Investment Alt Benchmarking For Benard Lester
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Investment Alternative Benchmarking for Bernard Lester
Lester Electronics (Lester) finds itself faced with a difficult decision after years of profitability and growth due in large part to its long-term relationship with Shang-wa (University of Phoenix, 2008.).Threatened with the loss of its exclusive distributorship of Shang-wa capacitors, it must decide whether to recommend a joint development with Shang-wa, the acquisition of or merger with Shang-wa, or a takeover by Avral Electronics, S.A.
Hawanini and Viallet (1999) believe that “the ultimate objective of financial management is value creation” and that “managers should manage their firm’s resources with the objective of increasing the firm’s market value.” Companies can increase their value through investment in growth opportunities (internal and external), sound management of working capital, and the careful allocation of resources across a portfolio of projects and activities that are most likely to deliver the expected returns at the desired level of risk (Ross et al, 2005). This paper examines the efforts of 10 companies to measure and increase value and which might offer a solution for Lester.
Analysis of Key Findings of Benchmarked Companies
Evaluate internal and external growth strategies
Internal growth strategies rely on efforts generated within the firm itself, such as new product development, or by geographic expansion or globalization. For example, Ford, Microsoft, and Allstate, grow almost exclusively through internal growth strategies. The distinctive attribute of internally-generated growth is that a business relies on its own competencies, expertise, business practices and employees to find new ways to grow. As a result internally generated growth is often referred to as organic growth, because it does not rely on outside intervention.
External growth expansion relies on establishing relationship with third parties, such as mergers, acquisition, strategic alliances, joint ventures, licensing and franchising. An entrepreneurial firm can grow externally by acquiring other firms, engaging in alliances and joint ventures, licensing proprietary assets to other firms, or through franchising. The use of this strategy is becoming more prevalent, as firms increasingly are relying on acquisition and strategic partnership to stimulate growth (Salama, Holland and Vinten, 2003).
All the companies benchmarked have pursued external growth through partnerships or acquisitions. Prior to AT&T acquisition of BellSouth Corporation, AT&T had created a strategic alliance with Cingular Wireless, which allowed customers of either carrier to talk to unlimited amount of time free of charge. This alliance between these two companies made the move more profitable. Although A&TT is a veteran of the market, it was losing its customers due to influx of competition (AT&T, 2008). As companies are acquiring or merging with other companies to continue its strong present in their industry, Caremark is one of those companies. Like LEI deciding to acquire Shanga-wa in order to keep ahead in the market, Caremark Merge with CVS in order to stay competitive in its market too. As a result of the merger, making CVS/Caremark the nation’s premier integrated pharmacy services provider (Poggi, 2006).
Describe working capital management strategies to maximize shareholder wealth
Capital management strategies are mathematical calculations that are developed to determine methods to better control funds within a company to increase the amount of money that a company incurs. In order to have good working capital management strategies, it requires having the right company leadership in place, Allstate knew that and announced it decision to hire a new Vice President of Corporate Relations. Allstate is an industry leader in the insurance industry; they are looked upon as a trend setter and a company that can set directives for other smaller companies within the industry. Just as in the Lester Electronics scenario, the company strives for excellence, stability, and to maintain longevity in the industry.
Conversely, Ford Motor Company introduced a comprehensive “Way Forward” plan in hope of restoring profitability to Ford’s automotive business. This plan included actions design to further reduce operation costs and increase the flow of new products. By doing this Ford’s goal is to keep employees and investors focused on sustaining profitability over time (Ford.com, 2008). In following Ford’s restructuring plan, Lester Electronics can add new products and components to the company existing product-line thus avoiding a heavy reliance on Shang-wa.
Describe the challenges of cross-border growth strategies
Maximization of wealth is one of the main goals of any organization. “Corporate wealth is closely associated with corporate growth and corporate size, it tends to lead to increased growth by providing funds for growth and limiting the extent to which new equity is raised” (Ross, Westerfield, and Jaffe, 2005). During the earlier discussion of external growth strategies, we saw that many companies successfully expanded internationally through the formation of partnerships and alliances or outright acquisitions.
Lester is faced with the choice of selling the company to Avral or some sort of partnership or merger with Shang-wa. The final decision will be directly related to the perceived value of these options and Lester’s growth strategies. Lester could look to IBM, Ford, Microsoft, and HP for examples of how these companies increased its value through cross-border growth strategies.
Assess organizational performance using financial statement and ratio analysis
Ratios derived from financial statements measure an organization’s past performance as related to near-term solvency, asset utilization, “financial leverage, profitability and value (Ross et al, 2005)”. Liquidity and financial leverage ratios can also provide an indication of future risk. The comparison of an organization’s ratios with those of its competitors and industry over time is more powerful than the analysis of ratios in isolation (Block and Hirt, 2005).
One of the biggest shortcomings in the use of financial statements for business valuation is that the balance sheet does not reflect the market value of a company or its assets (Hawanini and Viallet, 1999). Ratios that incorporate the market share price, such as the price-to-earnings