Case Study: Filmore

Assignment 5: Filmore Case

Due Date: February 02, 2013

Submitted by:

Summary:

Fred Filmore established Filmore Furniture Ltd. in 1970, this particular company
designs, manufactures, and sells colonial maple furniture to small retail stores and
major chain stores. In 1983 Phil Filmore took ownership of this company and further
enhanced it through modernizing the plant, as well as introducing aggressive
management skills, new marketing strategies, and merchandising ideas, causing an
increase of $3.8 million in sales income within a ten year time frame. The business
was very successful, however its profits and cash flow was not adequate to afford
paying for modernization programs, which resulted in selling 31% of the company
shares to 5 investors. In 1999, Phil Filmore died in a car accident leaving his debt,
and 63% of the companys shares, to his wife Lucinda, who faced with 3 decisions:
to retain the ownership of the company, merge with another company within the
industry or simply sell it.

Statement of Problem & Objective:

Mrs. Filmore has to make a decision regarding this company that will release her
from the entire debit left behind, as well as maintaining her financial needs and high
quality standard of living. To achieve this, Mrs. Filmore has to choose 1 of the
following options:

* to retain the ownership of the company,

* merge with another company within the industry

* Sell it.

SWOT:

Strengths

* Modernized manufacturing facilities enable output of furniture at a much lower

cost than before.

* Currently have 58 full-time employees that management can rely on.

* Strong marketing strategies and merchandising ideas implemented by

management

* Has had effective research and development displayed through previous success
with innovative product designs.

* Company has achieved a steady income growth of approximately 14.64% per year
from 1983-1993.

Weaknesses

* Product line is limited to a single type of furniture (colonial maple furniture) this
means that buyers may pursue suppliers with a more diversified product line.

* Current internal management is not entirely familiar with the furniture industry;
their executive decisions affect the company negatively.

* Major accounts are only handled by top management making it difficult for others
to step into that role or assist if / when necessary.

* The profit margin of the furniture industry is relative low, averaging about 4%.

Opportunities

* Possibly down the line introduce a wider range of furniture designs in order to
broaden their company and tap into unexplored markets.

* Lowered Canadian dollar increases sales to the U.S. by making furniture less
expensive than U.S. imported furniture.

* Free trade agreement between Canada and the U.S. allows for increases in exports
into a larger market.

Threats

* Free trade agreement between Canada and the U.S. allows for increased import
competition from larger American companies

* A change in consumer preferences to more modern and contemporary designs, as

well shifting market trends may cause a decline in sales.

* Small profits may slow down the Research and Development phase, which in turn
will delay the introduction of new products

Five Forces:

Industry Overview and the Intensity of Competition

The industry that a business operates in, can dictate quite a number of things that
the company may have to deal with on an external level. To understand Filmore
Furniture better and to examine the external factors affecting the company we will
apply Michael Porters Five Forces Model. Filmore Furniture is in the furniture
manufacturing industry. Being in the manufacturing business and selling to large
chain stores means that you are dealing with a number of competitors. Although
there is opportunity for growth in this industry, it heavily relies on your clients and
your ability to reduce costs. In the manufacturing industry, fixed costs are very
important in determining your bottom line. Managing fixed costs through a pre-

determined level of output, or production is crucial to keeping costs down and

profits up. In the furniture manufacturing industry, competition is very high which
results in products having to be marked near cost driving the profit margin down. In
order to stay competitive companies have to keep prices low as to not scare off
clients to a competitor. In highly competitive industries advertising is essential.
Being able to market your product effectively will help increase the volume of sales,
as it would attract the interest of more buyers. In an industry where products are
similar and set at comparable price points, advertising can set your product apart.
Although you are not selling directly to consumers, advertising to potential clients
by: attending trade shows, setting up showrooms, sending product samples to
buyers, or offering discounted rates in large volume purchases, would all be
effective at increasing sales.

Bargaining Power of Suppliers

In the furniture manufacturing industry, suppliers would represent their fixed costs.
Since this is an industry where products have to be priced competitively, it is
imperative that costs remain as low as possible. Supplies such as the foam,
hardware, and fabric can all be acquired relatively cheaply. But one thing that is
hard to substitute in this case is the lumber supplier. Although lumber is a
commodity with the price being extremely relative to the market, Filmore Furniture
requires a specific type known as colonial maple wood. This shrinks the vast number
of lumber suppliers to a very limited amount, and allows the supplier to hold the
bargaining power in this business relationship. Overall the cost of lumber to the
manufacturer would be the most costly expense and would have a large impact on
dictating the end price of the product. With that in mind it would not be easy to
switch lumber suppliers and could prove to be a costly endeavour. In the furniture
manufacturing industry, there is significant threat of forward integration; however
there is a threat of backward integration. The chain stores that the manufacturers
sell too can decide to develop or acquire their own manufacturing in an effort to
reduce costs and expand the business as a whole.

