Indian Institute of Management, Lucknow
CASE ANALYSIS IN SHORT REPORT MEMO FORMAT OF
“Clayton Industries: Peter Arnell, Country Manager for Italy”
Course: Written Executive Communication
Submitted to: Dr. Payal Mehra
R. Prasad Iyer PGP26228 November 24th, 2010 Submitted by: Section D
The objective of my analysis is to restore the Italian subsidiary to profitability and sound financial health. Spain and Italy. Italy Dear Mr. Please find in the pages below a blueprint that I have prepared to revive and turn things around at Clayton SpA in the aftermath of the global recession. However. The Italian company was a manufacturer of compression chillers for large commercial. Inc.Page |1
To Daniel A. However. National brand preferences. to exploit the growth opportunities there. one each in UK. Belgium From Peter Arnell Country Manager Clayton SpA Brescia. public. Briggs President & CEO Clayton Industries. due to improvement in operational efficiency. Italy Date: 24th November 2010 Subject: Revival and Growth Strategies for Clayton SpA. and institutional installations. The situation was all the more alarming for Italy as sales outside this country accounted for only 12% of the total sales. Buis I have completed a preliminary assessment of the state of affairs at Clayton SpA since my arrival here just over two months back. initial progress in the European markets was slow. In the early 1980s the management envisaged a lucrative market in Europe and consequently acquired four European companies. Milwaukee. non compliance of design to European homes. Wisconsin. competition from Asian producers and the recalcitrant behavior of the average European consumer meant that initial sales were going to be very sluggish. Belgium. Background 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. Briggs and Ms. reduction in costs and country managers being made
. USA Simonne Buis Executive Vice President Clayton Europe Brussels.
European growth was stalled by the recession as a result of which profit margins were badly hit (Refer Exhibit 1. in 2008-09. The
. Exhibit 1: Net Income of Clayton Industries Inc. However. The fact that some of the central AC units of Clayton required duct work done in buildings for installations did not help the company’s cause. below). There were design issues in the product which did not make it compatible with European buildings. It was a challenge in itself to sell the product in European markets as the consumer buying habits were very different from their American counterparts.Page |2
to shoulder greater responsibility. Hence it was imperative for the management to activity come up the strategy to regain the market share and its revenue growth after recession. Moreover. The Europeans perceived air conditioning as an expensive American luxury which was detrimental to the environment. In 1998 the penetration of AC was only 7 % in Italy and 11 % in Spain as compared to an overwhelming 71 % in America. 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. from 2004 to 2009
This report attempts at projecting the growth options and strategies available at Clayton SpA to restore it back to sound financial health. Problem Statement .Challenges for Clayton Industries (especially Clayton SpA) The European market for Clayton manufactured Air-conditioners was never as receptive to the product as the American markets. the company was able to turn the tide. Asian manufacturers were eating into a sizeable proportion of the market segment because of their low pricing strategy.
• • 10/10/10 plan – this plan lays down that inventories and receivables will be cut down to 10 days each while the headcount will fall by 10 %. The sales were showing signs of improvement when global recession happened in 2008-09.3% decline in sales in 2008 followed by a 19. Mrs. However.
. The demand shot down due to the slowdown and there has been a dip in profits for the years 2008 and 2009. Top Four in Four – this plan lays down the view for Clayton to become one of the top four players in Europe in Four years. In the European division of the company.4% plummet in the first half of 2009.
Issues faced by Clayton Industries Implementing these targets in the Italian context is going to be a be a big challenge as the company has been lagging its other European counterparts. Buis proposed the following two plans in a meeting with the country managers. The company suffered a 5.Page |3
sales outside of Italy were also a major cause of concern as they accounted for only 12 % of the total. Clayton SpA has been the worst hit with revenues having nosedived in the years 2008 and 2009 and Net income has also taken a severe beating (Refer Exhibit 2 and Exhibit 3 below) Exhibit 2: Total Revenues (in millions of USD) of Clayton SpA for the last six years (2004 – 2009) Exhibit 3: Net Income of Clayton SpA (in millions of USD) for the last six years (2004 – 2009)
To overcome the crisis that the company found itself in. due to effective management strategies the company was able to make a mark in the European markets and the period from 2000 to 2009 witnessed an upswing in revenues.
