Homework Title / No. : _________01____________________Course Code : __MGN101_______

Course Instructor : ___ MEGHA MEHTA _________ Course Tutor (if applicable) : ____________

Date of Allotment : _27/08/12_______ Date of submission : _____10/9/12______

Student’s Roll No.______A81,A82,A84_______________ Section No. : ____Q2206______________

Declaration:

I declare that this assignment is my individual work. I have not copied from any other student’s work or

from any other source except where due acknowledgment is made explicitly in the text, nor has any part

been written for me by another person.

Student’s Signature :

_Nishant_kumar______

Evaluator’s comments:

_____________________________________________________________________

Marks obtained : ___________ out of ______________________

REPORT ON CLAYTON INDUSTRIES CASE

PETER ARNELL, COUNTRY MANAGER FOR ITALY

OBJECTIVE

The purpose of this report is to analyze the daunting challenges faced by Clayton

SpA,the Italian subsidiary of US based Clayton Industries Inc. 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.

Contents

A brief introduction of Clayton Industries and their business

operations............................................................................................................................ 3

Description of Proble.......................................................................................................... 3

Evaluation of alternatives .................................................................................................. 4

Alternative I - Revive the compression chiller line ........................................................... 4

Alternative II – Changing the product line by shifting from compressor

chillers……………………………………………………………….….………………....6

Alternative III – In depth study of the overall business processes for a period of 6

months................................................................................................................................10

Final Evaluation Matrix between Alternative 1 and Alternative 2 ...................................12

Current Ratio Analysis………………………................................................................. 12

References .......................................................................................................................13

Introduction

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. In the early 1980s the management

envisaged a lucrative market in Europe and consequently acquired four European

companies, one each in UK, Belgium, Spain and Italy, to exploit the growth opportunities

there. The Italian company was a manufacturer of compression chillers for large

commercial, public, and institutional installations. However, initial progress in the

European markets was slow. National brand preferences, non compliance of design to

European homes, competition from Asian producers and the recalcitrant behavior of the

average European consumer meant that initial sales were going to be very sluggish. The

situation was all the more alarming for Italy as sales outside this country accounted for

only 12% of the total sales. However, due to improvement in operational efficiency,

reduction in costs and country managers being made to shoulder greater responsibility,

the company was able to turn the tide. 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. However, in 2008-09, European growth was stalled by the

recession as a result of which profit margins were badly hit (Refer Exhibit 1. below).

Hence it was imperative for the management to activity come up the strategy to regain

the market share and its revenue growth after recession.

Description of Problem

The company faces many challenges while operating in Europe. The market for air

conditioners is well developed as consumers view Air conditioners as a symbol of

American extravagance. However, the company did reasonably well through local brands

Corliss and Fontaire.

Simonne Buis took over the reins of Clayton in 2001 and immediately adopted a two

pronged approach to gain competitive advantage. The focus was either to slash costs or

build scales or both. Clayton started finding going tough post 2008-09 because of the

global recession. Its sales declined and quite markedly in Italy

By 2009 the revenue of the company had fell over 19 % which was not as per the

intended plan of the company. In wake of such a performance the country CEO of Italy,

Arnell decided to close down some of the facilities as well as reducing the labour force.

Apart from recession there are several other factors that are adding to the company’s

troubles. The company due to its uncompetitive product profile found itself struggling in

markets outside Italy. The poor sales and rising input costs hurt both the bottom line as

well as the top line of the company. The company faced labour union problems, and it

was very difficult to fire anyone owing to the norms of Italy. To top it the company also

has a high wage bill and a very limited customer base in Italy.

The company also faced stiff competition from Asian firms in other markets of Europe,

which provided better value for money products to the customers. Overall the company

faces a problem of high prices of its products with no tangible or intangible value

associated. The company is thus confronted by the upward task of restructuring its

product line, reducing costs and build scale.

Evaluation of alternatives

Target

a. To increase the market share of Clayton SpA from 7% to 15% within 4 years (“Four in

Four” objective).

b. To reduce Days Receivables, Days Inventory by 10 days and Headcount by 10%

(“10/10/10” objective).

Alternative I - Revive the compression chiller line

Key Steps involved

Manufacturing plan- 1. $5 million investment in the next 12 months in the existing manufacturing facility

2. Addition of new features in compression chiller which would bring them at par with

other Asian counterparts.

3. Technological improvement resulting in higher efficiency for the compressor.

4. Utilize Economies of scale to reduce Average Cost.

5. Increased substitution of labor by capital to utilize lower marginal cost of capital

versus higher marginal cost of labor.

Sales and Marketing plan-

1. Brand Diversification - Collaboration with local European brands to improve Brand

perception.

2. Market Expansion - Leverage sales and distribution channels of other European arms

of Clayton industries to explore newer markets.

3. Market Penetration - Increased spending in Advertising to improve customer

awareness about the new features and reduced carbon foot-print of the product.

