REPORT ON CLAYTON INDUSTRIES CASE PETER ARNELL, COUNTRY MANAGER FOR ITALY

Indian institute of Management Lucknow Written Executive Communication SUBMITTED TO: PROFESSOR Dr .PAYAL MEHRA

A.Venkatesan PGP26380 Section F

Headquarters. . Strategy that can help Clayton turn its loss in to a profit making business. President & CEO.To. Wisconsin. Daniel A Briggs. XX.. ZZZZ. Milwaukee. Date: 24th November 24. From. YYYY. Clayton Industries Inc. Peter Arnell. 2010 Subject: Growth strategy and market analysis for Clayton SpA.

has been asked to take over the Italian subsidiary which was incurring huge losses.S. BRIEF BACKGROUND: Clayton Industries. and air conditioning). Peter Arnell has just taken charge of the Clayton SpA to turn around the current loss making status of the company losing around $1 million a month after decades of solid returns.. Clayton restructured its top level management and Peter Arnell. a sixty-year-old U. The company VP Simoone Buis had set the following targets for the company: 1. As the economic crisis hit the entire Europe in 2009.a Barcelona-based manufacturer of climate control products for industrial and commercial applications. Fontaire . ventilation. Clayton company suffered huge losses. Italy based manufacturer of compression chillers for large commercial public and institutional installations. and Aero Puro . the Italian subsidiary of US based Clayton Industries Inc. it has positioned itself in the European market by acquiring four companies namely Corliss. ventilation and air conditioning(HVAC)systems. It has its head quarter for European operation in Brussels (Belgium) and each of the entities country is headed by a regional company president.OBJECTIVE The purpose of this report is to analyze the daunting challenges faced by Clayton SpA. with nearly $1 billion in revenue. previously Clayton's successful country manager for the U. a UK based manufacturer of home heating.-based firm in the HVAC industry (Heating.a Brussels-based manufacturer of fansand ventilating equipment. Positioned the company’s products in top four in European market . To cut the both receivables and inventories by 10% also reduce the headcount by 10% 2.a Brescia. Control del clima .K. As it expanded abroad.

First half of the FY 2009 has witnessed a 19. Company is aiming to be in top four in each product category which is quite a difficult task ahead for Peter Arnell.4% drop in the sales.Clayton struggled to pierce the window unit market because of the presence of familiar local brands that Europeans seemed to prefer. Bius first priority was to increase the operational efficiency of Clayton. In Italy situation is far more challenging as compare to the other regions of the Europe. .In 1998 air conditioners were present in only 7% of the total homes in Italy. The same can be understood through the steady drop in the EBITDA of the company performance in Italy year on year.About Clayton Europe & European Market conditions: European market for air conditioners began to grow from a much lower base in 1990 . receivables and inventories are both above 120 day sales. Chart1: Industry sales of air treatment products Determined to create a more integrated European organization. the new country manager.An additional responsibility of Europe-wide profitability of products produces in their plants. Chart2: Percentage change in Revenue of European operations Major problem: Recession in Europe has hit the company badly its sales has gone down drastically. Company is neither able to reduce its cost nor it has a product which is readily acceptable by the climate friendly people. So the company is facing a difficult situation to make profits in the time of recession when its sales are going southward very rapidly. Europeans perceived air conditioners as an expensive American luxury that harmed the environment.

European people also have an emotional attachment and preference towards their local national brand. But Environmentalists emphasized on the absorption chillers which were less carbon sensitive and used water instead of ozone depleting refrigerants. Product which had a local presence before are able to sustain well in the market even in the bad economic conditions. Brescia’s staffing levels were 20% to 30% high. Offering neither low price nor name familiarity. the Clayton and Fontaire brands struggled in Italy’s residence climate control market. Compression chiller produced by the company are not so climate friendly vis-a-vis absorption chillers so company is facing a huge challenge to make people accept their product who are climate sensitive. This has been a real problem for company to expand its market share in Europe. a temporary layoff provision that exempted workers coming to work for a significant pay cut with costs shared between the companies and the state. Clayton produced compression chillers which had 85% of the market share. The vulnerable cost position due to the highly unionized workforce prevented Lazzaro to lay off employees permanently or implements CIG (Cassa Ingrazione Gaurdagani).Chart2: Percentage change in Revenue of European operations Chart3: Percentage margin in net income/loss of European operations Reasons the company is facing problem in European market are enumerated below: European people saw air conditioning as a luxury item which is harming environment so they resist purchasing it. . In past most of the company policies were centred towards getting large projects from government in Italy so it is not only losing potential commercial customer but also losing the chance to reach in other parts of Europe.

