Case Analysis: Tennant Company Essay

Lead-In/Key Issues Over Tennant Company’s (Tennant) 141 year history, they have consistently remained a producer of floor-cleaning equipment and technologies focusing their efforts in producing products for non-residential use. Since the new CEO Chris Killingstad has come to the company however, he has been dramatically changing Tennant’s value proposition with a broader emphasis encompassing â€Å"chemical-free cleaning and other technologies.† This case shows Tennant’s move beyond traditional green efforts to centralizing environmentally-friendly performance at the heart of the company’s focus, and whether this new focus provides enough benefit as a competitive advantage. The challenge now for Killingstad and Tennant is how to move forward into 2013 in terms of company focus and direction; mainly the extent to which they should diversify. Should Tennant move into residential markets with smaller units for consumers to use in-home? Should they continue to focus on the commercial side, investing instead in the market potential of their ec-H20 and irreversible electroporation technologies? Or should they enter emerging markets with low-cost alternatives to truly increase their global exposure and propagate their vision of chemical-free cleaning? Situation Analysis External Analysis In this section I will use case information and provide an analysis of the commercial cleaning industry. I am choosing to ignore the residential cleaning industry at this time as they have only begun thinking about the consumer market at the time the case was written. Also, given the push by the majority of cleaning companies to â€Å"go green† it is important to look at the entire cleaning industry rather than just the ecologically-friendly niche in order to assess the level of Tennant’s competitive advantage relative to the industry as a whole. As aforementioned, there has been a general trend towards green alternatives in the 21st century, across a large array of industries. More specifically in the commercial cleaning industry it was revealed that consumers desired more environmentally-friendly solutions, as long as there was no sacrifice to price and performance. This ties in with the industry opportunities in the Tennant SWOT analysis (appendix 2) as the innovativ e products from Tennant give them the advantage over chemical-only cleaning companies. Before I analyze Porter’s five forces with respect to Tennant, we must understand what life cycle stage the commercial cleaning industry is currently at. Since profits for Tennant have been rising, and the industry as a whole is said to have risen to 5 billion, I can conclude the industry is still in the growth stage. Now it is important to look at how the development of new technology has impacted Porter’s five forces, most specifically the bargaining power of buyers and the threat of substitute products. Since the introduction of their disruptive technologies they have greatly reduced the risk of these two forces specifically; as these types of products are not easily available elsewhere. It is through these technologies they have created a new, unique selling proposition that has become a competitive advantage for Tennant. Internal Analysis Moving away from the external environment in the cleaning industry, I will now shift attention to Tennant’s key strengths (and their underlying causes) as well as an analysis of financial information to assess their profitability and efficiency. The main source of Tennant’s relative strength in the industry comes from their innovative and patented technologies (see Appendix 2). Firm-specific strengths are resources that can become core competencies; in the case of Tennant they have already become a primary strategic advantage. Now as technological strengths are quite often a by-product of well-structured R&D within a firm, it is therefore crucial to look at in this case. Most of their initial innovative success can be attributed to the Advanced Product Development group, which although was only allocated 10% of the R&D budget they developed the most significant technologies between 2002 and 2006, namely their FaST and ReadySpace technologies. Following the success of th eir ec-H2O technology, they decided to further develop its platform outside of the corporate culture of Tennant and created the subsidiary â€Å"Orbio Technologies Group.† It was through this subsidiary that Tennant developed the split-stream technology and irreversible electroporation, both successful innovations. In all, it can be concluded that the creation of an â€Å"entrepreneurial† subsidiary was a successful management move, and combined with well coordinated R&D it allowed Tennant to develop their core competency. Now it is also important to note where their strengths and weaknesses lie with respect to their financial data and corresponding ratio analysis. Tennant’s main concerns lay in three specific ratios: operating cash flow ratio, their operating profit margin, and their solvency ratio (see Appendix 1). First their operating cash flow ratio is well below one indicating they have not generated enough cash flow during the year to pay off their short-term liabilities. Second their operating profit margin is only 6.10% and 5.76% for the past two years respectively, indicating they are not generating an ideal amount of EBIT per sales dollar earned. And third their solvency ratio is below the healthy threshold of 20% (10.67% and 9.67% for the past two years respectively) meaning they have less of an ability to fulfill debt obligations and have a heightened default risk. Now they are a little stronger in some areas; their current ratio is above a two which is ideal for most firms. Also they do have some operating leverage (although not much above a one means it is low). There is a significant gap between their gross margin and operating profit margin, indicating they are spending a large amount of their revenue on operating expenses. This is to be expected with a highly R&D intensive company like Tennant, as well as the need for high selling expenses required to differentiate from the rest of the cleaning companies. Strategic Alternatives Alternative #1 My first alternative is for Tennant Company to move into the residential, consumer market with smaller Orbio-E handheld units. In this proposed alternative they should stay away from licensing and keep production within the company. This alternative simply provides a variation of their core competency, innovative technologies, and therefore does not stray far from their already established strategic strengths. Alternative #2 The second alternative I would recommend would be the proposed base-of-the-pyramid (BOP) model in emerging markets. As suggested by the case would allow them to identify areas to improve in their legacy markets by creating low-cost products for low-income consumers in developing countries. Furthermore, this action could potentially catapult them to industry-leader status by taking their green initiative to the next level. This very likely would also cause an increase in their goodwill. Alternative #3 The final alternative I will provide with this analysis is for Tennant to continue current operations. They would focus their resources on developing their existing customer relationships with their tried and tested product line. This alternative is taking the less risky approach, by not pursuing chemical-free cleaning too quickly and waiting to assess where the industry is after a given period of time. This will help mitigate potentially detrimental effects on their existing customer base who do not feel ready to make the transition to chemical-free cleaning. Strategic Recommendation I would suggest Tennant Company move forward with my second proposed alternative, of the BOP business model venturing into emerging markets. It does carry with it more risk, and would require them to take an in-depth analytical look at the profitability of that option. However the potential benefits outweigh the perceived risk in this example for Tennant. Not only will they gain valuable insight into reducing costs associated with their production by developing a low-cost line, but this option is the most synergistic with their core vision. Chris Killingstad even states: â€Å"We owe it to the world to grow and expand as much as we can,† and this simply cannot be accomplished by avoiding emerging markets in developing countries. All-in-all, with their unique technology and highly green initiatives, Tennant Company is well-positioned for continued success in the cleaning industry.