European Agricultural Machinery Company
Essay by shiyingt • February 7, 2018 • Case Study • 2,333 Words (10 Pages) • 953 Views
Case 2 Group 9
European Agricultural Machinery Company
(EAMC)
-Corrected version-
Acting in the role as management consultant:
- Critically review the current position of European Agricultural Machinery Company.
How does EAMC’s performance compare with that of Agricole Mecanique?
- Evaluate the strategies being proposed by George Pembury. To what extent would they help to rectify the underlying problems?
- What ethical problems might Pembury face in considering the incentive offered to him by Agricole Mecanique to facilitate the merger?
Submission date: 14/11/2017
Student ID number | Name | Signature |
A00236521 | Grace Shi Ying Tai | |
A00227174 | Ilaria Gandini | |
A00224959 | Joseph Kenny | |
A00225267 | Sasha Murphy |
This document aims to represent a guidance for European Agricultural Machinery Company plc for its future decisions. The report will analyse current position, financial performance, as well as give an evaluation of possible strategies and merger. A comparison with the French manufacturer Agricole Mecanique will be included.
Critical Review
Although management has been aware of the company’s gradual decline for some time, the actions taken thus far have failed to rectify the problems facing them. While the decision to discontinue the production of tractors may have been based off the information provided by consultants in 2003, and was a genuine attempt to reduce costs, for a brand that has existed for almost a century it has been proven to be a short-sighted measure which has contributed to the company’s loss of its market share in the past number of years. This decision, along with EAMC’s poor marketing, neglect of product development and foreign markets and its failure to identify overseas competitors as a threat prior to their arrival in the British marketplace have all contributed to bring EAMC to its current position.
Mr. Pembury’s acknowledgement of these problems and willingness to explore change and new markets for the company to expand into, while positive, may be too little too late if EAMC is to survive into the future. The streamlining of the company’s production facilities, for example, was a very positive move. It allowed each factory to specialise in the manufacture of a particular product, rather than having each manufacturing facility produce a wide range of machinery. This new emphasis on specialised production rather than regionalised distribution could help the company to keep overheads and production costs lower than in the past.
The suggested merger with Agricole Mecanique could indeed be a solution to EAMC’s current problems. Agricole Mecanique, while a relatively new company, has seen growth in sales return on capital employed over the past two years while making positive investment in research and development. Their production facilities are modern and while they produce a narrow range of machinery, they do manufacture their own tractors.
Economic Factors
EAMC has been experiencing financial losses over the past year or so, despite reductions in both production (discontinuation of product lines) and labour costs (workforce redundancies). The company has the potential to raise a substantial amount of finance (estimated £15 million) through the sale of its existing distribution outlets located across the country.
The company is also exploring the possibility of borrowing money to allow it to offer competitive financing to potential customers, something which is does not currently offer. This could be risky, given EAMC’s current position in the marketplace.
Technological Factors
The reputation of the machinery produced by EAMC is that it is old fashioned, difficult and costly to maintain, and lacking the flexibility and adaptability offered by its competitors. The company needs to revamp its product line and try to unburden itself of some of the negative opinions associated with its merchandise.
Performance
This section will outline the company's financial performance for the last two years, 2005 and 2006 respectively. After examining both Agricole Mecanique (AM) and EAMC, the performance of both was compared. Reading the outcomes, it is important to remember some factors about AM that should put the company in a less favourable position. The French organisation is:
- Relatively young
- Smaller than EAMC
- Unknown brand in the market
- Limited in its production range
Even if these factors should prove to be limitations, from comparing both it is undeniable that AM is performing better or on a similar level to the old established business that is EAMC. However, this could be caused by different standards and legal limitations imposed by the French government.
AM has a higher PE ratio than EAMC, this in turn means that AM shareholders have a more positive outlook on the company long term.
ROCE has fallen from 12% in 2005 to 2.4% in 2006 for EAMC. The same has happened for AM, but at a less dramatic percentage (19% in 2005 to 16% in 2006). This implies that despite the reduced sales, operating costs have remained the same for EAMC and indicates that no measures have been taken to offset the losses the company has been experiencing.
AM's results show that they are operating more efficiently and that they would greatly benefit from a merger with EAMC. The collaboration would give them access to the UK market. Furthermore, AM presents a higher debt ratio, a factor that can be attributed to the company been in its early stages. This in turn will have an effect on interest payments, causing them to be higher. Finally, it will affect the company’s ability to get more working capital for investment. This is another reason AM could be looking to merge with EAMC, as they will be shipping out some of their own manufacturing products, as well as benefiting from EAMC's knowledge of the UK market.
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