In addition. due to the fractured relationship with the union coupled with local tough laws. I would also like to do a Porter’s five forces analysis which shall give a vivid picture of the current state of affairs of the company vis-à-vis other industry parameters. Clayton offered neither a familiar brand name nor lower prices. Moreover. Clayton’s other product lines were also struggling in Italy. So. the erstwhile CEO. The company has only a 7% overall market share with an overall fifth position out of seven companies in the European chiller market. both receivables and inventories were above 120 days of sales. The result was huge losses in sales in rest of Europe.Page |4
Consequently. a decline in sales of these other products was obvious. Table 1: SWOT Analysis STRENGTHS • Strong Brand Name in America and part of a rich and once profitable parent organization • Have converted dwindling sales in the past to profitable sales – so no reason why we cannot do it now • Strong and dedicated management team committed towards improving the • • • • • • • WEAKNESSES Poor sales outside of Europe Poor Marketing strategies Poor Efficiency Product expensive in nature Lack Innovative features Overstaffed organization High labour costs and strained relationship with trade union
. Lazzaro. had the responsibility for compressor chiller sales in the whole of Europe but he focused on developing relationships to support big projects in Italy only. Even in Italy although chiller sales accounted for 55 % of Italy’s revenues. due the focus on Chiller line. For chillers. SWOT Analysis and Porter’s Five Forces Analysis of Clayton Before I come up with the alternatives for improving the efficiency of Clayton SpA. I would like to enunciate our company’s strengths and weaknesses with the help of a SWOT analysis (Refer Table 1 below). the 10/10/10 looks a near impossibility to achieve. Its central Air conditioning system was not a very good fit in Italian buildings which required duct work. The company is currently experiencing a massive loss of more than $1 million a month due to a 27% increase in the steel prices – this is a loss that cannot be recouped due to the competitors’ aggressive pricing. the “Top Four in Four” plan also seems like squaring the circle because only 12% of sales were generated in 2009 for chillers in the rest of Europe outside Italy. it lagged among commercial customers who preferred Asian products due to their efficient design and lower lifecycle costs. they could never develop marketing capabilities for other products.
. There were basically three approaches to solve the problem Clayton is facing.Page |5
fortunes of the company • Large manufacturing capacity • Good understanding with other Clayton European SBUs OPPORTUNITIES • Growing European Market for air conditioners both in the domestic as well as commercial segment • Company currently has only low penetration in rest of Europe – so large market to be tapped • Competency in Alternative Technology to serve the requirement for the forthcoming future
• Political influence
THREATS • • • • • Asian competitors Union regulations Unstable economic conditions Rising Raw Material cost Market preference getting inclined towards absorption chillers rather than compression chillers – this may mean high capital investment to meet demand
Table 2: Porter’s Five Forces Analysis Potential Entrants • High Bargaining Power of Suppliers • Higher prices of Steel entry and exit Bargaining Power of Buyers (Buyer Power) strong • Buyers switching to low cost value products due Manufacturer low cost to the current economic conditions
barriers Industry Competition • Growth Segment • Existing players • Asian providing products Threat of Substitutes • Absorption based chillers Options for Clayton’s Europe Growth Plans The vulnerable cost position had put Brescia (in Italy) under threat of operations in 2004 when Buis announced the second phase of her plant efficiency drive. We will discuss the pros and cons of each approach and try to decide which is the most feasible and profitable approach. She insisted that all plants become cost-effective European scale operations.
