HaCKeRz KrOnIcKLeZ 3/HaCKeRz_KrOnIcKLeZ.iso/anarchy/essays/schoolsucks/waterford.txt

Text File | 1996-04-27 | 21KB | 301 lines

Waterford Crystal a case analysis
Waterford Crystal


HISTORY OF WATERFORD CRYSTAL


    Waterford Glass was started by two brothers, George and William Penrose, in 1783.  It
was the most notable of all Irish crystal companies. In 1799, the Penrose brothers sold Waterford
Glass to the Gatchell family.  The crystal industry was prosperous until 1825.  Irish glass
manufacturers began to slowly close due to high export duties, the economic depression, and a
lack of capital.  Waterford Glass was the last to close in 1851.  It was reestablished nearly a
century later by Charles Bacik and Bernard Fitzpatrick.  In 1947, they set up a factory in
Waterford, Ireland.
    A turning point in the company's history came in 1950 when Joe McGrath made a sizable
investment in Waterford Glass.  He invested the capital needed to convert the small crystal
manufacturing company into one with the potential to become a major player in the crystal
industry.  This investment gave his family control for the next thirty-five years.  Joe McGrath was
committed to Ireland and providing jobs for his country.  He wanted to reduce the country's high
unemployment level.  His focus for Waterford Glass was on growing the company through
exports to the United States.  In 1966, Joe McGrath's son, Paddy McGrath, took over
management of Waterford Glass.  Like his father, he was dedicated to Ireland and to providing
employment opportunities for the Irish.  McGrath's quest to provide more jobs for the Irish led
him to diversify the company.  By 1983, the company had acquired more than thirty non-core
businesses.  To reflect the expansion, management changed the company's name to Waterford
Glass Group. In 1985, Paddy McGrath resigned as chairman of Waterford Glass.
     Concurrent with Paddy McGrath's resignation, Paddy Hayes was appointed chairman and
CEO of Waterford Glass Group. He immediately began to sell off the non-core businesses in an
effort to reduce the company's high debt level.  Waterford Glass's debt was virtually eliminated
with the issue of American Depository Shares (ADS) on the United States NASDAQ market.  On
November 28, 1986, Waterford Glass acquired Wedgwood, a two hundred year old manufacturer
and marketer of fine bone china. Paddy Hayes was named the chairman and CEO of both
companies and Paddy Byrne was appointed CEO of Wedgwood.  In 1989, the company's name
was changed to Waterford Wedgwood.  Three divisions were created as a result of this
acquisition: the Waterford Crystal division, the Wedgwood division, and the Creative Tableware
division.  In 1989, Paddy Hayes resigned from his position as chairman and CEO of Waterford
Wedgwood.
    Paddy Hayes was succeeded by Paddy Byrne as CEO of Waterford Wedgwood.  Paddy
Galvin was appointed as CEO of Waterford and Paddy Byrne continued as the CEO of
Wedgwood.  In 1990, the ownership of the company began to shift from Ireland.  This was the
result of an equity investment made by the Morgan Stanley/Fitzwilton consortium.  On April 5,
1990, the workers at Waterford Wedgwood went on strike.  The strike occurred when
management took steps to reduce high labor costs.  The strike lasted fourteen weeks causing
significant problems for the local community.  In December 1990, Waterford Wedgwood became
two independent entities.  Concurrent with the restructuring of the company, Paddy Byrne
resigned.  In September 1991, Waterford introduced a new brand of crystal called "Marquis by
Waterford Crystal."




