Bill Watson as President of Science Technology Company (STC) should ask the Chief Financial Officer, Harry Finson, to fine tune and rehash the 5 year financing plan Harry prepared. This is to address the following issues and concerns:
A. Projected thirty percent (30%) increase in annual sales Historically in a strong ATE market, STC was able to increase its sales on a compound annual growth rate of 12% only. In 1983, the company posted its highest sales increased thus far (20%). Preceding year (1984) however was below average at 10%. Industry wise, sales forecast is better and is expected to grow by 26% in the next four years. The 30% increase in annual sales projection prepared by the company’s division managers and Harry therefore is over stretched and very optimistic. A financial plan anchored on this simple projection without any detailed basis would be very risky for STC. It is suggested that projected sales growth is somewhere between historically what STC had achieved to industry growth forecast i.e. 12+ to 26%. B. Competition and the Industry
While STC is optimistic about the long term prospects for the ATE industry, competition was intensifying over the past years. Citing VLSI test market as an example, in 1977 when STC decided to enter this new field, there were only two firms competing in the market with a combined 80% market share. STC spent huge sum of money ($ 75Million) to develop its VLSI testers. High investment cost however did not deter six more competitors to join the fray. By 1985, STC is directly competing with 8 other companies in the ATE industry. C. STC Performance vs. Industry benchmark
To improve STC’s financial performance, it has to develop strategies addressing losing cash flow both in its operating and investing activities. Harry projected 41% of CGS/Net Sales for the next five years yet historically record shows that it was able to achieve only 44 to 47%. STC has also one of the...