Question 1: C. R. Plastics — Strategy Question
Part 1 (60%)
The president of C. R. Plastics Jamie Bailey has hired you for your expertise as a strategic management consultant. He wants a brief report (not more than 750 words in length) with a succinct, detailed snapshot of the industry and his company.
Critically analyze the external situation facing the outdoor furniture industry using the macroenvironmental factors. Critically appraise the internal resources and capabilities of his company.
Part 2 (40%)
After reading your report, the president says he knows the company needs more money. He has been thinking of expanding into the production of recycled plastic sleds and Christmas decorations, as it would create new revenue streams in the winter. Based on the internal and external analysis you created, how would you advise the president?
Note: Use outside information to gather industry and company information for your analysis. If you make any assumptions, state them at the beginning of your response. Be sure to provide references.
You may include supplemental information and analysis in an appendix to these questions, but it will not be explicitly considered in marking the question.
Your answers to both questions must be no more than 1050 words in total (as per the Word Limit policy in Section 1.3.7 of the Student Handbook).
F or u se o nl y in th e co ur se C P E X -5 06 a t A th ab as ca U ni ve rs ity ta ug ht b y A ris S ol om on fr om J an 2 3, 2 01 3 to J an 2 9, 2 01 3. U se o ut si de th es e pa ra m et er s is a c op yr ig ht v io la tio n. S w 9B11D016 C. R. PLASTICS Professors David Wood and Mary Heisz wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail
[email protected]. Copyright © 2011, Richard Ivey School of Business Foundation Version: 2012-10-05 Jamie Bailey, the owner and president of C. R. Plastics, had successfully grown his business every year since 1994, when he had begun producing his innovative line of recycled plastic outdoor furniture in his home town of Stratford, Ontario. However, each year presented a new challenge as rapid growth had constrained his financing, and the summer of 2010 was no different. Desperate for a new source of cash, Bailey had auditioned to be on Dragon’s Den, a new network television show, where entrepreneurs could pitch their business to a group of five successful venture capitalists. With only one week left before Bailey was to make his final pitch, he had a difficult decision to make: how much money would he need to keep up with growing demand? INDUSTRY The outdoor furniture industry was highly fragmented and very competitive. The majority of the furniture was either being produced in the United States or being imported from low-cost overseas countries, such as China. Canada had traditionally been a net exporter of furniture, but as a result of the recent increase in the valuation of the Canadian dollar and new low-cost overseas entrants, Canada was now a net importer. In the United States, the furniture industry was in similar transition, as domestic employment had been down in 10 of the last 11 years.1 This trend was all the more evident in the plastic furniture segment, which now imported more than double what it exported.2 Manufacturing outdoor plastic furniture did not require a great deal of engineering or capital. In many respects, this industry was ideally suited for off- shore production. However, some domestic furniture manufacturers were able to survive and even thrive by offering rapid response to requests for custom-made and highly fashionable products. The outdoor furniture industry had the added complexity of being highly seasonal. However, if a new product showed promise in the North American market, several low-cost competitors would be certain to introduce a similar product before the start of the next season. Despite these challenges, several companies in both the United States and Canada were offering high-quality recycled plastic outdoor furniture. 1 Furniture Manufacturing - Quarterly Update, 4/4/2011, First Research Industry Profiles, accessed July 6, 2011, from ABI/INFORM Trade & Industry. (Document ID: 2311004651). 2 Industry Canada, “Trade Data Online,” http://www.