THE CRYSTAL BUSINESS


    Today, the craftsmen of Waterford are supreme artists as they were in the 18th century.
Having craft and design skills is the critical element in establishing and maintaining a competitive
advantage.  The combined skills of the craftsmen create the distinctive patterns known all over the
world.  The exceptional clarity of Waterford Crystal is achieved through several steps that have
remained almost unchanged for over two centuries.
    Waterford products are manufactured by a strict process of mixing, blowing, cutting and
polishing.  Manufacturing crystal is very labor intensive.  Labor costs are generally 50 to 55
percent of the manufacturing costs.  Chemicals are mixed to create a unique formula that gives
Waterford crystal its special sparkle and light refractive qualities.  It is then heated to 1400
degrees centigrade in a natural gas fired furnace for at least 36 hours to produce molten crystal.
A blower, using the traditional tools and techniques as in the 18th century, gathers a quantity of
crystal from the furnace on the end of a blowing iron with a twisting motion.  This is then
smoothed with a wooden block that has been soaked in water and resembles the shape of the
desired item.  The craftsman then blows the piece, either by machine or by mouth, to its full
shape.  Crystal pieces are similarly cut to its unique pattern by either machine or by hand.  Those
crystal pieces that are mouth blown and hand cut have the highest quality of all crystal products.
No other crystal is cut as deeply as WaterfordÆs.  Some of the companyÆs core competencies are
its crystalÆs sparkle of light refractive qualities and unique 18th century designs.
    The assembly and packing of the crystal for distribution takes a considerable amount of
time to complete.  After the crystal is polished, everything is carefully checked and measured.
Every possible step is taken to ensure that every piece of crystal arrives at its destination safely
and securely.  With its quality craftsmanship and design expertise, Waterford has gained a
reputation for quality around the world.
    Based on price and brand name recognition, crystal products are divided into three market
segments: high-end (in which Waterford Crystal was dominant in), medium, and low-end.  These
markets can be further divided into three subgroups: stemware and giftware, premium and
incentive, and catalog mail order.  The major distribution channels of these crystal products are
department stores.  Waterford Crystal is unique among other crystal manufacturers in that its
stemware patterns are never discontinued.  If a replacement is needed for a stem pattern bought
many years ago, it can be specially made.

1950 - 1985 THE MCGRATH FAMILY ERA

    Joe McGrath, being intensely pro-Ireland, was more concerned with growing the company
in order to provide jobs for his country than making a profit. He focused on doing so through
exports to the United States, so in 1961 Waterford established a marketing subsidiary in the
United States.  A distributing company was established in the United Kingdom three years later.
Sales revenues and profits were on the rise.  Employment had grown and the company moved its
operations to a larger location.  Financing came from loans and stocks.
    When Joe McGrathÆs son Paddy McGrath took over management in 1966, the family
controlled 40% of the companyÆs equity and their success continued.  Paddy, like his father, had
that strong dedication and sense of responsibility to his homeland.  His goal of investing in Ireland
and creating new jobs led him into the acquisition of multiple businesses.  Waterford Glass, which
then changed to Waterford Glass Group, went beyond the manufacture and sale of high-quality
crystal and into fine bone china, car assembly, and department stores.  The acquisition of these
businesses increased the companyÆs debt to 50 million Irish punts.  Employment multiplied and of
course labor rates increased, especially with workers being paid on a piece-rate basis.  By mid-
1980s, WaterfordÆs labor rates were 77% above the average industrial salary in Ireland.
Management signed a three-year labor agreement that again raised labor-related costs by 44%
over the life of the agreement.  A typical labor agreement is renegotiated every year, which allows
labor to accommodate for inflation and the such.
    In 1984 Avenue Investments, the holding company, which maintained control of
Waterford Glass, made poor investments and had to sell its 20% stake in Waterford Glass to
Globe Investment Trust of London.  In order to meet GlobeÆs standards, Waterford found itself
having to meet an external standard for return of invested capital.  Shortly after that, McGrath
resigned as chairman of Waterford Glass.

1985 - 1989 THE PADDY HAYES YEARS

    The Waterford Board of Directors announced Paddy Hayes chairman and CEO of
Waterford Glass Group in 1985.  Hayes had strong experience and managerial know-how.  He
recognized how the companyÆs various businesses outside of the crystal industry were creating
low profits, poor cash flow, and had a lack of commitment toward winning a competitive
advantage.  These non-core businesses had low market share and were in a slow growth industry,
therefore, Hayes knew they had to be liquidated.  He then sold the retail division holdings for 7.4
million punts, the Aynsley China division for 19.7 million punts, and the printing division for 5.7
million punts.  Within 18 months, Hayes was able to rid the company of nearly all its debt.
Outstanding debt dropped to 22 million Irish punts and the debt/equity ratio was reduced 21% in
a year.  By 1989 the company, now Waterford Wedgwood, consisted of four divisions all
focusing on the manufacturing and sale of crystal and china.