2 mn in the last six months) and shelling up this amount of money for something which the Italian plants should already have been doing is not a very sound approach for growth. The second conference was a marketing conference where product development managers exchanged views with colleagues invited from other Clayton country organizations. already $18 million were invested in
. In the time of recession market expansion would be even harder than what it was pre-recession. For instance. The company is already facing a cash crisis (having lost $24. So.Page |6
The three approaches were: • Carrying on the Italian operations while revitalizing the compressor chiller line and a sales and marketing plan to expand market share outside Italy. for absorption chillers. • Funding a major new plant in Barcelona. Alternative 1: Reviving the Compression Chiller line of Italian Operations Two conferences were organized to share views between the management groups. Brescia had higher labor costs and less flexible workforce than Barcelona but Buis believed that only Brescia can meet the European demand. Lazzaro had convinced Buis to make Brescia the European source. Its direct competition was with Barcelona operations. Brescia was under threat of losing its widescale operations due to huge costs and unfavorable labor laws. One reason for that was that Brescia could make 500 to 2000 KW units while Barcelona could make only 300 to 1000 KW units. Spain and UK. Spain. Improving plant efficiency is a valid point which was proposed by Buis in her efficiency drive and it should be applied irrespective of more capital input or not in Italian plants. • Wait and Watch strategy We will have a closer look at each of the three options and discuss about their pros and cons before giving an opinion on which is the best option to follow. market expansion outside Italy should have been one of the top priorities a long time ago. The first conference was a manufacturing conference where production engineers and Quality Control managers from Brescia described their situation and ideas with their counterparts from Belgium. The Italian managers focused on restoring Brescia’s profitability and ensuring its long term viability. The compressor chiller line is already doing decently well in Italy but it is taking away a lot of development capabilities of other products which need a boost if Clayton has to improve its Europe position. Their plan of action included: • • • • Revitalizing the compressor chiller line Market expansion outside Italy Improving plant efficiency Product development initiatives
The estimated costs were about $5 million with most of the investment in first 12 months.
After a bit of investigation it was found that this product of theirs was too expensive in other European countries and also lacked innovative features like high speed technology. Thus we can summarize in a tabular form (Refer Table 3 below) the pros and cons of Alternative 1: Table 3: Pros and Cons of Alternative 1 Pros 1. 3 or No. Initial investment of $5 mn may pinch the company since it already incurred loss to the tune of $24. very remote chance of catapulting to No. Clayton Industries lagged the operative efficiency of market leaders by 15 %. 6. 4. improve efficiency and reduce costs. no cannibalization other products Cons 1. 4 in the market. He is convinced that the way forward was by introducing a new plant in Barcelona which would make absorption chillers. Furthermore. Better competition against Asian products due to better promotion and pricing strategy 4. the CEO of Spanish operations.
Approach 2: Funding a new plant in Barcelona. Leveraging the skill sets of existing workers 7. Sanchez had some backing for his suggestion.2 mn in the last six months 2. No one would like to buy outdated technology for higher price. Brescia’s chiller penetration outside Italy was low. 5. hence reduce prices. well below 21 % Italian market share. Cost cutting may involve layoff and can sour an already troubled relationship with the trade union and hence can jeopardise sales. The move may backfire if recession continues for a prolonged time. Immediate results are not guaranteed i. Existing market of compression based units will not be affected i. Not exploring new avenues. Spain Sanchez. First of all
. Due to market demand.Page |7
Italy to upgrade and expand its operations with 203 people employed. the product may be profitable post recession 6. This number was 20 % to 30 % too high. Achieve the higher management target to promote Compression Chiller sales in rest of Europe and consistent with the dictum of “opportunity in crisis” 3. Output can be scaled and economies of scale can be achieved because of capacity availability 5. new market opportunities or technology. 3. Extensive effort and expenditure required in Sales and Market to increase market share. had raised an alternative option in the conference.e.e. This was the prime reason for stunted sales in countries outside Italy. All this pointed at one thing only. Limited investment period of only 12 months 2. It had 7 % European market share. It made Clayton number five in terms of market share in Europe.
But on the flipside. Customers in Scandinavia and Germany used absorption chillers heavily for these reasons: • • • They were energy efficient They used water instead of ozone-depleting refrigerants for cooling It was less carbon intensive
These reasons would go very well with the European customers who considered Air conditioning as an environmental hazard. Second. This is higher that continuing with Italian operations and could well turn out to be a gamble. Moreover. Hence in the prevailing uncertainty. Making large scale compressor chillers in Barcelona was not possible and they were siteconstrained to grow the plant. they had the license for a first-class technology for this product. the money requirement for this change would be $15 million over five years. Rather. we are undergoing a lot of liquidity crunch at the moment and financing from banks is going to be very difficult. Thus converting the capacity at Clayton SpA to absorption chillers while phasing out the compressor chiller line seems a viable option. the pros and cons can be summarized in the Table 4 below:
. this option does not seem very viable. Absorption Chillers were less harmful to environment than compressor chillers and would suit their way of living.Page |8
absorption chillers is a developing product and has a tremendous growth opportunity. we can hold this back for a couple of years. In a nutshell.
