Science Technology Company was a leading manufacturer of computer-controlled automated test equipment (ATE) that was used to monitor and manage quality over the life cycle of electronic products. With 31% market share, the company was the dominant firm in the design and manufacture of testers and test software for printed circuit boards. Its second business was its semiconductor test operation, which manufactured complex systems that cost in excess of $1 million and were used to test state-of-the-art very large scale integrated (VLSI) circuits. Other Products included a system to test electronic products in the field; systems used to test a products mechanical and structural integrity under stress and computer aided engineering software used to test and verify designs before they were physically built, by creating electronic models and simulating their performance in the software version.
Company Objectives and Strategy
STC’s primary objective was to be the recognized international leader in providing integrated quality management systems to manufacturers of electronic devices and equipment. This objective required maintaining its leadership in creating new test technologies and new products for all segments of the design and test markets. This commitment to maintain fundamental superiority in test expertise required very heavy spending on research and development.
Early in march 1985, Bill Watson, president of STC was reviewing a 5 year financing plan prepared for the company by Harry Finson, Chief financial officer. After some study, Mr. Watson identified several questions for further consideration and resolution:
1.In view of the uneven growth in sales, inventories and receivables and earnings in the past were Mr. Finson’s 5 year forecast useful?
Mr. Finson’s 5 year forecast is somewhat useful because the increase of 30% annual growth rate in projected sales is achievable knowing that the market for computer related technology products specifically the ATE and VLSI products is rapidly growing. From 1978 to 1984 we can see a sales increase of $359 million to $1.6 billion from the ATE market alone.
However because of the unpredictability of the past sales for 1978 to 1984, the ability to accurately project sales in the next 5 years will be low. Mr. Finson’s could either go directly to the sales and find out more accurately the seasonal demand not just the yearly sales of STC Company Products to further improve the accuracy of its sales projections.
As discussed last week about high risk of inventories, I could say the same with STC Company Inventory. Since accuracy of the sales projected for the 5 years are questionable they have a high risk in incurring over inventory thus leading to higher costs. Even though that inventories were lowered in the projected 5 year forecast, what they can do to manage inventory is to do a just in time. By lowering inventory they would be able to further reduce the costs.
2.What impact would a resurgence of inflation, fueled by massive budget deficits, have on STC?
I am not sure if Mr. Finson included the inflation rate in his 5 year forecast but if he didn’t there would be a big impact on its financial statements. As we can see in the financial statements, a lot of fixed expenses are put into product cost and when inflation hits it will increase product costs and therefore lower the profitability of the company.
We can assume that one of the major components of the product cost is labor cost. And I suggest that the company do an Activity Based Costing since they rely heavily on labor intensive jobs. By doing ABC they are able to eliminate low value-adding costs, improve effectiveness of the value adding activities and to remove distortions caused by poor assumptions and bad cost allocations thus reducing overall cost.
3.Was the company well positioned to finance the rapid sales growth that was anticipated?
The company was well positioned to finance the rapid sales growth because of the 3.45 million shares of common stock sold in 1982 and 1983.
However due to the accuracy of the projected sales for the 5 year forecast being low, there is a big chance that the company will incur a net loss since their strategy to decrease COGS by 41% is by increasing their sales which is very unpredictable due to the assigned percentage growths.