that models are no longer in demand and need to be replaced. Different generations acquire different buying preferences and Atherley must rapidly adapt to these changes or risk losing potential sales. Identification of Alternatives 1.
Modify wood forming machines so they are compatible with the Atherley as well 2. Discontinue production of the Parkdale and Atherley models 3. Discontinue production of the Parkdale model and purchase an additional wood forming machine Analysis of Alternatives Modify wood forming machines so they are compatible with the Atherley as well Approximate cost: $50,000 Pros: The above average amount of labour required for the Atherley would be greatly reduced More units produced in less time Variable cost/unit would be reduced Cons: Additional cost of $50,000
Less time on the machine for the production of the Caledonia Lowered unit production of the Caledonia which is the best performing and most profitable model Discontinue production of the Parkdale and Atherley models Approximate cost: None Pros: Save fixed and variable costs related to the production of the two underperforming models Employees and equipment can be focused completely on the very profitable Caledonia No need to retain skilled upholsterers or pay them extra No more disparity among workers in terms of wages and they won’t feel as if they being mistreated Cons: Completely depended on the success/failure of the Caledonia
Caledonia has only been around a few years, and if this design turns out to be a fad, the company will sink as the demand diminishes over the years Giving up the Atherley without trying to fix any of the issues at this stage may be a bit premature Discontinue production of the Parkdale model and purchase an additional modified wood forming machine Approximate cost: $250,000 for Equipment + $50,000 for modification = $300,000 Pros: The above average amount of labour required for the Atherley would be greatly reduced Backorders and delayed delivery times for the Caledonia would be greatly reduced or eliminated Greater production efficiency
Variable cost/unit would be reduced Save fixed and variable costs related to the production of Parkdale No need to retain skilled upholsterers or pay them extra No more disparity in wages among workers Company would focus solely on the 2 profit making models Cons: Additional cost of $300,000 A lot of financial pressure on a company that is already struggling in that department If the Parkdale style of chairs were to rebound in popularity the company would miss out of sales Recommendations: We recommend Atherley Furniture Company to discontinue production of the Parkdale model and purchase an additional modified wood-forming machine.
This alternative was chosen despite the steep initial costs because the elimination of the costs associated with the Parkdale and the reduced variable costs of the other 2 models. As a result, the new machine would allow the company to recoup the initial investment of $300,000 in the first few years. This alternative despite having seemingly the highest financial risk, does not have all the other downsides like being completely dependent on one product or taking valuable equipment time from the best performing model and thus reducing output.
This alternative not only allows the “Atherley” model to be made more efficiently but also will help in fulfilling all the orders for the “Caledonia” as they both use the same machine just with some added modifications. When it comes to implementation there may be a few issues in financing the purchase of the new wood forming machine and modifying it, but that cost can be taken out of the now eliminated “Parkdale” budget. Last year the company had invested $910,000 in materials and labour alone for the “Parkdale”, and was left with a $50,000 loss at the end of the year.
Without the need to invest in “Parkdale” there should be enough cash to invest in the new equipment instead. Porters Five Forces The company is in the manufacturing industry of furniture products. Buyers Power-The buyers are retail stores as well as retailers, large retail stores would have higher power due to size where as small retailers would have less power in terms of size. Suppliers Power- the suppliers are raw material providers, they would have a moderate to high level of power according to the size or if they supply certain differentiated material.
Substitutes- Substitutes would be decorations such as curtains or paintings; this would have a small level of threat as it is hard to find an exact substitute for furniture. Potential Entrants- Potential entrants would be already well-established furniture retail stores (backward integration) as well as new entrants looking to set up manufacturing plants and foreign companies. There is a moderate level of threat, as it would require a large capital investment and good customer and supplier relations that many foreign and existing companies may have.
Industry Competition- The competition would be from other manufacturing companies both foreign and domestic as well retail stores who also manufacture themselves such as IKEA; there would be a high level of competition for products, which are not differentiated where as a moderate level for products that are differentiated. Conclusion- This is would be a fairly unattractive industry to be in as there is a moderate to high level of threat from potential entrants and industry
completion, although there is low substitute threat and low to moderate level of buyers power there is high level of suppliers power PEST Political- the main issues could be foreign competition legislations and environmental concerns Economic- The value of Canadian dollar as well the economic condition of the market. Social- the effects on the environment for manufacturing furniture products e. g. spillage concerns, deforestation etc. Technological- Modern manufacturing techniques requiring certain type of equipment and machines.