Strategic Analysis of
LRH Enterprises, Inc.
Group 1
Final Project
Fall 2009
Overview
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Manufacturer of a wide variety of cutting tools
Competes in the North American Woodworking-ToolManufacturing Industry
Serves small- to medium-size cabinet shops
Known for quality, speedy delivery, and
knowledgeable sales representatives
President is Curt Hubert
Headquartered in Chatsworth, California
Revenues in 2008 were $1.54M

For the first eight months of 2009, revenues are down by 40%,
but NIAT up by 32%
History
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
Hubert Saw began operations in the 1950s
It was dissolved in 1975 and LRH Enterprises was
begun
Established by Leo Remy Hubert
 Switched from servicing to manufacturing
 Switched focus from saws to cutters and bits
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LRH received an industry award for leadership in
ergonomics and safety
The company began to downsize in 2008 to cope
with economic downturn
Curt Hubert took over the presidency of the company
from his father in August 2009
Company Structure
Three years ago
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Employed 40 people
Ran two shifts at its manufacturing plant
Today
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Ten full-time and 2 part-time, on-call staff
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President
Bookkeeper/CFO
One production manager
Five production personnel (+ two additional part-timers on call)
One drafting engineer/machine programmer
Three salesmen
One day shift
Company Structure (cont.)
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President has full control of day-to-day operations
Three members of the Board of Directors vote on
major decisions
The company has four major stakeholders
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Two are members of the Board of Directors
Employees
Most have been with company over 20 years
 Three employees are family members, including the
bookkeeper

Recent Changes
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Reduction of in-stock inventory parts by 1/3
Animosity between sales and marketing being
addressed
 Managers

creating the problems removed
Sales department shifting focus
 New
emphasis on increasing product awareness and
demand
 Prior emphasis was on customer service and ordertaking

Culture becoming more corporate
Products
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Catalog of standard products
Niche router bits used in
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Yacht construction
Musical instruments
Custom, made-to-order cutters and bits
100% American made
Open-style cutters
High quality
Technology used in production
 Automatic CNC equipment
 CAD/CAM design, scanner, and template system
 Electronic spin-balancing for vibration-free and chatter-free
performance
Product Lines

Magic Molder
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Enables use of table saw to
create moldings
Over 70 profile plug sets
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Stackable shaper heads
Allows the Magic Molder
Plugs to be used on a shaper
CO-ST Cutters
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Two-wing cutters for lightduty shapers with ½” or ¾”
spindles
5 fluting cutters and 2 inlay
rosette bits
King Cutters
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Magic Shaper
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Router Shaper Bits
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Standard, high-quality,
shaper cutters
Offer over 1,000
standard profiles
More than 90 antikickback router bits for
making cabinet doors
Insert Tip Tooling
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Insert heads and tips
Over 150 products
Sales
Generation
 Distributors – LRH
provides education
 Tradeshows – limited
benefit, rarely used
 Woodworking shows
- limited
 Customer referrals
Type
 Distributor Network
 Approx.
1,500
distributors and retailers
in U.S. and Canada
 About 70% of sales

