Objective
The purpose of this report is to analyze the challenge we are faced with at Clayton SpA and to submit my recommendation for our future growth strategy.

Background
At Clayton SpA sales have been down 19% and we are in our third year of losses. We are accumulating an additional $1million in debt per month. I arrived two months ago to discover great inefficiencies that have been creating this downturn. I am dedicated to this company and to seeing future growth. I have impressed upon my team the great sense of urgency and the need to take immediate action. I have already negotiated with our bank to postpone large payments due over the coming quarter to buy us some time, but we need to act swiftly. Our compression chillers lag behind in innovative features, pricing strategy, and operating efficiency. Our Asian competitors are a great threat with promised lower lifecycle costs through more efficient design. I have also learned that our central air conditioners fit poorly in Italian buildings and our marketing efforts have been insufficient in communicating the function of our products and what our brand stands for.

We are over-staffed by 20% - 30% and knowing that a company-wide priority is to reduce capital use and bring costs under control, we need to take serious action. The 27% increase in steel prices is an important factor in my recommendation to reduce our fixed costs. I have also given great consideration in my recommendation to our other company-wide priority that we should be focused on products that can position us for post-recession profitable growth.

Analysis
I have honed in on our three main options with a strong recommendation for only one of them. We can sit back and continue to do nothing with the hope that our downward trend will magically correct itself, we can pour more money into our already proven inefficient current structure, or we can make a strong and bold move toward a new vision for Clayton SpA. With the state of the economy, more “green” conscience consumers, increasing steel costs, and our inefficient labor structure, we would be wise to phase out compression chillers and convert over to absorption chillers. This would involve restructuring on many levels as well as investing $15 million over the next 5 years, but as we have seen in Spain, we are sure to reap great reward.

There is a trend with absorption chillers that will soon no longer be just a trend. We need to be the first mover in our area. Absorption chillers are less carbon-intensive and use water instead of the ozone-depleting refrigerants that compression systems require. In Italy, the majority of consumers are concerned with our compression chiller inefficiencies as well as the environmentally hazardous materials that are used.

In reviewing our EBITDA we observe that there has been a huge decline. The overall EBITDA has shrunk from a healthy 25.1% in 2004 to -7.6% in only the first half of 2009. Clayton SA (Spain), on the other hand, with its absorption chillers, has maintained a steady EBITDA. We find a continuous decline in the current ratio of Clayton SpA which can be attributed to the shrinking EBITDA. Clayton SA (Spain) has a current ratio at a constant 1.3. The asset turnover ratio has moved in line with the industry; however we have not been able to transform this into consistent profits. This is another clear indication that change is inevitable.

Our total operating expense in 2004 was $64.8 million and in 2008 we ended at $99.4 million. Our increase in labor, overhead, and material costs did not translate to an increase in profit. The forecast of sales of air treatment products in Italy for the next 5 years shows a healthy increase that can be ours for the taking.

Conclusion
We are a part of a severe oligopoly in which we will continue to face pressure - that is our opportunity cost. Therefore, diversifying into absorption chillers has a positive forecast. To be operationally effective we need to create, produce, sell, deliver and service our products better and with fewer inputs and defects than our competition. What is distinctive about our company? What is our strategic position? We have the license for a first-class technology and I want Clayton to be a dominant force in this segment.

Recommendation
1. Create plan to phase out compression chillers.
2. Restructure plant to manufacture absorption chillers.
3. Transfer technology from Spain to Italy to boost overall capability.
4. Reduce superfluous labor and material costs.
5. Create a new marketing campaign communicating brand image as well as advertising new absorption chillers.