Harvard Case - Briggs & Stratton, Inc.
"Briggs & Stratton, Inc." Harvard business case study is written by Kenneth Eades, Martson Gould, Jennifer Hill. It deals with the challenges in the field of Finance. The case study is 17 page(s) long and it was first published on : Jun 1, 1998
At Fern Fort University, we recommend Briggs & Stratton, Inc. pursue a strategic shift towards a more focused and diversified business model. This involves:
- Divesting non-core assets: Selling off underperforming or non-strategic business units, such as the turf care division, to generate capital and streamline operations.
- Investing in innovation and technology: Developing new products and technologies, particularly in the areas of alternative power sources and smart engine management systems, to capture emerging market opportunities.
- Expanding into international markets: Capitalizing on the growing demand for power equipment in developing economies, particularly in Asia and South America.
- Strengthening financial position: Optimizing capital structure, managing debt effectively, and exploring potential strategic partnerships to enhance financial stability and secure long-term growth.
2. Background
Briggs & Stratton, Inc. is a leading manufacturer of gasoline engines for outdoor power equipment, with a long history dating back to 1908. However, the company has faced significant challenges in recent years, including declining sales, intense competition, and changing consumer preferences. The case study focuses on the company's financial performance, strategic options, and potential restructuring plans.
The main protagonists of the case study are:
- Todd Teske: The CEO of Briggs & Stratton, who faces the daunting task of leading the company through a period of significant change.
- The Board of Directors: Responsible for overseeing the company's strategic direction and financial performance.
- The Management Team: Charged with implementing the CEO's vision and navigating the company through a challenging market environment.
3. Analysis of the Case Study
The case study presents a complex situation with several key issues:
Financial Performance: Briggs & Stratton has experienced declining sales and profitability, leading to a weakening financial position. This is reflected in:
- Declining revenue: The company's revenue has consistently declined over the past few years, driven by factors such as increased competition, declining demand in mature markets, and a shift towards electric power equipment.
- Profitability challenges: The company's profit margins have been squeezed by rising costs and competitive pressures, leading to reduced profitability.
- High debt levels: Briggs & Stratton carries a significant amount of debt, which increases financial risk and limits its ability to invest in growth initiatives.
Strategic Challenges: The company faces several strategic challenges, including:
- Market saturation: The market for gasoline-powered outdoor power equipment is increasingly saturated, with limited growth potential in mature markets.
- Shifting consumer preferences: Consumers are increasingly demanding quieter, cleaner, and more environmentally friendly power equipment, leading to a shift towards electric and alternative power sources.
- Intense competition: Briggs & Stratton faces fierce competition from both domestic and international players, including established manufacturers and new entrants.
Strategic Options: The company is exploring several strategic options to address these challenges, including:
- Divesting non-core assets: Selling off underperforming or non-strategic business units to generate capital and streamline operations.
- Investing in innovation: Developing new products and technologies, particularly in the areas of alternative power sources and smart engine management systems, to capture emerging market opportunities.
- Expanding into international markets: Capitalizing on the growing demand for power equipment in developing economies.
- Restructuring operations: Streamlining operations, reducing costs, and improving efficiency to enhance profitability.
Financial Analysis: A comprehensive financial analysis reveals the following key insights:
- Declining profitability: The company's profit margins have been declining due to rising costs and competitive pressures.
- High debt levels: Briggs & Stratton carries a significant amount of debt, which increases financial risk and limits its ability to invest in growth initiatives.
- Limited cash flow: The company's cash flow has been declining, making it difficult to fund growth initiatives and manage debt obligations.
Capital Budgeting: Briggs & Stratton needs to carefully evaluate potential investments in innovation and technology to ensure they generate a positive return on investment (ROI).
Risk Assessment: The company faces several risks, including:
- Competitive risk: Intense competition from established and emerging players.
- Technological risk: Rapid technological advancements in the power equipment industry could render existing products obsolete.
- Financial risk: High debt levels and declining cash flow pose a significant financial risk.
Financial Forecasting: Briggs & Stratton needs to develop accurate financial forecasts to guide its strategic decisions and ensure financial stability.
Balance Sheet Analysis: The company's balance sheet reveals a high level of debt and a declining level of equity, highlighting the need for financial restructuring.
Income Statement: The company's income statement shows declining revenue and profitability, emphasizing the need for cost reduction and revenue growth initiatives.