Direct Sales
 Primarily
from rural
areas
 About 30% of sales
North American Woodworking-ToolManufacturing Industry
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Classified as part of the hand-and-edge-tool-manufacturing
industry
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In 2002, comprised 1,178 establishments
In 2002, totaled $6.03B in shipments
Between 1997 and 2002, establishments decreased 9%
Highly dependent on other industries, such as construction and
furniture sales
Economic downturn causing a major shakeout
Limited technological innovation
Numerous manufacturing regulations
The degree of concentration is moderate but increasing
This industry is in the shakeout stage of the life-cycle
Industry Driving Forces
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Demand for quick turn-around by customers
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Increasing efforts to reduce costs
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Poor economy causing fluctuations in demand
Cost of carrying too much inventory
Divergent responses within industry
Rising cost of metals and energy
Customers highly price sensitive
Increasing use of technology for process improvements
Demand for increased quality, speed, and durability
Porter’s Five-Forces Model
POTENTIAL NEW ENTRANTS
Intensity of Rivalry
High: companies
fighting to survive
Anyone with capital
and manufacturing
experience
Earle M Jorgenson
Tigra-USA
Ceratizit
RIVALS
LRH Enterprises
Amana
Freud
Freeborn
Threat of Substitutes
Low: no alternative to
woodworking tools
SUBSTITUTES
Items prefabricated by
large companies or made
from other materials
SUPPLIERS
Bargaining Power
Suppliers: High
Distributors: High
End-Users: High
BUYERS
Any company or person
in need of woodworking
cutters and bits
Barriers to Entry
Medium: Those with
enough capital can enter
the industry
Industry Attractiveness
Factors
Market Size
Sales Growth Rate
Profitability
Intensity of
Competition
Barriers to Entry
Regulation
Weight Rating
30
0.7
20
0.2
20
0.5
10
0.2
10
10
0.4
0.4
Product
21.0
4.0
10.0
2.0
4.0
4.0
45.0
Competitive Strength
Factors
Specialization
Management
Quality
Reputation
Distributor Network
Weight Rating Product
35
0.9
31.5
20
0.4
8.0
20
0.9
18.0
15
0.8
12.0
10
0.5
5.0
74.5
G.E. Matrix
Industry
Attractiveness
High
Invest
Medium
Low
Divest
Weak
Avg.
High
Competitive Strength
Competitive Analysis
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LRH has three main competitors
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Freeborn Tool
Amana Tool
Freud Tool
All produce woodworking cutting tools
Compete on price, quality, and speed of delivery
All serve North American woodworking industry
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Freud also serves Europe, Russia, and China
Competitive Analysis
Freeborn Tool
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Founded in 1976 as a saw-sharpening shop
Headquartered in Spokane, WA
Small private company
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Manufactures European style spindle cutters
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Approximately 55 employees
Produced domestically and abroad
Products sold through a dealer network; no direct sales
Competitive Analysis
Amana Tool
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Founded in 1972 as a router bit manufacturer
Headquartered in Farmingdale, New York
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Small private company
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Approximately 70 employees
Estimated annual revenues of $7.2M
Manufactures router bits, CNC bits, European style shaper
cutters saw blades, boring bits, and planar knives
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Fulfillment center in El Cajon, CA
Produced abroad
Products sold through a distributor network and online
dealers; no direct sales
Competitive Analysis
Freud Tools (Freud America, Inc.)
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Founded in 1960s as a cutting tool manufacturer
Headquartered in Milan, Italy
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Large company
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Over 1000 employees
Acquired by Robert Bosch GmbH in 2008
2007 revenues of 100 million euros
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Manufacturing facilities in Italy and Spain
Subsidiaries in Britain, Poland, Russia, China, Canada, and U.S.
2007 revenues of Bosch Power Tool Division of 3.1 billion euros
Manufactures router bits, saw blades, European style shaper cutters,
drill bits, and accessories; also power tools routers, saws, jointers,
and planers
Vast distributor network (B&M and online); no direct sales
Strategic Group Map
High
LRH
Freud
Quality
Amana Freeborn
Imports
Low
Open
European
Cutter Style
Market Analysis
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Target market comprises any individual or company requiring highquality woodworking cutters and bits, in North America
Served market is small- to medium-size businesses that produce
custom cabinets, interior & exterior entry doors, and furniture in
North America
Distribution channels
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Distributors
Catalog sales
Internet sales
Sales representatives
Customers expect higher speeds and longer lifetimes from their tools
Customers are extremely sensitive to price and speed of delivery
Environmental Trends
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Increasing demand for quality – positive
More companies using Computer Numerically
Controlled (CNC) machines – positive
More companies outsourcing – negative
Economic downturn getting worse – negative
Decline in construction industry
 Decline in furniture sales
 Decline in customization
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Revenues ($M)
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2004
2005
2006
2007
2008
NIAT ($K)
$200
$100
$2004
$(100)
$(200)
$(300)
$(400)
$(500)
2005
2006
2007
2008
Current Ratio
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2004
2005
2006
2007
2008
D/A Ratio
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
2004
2005