Bargaining Power of Buyers

Retailers, such as chain stores that sell to consumers are your buyers in the
furniture manufacturing industry. They are selling a product to consumers, which is
a purchase that requires a lot of deliberation. Due to the infrequency of making
these types of purchases, consumers will most likely invest a lot of time and
research into making their final purchase decision. That is what your buyer is
dealing with, so what does that mean for you the manufacturer. It means that in this
relationship buyers hold the bargaining power. They are price sensitive and have a
lot of products to choose from. Manufacturers need to be sure that they are making

a profit but profitability overall is quite low based on the needs of their buyers being
overwhelmingly demanding. Furthermore, their buyers are not simply buying one or
two items, they are buying large quantities. A manufacturer does not necessarily
need to have a lot of clients because the one or two that they do have may make
such large volume purchases that their business is simply enough to maximize their
production capability. Large chain stores in the furniture industry are few and far inbetween. They represent such large portfolios that they can easily acquire new
manufactures at a good rate because they are such an attractive client to have. The
manufacturer though can relatively easily be replaced, especially for lower prices
and comparable quality.

Threat of Potential Entrants

Potential entrants to the furniture manufacturing industry would be discouraged by

the low profitability versus high capital costs. Starting up this business would be
difficult simply because of the plant and equipment or capital assets that would be
needed to manufacture the pieces. Obtaining patents on the production of your
furniture would be next to impossible because product differentiation from a
competitor will be very hard to distinguish. The real strength in entering this
business would be a firms creativity and innovation in their designs, and their
ability to stay on top of trends. People with renowned design strengths could enter
the market fairly easily because their brand would be recognizable based on their
existing reputation. In the furniture manufacturing industry, it is not brand
recognition that buyers are looking for, but rather well made, good quality products
that are priced competitively. Building a clientele and creating a reputable company
is difficult in the furniture manufacturing industry and usually takes years to
accomplish. It would not be considered for a quick turnaround in profits. It needs to
build their distribution, because in the beginning, access would be limited. There are
high barriers to entering the furniture manufacturing industry. Even with high
barriers the industry is still very competitive. Competitive advantage goes to the
business with good quality furniture at a low price. New competition is a small
threat. A larger threat is the possibility of backward integration as discussed earlier.
The threat of large clients being charmed by a competitor is the threat that existing
firms face.

Threat of Substitute Products

In an industry where you are manufacturing a household essential there are not
many substitutes out there. Buyers propensity to substitutes is very low. There are
not very many alternatives for buyers. There are different trends that do sweep the
industry. However these are large-scale purchases for consumers and therefore,
they tend to lean towards more classic, timeless pieces that do not require updating

regularly. Products tend to be very similar with subtle differences but no distinct
features, or additions to the product that would set them apart from one another.
Buyers are price sensitive but this sensitivity to pricing would result in them turning
to a competitor, not a substitute. The inadequate availability of substitutes is good
for the furniture manufacturing industry. It enables them to be more confident in
trying new ideas and concepts. It promotes creativity.

Overall, we would conclude that the furniture manufacturing industry is not an

attractive one to be in. The industry relies too heavily on the bargaining power of
their suppliers and buyers. Although the industry does do fairly better when it
comes to potential new entrants and the threat of substitutes, it is not enough. The
high competition coupled with low expected returns makes this industry an
unattractive one to be in.

Financial analysis

In 1983 Fred Filmore retired and sold the business to his son Phil Filmore. The total
sales in that year were 1.3 million dollars. Phil Filmore was an aggressive manager
and strategist who with a direct marketing/production plan, was able to in a span of
10 years (1983-1993) increase sales to 5.1 million dollars. In those 10 years, sales
on average increased about 14.54% per year. While sales were increasing at a
steady pace, the companys net profit in 1993 was only $204 000; about 4% of the
total gross sales. While this percentage is quite low, it is very close to the industry
average for the furniture industry. In 1998 net profit was also $204,000, this
signified that sales in 1998 were exactly the same as sales in 1993 (5.1 million).
Although they may have fluctuated in that 5 year span, sales & profits did not grow
in the past 5 years (1993-1998).

PEST:

Political

* Industry is governed by federal pollution-control legislations, these results in

certain limitations in regards to equipment & supplies.

* Political forces play a role in terms of trade agreements made between countries.

Economic

* Current recession is causing consumers to lose interest in purchasing new

furniture

* Consumers being price sensitive, meaning if the competition offers better deals
and lower prices this will magnify the attraction of consumers

Social

* A new trend of environmentally conscience people are against the deforestation

that the furniture industry causes.

* Depending on the age group, ergonomics & design could influence future furniture
choices.

Technological

* Internet is starting to become popular, in terms of online shopping and websites

such as: Amazon & EBay.

* Products are priced very close to their costs which means the industry must
always keep on top of changes in technology.

* Aspects of automation and advancements in technology have led to a reduction in

jobs, and increases in output.

Alternative Course of Actions:

Several alternatives have been mentioned in the case by different individuals.

The first alternative was mentioned by Mr. Beauregard Bouvier who is a shareholder
representing the interests of the 5 investors. As investors they wished to retain their

shares and none of the . He also suggested to Mrs. Lucinda Filmore that she should
promote managers from within the business by using a management consulting firm
experienced in recruiting executives in order to have management taken care off.