Ratio Analysis: Key financial ratios, such as profitability ratios, liquidity ratios, and asset management ratios, provide insights into the company's financial health and performance.
Working Capital Management: Briggs & Stratton needs to improve its working capital management to optimize cash flow and reduce financial risk.
Debt Financing: The company should explore options for managing its debt, such as refinancing existing debt at lower interest rates or seeking new sources of debt financing.
Equity Financing: Briggs & Stratton should consider raising equity capital to reduce debt levels and fund growth initiatives.
Mergers and Acquisitions: The company could explore potential mergers and acquisitions to expand its product portfolio, enter new markets, or acquire key technologies.
Valuation Methods: Briggs & Stratton should use valuation methods to assess the value of its assets and potential acquisition targets.
Financial Modeling: The company should develop financial models to analyze the impact of different strategic options on its financial performance.
Cost of Capital: Briggs & Stratton needs to determine its cost of capital to evaluate potential investments and make sound financial decisions.
Dividend Policy: The company should review its dividend policy to ensure it is aligned with its financial goals and shareholder expectations.
Financial Leverage: Briggs & Stratton should carefully manage its financial leverage to minimize financial risk and maximize shareholder value.
Break-even Analysis: The company should conduct break-even analysis to understand the level of sales required to cover its fixed costs and achieve profitability.
Profitability Ratios: Key profitability ratios, such as gross profit margin and net profit margin, provide insights into the company's profitability and efficiency.
Liquidity Ratios: Liquidity ratios, such as current ratio and quick ratio, measure the company's ability to meet its short-term financial obligations.
Asset Management Ratios: Asset management ratios, such as inventory turnover and accounts receivable turnover, measure the efficiency with which the company manages its assets.
Market Value Ratios: Market value ratios, such as price-to-earnings ratio and price-to-book ratio, provide insights into the company's market valuation.
Financial Statement Analysis: A thorough analysis of the company's financial statements is essential to understand its financial health, performance, and risk profile.
Corporate Governance: Briggs & Stratton should strengthen its corporate governance practices to enhance transparency, accountability, and shareholder value.
Financial Risk Management: The company should implement a comprehensive financial risk management framework to identify, assess, and mitigate potential financial risks.
Capital Structure Decisions: Briggs & Stratton should make informed capital structure decisions to optimize its debt-to-equity ratio and minimize financial risk.
Initial Public Offering (IPO): The company could consider an IPO to raise capital and enhance its financial flexibility.
Financial Regulations Compliance: Briggs & Stratton must ensure compliance with all applicable financial regulations and reporting requirements.
Shareholder Value Creation: The company's primary objective should be to create shareholder value through profitable growth, efficient operations, and a sound financial strategy.
4. Recommendations
To address the challenges and capitalize on opportunities, Briggs & Stratton should implement the following recommendations:
1. Divest Non-Core Assets:
- Sell the Turf Care Division: This division has been underperforming and is not a strategic fit for the company's core business. Selling it will generate capital that can be used to invest in growth initiatives.
- Explore the Sale of Other Non-Core Assets: Briggs & Stratton should review its portfolio of businesses and identify other non-core assets that can be divested to streamline operations and improve financial performance.
2. Invest in Innovation and Technology:
- Develop Alternative Power Sources: Briggs & Stratton should invest in research and development to develop alternative power sources, such as electric motors and hybrid engine systems, to meet the growing demand for cleaner and more efficient power equipment.
- Develop Smart Engine Management Systems: The company should invest in developing smart engine management systems that improve fuel efficiency, reduce emissions, and enhance performance.
- Partner with Technology Companies: Briggs & Stratton should explore partnerships with technology companies to access cutting-edge technologies and accelerate its innovation efforts.
3. Expand into International Markets:
- Target Emerging Markets: Briggs & Stratton should focus on expanding into emerging markets, such as Asia and South America, where there is strong demand for power equipment.
- Develop Localized Products and Services: The company should tailor its products and services to meet the specific needs of different international markets.
- Establish Strategic Partnerships: Briggs & Stratton should explore strategic partnerships with local companies in international markets to gain access to distribution channels, manufacturing facilities, and local expertise.
4. Strengthen Financial Position:
- Optimize Capital Structure: The company should optimize its capital structure by reducing debt levels and increasing equity financing.
- Manage Debt Effectively: Briggs & Stratton should develop a comprehensive debt management strategy to minimize interest expense and reduce financial risk.
