Declining sales, a global recession, stiff competition from Asian manufacturers, inflated operational costs, and decreasing demand for the product are all reasons why Clayton SpA is forced to reevaluate the Brescia Italy plant and make a sound business decision as to its fate. After discussions and meetings with other plant management and personnel, three options were proposed: invest additional monies into the Italian division and revive operations, target production towards absorption chillers rather than the compression chillers, or wait about six months and observe the activity of the economy before making any type of financial decision.
Targeting production towards absorption chillers is the best option for Clayton in order to regain its position financially and its competitive position in the market. INTRODUCTION Clayton Industries, a business based on sales of window mounted air conditioning units sold in residential and small commercial units, was formed in 1938 in Milwaukee, WI. In the 1980’s, the company decided to expand into commercial operations in North America and saw an opportunity for growth in the European market.
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It achieved this growth through the acquisition of four other companies, including Corliss – a company that manufactured HVAC units and AeroPuro – an Italian manufacturer of compression chillers. Clayton did an organization restructure in order to accommodate the global expansion and developed a new entity, Clayton Europe, to handle the European acquisitions. These acquisitions enabled Clayton to be a dominant force in that market until the global recession in 2009 at which point Clayton’s international divisions saw a decline in sales.
Clayton SpA, the Italian division of Clayton Industries, was the most negatively impacted, suffering a 19% decline in sales and experiencing revenue losses of $1 million per month (Bartlett & Barlow,2010,p. 3). Internal mismanagement, an exaggerated workforce, and the view of air conditioning units as an unnecessary “American luxury” by European citizens all contributed to the rapid decline in sales and loss of revenue. Facing competition from Asian manufacturers that were making the same product more efficient and less expensive also proved to be an obstacle for Clayton SpA.
This contributed to the need to offer a better product at a cheaper price for Clayton SpA to remain competitive and profitable in this market. In reaction to all of these issues being faced by Clayton, all country management was asked to participate in a “10/10/10” plan which entailed cutting days receivables and days in inventory by 10 days each and reduce the labor force by 10%. The “Top Four in Four” initiative was also presented to country management in which they were asked to develop a plan where the product for which their division was responsible for selling would be in the top four of the European market share in four years.
In this report are the options being considered and plans presented in order for Clayton SpA division to rally back from the losses it has suffered financially. INTERNAL/EXTERNAL ANALYSIS SWOT ANALYSIS • One strength is that the Clayton European division is now being led by more effective and goal-oriented management. The fact that they were also hired from other more successful sectors of the company enables this division to be led by individuals who already know the business and the company and draw from prior plans in order to make this division more successful. Another strength is that the initial plan put into action by Simonne Buis a few months prior to cut costs immediately freed up some monies needed for immediate restructuring and rebuilding. The ability of management to take ideas from more successful divisions of the company (i. e. Spain) can make the Italian division more profitable in the future. • One potential weakness is that the financial obstacles faced by Clayton SpA due to internal mismanagement and exaggerated labor costs were there for quite some time, therefore the company must come up with a lot of money up front in order to attempt to restructure and rebuild. Another weakness is that the company is expected to jump back up into the top 4 in the next 4 years yet it is currently 5th on the list with only 7% of the market share. This goal will prove extremely difficult with current conditions. • One opportunity for Clayton is that they can develop a more efficient product in order to become more competitive in the market now and in future. Another opportunity is that effectively cutting costs now can enable the company to run more efficiently in the future because it will show that the company can indeed increase profits with reduced operating expenses and liabilities, therefore offering higher shareholder equity in the end. Higher shareholder equity means the increased probability of more investors in the end. • One threat to Clayton are Asian firms, or possibly any other company that tries to operate in this market, operating more efficiently and offering a better product to consumers. Another threat is the rising costs of materials, as seen with the increase in the price of steel. PEST ANALYSIS Analysis of this firm using PEST, I have determined that the political aspect has played a major role in the business decision making in Clayton SpA. It was due to the major impact that the union had in Italy that caused the high labor costs in that division. The political relationships held by prior management seemed to influence some of the poor decision making on the part of management. The economic factor is that the global recession and slow economy in 2009 is when Clayton began to suffer huge financial losses.