. Tightening the existing control may further delay the implementation of the real steps to address the issues of the declining Italy sales revenue and competitor may take aggressive strategies to capture more and more market share which may actually harm the future prospects of the company even further. The basic fact is that the picture is still not clear. 4. Clayton already has license to technology in this area. 5.Page |9
Table 4: Pros and Cons of Alternative 2 Pros 1. 2. No guarantee of Absorption Cooling Technology process in the market. In his opinion efficiency measures must be carried out to increase profitability while strategic options should be studied thoroughly before they are applied for atleast six months or until the things become clearer. 3. since it requires $15mn investment over 5 years. The finance director also brought to notice that currently the company is losing $1 million every month and any widescale capital investment without careful thought can be a very bad idea. Fight competition from Asian companies in this area at cheaper prices 6. which is more financially viable than Option A ($5mn over 1 year). Scandinavia. eco friendly and energy efficient product. Spain and other countries. On one side of the coin wait and watch strategy will not be a bad idea. 7. Moreover bank financing will be difficult because of the current state of affairs of the firm 2. Tap the growing market demand in Germany. Customer preferences for this product in Italy has not been backed by adequate research 3. 6. Higher NPV of investment. There are talks about double dip happening in American and European Economies. 4. He suggested that the economy is still unstable. 5. Human resource restructuring will not be acceptable to the employee unions and the Italian government – FILM will oppose the phasing out of Compression chillers. The company leadership in Europe is not in favour of absorption based cooling. Absorption based technology is an environment-friendly alternative offered to the environment conscious customers. Plant restructuring will require machinery upgrade and employee skills.
Approach 3: Wait and Watch strategy My finance director suggested that it is still too early after recession to make a decision where to invest the capital for growth. Cons 1. No measure to improve sales of other product lines such as air conditioners and ventilators in Italy. The company faces a high liquidity crunch. taking into consideration the time value of money. But there are multiple cons of using this strategy. and is already reporting a net loss. Ability to market the product as a less carbon intensive. Phased changeover process with an investment of$15 million spread over 5 years. 7. High investment is not a viable option at present.
please feel free to revert. Cons 1. This way they can not only recover their losses but also understand whether to go ahead with the compression chiller or to phase it out. 6.P a g e | 10
Table 5: Pros and Cons of Alternative 3 Pros 1. 3. 4. This would result in Clayton SpA meeting its existing credit liabilities 4. The first strategy will be first to ease this tension of financial crisis and then to go ahead with the strategy of implementing a new product development activity. Possibility of Clayton being left behind in the recovery stage of the economy due to lack of new products. Conclusion I have made my above recommendation after doing requisite due diligence to the financial statements of the company and doing a pragmatic analysis of the prevalent circumstances. Yours Sincerely Peter Arnell
Recommendation In the prevalent scenario. 6. It provides flexibility to adopt strategy based one emerging trends postrecession. Therefore the best available option is to go ahead with the existing product and tighten the control on the costing and efficient operations. 5. you do not agree to the above. There is no unified strategy within company regarding product lines. Doesn’t details how to handle the over staffing at the plant. 5. There is no plan to promote sale of chillers outside Italy in Europe. It moves along the economic cycle. Clayton doesn’t have the financial stability to carry out new strategies like altering the product line altogether. 2. In uncertainty of economic condition maintaining status quo can be sound strategy. and waits for economy driven growth and demand. This strategy fails to promote sales of other product lines in Italy. rather they are carrying high debt and liabilities. In case. I look forward to a healthy brainstorming session with you in our next meeting. As all other industries are hit by recession so it will not be proper in the recessionary phase to take such a bold step to phase out an existing product and introduce a new product. It doesn’t meet any of the objectives put forward by the management and is basically a wait and watch approach. Therefore it’s advisable for Clayton to wait for some more time and try to increase the market share with aggressive marketing strategy as far as possible. The company doesn’t have enough assets. 2. This option carries the least risk. 3. The company can concentrate on cost reduction and increase in efficiency.