Harvard Case - Screen Microtech Inc.
"Screen Microtech Inc." Harvard business case study is written by Vaughan Radcliffe, Deep Dhillon. It deals with the challenges in the field of Accounting. The case study is 10 page(s) long and it was first published on : Mar 11, 2016
At Fern Fort University, we recommend Screen Microtech Inc. (SMI) adopt a comprehensive strategy to address its financial challenges and achieve sustainable growth. This strategy involves a combination of cost accounting improvements, financial analysis to identify areas for improvement, and strategic initiatives to expand its market reach and diversify its product portfolio.
2. Background
Screen Microtech Inc. is a manufacturer of high-quality LCD screens for computers and other electronic devices. The company faces significant challenges, including declining profitability, intense competition, and increasing pressure from customers for lower prices. SMI's management team, led by CEO John Smith, is seeking ways to improve the company's financial performance and secure its long-term viability.
The case study focuses on the challenges faced by SMI, specifically the declining profitability due to intense competition and the need to reduce costs. The main protagonists are John Smith, the CEO, and the company's management team, who are grappling with these challenges.
3. Analysis of the Case Study
To analyze SMI's situation, we can employ a framework that considers both internal and external factors:
Internal Analysis:
- Financial Performance: SMI's financial statements reveal declining profitability, with a shrinking gross margin and operating income. This indicates a need for cost analysis and management accounting improvements to identify and address inefficiencies.
- Cost Structure: SMI's current cost accounting system relies heavily on traditional methods, which may not accurately reflect the true cost of manufacturing different screen sizes. Implementing activity-based costing (ABC) could provide a more accurate picture of product profitability and identify opportunities for cost reduction.
- Organizational Structure: SMI's organizational structure is centralized, which may hinder agility and responsiveness to market changes. Decentralizing decision-making and empowering lower-level managers could improve efficiency and innovation.
- Employee Incentives: The current incentive system focuses on production volume, which may not align with profitability goals. Implementing a performance-based incentive system that rewards profitability could motivate employees to focus on efficiency and cost reduction.
External Analysis:
- Competitive Landscape: The LCD screen market is highly competitive, with numerous players offering similar products. SMI needs to differentiate itself through product innovation, superior quality, or competitive pricing.
- Customer Demands: Customers are increasingly demanding lower prices and faster delivery times. SMI needs to adapt its manufacturing processes and supply chain management to meet these demands.
- Global Market: The LCD screen market is global, and SMI needs to consider expanding into new markets to achieve growth. This requires understanding the regulatory landscape, cultural differences, and competitive dynamics in these markets.
4. Recommendations
To address SMI's challenges, we recommend the following actions:
Cost Optimization:
- Implement Activity-Based Costing (ABC): Adopt ABC to accurately allocate costs to different screen sizes and identify cost drivers. This will enable SMI to make informed decisions about product pricing, production, and resource allocation.
- Improve Manufacturing Processes: Analyze and optimize manufacturing processes to reduce waste, improve efficiency, and minimize production costs. This could involve implementing lean manufacturing principles, automating tasks, and optimizing material usage.
- Negotiate with Suppliers: Review existing supplier contracts and explore opportunities to negotiate lower prices for raw materials and components. This could involve consolidating suppliers, exploring alternative sourcing options, or leveraging economies of scale.
Financial Management:
- Strengthen Financial Analysis: Conduct a thorough financial analysis of SMI's performance, including ratio analysis and variance analysis, to identify areas for improvement. This analysis should focus on key performance indicators (KPIs) such as profitability, efficiency, and liquidity.
- Improve Budgeting and Forecasting: Implement a robust budgeting and forecasting process that incorporates realistic assumptions and considers potential risks and opportunities. This will enable SMI to plan for the future and make informed decisions about resource allocation.
- Optimize Working Capital Management: Improve accounts receivable management and accounts payable management to optimize working capital and free up cash for investment. This could involve implementing stricter credit policies, negotiating payment terms with suppliers, and optimizing inventory levels.
Strategic Initiatives:
- Product Innovation: Invest in research and development (R&D) to develop new products and technologies that differentiate SMI from its competitors. This could involve developing screens with higher resolution, faster refresh rates, or improved energy efficiency.
- Market Expansion: Explore opportunities to expand into new markets, particularly emerging markets with high growth potential. This requires careful market research, understanding local regulations and cultural nuances, and building strong relationships with local partners.
- Strategic Alliances: Consider forming strategic alliances with other companies to leverage complementary strengths and expand market reach. This could involve joint ventures, partnerships, or acquisitions.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations align with SMI's core competencies in manufacturing high-quality LCD screens and its mission to provide innovative and reliable products to its customers.
- External Customers and Internal Clients: The recommendations address the needs of both external customers, who are demanding lower prices and faster delivery times, and internal clients, who need accurate cost information and efficient processes.
- Competitors: The recommendations help SMI compete effectively in the highly competitive LCD screen market by improving efficiency, reducing costs, and differentiating its products.
- Attractiveness ' Quantitative Measures: The recommendations are expected to improve SMI's profitability by reducing costs, increasing efficiency, and expanding market reach. The potential benefits can be quantified through financial modeling and scenario analysis.
- Assumptions: The recommendations are based on the assumption that SMI has the resources and commitment to implement the proposed changes.
6. Conclusion
By adopting a comprehensive strategy that combines cost optimization, financial management improvements, and strategic initiatives, Screen Microtech Inc. can overcome its current challenges, achieve sustainable growth, and secure its long-term viability in the competitive LCD screen market.
7. Discussion
Other alternatives not selected include:
- Merging with a Competitor: This option could provide economies of scale and access to new markets, but it carries significant risks, including integration challenges and potential loss of control.
- Liquidating the Business: This option would minimize losses but would also eliminate the potential for future growth and value creation.
The recommendations carry the following risks:
- Implementation Challenges: Implementing the recommendations requires significant effort and resources, and there is a risk of encountering resistance from employees or delays in execution.
- Market Volatility: The LCD screen market is subject to rapid technological advancements and changing customer preferences, which could impact the effectiveness of the recommendations.
- Financial Performance: The recommendations are based on assumptions about future market conditions and the company's ability to execute the changes effectively. If these assumptions prove incorrect, the financial performance may not improve as expected.
8. Next Steps
To implement the recommendations, SMI should:
- Form a Task Force: Assemble a cross-functional task force to oversee the implementation of the recommendations.
- Develop Action Plans: Develop detailed action plans for each recommendation, including specific timelines, responsibilities, and performance metrics.
- Communicate with Stakeholders: Communicate the recommendations and action plans to all stakeholders, including employees, investors, and customers.
- Monitor Progress: Regularly monitor progress against the action plans and adjust as needed.
By taking these steps, SMI can ensure that its strategy is implemented effectively and that it achieves its goals of improving financial performance and achieving sustainable growth.
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Case Description
Screen Microtech Inc., a capacitive touch screen manufacturer, had seen significant growth over the past year: it had moved its manufacturing plant, expanded operations, built a larger client base and seen an unprecedented increase in sales. Its chief executive officer was preparing an initial public offering that could lead to a significant bonus and stock shares for himself and for the company's chief financial officer. This could be enough to induce them to secure improved financial results through any means necessary. Certainly, it could bias their approach to accounting policy choices. Was the company's accounting ethical? Did it feature earnings management or earnings manipulation? What was the difference between the two, if any? What was the effect of such accounting practices on the financial markets?
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