2006
2007
2008
Coverage Ratio
6.0
4.0
2.0
0.0
2004
-2.0
-4.0
-6.0
2005
2006
2007
2008
Inventory to NWC Ratio
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
2004
2005
2006
2007
2008
Net Profit Margin
0.1
0.0
2004
-0.1
-0.1
-0.2
-0.2
2005
2006
2007
2008
Altman’s Z-Score
6.00
5.00
4.00
Safe Zone
3.00
2.00
Bankruptcy Zone
1.00
0.00
2004
2005
2006
2007
2008
Financial Conclusion
LRH Enterprises is not well managed. It has not performed well
financially and the company is in seriously declining financial condition
In 2008…
 Revenues declined 30%, third year of decline
 NIAT is a negative $200K, third year of net losses
 D/A Ratio is 1.22 and equity is negative
 NPM is a negative 17.5%, third year in a row
 Current ratio is 1.75 but has been declining for four years
 Coverage Ratio is a negative 2.9, negative for three years (cannot even
pay the interest on its debt)
 Inventory to NWC ratio is 0.86 and has been increasing for two years
Needed to show a chart of cash and comment it was negative.
Strengths
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Strong brand name and reputation
Produces very high quality products
Expertise in high-tolerance and precision
manufacturing
Loyal employees
Provides some unique products to the industry
Weaknesses
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Negative NIAT, NPM, and cash for three years
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Declining revenues, current ratio, and Altman’s Z-Score
Narrow target market
Excess capacity
Lack of marketing and advertising
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And negative equity last year (debt is too high)
Dependent on distributors for marketing
Expensive products
Limited product line
Inadequate Internet presence
Inability to cope with economic downturn
Management
Core Competence and Competitive Advantage
Criteria for Core Competence
Capabilities
Is the
capability
valuable?
Is the
capability
rare?
Is the
capability
costly to
imitate?
Is the capability
nonsubstitutable?
Competitive
Consequences
Performance
Implications
High-Precision
Manufacturing
Yes
No
Yes
Yes
Temporary
competitive
advantage
Above-average
returns
Strong Reputation
Yes
No
Yes
Yes
Temporary
competitive
advantage
Above-average
returns
Provide a unique
product (patents)
Yes
Yes
Yes
Yes
Sustainable
competitive
advantage
Above average
returns
Threats
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Economic downturn
Less expensive foreign-made competition
High raw-material costs
Competition that produce both the cutting tool and
the cutting machine
Cheaper, imported, finished carpentry goods (e.g.,
cabinets) that reduce demand for tools
TOWS Matrix
Internal Factors
External
Factors
Opportunities
1.
2.
3.
Strengths
Target the expanding
casual/home woodworking
market
Market the benefits of hightolerance manufacturing
Make tools readily available
through the Internet
1.
2.
3.
Threats
1.
2.
Market unique cutting tool as
a less expensive alternative
to spindle cutters
Market directly to customers
to increase brand awareness
1.
Weaknesses
Redevelop company
website to provide better
information to potential
customers
Provide samples and
demonstrations to
publications
Provide products to local
trade schools and
colleges to familiarize
future users of its brand
Commit to material order
quantities in advance to
combat rising prices
SPACE Analysis
Factors Determining…
Financial Strength (FS)
1.9
Industry Strength (IS)
4.0
Environmental Stability (ES)
-3.5
Competitive Advantage (CA)
-3.1
SPACE Analysis
Key Strategic Issues
How can LRH Enterprises…
 … increase revenues?
 … improve NIAT (turn a net profit)?
 … improve its cash flow and balance?
 … reduce its debt?
 … improve management?
Key Strategic Issues (cont.)
Should LRH Enterprises…
 … increase direct sales to customers?
 … form alliances with colleges/trade schools?
 … be acquired by another company?
 … improve its website?
 … replace its management?
 … stop growing until it regains control of its financial
performance and condition?
 … continue product development?
LRH Enterprises Has Three Strategic
Alternatives
1.
2.
3.
Form collaborative alliances with
colleges/trade schools
Reduce ratio of distributor/direct sales
Be acquired
1. Form collaborative alliances with
colleges/trade schools
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Build relationships
with universities and
trade schools that
teach woodworking
to increase product
awareness
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Starting in the Los
Angeles
metropolitan area,
e.g. Cerritos College
Demonstrate
products
Provide products at
a discount
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Maintain strong distributor relationships
Increase market share
Maintain strong reputation through careful quality
control
Establish performance goals to improve health of the
company
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Hold management responsible for attaining
performance goals
Strengthen controls over financial reporting
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generate cash flow
pay down debt
control costs
hire a CPA to check books monthly and advise
management
The company needs to obtain an infusion of investor
money or become profitable quickly in order to
finance these efforts
2. Reduce ratio of distributor/direct
sales
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Upgrade company website
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Guarantee security
Enhance image/branding
Create product-video
demonstrations, Blog
Make it easy to purchase
online
Create new products and
services based on customer
feedback
Develop customer mailing
lists and send monthly emails
Increase marketing to niche
segments
Hire marketing and design
interns to minimize costs
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Maintain strong distributor relationships
Increase market share
Maintain strong reputation through careful
quality control
Establish performance goals to improve health
of the company
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Hold management responsible for attaining
performance goals
Strengthen controls over financial reporting

