Lester Electronics Benchmarking

Lester Electronics Benchmarking

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, n.d.). 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 (p. 39)" and that "managers should manage their firm's resources with the objective of increasing the firm's market value (p. 1)." 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, 2004). This paper examines the efforts of 12 companies to measure and increase value and which might offer a solution for Lester.

Team Analysis

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, Wal-Mart, Royal Dutch Shell and FedEx-Kinkos, 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 Citibank's acquisition of Confia, the alliance between the two banks helped Citibank to expand its banking network in Mexico without an investment in physical property (Grosse, 2001). American Freightways expanded its services into Canada, Central and South American through alliances with other transportation companies (SupplyChainBrain.Com, 2001). In a strikingly similar situation to Lester's, Evox Rifa formed a very successful joint venture with a former supplier ("Evox Rifa," 2002). Kemet formed a joint venture to ensure continued access to a natural resource that was an essential raw material in its manufacturing process ("Kemet completes joint venture," 2001). Toyota Motor Corporation (Toyota) used partnerships to gain access to developing markets in India and China. Based on the companies reviewed, forming a joint partnership with or acquiring Shang-wa could prove to be a high-value investment for Lester (University of Phoenix, n.d.). Hewlett-Packard (HP), Apple Computer, Inc. (Apple) and Microsoft Corporation (Microsoft) used alliances and acquisitions to obtain knowledge and technology to maintain competitive in a world of rapidly changing technology ("Apple," 2006; "Needed: A Strong HP," 2005; Ricadela, 2007).

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. Yorkshire Global (Yorkshire) streamlined costs and used the brand name to promote the business by creating storefronts in areas where extra space was available or through co-branding with another company to share the costs (Larson, 2003).

Conversely, Victory Capital Management (Victory) streamlined its business plan by re-evaluating which areas were profitable then removing all others. It then used the extra capital to acquire more companies that complemented its core business plan. By doing this Victory reduced costs through staff reduction as well as having customers who could use multiple areas of its company (Appell, 2006).

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. Corporate wealth 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, 2004, p.15)". 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 HP, Microsoft, Citibank, American Freightways, Evox Rifa, or Kemet for examples of how these companies increased their 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, 2004, p. 34)". 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, chap. 3).

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, chap. 5). Ratios that incorporate the market share price, such as the price-to-earnings and market-to-book ratios, seek to rectify this problem.