Hampton Tool Manufacturing Company – the Porter Analysis
Think about the Porter Industry Analysis framework we read at the start of the course. Describe Hampton and its industry as specifically as possible and use the terminology of the Porter model. For each “Porter element,” describe the financial statement area/ratio of potential effect. Also, is it a good industry, both for the company and for the bank (to be financing)?
Hampton Tool Manufacturing Company, a machine tool manufacturer, has weathered the cyclical fluctuations of this particular industry since the company’s inception in 1915. By the later 1960s and early 1970s the company recorded its highest production and profitability, which was a result of increase demand from major customers such as aircraft and automobile manufacturers. To further analyze and understand Hampton’s industry, the Porter model can be used. In the machine tool manufacturing industry, the threats of new entrants will be relatively low. For example Hampton has been in business for a while, since the company has evolved and found ways to survive. By keeping with the advancements in technology and as well as using conservative financial reporting, Hampton and other existing companies continue to survive and reduce entrance from new companies. To see if threats of new entrants will be hard, the calculation of the market share, comparing sales of a company with the entire industry, will be a great indicator. Another element of the Porter model is the power of suppliers. In this industry suppliers do not appear to be a major power player. By looking at the liquidity ratios (current asset ratio) or leverage ratios, we can make judgments on whether suppliers are major players. On the other side I do believe buyers have major power in the industry. In this industry, the buyers such as aircraft and automobile manufacturers account for most sales. Their needs sometime vary according to the economy or during wartime, which will have some affects on a company’s statements. Reviewing a company’s net account receivable and calculating days sales uncollectible will show how much power buyers have. Availability of substitute is the next element of the model. This industry is very specific so there will be few products that customers can substitute. For example Hamptons sales declined due to the ending of a war and increase in oil price, and not from the cheaper available substitute. Finally the last element is competitive rivalry. Hampton seem to have the most competitive edge is this industry as indicative by the company’s large market share and conservative financial reporting. By comparing Hamptons profitability ratios (ROA, gross profit margin, etc.) and operating efficiency ratios (inventory turnover) to others within the industry, will show Hampton’s competitive edge. Overall, this is a great industry for Hampton and also the bank financing Hampton. Hampton appears to be the dominant company in an industry where there is little threat of new entrants,