Science Technology Case Study
Critique on the Financial Projections of the CFO Mr.Harry Finson.
The complexity of winning a major market share was not considered well by Mr.Finson. Multifaceted issues such as the mix of business shifting towards more complex systems requiring intensive research and development spending, short product life cycle, rapid technology obsolescence and fast growth with increasing technology competition and the potential price competition were not taken into account. The failure to consider these issues led the CFO to assume a large sales growth from 1985 to 1989. These assumptions would further hurt the financial position of the company because it would tend to hedge on the forecast by needlessly expanding capacity and increasing inventory in anticipation of strong sales.
1. Projections for Sales Growth of an additional 30% per year are too optimistic considering that competition in the market was intensifying. Other than the strong presence of Fairchild and Tecktronix, the CFO missed to consider that from 1985, the company will be facing tougher competition with the entry of Teradyne, Takeda Riken, Ando, Megates and LTX. Based on 1984 Sales alone Teradyne and Fluke performed better at $389 million and $208million compared to $227 Million of STC.
2. Future price competition brought about by new market competitors were not taken into consideration. Without a very solid technological edge STC’s prices would soon find stiff competition if other competitors could find an efficient way to manufacture the products.
3. Projections for Profit after Tax (or profit margin on sales) are also too optimistic. The 1980 to 1984 data shows an average Profit after tax of just 9.2 million or an Average Return on Sales at 4.25% but projections for 1985 to 1989 shows a very optimistic average profit projection of 39.8 Million or an Average Return on Sales of 7.54%. The CFO failed to take into account the impact of Cost of Goods Sold (COGS), R&D Expenses and General
The complexity of winning a major market share was not considered well by Mr.Finson. Multifaceted issues such as the mix of business shifting towards more complex systems requiring intensive research and development spending, short product life cycle, rapid technology obsolescence and fast growth with increasing technology competition and the potential price competition were not taken into account. The failure to consider these issues led the CFO to assume a large sales growth from 1985 to 1989. These assumptions would further hurt the financial position of the company because it would tend to hedge on the forecast by needlessly expanding capacity and increasing inventory in anticipation of strong sales.
1. Projections for Sales Growth of an additional 30% per year are too optimistic considering that competition in the market was intensifying. Other than the strong presence of Fairchild and Tecktronix, the CFO missed to consider that from 1985, the company will be facing tougher competition with the entry of Teradyne, Takeda Riken, Ando, Megates and LTX. Based on 1984 Sales alone Teradyne and Fluke performed better at $389 million and $208million compared to $227 Million of STC.
2. Future price competition brought about by new market competitors were not taken into consideration. Without a very solid technological edge STC’s prices would soon find stiff competition if other competitors could find an efficient way to manufacture the products.
3. Projections for Profit after Tax (or profit margin on sales) are also too optimistic. The 1980 to 1984 data shows an average Profit after tax of just 9.2 million or an Average Return on Sales at 4.25% but projections for 1985 to 1989 shows a very optimistic average profit projection of 39.8 Million or an Average Return on Sales of 7.54%. The CFO failed to take into account the impact of Cost of Goods Sold (COGS), R&D Expenses and General