- Explore Strategic Partnerships: The company should explore strategic partnerships to access capital, technology, or distribution channels.
5. Restructure Operations:
- Streamline Operations: Briggs & Stratton should streamline its operations to reduce costs and improve efficiency.
- Improve Manufacturing Processes: The company should implement lean manufacturing principles to optimize production processes and reduce waste.
- Implement Activity-Based Costing: Briggs & Stratton should implement activity-based costing to identify and manage costs more effectively.
6. Enhance Corporate Governance:
- Strengthen Board Oversight: The company should enhance board oversight of management and financial performance.
- Improve Transparency and Accountability: Briggs & Stratton should improve transparency and accountability by providing clear and timely information to shareholders.
- Implement Best Practices: The company should adopt best practices in corporate governance to enhance shareholder value.
5. Basis of Recommendations
These recommendations are based on the following considerations:
1. Core Competencies and Consistency with Mission: The recommendations focus on leveraging the company's core competencies in engine design and manufacturing while aligning with its mission to provide innovative and reliable power solutions.
2. External Customers and Internal Clients: The recommendations address the changing needs of external customers, such as the demand for cleaner and more efficient power equipment, while also considering the needs of internal clients, such as employees and shareholders.
3. Competitors: The recommendations are designed to position the company to compete effectively against both established and emerging competitors.
4. Attractiveness ' Quantitative Measures: The recommendations are expected to generate positive returns on investment (ROI) and improve the company's financial performance.
5. Explicit Assumptions: The recommendations are based on the following assumptions:
- The market for alternative power sources will continue to grow.
- Briggs & Stratton can successfully develop and commercialize new technologies.
- The company can effectively manage its debt and improve its financial position.
- The company can successfully expand into international markets.
6. Conclusion
By implementing these recommendations, Briggs & Stratton can transform itself into a more focused, diversified, and innovative company. This will enable the company to adapt to the changing market environment, capitalize on emerging opportunities, and achieve sustainable growth.
7. Discussion
Alternatives Not Selected:
- Liquidation: This option would involve selling off all of the company's assets and shutting down operations. This would be a drastic measure and would likely result in significant job losses.
- Status Quo: This option would involve continuing with the company's current strategy. This would likely lead to continued decline in sales and profitability.
Risks and Key Assumptions:
- Technological Risk: There is a risk that Briggs & Stratton may not be able to successfully develop and commercialize new technologies.
- Market Risk: There is a risk that the market for alternative power sources may not grow as expected.
- Financial Risk: There is a risk that the company may not be able to manage its debt effectively.
- International Risk: There is a risk that Briggs & Stratton may not be able to successfully expand into international markets.
Options Grid:
| Option | Benefits | Risks |
|---|---|---|
| Divest Non-Core Assets | Generate capital, streamline operations | Loss of revenue, job losses |
| Invest in Innovation | Capture emerging market opportunities, enhance competitiveness | High investment costs, technological risk |
| Expand into International Markets | Access new markets, increase sales | Political risk, cultural differences |
| Strengthen Financial Position | Improve financial stability, reduce risk | High debt levels, limited cash flow |
| Restructure Operations | Reduce costs, improve efficiency | Job losses, resistance to change |
8. Next Steps
- Develop a Detailed Implementation Plan: Briggs & Stratton should develop a detailed implementation plan that outlines the specific steps required to implement the recommendations.
- Secure Board Approval: The company should secure board approval for the implementation plan.
- Communicate with Stakeholders: Briggs & Stratton should communicate the recommendations and implementation plan to stakeholders, including employees, investors, and customers.
- Monitor Progress: The company should monitor the progress of the implementation plan and make adjustments as needed.
- Evaluate Results: Briggs & Stratton should evaluate the results of the implementation plan and make any necessary changes to its strategy.
By taking these steps, Briggs & Stratton can position itself for long-term success in the evolving power equipment industry.
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Case Description
The student's task is to develop a comprehensive strategy for Briggs & Stratton, which is facing severe competition and margin pressures. A major component of the strategy to be considered is whether to implement economic value added (EVA) as a new performance measurement for management. The case is designed to serve as an introduction to how to compute and use EVA. It emphasizes the importance of performance evaluation as part of a larger strategic plan. A teaching note is available to registered faculty, as well as two video supplements to enhance student learning.
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