Case Study-5 – Construction Materials Manufacturer
The Company has been in the wood panel business since 1994. The current owner took over sole ownership of the business in 2001. Under her management, the Company achieved consistent year-to-year profitability. The gross profits in 2011 and 2012 were 43% and 39%, respectively, exceeding the industry average of 32% by a significant margin. However, in 2013 the worsening economic conditions for construction contributed to a drop in average net profits of 7% achieved in the previous two years, to an average of 3.2% in 2013-2014. Trying to maintain their market share in a diminished market, competitors drove down the historical margins by 3.1 % as a ratio of sales. Nevertheless, the Company was able to maintain average gross margins of 43% but was not able to absorb the rising overhead burden. This is expected to continue into 2014 but improve very significantly in 2015 due to the addition of two new profit centers- audio speakers and molding.
Where in the past the Company could count on more of the projects to be directly negotiated with general contractors, the intense competition prompted many of them to go to an open bid process – forcing stronger price competition. The Company followed suit by reducing margins on larger projects in order to be awarded the bid. At the same time, the pricing model used was inaccurately tied to the Company’s past financial history. Also, the Company fell into the classical trap of competing on price by not effectively promoting values like quality, reliability, personalized response, and product knowledge.
The Strategic Plan
The strategic plan sets out to realign the company with its past history of better-than-industry net profits, by determining an appropriate marketing mix and sales effectiveness that will drive revenues past the $6.3 million level in 2015, at a 48% targeted gross margin. The strategic plan is to be matched by the implementation of a more accountable organization, improved financial and operational controls, and effective communications.
The company relies on a core group of 19 customers for its wood panel sales, and 30 contractors, primarily located within a 200-mile radius, who provided annual sales of $5.4 million in fiscal 2014. Most of the panel sales are made to direct competitors who lack the equipment for lamination. The Company relies on only five general contractors located in the area for the major part of their custom cabinets sales in the commercial and institutional segments.
In order to establish a successful strategy for future growth more definition is required of sales goals per estimator, and per market segment – health care, industrial, commercial, institutional – and per service/product type. Sales of the service/ product types will be separated in the 2015 financial statements, providing a good starting point for future planning. Specific revenue goals have been set for each estimator in 2015. This will be tracked on a quarterly basis, and are tied to an incentive plan, which promotes volume growth at a targeted gross profit
With the emerging strength of the economy in the aftermath of the 2008 recession, the Company is in a good position to grow and gain market share through the development and implementation of the new market strategies and improved sales and organizational effectiveness. It is the belief of the management team that a well-established company with a superior marketing program can outdistance its competitors.
Competitors in the industry tend to depend on existing networks and established clients. Their marketing mix is usually low-tech, high touch oriented. But they are dealing with sophisticated property managers and developers who communicate daily through advanced electronic technologies built around business application software, the Internet, videos, e-mail, and websites. By developing improved electronic and digital promotional tools built into their website, the Company can stand out from the pack.
With a sound current and low debt to equity ratios, the improved organizational accountability, and a workable strategic plan, the Company is in a good position to benefit from the stabilizing economy, where the construction industry, in particular, continues to show strength.
The vast wealth being inherited by the baby boomers, and the increasing need for expanded health services boosts the construction of more health care facilities, retirement homes, and hotels – two segments that have been advantageous for the Company in the last three years. There will be over 71 million senior citizens by 2030. Most of them will be composed of baby boomers, controlling 67% of the national personal investment – by far the wealthiest and most prominent demographic segment. By picking up experience in the healthcare segment (hospital, nursing homes) on these more complex projects, the Company is positioning itself to be a leader in this growing segment, which is directly tied to the most prominent demographic surge.
Selectivity on bids to ensure a better award to bid ratio is to be practiced more stringently. The quoting activity is time-consuming and costly. Knowing the type of clients, and jobs that have led to profitable completion is an important consideration in the estimating process. Better tracking with the bid log and job costing reports will improve tracking of data.
The Company’s goal for the new fiscal year is to increase the margins and produce 11.0% growth in speakers. The close ties established with the customer who distributes these audio products throughout the world makes it possible to consensually increase prices, so as to improve the 27% gross margins achieved in 2014. The forecast from the customer is for moderate growth in the next three years, and a product life cycle of seven years.
Building the high-margin molding work to produce $500,000 new revenue in 2015 (as per budget) can be accelerated with the addition of a dedicated Estimator with knowledge of the industry and contacts in the community. An entrepreneurial candidate has been hired for this position.
The Company currently sub-contracts the installation of the cabinets and shelving systems for its commercial projects. After it stabilizes its aggressive diversification and customer expansion program in 2015, it will evaluate the benefits of setting up installation as another profit center in 2016, headed by a dedicated division manager.
The hiring of two experienced Estimators with contacts in the wider regional area will promote the establishment of new contacts with general contractors, and help the Company to expand its customer base, providing additional stimulus for the more rapid growth forecast in the next three years. It would also produce a healthy competitive environment in the estimating and other departments.
Most of the Company’s revenues are generated in one region, with some scattered projects in adjoining territory. Through more intensive sales activity by the Sales Manager, the Company will both piggyback on a loyal base of larger contractors who operate in other regions and develop new contractor relationships through penetration pricing – stretching its territorial reach.
The Company has developed a line of DIY assembled residential cabinets and closets, which is ready to be manufactured and requires no additional equipment for the initial orders from Ikea. In addition, the new Estimator has experience in the marketing and assembly of these products and provides an additional resource for the Company. However, the immediate objective is to stabilize the already aggressive growth plans in 2015, so as not to surpass the financial, and human resource requirements of rapid expansion. The launch time for this new diversification is contemplated for the third quarter of 2016. A separate marketing plan is to be developed, with its own marketing mix – promotion, price, product categories, website page, and distribution channels.