Little hope for cost improvement 4. CHOICES AVAILABLE TO THE PARNELL: One of the options that are available to Parnell is to focus on Italian market and increase plant’s efficiency and at the same time prepare a plan to expand its market in other parts of Europe. As the company is neither offering low price products nor able to cope up with the perception of climate friendly product. PROS 1. Rebuilding market share will take time 5. Becoming the #3 or #4 competitor almost impossible . Implements existing European strategy 2. Company is struggling in the European market where it is not a familiar local brand. Italian management team’s strategy 5. Recognize the failure and move on 3. Its air conditioners are not suitably designed according to the Italian buildings which lacked the duct work. Because of its inefficient operations the compression chillers produced by the company are too expensive which are facing tough competition from the cheap Asian products. Gives Italy a chance to step up under new leadership 4. Compression chillers are key components in a $20 Billion European industry 3. Buis is likely to be supportive CONS 1. $5 million investment is too much to invest as the company is already making losses (Clayton lost $24.2 million in the last six months) 2.The 27% increase in the prices of steel in the past years was also one of the prime reasons since cost could not be recoupled due to foreign competitor’s aggressive pricing. Fits Brigg’s belief of “opportunity in crisis” 6.

2. 3. Short-changes the Italian plan 4. Requires very large investment Third alternative which Arnell is considering is to wait for some time. Staged strategy allows phase out of existing line 5. Absorption chillers are climate friendly while at the same time producing in Spain will cost company a reduction of 20% labour costs. Spanish company has good product. Absorption chillers a fast-growth segment. FILM will oppose production phase out 5. However. restructuring might call for layoffs which will be a tough nut to crack in Italy's highly unionized business space. Investment timing is more reasonable CONS 1. In the meantime company he can focus on improvement in operational efficiency to reduce cost of the product. It will require investment: $15 million over five years with most costs starting in the phase-out and restructuring process two to three years down the line. and market to build on. PROS 1. 3. Abandons mainstream commercial air-conditioning prematurely. Can achieve #3 or #4 position in this niche market. (Perhaps #1 or #2) 4. 2. PROS 1. technology. . Contrary to existing European strategy 2. It will be increasingly popular in future since they are more eco-friendly. Affordable. appropriate for the time.The next option is to establish a new plant for absorption chillers in Spain. as the economy is unstable so taking any strategic decision at this time can boomerang. Lower risk option.

Arnell and team need the chance to prove them. Offers more time to study options.8% contraction in the economy so any strategic commitments to suppliers for expanding its production and thereby sales can have repercussions. Chart4: Long term Debt analysis . Keeps future options open. It would be good for the company to make necessary adjustments in the operations so that its inventory level can go down. A marketing strategy associated with a better Corporate Social Responsibility of Clayton in reducing the ozone depletion will give a better entry for Clayton and market penetration. As forecasted by the government that economy will take some time to come back on growth path so it would be a good decision for the company to focus on improvement in its operations and rethinking on its product line. As the economy is still struggling this is clear from the draft budget projection of 4. 4. CONS 1. Delaying for six months is not cost-free 2. In the long term company can invest in a new plant for absorption chillers. RECOMMENDATIONS: On considering all these suggestions I would suggest the third option in the short term. European peoples avoid purchasing compression chillers so it would be good for the company in near future to focus on absorption chillers which is more climate-friendly. Company is already struggling with its inventory which kept on and is increasing. 5. Lazzaro was fired for his “batten down the hatches” approach. Briggs and Buis want turnaround proposal.3. Arnell set his team in motion. 4. 3.

Chart5: Current Ratio Analysis The long term debt analysis and the current ratio analysis clearly gives an indication that the company should not invest immediately in manufacturing absorption type chillers. CONCLUSION: The company should focus on sustaining the market losses in the short term and wait for the economic recession to change to better conditions. Also due to economic crisis it is not a wise decision to concentrically diversify now in the European market. This will increase company’s chances to increase its market share across the region. Investing in a new absorption chillers plant will require significant cost in layoffs and restructuring with a gradual phased changeover process. But the absorption chillers is not only eco-friendly but also it has growing market in Europe. . Hence it would be a good strategy to focus on investments only in the long run. The company should formulate the growth strategies for the long term to capture the phenomenal amount of market share in the long run in absorption type chillers and conditioners that connect with the people of Italy.

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