ACQUISITION OF WEDGWOOD

    Although Waterford had sold off all of its non-core businesses, the company still wanted
to diversify into other markets similar to the crystal industry.  In 1986, Waterford Glass purchased
Wedgwood China for 255.5 million punts.  Waterford Glass issued ordinary shares of stock to the
public in exchange for their share of Wedgwood stock.  Fourteen shares of Waterford Glass stock
were issued for three shares of Wedgwood China stock that raised 166.6 million punts toward the
purchase of Wedgwood.  Before the issuance of the shares Ireland owned 42%, more than any
other country, of Waterford's stock.  After the issuance of the shares, the United Kingdom held
55% of Waterford's stock and Ireland only 35%.  Ireland was not the shareholdersÆ main concern
for the first time.  In addition, Paddy Hayes sold the non-core businesses of Wedgwood to reduce
the debt even further.  Trent Sanitaryware, a company that produced bathroom fixtures, sold for
26.5 million punts the Ranton Estate, a hunting reserve, sold for 2.8 million punts and two
facilities in Australia sold for 2.4 million punts.  However, the debt level that was previously zero
increased to a level of 67.3 million punts after the purchase of Wedgwood.  Management thought
that they could decrease this debt level through savings from the operations of the two companies.
    Wedgwood China, famous in both British and Japanese Markets for quality, was a 200
year old company based in England.  Wedgwood had 18 factories and 6,600 employees while
Waterford only had 5,300 employees at the time of the purchase.  The company made fine bone
china with a high quality image though the market was controlled by porcelain china.  The fine
bone china attracted people because it was made very thin and translucent giving it a delicate and
eloquent appearance.  The core competencies of the two companies as well as the strategies were
basically the same.  Both of the companies used excellent manufacturing skills to gain a
competitive advantage over their competitors.
    Waterford Glass and Wedgwood also had the same international strategies of producing  a
high quality standardized product for each country to which they distributed.  Though the
acquisition created high amounts of debt, Waterford's  management thought the purchase would
be beneficial as a strategic move.  Paddy Hayes felt that the two companies could benefit from
each other because Wedgwood was striving for the same brand name image of  high quality and
prestige that Waterford was striving to obtain.  Management thought that the image of
Wedgwood would complement the products of Waterford and vice versa.  Another reason that
Waterford thought highly of the acquisition was Wedgwood's channels of distribution.  The
distributions of the two companies were similar because both sold high quality products through
high-end retail shops.  Waterford thought that they could reduce distribution costs through a
world wide distribution network.  Waterford now had access to 150 Wedgwood distribution
shops in Britain and the Wedgwood sales network in Japan.  Also, Wedgwood increased
penetration into other markets by gaining access to Waterford's sales network in the United
States.  Management wanted to market the products separately but use the same distribution
channels to lower the distribution costs for both companies.  Waterford estimated that they could
save 10 million punts annually with the new distribution network.
    Unfortunately, the two companiesÆ brand name recognition did not benefit one another.
WaterfordÆs crystal was the premier brand in the United States while Wedgwood's china image
was weakest in the United States.  The crystal of Waterford and the china of Wedgwood were
both sold in retail shops; however, the crystal was sold at full price with no discounts and the
china could not be sold without offering a discount.  As a result, the crystal and the china could
not be in the same area of the store preventing Wedgwood's name to be associated with
WaterfordÆs crystal.  The strategy of brand name recognition complementing each other did not
succeed in the United States but it did work in Japan.  In Japan, Wedgwood had a high quality
image while Waterford Glass' image in Japan was weak.   Wedgwood's base and quality image in
Japan increased the image of Waterford's crystal and in turn increased sales.  In 1987, all of
Japan's major department stores carried Waterford crystal.
    Even with the difficulties surrounding Wedgwood's sales in the United States, Waterford
still changed its name to Waterford Wedgwood in 1989.  The Wedgwood division consistently
contributed operating profits year after year averaging 20 million punts in profits from the mid
1980's to the early 1990's.  In addition, the operating expenses for the Wedgwood China division
were far lower than the Waterford division.  For example, an employee of Waterford Crystal
division made three times as much as an employee from Wedgwood.  The Waterford division
needs to coordinate some of their activities with the Wedgwood division to share knowledge on
how to improve their profitability.  A strong competitive advantage can be gained through the
sharing of ideas across all of Waterford Wedgwood divisions.

PRESENT CONDITIONS AT WATERFORD

    At their lowest peak, Waterford reported a one year loss of 21.3 million punts, reflecting
high operating costs, unfavorable exchange rates (weak US dollar) and additional provisions
relating to stocks and debtors in the United States.  It was dreadfully obvious that Waterford
Crystal had become over-dependent on the United States market.  Also, the loss was caused by
exceptional restructuring provisions of 18.4 million punts with the separation of the Wedgwood
porcelain product line.
    Around 1990, at the height of WaterfordÆs problems, the company was near the point of
insolvency. Mr. OÆDonoghue, now WaterfordÆs Chief Executive, was sent to the U.S. to
restructure the companyÆs retail business.  He spent just under a year in the U.S., which now
accounts for about 70% of sales.  Mr. OÆDonoghue said that US sales are likely to continue to
account for about 70% of company sales, but it will be a 70% slice of a bigger pie.
    In 1990, Fitzwilton, U.S. merchant bank Morgan Stanley, and an investment group headed
by Dr. Tony OÆReilly invested 80 million punts for a 29.9% stake in Waterford Wedgwood - the
holding company for Waterford Crystal and Wedgwood -- as part of a financial restructuring.
This restructuring included 1990Æs wage freezes and a new investment scheme that secured over
200 million punts to stabilize the companyÆs finances.  Since the 1990 restructuring, the
investment group has been steadily recovering from heavy losses.  By the end of March 1995,
profits have doubled to 22.6 million punts and the group paid dividends for the first time since
1988. Also, the group appears to be on target to increase profits by at least 20% for the full year.