Clayton SpA suffered a $15 million dollar loss of stockholder’s equity in 2009. As seen in Exhibit 2 Clayton Industries income statement, revenues were down 19% and net loss was 12%. The social factors affecting Clayton are that for one, Europeans did not view air conditioning in their homes as a necessity. They saw it as a luxury. Additionally, Europeans were buying from local firms because they were more familiar and better priced. Technological factors affected Clayton in that the compression chillers marketed and sold by Clayton were too expensive as well as lacking in operational efficiency.
The Barcelona plant manufactured specialized absorption chillers which proved to be far more profitable than the compression chillers were. The compression chillers lacked several new features that other competitors were using, therefore causing Clayton to fall behind in the market. They were operating 15% less efficiently (Bartlett & Barlow,2010, p. 6). Absorption technology is a new trend that has become increasingly popular due to its use of water rather than the harmful chemicals used in compression chillers.
Based on Clayton Industries’ forecast sales in exhibit 5, it is predicted that Clayton Italy will experience a growth in sales of between 5 – 6 % annually if the economic conditions improve. These percentages are relatively small in comparison to the huge losses suffered in 2009, therefore a more aggressive approach should be taken in order to meet the goal of being in the top four by 2013. OPTIONS There are a few possible options for Clayton to successfully attain its goals of rebounding financially and becoming one of the top four competitors in the market.
One option is to regain profitability in the Italian division by increasing efficiency at the plant site, revitalization of the current product line of compression chillers through further product development, and a development of a sales and marketing plan so as to expand and increase their market share. The costs of this option are around $5 million, most of which will be spent within the first year of implementation. The pros of this plan are that revitalizing the compression chiller product line may prove profitable since the compression chillers still make up 85% of the market.
Another pro is that through development of the sales and marketing team, innovative ideas by new management or a new sales and marketing team can be tested in this time of crisis. A third pro of this option is that increased efficiency at the current plant will keep the company from having to do a full restructure, therefore saving the company money in the long run. Clayton can build upon what they already have rather than tear it down and rebuild it. The cons of this option are that the company’s current financial position is poor therefore coming up with the $5 million needed for start-up could prove difficult at this time.
There is also a chance that the investment of the $5 million does not yield the profitable results that the company desires, therefore putting the organization in a worse position financially. Using $5 million of the company’s funds will also create a diminished cash flow, possibly affecting other divisions in a negative way. Another option is to build upon the already successful market in Spain. This would enable Clayton to also partake in the new technological advancement of the absorption chiller that has given the Barcelona plant its increased profitability.
Market growth of the absorption chillers is increasing and this would give Clayton an opportunity to step into a new market and work towards achieving its goal of once again being a top competitor in the market. The costs of this plan would be approximately $15 million over a period of five years. The large part of this investment would come within two to three years of plan implementation. The plan would also involve a lot of restructuring of the organization and removal of old equipment and processes. The pros of this plan are the opportunity to gain entry into a new market that appears to already be profitable for a division of Clayton.
In recent years, there has been an increased demand for products that more environmentally friendly so selling the absorption chillers would satisfy that demand and increase profit. Another pro to this plan is that Spain already has licensed technology to support the production of the absorption chillers and they are already familiar with the product. Cons to this option are that it might be risky to phase out the compression chillers, which comprise of 85% of the market to invest in the absorption chillers, which are still only 15% of the market.
Investing these funds not expanding or building a new office in Spain would still mean that the office in Italy would still be left in a bad position financially. Having to close the Italy office would also cause an uproar with the union officials that initially showed concern that this would occur. Another downside to this plan is the large investment amount needed to get it up and running with no guarantee that it will prove profitable in the end. If a $15 million dollar investment is made and the absorption chillers do not prove profitable, the company will have lost that investment and the loss of the Italy division.
A third option is to wait until the economy becomes more stable, at least six months, before making any type of financial decision or commitment to an alternative plan. If slow economic growth and global recession continue, using millions of company funds to restructure could put the organization in a worst position in the end. The pros of this plan are thought it does allow management and the financial department a little more time before making a decision. This would allow for more research and review of economic conditions and industry trends, therefore enabling a more sensible decision.
This will also still allow for the other two options to remain on the table whereas if one of the other two plans are implemented, funds will be depleted and another option will prove difficult of not impossible to attempt. The downsides to this option are that not taking any action for six months may put the company in a worse position financially. If the divisions that are lacking continue to operate in a deficit, it will put the company as a whole in turmoil. If the company is currently experiencing a loss of $1 million a month, six more months of operating in that manner would be a total loss of $6 million more.