Harvard Case - Baker Adhesives
"Baker Adhesives" Harvard business case study is written by c Lipson. It deals with the challenges in the field of Finance. The case study is 6 page(s) long and it was first published on : Jan 25, 2007
At Fern Fort University, we recommend that Baker Adhesives pursue a strategic growth plan focused on international expansion and product diversification through strategic acquisitions and organic growth strategies. This will involve a comprehensive financial analysis, risk assessment, and capital budgeting process to ensure the viability and profitability of these initiatives.
2. Background
Baker Adhesives is a family-owned business specializing in manufacturing and distributing adhesives for the construction and industrial sectors. The company has achieved significant success in the US market, but faces increasing competition and limited growth opportunities. The case study focuses on the dilemma faced by the Baker family, who are considering different strategies to ensure the company's long-term success, including a potential sale of the business.
The main protagonists are:
- The Baker Family: The owners of Baker Adhesives, concerned about the company's future and their legacy.
- John Baker: The current CEO, seeking to maintain family control and ensure the company's growth.
- Tom Baker: John's brother, advocating for a sale of the company to maximize shareholder value.
3. Analysis of the Case Study
Strategic Analysis:
- SWOT Analysis:
- Strengths: Strong brand reputation, experienced workforce, established distribution network, niche market expertise.
- Weaknesses: Limited geographical reach, reliance on a single product line, family-owned structure potentially hindering growth.
- Opportunities: Expanding into new markets, diversifying product portfolio, leveraging technology for efficiency gains.
- Threats: Increasing competition, economic downturn, changing customer preferences, raw material price fluctuations.
- Porter's Five Forces:
- Threat of New Entrants: Moderate, due to barriers to entry in the adhesives industry.
- Bargaining Power of Buyers: Moderate, as customers have some leverage in negotiating prices.
- Bargaining Power of Suppliers: Moderate, as raw material prices can fluctuate.
- Threat of Substitutes: Moderate, as alternative bonding solutions exist.
- Competitive Rivalry: High, with several established players competing in the market.
Financial Analysis:
- Financial Statements Analysis: Analyzing Baker Adhesives' balance sheet, income statement, and cash flow statement reveals a healthy financial position, but with limited growth potential.
- Ratio Analysis: Key ratios such as profitability ratios, liquidity ratios, and asset management ratios indicate a strong financial performance but highlight the need for expansion and diversification.
- Capital Budgeting: Evaluating potential investments in new products, manufacturing facilities, and international expansion requires thorough capital budgeting analysis, including NPV, IRR, and payback period calculations.
Risk Assessment:
- Financial Risks: Fluctuations in raw material prices, interest rate changes, economic downturn.
- Operational Risks: Production disruptions, supply chain disruptions, technological obsolescence.
- Strategic Risks: Competition, market saturation, failure of expansion initiatives.
4. Recommendations
International Expansion: Baker Adhesives should pursue strategic expansion into new international markets, particularly in emerging economies with strong growth potential. This can be achieved through:
- Joint Ventures: Partnering with local companies to leverage their market knowledge and distribution networks.
- Acquisitions: Identifying and acquiring established companies in target markets to gain immediate market share and access to local expertise.
- Organic Growth: Establishing new manufacturing facilities and sales channels in strategically chosen countries.
Product Diversification: Baker Adhesives should expand its product portfolio by developing and acquiring new adhesive products targeting different market segments. This can be achieved through:
- Research and Development: Investing in R&D to develop innovative adhesives with enhanced performance and sustainability features.
- Acquisitions: Acquiring companies specializing in niche adhesive products or complementary technologies.
- Strategic Partnerships: Collaborating with other companies to develop and market new products jointly.
Financial Strategy: To support these growth initiatives, Baker Adhesives should:
- Secure Financing: Explore various financing options, including bank loans, private equity investments, and debt financing, to fund acquisitions and expansion projects.
- Optimize Capital Structure: Review and adjust the company's capital structure to balance debt and equity financing for optimal financial leverage.
- Implement Cash Flow Management: Implement robust cash flow management practices to ensure sufficient liquidity for operational needs and growth investments.
5. Basis of Recommendations
- Core Competencies and Consistency with Mission: The proposed growth strategy aligns with Baker Adhesives' core competencies in manufacturing and distributing adhesives, and its mission to provide high-quality products and excellent customer service.
- External Customers and Internal Clients: Expanding into new markets and diversifying product offerings will cater to a wider customer base and provide new opportunities for internal employees.
- Competitors: The proposed strategy will allow Baker Adhesives to compete more effectively with larger players in the industry by expanding its reach and product offerings.
- Attractiveness: The potential for significant growth and profitability in new markets and product segments makes this strategy highly attractive.
- Assumptions: The success of this strategy depends on the following assumptions:
- The company can successfully identify and execute strategic acquisitions.
- The company can effectively manage financial risks associated with expansion.
- The company can adapt its operations and marketing strategies to different international markets.
6. Conclusion
By pursuing a strategic growth plan focused on international expansion and product diversification, Baker Adhesives can overcome its current limitations and achieve long-term success. This strategy will require careful planning, financial analysis, and risk management, but it has the potential to significantly enhance the company's value and ensure its continued growth.
7. Discussion
Other Alternatives:
- Selling the Company: This option would provide immediate liquidity for the Baker family but would result in the loss of family control and potentially a less favorable outcome for employees.
- Maintaining the Status Quo: This option would provide stability but would limit the company's growth potential and expose it to increased competition.
Risks and Key Assumptions:
- Execution Risk: The success of the growth strategy depends on the ability of Baker Adhesives to effectively execute its plans, including identifying and acquiring suitable targets, managing financial risks, and adapting to new markets.
- Market Risk: The growth strategy relies on the assumption of continued growth in the global adhesives market. Economic downturns or changes in customer preferences could negatively impact the company's performance.
- Competition Risk: The company will face increased competition from both existing and new players in the market.
8. Next Steps
- Conduct a comprehensive financial analysis and risk assessment.
- Develop a detailed strategic plan for international expansion and product diversification.
- Identify and evaluate potential acquisition targets.
- Secure necessary financing for growth initiatives.
- Implement a robust cash flow management system.
- Develop a communication plan for employees and stakeholders.
By taking these steps, Baker Adhesives can position itself for continued growth and success in the global adhesives market.
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Case Description
A small adhesives company faces exchange-rate risks as it makes its first foray into international sales. The receipt of payment from an unhedged foreign currency denominated past sale illustrates potential currency risks while a potential follow-on order provides a context to discuss potential hedges. Additional richness is provided by the fact that the follow-on sale appears unprofitable unless the analysis acknowledges the irrelevance of overhead and that the market value of raw materials is below book value.
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