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generate cash flow
pay down debt
control costs
hire a CPA to check books monthly and advise
management
Company needs to obtain an infusion of
investor money or become profitable quickly
in order to finance these efforts
3. Be acquired
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Focus on increasing NIAT and
reducing debt to improve
company attractiveness and
bargaining position
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Reduce overhead costs
Increase sales
Remove or replace lowperforming
management/staff members
Hire broker to market the
company
Hire accounting-acquisition
consultant
Hire valuation consultant to
value the company and
advise on how to improve
value quickly
Continue current programs
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Maintain strong distributor relationships
Increase market share
Maintain strong reputation through careful
quality control
Establish performance goals to improve health
of the company

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


Hold management responsible for attaining
performance goals
Strengthen controls over financial reporting


generate cash flow
pay down debt
control costs
hire a CPA to check books monthly and advise
management
The company needs to obtain an infusion of
investor money or become profitable quickly in
order to finance these efforts
Criteria Matrix
1. Form collaborative
alliances with colleges/
trade schools
2. Reduce ratio of 3. Be Acquired
distributor/ direct
sales
Revenue Growth
3
7
5
Profitability
3
7
5
Competitive
Advantage
5
7
4
-2
-4
-3
-2
-4
-4
7
13
7
Investment
Required
Riskiness
Totals
2010 Recommendations
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Increase revenues 15% and NIAT to
breakeven
Contact universities to obtain interns
with the capabilities needed to
redesign the LRH website
Redesign website
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Include product photos and
demonstration videos
Make it secure and navigable
Start a website Blog
Modernize company’s
branding/image
Emphasize product quality and that it
is made in America
Create new marketing campaign to
niche segments
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Begin monthly e-mails
Maintain market share
Take advantage of discounts in
purchasing where possible
Maintain strong distributor relations
Establish performance goals to
improve health of the company

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
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
generate cash flow
pay down debt
control costs
Hold management responsible for
attaining performance goals
Maintain strong reputation through
careful quality management
Hire a CPA to check books monthly
and advise management
2010 Recommendations (cont.)

If market preferences for other kinds of cutters
cause revenues to lag projections by 15%, then
LRH should start a new marketing program to
promote the benefits of open-style cutters
2012 Recommendations
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

Increase revenues by 15%/yr and NIAT by 10%/yr
Develop customized e-mails for niche segments
Evaluate customer suggestions from website Blog to create new products
and services
Conduct an evaluation of demand for niche-router bits and begin carrying
high-demand items
Increase market share
Re-evaluate performance goals and set new targets

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



Sales
Cash flow generation
Debt management
Cost Control
Replace underperforming managers and obtain commitment from managers
to take responsibility for attaining performance goals
Continue to take advantage of discounts in purchasing
Maintain strong distributor relations
Maintain strong reputation through careful quality management
2012 Recommendations

If costs of carrying inventory cause NIAT to lag
projections by 15%, then LRH needs to refine
its inventory management system
Thank You
Any Questions?