Arriving in Brescia in late September 2009, Peter Arnell confronted significant challenges caused by the global recession. Sales experienced a sharp decline of 5.3% in 2008 and a further decrease of 19.4% in the first half of 2009. Clayton SpA suffered losses for three consecutive years, accumulating over 1 million US Dollars per month. Furthermore, both receivables and inventories exceeded 120 day sales. In addition to these difficulties, the Italian market was divided between inexpensive imports from Asia and domestic Italian brands. As Clayton did not offer either type of product, the company lost its market share. In summary, the company contended with high prices for its products without any associated tangible or intangible value, like variable speed technology.
In such situation, it would have been very challenging to meet the requirements of achieving the “top four in four” and the “10/10/10” plan for all country operations as suggested by Simonne Buis (EVP Europe). Simonne’s proposal aimed to reduce inventories and receivables within 10 days and reduce headcount by 10%.
As CEO Dan Briggs aimed to decrease capital usage and control costs, he emphasized the importance of focusing on products that could help Clayton achieve profitable growth after the recession. The three options for achieving this are as follows:
- Revitalizing the compressor chillers line and adopting a careful marketing plan to promote and boost product in foreign countries.
According to Brigg’s belief in the potential within crises, this strategy aligns well with his beliefs. Buis, who doubted absorption chillers would gain popularity, wanted to give Italy an opportunity to prove itself. Revitalizing the compressor chillers line has many advantages, as they are crucial components in a EUR20 Billion European industry and make up 85% of the total market.
Furthermore, implementing this option would allow for an increase in plant efficiency, resulting in economies of scale due to the available capacity. However, the cost estimates were approximately 5 million, with the majority of the investment occurring in the first 12 months. This would contradict the guidelines of the CEO and EVP and prove challenging given the state of the balance sheet. Clayton SpA suffered a loss of 24.2 million in the past six months, with only Clayton SpA losing 6.7 million. Additionally, the company is currently experiencing a monthly loss of over 1 million due to a 27% increase in steel prices over the past two years. Opting for this option would incur a cost that couldn’t be recovered due to aggressive pricing from foreign competitors, particularly from Asia. Consequently, it would be very difficult to compete with their low prices considering both the initial 5 million investment and higher manufacturing costs.
Hence, it will be almost impossible for Clayton SpA to develop a new product line that can acquire new market share in the post-recession profitable growth. This means that achieving the “top four in four” plan and increasing the low percentage (7%) of the overall market share would be difficult. In 2009, compressor chillers only generated 12% of sales for the rest of Europe. Additionally, this option would result in a greater number of layoffs, which would counteract the FILM, unions, local laws, and affect the company’s political relationship. However, achieving a downsizing would be challenging due to strict layoff rules.
- Funding a major new plan in Spain, changing the product line by shifting from compressor to absorption chillers.
Arnell’s estimation suggests that this option necessitates approximately 15 million dollars to be invested over the course of five years. Despite potentially requiring a larger investment, this amount can be distributed over a five-year period instead of the 5 million dollars needed in one year under the previous alternative. As a result, it ensures a higher net present value (NPV) of the investment.
Furthermore, despite the fact that the absorption chillers currently hold only a 15% market size and are still in their early stages, Carlos Sanchez believes that they are the market’s future. In Spain alone, absorption chillers generated 35 million in revenue in 2008, accounting for 48.5% of the total earnings (72.2 million). This is already more profitable than ever before for the compressor line. Although the company is currently facing challenges with liquidity and has reported a net loss of 6. million in the first half of 2009, absorption chillers have numerous advantages that could boost sales. Firstly, they have a lower carbon footprint as they use water instead of ozone-depleting refrigerants required by compression systems. Secondly, while compression systems rely on electricity, absorption chillers are powered by heat, often obtained from waste hot water sources. They are also increasingly being powered by solar energy.
By producing “eco-friendly” chillers, Clayton can meet the growing demand in Scandinavia, Spain, and Germany. Environmentalists in these countries emphasize the importance of respecting nature and protecting the environment. This production of absorption chillers can help penetrate the European market and overcome suspicions that air conditioning is an expensive luxury that harms the environment. Absorption chillers are a fast-growing segment, and with Clayton’s proven technology, the company can become a market leader in this niche, taking advantage of being the first mover.
By developing this excellent product, Clayton can achieve two goals: surpassing his competitors and fulfilling Simonne Buis’ “Top four in four” plan. To finance this project, cost reduction is crucial, starting with downsizing. Brescia’s current staffing levels are 20 to 30% higher than necessary. Despite facing opposition from FILM, unions, and workers, layoffs are inevitable.
Additionally, the company would decrease its total cost by reducing manufacturing expenses. By leveraging the synergy with Spain, the company can also take advantage of economies of scale, resulting in increased production capacity. Although obtaining immediate positive cash flows may be challenging, the long-term reduction in fixed costs justifies the decision to move production to absorption chillers.
- Focusing on efficiency measures to restore profitability while studying other strategic options for at least 6 months.
Certainly, by choosing this alternative, the company can reduce the risk of making a wrong decision as it allows more time to study different options while keeping them all open. Additionally, this option offers flexibility to adopt different strategies in response to changes in consumer trends or new post-recession trends. However, it is important to note that delaying for six months is not without costs; currently, Clayton SpA is losing over 1 million per month. Furthermore, Arnell is aware that Buis and Briggs expect prompt action to turnaround Clayton SpA.
In summary, the CEO’s belief in “opportunities that always reside inside crisis” would contradict this cautious approach, which would only benefit competitors. Therefore, during times of crisis, this static proposal would not be the appropriate solution.
Recommendations
After considering the options, I would advise against recommending either the first or the third alternatives to my CEO and Europe EVP. The first option does not ensure the accomplishment of any of the goals mentioned by Buis and Briggs. On the other hand, the third alternative is currently not feasible as it involves a “static solution”.
To achieve both Simonne Buis’ “10/10/10” plan and the “Top four in four” plan, I would recommend the second solution. This solution aligns with Dan Briggs’ guidelines and involves shifting from compression to absorption chillers. By doing so, costs can be controlled, and focus can be placed on products that position Clayton for profitable growth after the recession.