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.php, accessed on July 5, 2011. F or u se o nl y in th e co ur se C P E X -5 06 a t A th ab as ca U ni ve rs ity ta ug ht b y A ris S ol om on fr om J an 2 3, 2 01 3 to J an 2 9, 2 01 3. U se o ut si de th es e pa ra m et er s is a c op yr ig ht v io la tio n. Page 2 9B11D016 Within Canada, for example, Home and Leisure Group Limited in Brantford had introduced a line of recycled plastic chairs to augment its line of cedar chairs. In the United States, two of the larger suppliers of plastic outdoor furniture, Casual Living Products LLC in Pennsylvania and Poly-Wood in Indiana offered an extensive product line and operated at significant economies of scale. Sales of recycled plastic chairs and other outdoor furniture were primarily made through distributors or direct to small independent dealers, including swimming pool dealers, outdoor furniture specialists, cottage outlets and landscape nurseries. In total, these retailers offered significant geographical coverage but did not do a great deal of advertising and could not carry large amounts of inventory. Until recently, no national retailers had taken an interest in high-quality recycled plastic furniture. However, Costco had been looking at adding a few of the more popular products to its offering for next outdoor furniture season. Because Costco operated on much lower margins than most other retailers, its buying power could represent a significant change in the retail price. COMPANY HISTORY In 1994, Bailey started producing wood furniture, but quickly realized that the saturated market dominated by larger integrated companies left little room for a new start-up. Later that year, Bailey was introduced to new type of lumber made from recycled plastic. This new material not only offered an opportunity to differentiate Bailey’s product but also a great way to divert materials that would otherwise end up in landfill. Bailey explained: Since 1994 when we first began manufacturing our own line of outdoor furniture, our mission to create beautiful and functional designs from recycled plastic has steadily increased in scope. What began as a small family operation has since expanded to include sales all over the world. We feel that using unwanted plastic that would otherwise be destined for a land fill site is important to ourselves and others’ peace of mind. By purchasing recycled products, we all keep the wheel turning. New products made from recycled materials are a sustainable method of conserving finite resources. C. R. Plastics had seen impressive growth over the past four years (see Exhibit 1). The original Adirondack chair had captured the attention of retailers across the United States and Canada. In an effort to maintain a leadership position in the market, Bailey started introducing new colors. C. R. Plastics could now make chairs in 15 different colors to suit any backyard or cottage. In addition, Bailey decided to introduce other plastic outdoor furniture, such as tables, pub chairs, rockers, benches and a host of other furniture and accessories. In all, C. R. Plastics now offered more than 20 different outdoor furniture designs (see Exhibit 2). Each year, Bailey added a few new colors and designs while removing those models that had not perform well the previous year. However, the original Adirondack chair in a few top- selling colors continued to comprise 50 per cent of sales. As the company grew, more and more capital was required to finance equipment, inventory and receivables. Sales grew only as fast as the business could finance the expansion. However, because of limited income and unwillingness on the part of the company’s lender to finance further growth, Bailey knew that sales could no longer expand without the injection of some new money. F or u se o nl y in th e co ur se C P E X -5 06 a t A th ab as ca U ni ve rs ity ta ug ht b y A ris S ol om on fr om J an 2 3, 2 01 3 to J an 2 9, 2 01 3. U se o ut si de th es e pa ra m et er s is a c op yr ig ht v io la tio n. Page 3 9B11D016 MANAGING GROWTH Despite the success of C. R. Plastics, the company faced challenges. The biggest challenge was financing the growth of the company, and 2010 had been a very difficult year. To keep up with demand, Bailey had used his line of credit, which had reached its maximum of $416,000 during the peak season, loaned the company an additional $150,000 of his own money and borrowed another $35,000 on the company’s credit cards. Now with only a few months left in his fiscal 2010, he began to worry about 2011 (see Exhibit 3). His bank had agreed to increase his line of credit to $500,000, but remained cautious, given C. R. Plastics’ financial performance and the recent credit crisis. Bailey was also uncomfortable increasing his loans to the company and instead wanted to start paying down the debt. With this financial situation in mind, Bailey had auditioned for Dragon’s Den, but was still wrestling with how much new money he should request. Dragon’s Den was a relatively new Canadian Broadcasting Corporation (CBC) television show where entrepreneurs could pitch their business to five successful venture capitalists who would then decide whether to