Harvard Case - Empire Glass Co. (A)
"Empire Glass Co. (A)" Harvard business case study is written by David F. Hawkins. It deals with the challenges in the field of Accounting. The case study is 19 page(s) long and it was first published on : Apr 1, 1964
At Fern Fort University, we recommend that Empire Glass Co. (EGC) implement a comprehensive strategy to address its declining profitability and improve its overall financial performance. This strategy should focus on improving operational efficiency, optimizing pricing, and expanding into new markets.
2. Background
Empire Glass Co. (EGC) is a family-owned glass manufacturing company facing declining profitability due to increased competition and rising input costs. The company's traditional cost accounting system is inadequate for accurately allocating costs and identifying areas for improvement. EGC's management is considering various options to address these challenges, including implementing activity-based costing (ABC), adjusting pricing strategies, and exploring new markets.
The main protagonists of the case study are the company's owner and CEO, John Empire, and his son, Mark, who is responsible for operations. They are tasked with finding solutions to improve the company's financial performance and ensure its long-term sustainability.
3. Analysis of the Case Study
Financial Analysis: EGC's financial statements reveal a declining trend in profitability, with declining gross margins and net income. This is primarily attributed to rising input costs and intense competition. The company's traditional cost accounting system, based on direct labor hours, fails to accurately allocate overhead costs, leading to distorted product costs and inefficient decision-making.
Operational Analysis: EGC's manufacturing processes are labor-intensive and lack automation. This contributes to high production costs and limits the company's ability to compete effectively. The company's organizational structure is hierarchical, with limited communication and collaboration between departments. This hinders innovation and agility in responding to market changes.
Strategic Analysis: EGC's current strategy is focused on its core market, but the company faces increasing competition from both domestic and international players. The company's pricing strategy is based on cost-plus pricing, which is not effective in a competitive market. EGC needs to explore new markets and develop a more dynamic pricing strategy to remain competitive.
Framework: To analyze EGC's situation, we can use the Porter's Five Forces framework:
- Threat of New Entrants: High, due to low barriers to entry in the glass manufacturing industry.
- Bargaining Power of Buyers: Moderate, as buyers have multiple options for glass products.
- Bargaining Power of Suppliers: High, as raw materials are a significant cost component.
- Threat of Substitute Products: Moderate, as alternative materials like plastics and acrylics exist.
- Competitive Rivalry: High, due to numerous competitors and price-based competition.
4. Recommendations
1. Implement Activity-Based Costing (ABC): EGC should implement ABC to accurately allocate overhead costs to products and activities. This will provide a more accurate picture of product profitability and identify areas for cost reduction.
2. Optimize Pricing Strategy: EGC should move away from cost-plus pricing and adopt a value-based pricing strategy. This involves understanding customer needs and perceived value and setting prices accordingly.
3. Expand into New Markets: EGC should explore new markets, such as the emerging markets in Asia and Africa, where demand for glass products is growing. This can be achieved through strategic partnerships or setting up manufacturing facilities in these regions.
4. Improve Operational Efficiency: EGC should invest in automation and process improvements to reduce labor costs and increase productivity. This includes exploring lean manufacturing principles and implementing technology solutions for inventory management and production planning.
5. Enhance Organizational Structure: EGC should flatten its organizational structure and encourage cross-functional collaboration. This will improve communication, foster innovation, and enable faster decision-making.
6. Develop a Growth Strategy: EGC should develop a clear growth strategy that outlines its target markets, competitive advantages, and key performance indicators (KPIs). This will provide a roadmap for achieving sustainable growth and profitability.
7. Implement Employee Incentives: EGC should implement performance-based employee incentives to motivate employees and align their goals with the company's objectives. This can include profit-sharing programs, bonuses, or stock options.
8. Enhance Corporate Governance: EGC should strengthen its corporate governance practices to ensure transparency, accountability, and ethical decision-making. This includes establishing a board of directors with diverse expertise and implementing a robust internal control system.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations focus on leveraging EGC's existing core competencies in glass manufacturing while expanding into new markets and improving operational efficiency.
- External Customers and Internal Clients: The recommendations consider the needs of both external customers and internal clients, aiming to provide high-quality products at competitive prices while improving employee satisfaction and engagement.
- Competitors: The recommendations address the competitive landscape by emphasizing cost optimization, pricing strategy, and market expansion.
- Attractiveness - Quantitative Measures: The recommendations are expected to improve EGC's profitability by reducing costs, increasing revenue, and expanding market share. While specific financial projections are not provided in this case study, the expected outcomes are positive.
- Assumptions: The recommendations assume that EGC has the resources and commitment to implement the proposed changes. They also assume that the market for glass products will continue to grow, albeit at a slower pace than in the past.
6. Conclusion
By implementing these recommendations, EGC can address its declining profitability, improve its financial performance, and ensure its long-term sustainability. The company needs to embrace change, adapt to the evolving market dynamics, and leverage its core competencies to achieve success.
7. Discussion
Alternatives not selected:
- Merging with a competitor: While this could provide economies of scale and access to new markets, it carries significant risks, including potential conflicts of interest and cultural clashes.
- Selling the company: This would provide a quick solution, but it would also result in the loss of family ownership and control.
Risks and Key Assumptions:
- Implementation risks: The success of the recommendations depends on EGC's ability to implement them effectively and efficiently. This requires strong leadership, commitment, and resources.
- Market risks: The recommendations assume that the market for glass products will continue to grow, but this is subject to economic and technological changes.
- Competitive risks: The recommendations assume that EGC can effectively compete in the market, but this depends on its ability to differentiate itself from competitors and offer value to customers.
8. Next Steps
- Phase 1 (Short-term): Implement ABC, optimize pricing strategy, and explore new markets (within 6 months).
- Phase 2 (Medium-term): Invest in automation, improve operational efficiency, and enhance organizational structure (within 12 months).
- Phase 3 (Long-term): Develop a comprehensive growth strategy, implement employee incentives, and strengthen corporate governance (within 24 months).
By taking these steps, EGC can transform itself from a struggling company to a thriving and sustainable enterprise.
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Case Description
Concerns management control at the divisional level, and the use of budgets.
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