ENVIRONMENTAL AWARENESS

    Waterford Crystal was one of eight Irish environmental demonstration projects to receive
a partial grant from the European LIFE fund. This partial grant was used by Waterford Crystal
towards a 2.7 million punt project that seeks to develop and demonstrate an emission free process
for glass manufacturing.  The company already meets the highest national and international
standards.  This move keeps Waterford in line with their strategic objective of being at the
forefront of technological development within the industry.
    In an interim report that ended June 30, 1996, Waterford Wedgwood reported an increase
of 28% in profit before taxes and sales rose by 8%.  This performance was principally due to
record sales in the United States and Ireland.  Both markets saw increases of 17% and a further
strong contribution from its Marquis brand, which equates for nearly 30% of WaterfordÆs sales.
To date, the Marquis brand has not cannibalized sales from the Waterford brand, but sales in
western Europe could be characterized as ôdifficult conditions."
    Today, Waterford Crystal employs 1500 people.  It has an estimated market value in
Ireland worth 12 million punts and its export market value is 50 million punts.  Not only has
Waterford increased crystal sales in its key markets, it has also transformed the actual business of
producing crystal into something of a tourist attraction. The companyÆs factory tours attracted
230,000 visitors last year making it the forth largest tourist destination in Ireland. This year
Waterford estimates tourist numbers will rise to 250,000.   Furthermore, in 1996, Waterford
Crystal has highlighted a campaign where it will specifically target the Northern Ireland market.
Currently, Waterford is a distant second to Tyrone Crystal that controls 65% of Northern Ireland.


INDUSTRIAL ANALYSIS

Threat of new Entrants:
    There is little threat of a new entrant either coming on the scene or drastically affecting the
new market share of Waterford due to the labor intensive craftsmanship needed for the high end
crystal market.  The Crystal market seems to be heading into the mature market phase that is
indicated with slow growth.  The demand for high end crystal is already fulfilled by the present
companies of Waterford/Wedgwood (Ireland), Lalique (France), St. Louis (France), Baccarat
(France) and Orrefors (Sweden).

Bargaining power of Suppliers:
    Power of the suppliers is considerably low due to the relative abundance of the silica, red
litharae, and potash, which are the basic ingredients to the sparkling multimillion dollar crystal
industry.

Bargaining Power of buyers:

    The bargaining power of the buyer is somewhat high when compared to the necessities of
a household.  If the customer does not like what they are being shown, for whatever reason, they
can simply leave the store without purchasing the crystal.  The product that Waterford produces
must be of value to the customer to make them purchase it over the competitors crystal.

Threat of Substitutes:
    The threat of substitutes is moderate to low.  When purchasing high-end crystal, the
question is not one of price, but one of quality.  In the US, if you want the best, then there is no
substitute.  You may select from one of the before mentioned high-end crystal producers, but they
are competitors and not substitutes.

Intensity of Rivalry:
    The intensity of rivalry is high, but less so in the United States, where nearly 70% of
WaterfordÆs products are shipped. In the United States, Waterford is a household name, so when
people look for crystal, they look for Waterford quality.

RECOMMENDATIONS

n    The Waterford division needs to coordinate their activities with the Wedgwood division to
share knowledge on how to improve their profitability.  A strong competitive advantage
can be gained through  the sharing of ideas across all of Waterford Wedgwood divisions.
n    They should possibly expand beyond its core business by using brand enhancing.
n    They should look at expanding into existing markets such as U.S. (which now represents
70% of sales), Britain, Japan, Australia and Northern Ireland as well as build sales in new
markets such as Thailand, Taiwan and South Korea to keep globally competitive.
n    Being globally successful will allow Waterford Wedgwood to cope more easily with
localized fluctuations in demand and become less dependent on its U.S. market.
n    They should improve on operating efficiencies along with the ever increasing cost of their
main core competency of skilled labor.
n    They should extend the growth rate of its new mid-priced Marquis line of stemware into
all market  areas.










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