STERLING HOUSEHOLD PRODUCTS COMPANY Case Study Solution
CURRENT SITUATION OR ISSUES:
Sterling was founded in early 1920s and started with the manufacturing of only laundry products, but expanding the business line through successful strategies enabled the company to grow and increase its operations. Apart from growth in development of consumer goods, company achieved much of its growth by acquisitions and mergers of successful brands.
Sterling is a large company which manufactures household consumer goods like soaps, cosmetics, toilet preparations etc.not only domestically but on an international scale. The quality products and brand image of the company had played an important part in increasing the sales of its products.
The financial results of the company are quite promising. However, the time series analysis is showing a very low margin of sales growth, sales volume and profits. Not only low profits, but the cost of company’s operations is increasing at a higher rate than inflation, which increases pressure on company. The situation company is facing, is not expected to be improved in the future and the existing product line is not showing any growth.
Exhibit 1 shows the company’s horizontal analysis of three-year income statement (base year is 2010) which shows the major problems of increase in cost and decrease in profits. As the sales in 2011 is declining from 2010 and in 2012, as light increase in sales revenue is observed. However, the cost of goods sold in both years is increasing at a higher rate than sales. General, selling & admin expense along with research & development expense are also increasing, which decline the gross profit of both years in respect to 2010. As a result, net income and EPS are declining from the previous year and show a high Price/Earnings ratio.
Considering the current financial issues, further growth in existing product line seems to be impossible. Therefore, company has planned to make an investment in the health sector, as the current product line also includes health care products. Sterling has planned to acquire Montagne Medical Instruments Company’s department of manufacturing and marketing, germicidal, sanitation and antiseptic equipment.
IMPORTANT MEASURES FORISSUES:
Sterling is currently facing financial issues, which are increasing its costs and decreasing profits. The reasons for these issues are:
- Company’s product quality has been decreased. In order to increase profit through acquiring existing and successful companies, the quality of the manufacturing product is not up to the mark and is decreasing by time. As a result, there is a slight increase in sales from the previous year.
- Competitors are playing aggressive marketing strategies, which left behind the brand image of Sterling and its products. Company is not making intelligent marketing strategies which has resulted in increasing the brand image of the competitor and declining the reputation of Sterling’s products and thus decreasing its sales.
- Increase in cost of goods sold is due to the rise in suppliers’ prices. Manufacturing inventory supplier increase its cost, which consequently cause an increase in COGS.
- Rise in cost of goods sold is due to increase in the manufacturing cost, including raw material inventory and work-in-process. In addition, labor cost and overhead costs are also increasing its price which resulted in a rapid increase in COGS. This is a big threat for company in the future.
- Major decline in gross profit is due to the vast increase in cost of goods sold. Hence, this has also affected net income and earnings per share. The overall financing is disturbed due to major increase in costs and decrease in sales.
ANALYSIS OF POTENTIAL PLANS:
To solve the above identified issues, company has decided to make an acquisition and increase its product line by investing in the health sector, as it is a growing industry.Company has offered Montagne Medical Instruments Company to let company acquire its department of manufacturing and marketing, germicidal, sanitation and anti-septic products. As these units are large and growing and are also related to Sterling’s products that are environmentally friendly. This step would help the company to grow its product line...................
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