The lawyer, Perry Pluckem, suggested to keep the business and to hire an
experienced manager from a competitor to run it for her. He sees that the business
has a bright future, particularly with the low value of the Canadian dollar where
exports will help bring prosperity and recover the business.

The local banker, Sam Sheckles advised to sell the business due to the fact how
competitive that industry is and if she chooses not to she should consider merging
with another furniture company. The merger would most likely take place with a
larger company. This will put an end to the worry of running the business where she
wouldnt be responsible for managing it.

Last but not least was her old time friend Sally Forth who recommended Mrs.
Filmore to keep the business to herself and that she should learn to manage it. In
this case she not only will retain 63% percent of the company but as well as earning
Mr. Filmores (her husband) salary as well as collecting the dividends.

Analysis of Alternatives:

With so many options and suggestions for Mrs. Lucinda to choose from, we have to
analyze which among the given alternative best suits the situation from which Mrs.
Lucinda could benefit from. To begin with, the investors among which Mr.
Beauregard Bouvier is the major shareholder among the 31% show no interest in
managing the company and recommend that they promote someone within the
company who could take care of the whole operations.

This alternative does seem promising but has some flaws, because Jean Lechaise
who has been an operational manager for several years has denied to take full
control as he lacks management skills in both merchandising and promotion and
has also admitted that he may retire in 4 to 5 years. With no partner and
managerial support this may not be the best suitable alternative for Mrs. Lucinda to
choose from.

As for Perry Pluckem who is currently the lawyer suggests Mrs. Filmore to keep the
business and to hire an experienced manager from a competitor to run it for her,

unlike the first alternative, Perry Pluckems suggestion does seem to have some
solid grounds on which Mrs. Lucinda could act on, for instance hiring an experienced
manager from another company could fill Mr.Filmores spot and may solve the
problem of a company manager but there are certain other aspect which does not
provide permanent security such as:

* The new manager will not have much knowledge about the company and its
products which it manufactures.

* The currency fluctuation may not last long and does not provide any long-term
solution for the company.

* The new manager may also fail to run the company risking everything into
bankruptcy.

Taking all these factors into account, this alternative may not the best suitable
answer.

Sam Sheckles who is the banker long-time friend of Mr. Filmore advises Mrs. Filmore
that she can either sell the company or merge with another larger company
resulting in her losing management power. This alternative seems to be helpful to a
certain degree but it does pose some pros & cons.

* Pros:

* Merging the company would eliminate the problem of managing the company.

* Bring in a steady income from dividends for Mrs. Filmore which would eventually
pay of her debts.

* Cons:

* Selling the company would only fetch the partners around $800,000 in which only
$500,000 would belong to Mrs. Filmore. This would not be sufficient in a long term
basis

* Merging would not necessarily prove to be a successful decision.

Lastly Mrs. Fillmores friend Sally advises her to keep the company and run it
herself, similarly with previous alternatives, this decision has flaws with it which are
pointed out below.

Pros:

* Mrs. Filmore will have the managing power of the company.

* She will also be entitled for a salary which would pay off her debts quickly and let
her maintain the same lifestyle.

Cons:

* Because Mrs. Filmore has no experience on any of the business matters, she would
not be able to manage the business on her own.

* Even if Mrs. Filmore does manage the business, it would likely not survive after
Jean Lechaise leaves who is the current manager of operations.

Another alternative that is not mentioned but would be viable for the situation at
hand could be to combine the suggestion from Mr. Pluckem with an option that
allows Lucinda to remain employed under Filmore Furnitiure. The newly hired
manager would be employed with a base salary of $50,000 which is the industry
standard for someone of that expertise. This would leave $30,000, to pay Lucinda
for her new position as a sales representative.

Pros:

* Allows Lucinda to retain ownership of the company as well as earn any dividends
that the late Mr. Filmore was receiving.

* This means that she will be able to pay off expenses such as her mortgage.

* Guarantees an experienced manager that will be able to run the company

efficiently.

* Gives Lucinda a chance to learn the furniture industry and possibly one day run
the company herself.

Cons:

* The newly hired manager will have to overcome the timely transition of moving
from one company to another.

Recommendation of ONE Alternative:

The best alternative that would guarantee a successful future for Filmore Furniture
would be to hire a manager from a competitor to run the company, while training
Lucinda Filmore for a sales representative position. After evaluating the base salary
for a manger in the furniture industry, statistics suggest that a suitable salary for a
manager of this capacity would be $50,000. This allows a spare $30,000 from Phil
Filmore existing salary to be paid to Lucinda Filmore for her new position as a sales
representative. This way Lucinda: retains ownership of the company (dividends),
can immerse herself in the industry and continue to live the lifestyle she does. The
one flaw to this alternative would be that, the manager needs time to learn the
specifics of Filmore Furniture as well as familiarize him/herself with all the accounts.
After that boundary is overcome, operation can continue just as it normally would.
We feel that this is the ideal alternative to meet all 3 of these objectives, and would
be best for Lucinda and the future of company.