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Corporate Strategies: Clayton Industries Inc.

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    Peter Arnell arrived in Brescia in late September 2009, and suddenly he had to face some daunting challenges due to the global recession: sales recorded a sharp decline of 5. 3% in 2008 and a drop of 19. 4% in the first half of 2009; Clayton SpA was in the third consecutive year of losses and accumulating more than 1 million US Dollars per month; receivables and inventories are both above 120 day sales. In addition, the Italian market was split between low-priced foreign imports (Asian products) and Italian brands and offering neither the former, nor the second, Clayton was losing its product share in the market. Overall, the company faced a problem of high prices of its products with no tangible or intangible associated value (such as variable speed technology).

    In such situation achieving the “top four in four” requirement, and the “10/10/10” plan for all country operations, as proposed by Simonne Buis (EVP Europe) who promoted to cut both inventories and receivables within 10 days, and to reduce headcount by 10%, would have been very difficult.

    As Dan Briggs (CEO) wanted managers to reduce capital use, in order to bring costs under control focusing on products that could position Clayton in post-recession profitable growth, the three following options are listed below:

    • Revitalizing the compressor chillers line and adopting a careful marketing plan to promote and boost product in foreign countries.

    The implementation of this strategy fits Brigg’s belief regarding “the great opportunities always reside inside crisis” and would have been supported by Buis who wasn’t convinced that absorption chillers would ever be more than a niche market and wanted to give Italy a chance to prove itself. There are a lot of advantages arising from the choice to revitalize the compressor chillers line as they are key components in a USD20 Billion European industry and they comprise the 85% of the total market.

    Furthermore, by implementing this option it will be possible to increase plant efficiency achieving economies of scale because of available capacity. Nevertheless, cost estimates were about 5 million, with almost all the investment in the first 12 months. Such investment would have been in contrast with the CEO’s and EVP’s guidelines and would have been very difficult considering the condition of the balance sheet, as Clayton lost 24. 2 million in the last six months, with the only Clayton SpA oosing 6. 7 million. Overmore, the company is currently losing more than 1 million per month as a consequence of a 27% increase in steel prices in the past two years. A a cost that would still affect the company by choosing this option and that could not be recouped due to foreign competitors’ aggressive pricing. In this sense it will be very difficult to compete with Asian low prices because both of the initial 5 million investment and the higher manufacturing costs.

    Hence, Clayton SpA is not going to develop a new product line able to acquire new market share in the post-recession profitable growth, it will be almost impossible to achieve the “top four in four” plan and to increase the low percentage (7%) of the overall market share, as compressor chillers have generated in 2009 only the 12% of sales for the rest of Europe. Finally this option would imply a greater layoff , counteracting the FILM, unions and local laws and affecting the company’s political relationship.However it would be very difficult to achieve a downsizing owing to strict layoff rules.

    • Funding a major new plan in Spain, changing the product line by shifting from compressor to absorption chillers.

    Arnell estimated that this option does require about 15million, over a timeframe of five years. But even if this project requires a higher investment, this amount can be spread over a period of five years, rather than the 5million in one year of the previous alternative, thus guaranteeing a higher NPV of investment.

    In addition, even if it is true that the current market size for the absorption chillers is only 15% and this market is still at its initial stage, as Carlos Sanchez said “absorption chillers is the market of the future” and in fact, in Spain they accounted for 35 million in 2008, 48. 5% of the total revenues (72. 2 million), already far more profitable than compressor line had ever been. And so, even if it is true that the company is facing a very difficult challenge in terms of liquidity and it is currently reporting a net loss (-6. million in the first half of 2009), absorption chillers have many important advantages that could increase sales: they are less carbon-intensive, use water instead of the ozone-depleting refrigerants that compression system required; and while these latter rely on electricity, absorption chillers are driven by heat, often from waste hot water, and are increasingly solar-powered.

    Moreover by producing these “eco-friendly” chillers, it would be possible to meet also the growing demand in Scandinavia, Spain and Germany, where nvironmentalists emphasized the importance of respecting our Nature and safeguarding our Heart. And in this sense the production of absorption chillers would increase penetration in Europe, overcoming many European suspicious according to which air conditioning had always been considered as an “expensive American luxury that harmed the environment”. Absorption chillers can therefore be considered as a fast-growth segment and as Clayton already offers a proven “first-class” technology, the company can easily become a market leader in this niche segment, especially exploiting the first mover advantages.

    In this way, it is possible to state that by developing this excellent product, it will be possible to both, placing Clayton in the very first place in its challenge with his competitors and achieving the “Top four in four” plan proposed by Simonne Buis. Obviously, in order to cope with the important investment that this project requires, a cost reduction is necessary and essential, starting from downsizing. Brescia’s staffing levels are in fact still 20 to 30% higher than due. Even if this choice would be followed by a strong opposition by FILM, unions and workers, dismissals are unavoidable.

    On top of this, the company would reduce its overall cost due to lower manufacturing expenses, and because of the exploitation of the synergy with Spain, it will be feasible to rely on economies of scale, thus increasing the production capacity. Even if it would be difficult to get immediate positive cash flows, since the fixed costs would go down in the long run, it makes sense to shift 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 would lower the risk of making a wrong decision, since it offers more time to study the different options while keeping all of them open. Furthermore, this option provides flexibility to adopt different strategies in case of changes in the consumer trends or in case of emerging of new post-recession trends; however delaying for six months is not cost-free, as we know that currently Clayton SpA is losing more than 1 million per month(-. Moreover, Arnell is aware that Buis and Briggs expect him to take action to turn around Clayton SpA in a short time.

    In summary, this cautious approach would be contrary to the CEO’s belief of “opportunities that always reside inside crisis” and would be considered as a passive one, being just beneficial for the competitors. Therefore in time of crisi,s this static proposal would not be the right answer.


    Based on the above considerations I would not suggest to my CEO and Europe EVP neither the 1st nor the 3rd alternatives, as the former does not guarantee the achievement of any of the purposes highlighted by Buis and Briggs, while the latter implies a “static solution” which currently is not viable.

    I would instead recommend the 2nd solution as it is the best way in order to achieve the “10/10/10” plan and the “Top four in four” plan proposed by Simonne Buis, and it is perfectly in accordance with the guidelines highlighted by Dan Briggs, as by shifting from compression to absorption chillers it will be possible to bring costs under control focusing on products that could position Clayton for post-recession profitable growth.

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