Financial Analysis and Forecasting

Debt-to-Equity (D/E) ratio As per the balance sheet of Clayton SpA for the period 2004-2009 we observe that there

has been a huge erosion in shareholder’s equity. This can be mainly attributed to poor

financial performance of the company during recession which has resulted in huge losses.

This erosion in the equity in the period of time has been compensated by increase in long-

term debts and current liabilities of the company. The D/E ratio for the year 2004 was

1.16 which was comparable to the industry average of 1.17. The current D/E ratio is -4.89

since the equity has turned negative. This is an alarming situation for the company.By

implementing Alternative 1, initially the D/E ratio will be adversely affected but in the

long run the profitability of the company will improve resulting in improved D/E ratio.

This situation would result in high risk aversion of banks to finance the expansionary

plans of the company. Raising money from shareholders

Return on Equity (Sales/Total Shareholder Equity)

As per the balance sheet of Clayton SpA for the period 2004-2009 we observe that the

return of equity has gradually withered to negative values. This is a grave matter of

concern for the company as the company will face difficulties in raising debt and also in

raising money through shareholder equity.By implementing Alternative 1, we expect to

reap high profits by the second year of operations onwards which will gradually improve

the retained earnings of the company. These will in-turn improves the Return on Equity.

Alternative II – Changing the product line by shifting from compressor chillers

to absorption chillers.

Key Steps involved

Manufacturing plan

1. Changing the plant setup to manufacture absorption chillers.

2. Transfer of technology from Spain to Italy which would boost the overall capability of

Clayton Industries.

3. Lower involvement of labour would ensure substitution of labour by capital as per the

isocost line.

4. Company would reduce it carbon foot prints by manufacturing these chillers, and gain

on the carbon credits due to such chillers.

5. The company would reduce its overall cost due to lower manufacturing expenses, and

also hedge against adverse commodity cycles.

Sales and Marketing plan

1. Brand Diversification – The Company can get into product distribution pacts with

various other companies in the same niche market.

2. Market Expansion - The sales channel can improve by deriving synergies between the

associated companies.

3. Market Penetration - No new marketing expenditure would be required as this product

would be a part of the successful range of product line, manufactured in Spain.

Financial Analysis and Forecasting

EBIDTA and EBIDTA Margin:

As per the balance sheet of Clayton SpA for the period 2004-2009 we observe that, there

had been a huge decline in the Overall EBIDTA and the EBDITA margins. The overall

EBIDTA margins of the company have shrunk from a healthy 20 % to a negative figure.

Whereas the Spanish business of absorption chillers maintaining an EBIDTA of around

10 % even during the recessionary phase. Severe oligopoly ensures that the company

would face continued pressures on both top line and bottom-line. This makes the

opportunity cost of diversifying into absorption chillers, adversely lucrative.

Current Ratio (Current Asset/Current Liability):

The ratio is a good indicator of the liquidity concerns of the company. Higher values of

the current ratios are favorable for the organization. We find a continuous decline in the

current ratio of the company. This can be mainly attributed to the shrinking EBIDTA

which is reducing then assets. Whereas the company is forced to increase its debts on

account of its poor financial performance in recent years. Whereas we find the current

ratio is constant at 1.3 for the Spanish subsidiary of Clayton industries.

Figure 5 - Comparison of Current Ratios of Spanish and Italian

Subsidiaries

Asset Turnover ratio: The asset turnover ratio has moved in line with the industry

benchmark, but since the company has not been able to transform a good asset turnover

ratio into consistent profits, the company needs to change the product line it is operating

in. Changing over to absorption chillers seems to be an obvious option.

Alternative III – In depth study of the overall business processes for a period

of 6 months, for coming to a well informed decision.

This option requires more in-depth analysis of the business processes by waiting for a

period of 6 months, but this proposal seems to be impractical because of the fact that

company is facing current issues of stagnant cash flows along with huge debts on the

balance sheet doesn’t seem to be a logical step to undertake. The company has also taken

steps to postpone the debt payments. Moreover taking this extra time doesn’t guarantee

the company of anything concrete or different in terms of the options that company has.

If there are possibilities of internal improvement these can be looked into, simultaneously

with other improvement initiatives. Waiting would further lower investor confidence and

worsen the current situation

Final Evaluation Matrix between Alternative 1 and Alternative 2

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.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. This will increase

company’s chances to increase its market share across the region. Also due to

economic crisis it is not a wise decision to concentrically diversify now in the European

market. Hence it would be a good strategy to focus on investments only in the long run.

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. 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.

References

1. www.wikipedia.com accessed on 20th November, 2010

2. www.hbr.org accessed on 20th November, 2010

3. www.claytonindustries.com accessed on 20th November, 2010

4. Philip Kotler and Kevin Kelly. Marketing Management, Pearson Publishing, 13th

Edition, 2009

5. Anthony, Financial Accounting, Tata McGraw hills, 10th Edition, 2009