Gap Analysis Lei

Problem Solution: Lester Electronics Inc.

Situation Analysis and Problem Statement for Lester Electronics

Despite the popular belief generated by the abundance of new headlines reading fraises such as China Trade Deficit, Globalization and Outsourcing, transition of product manufacturing to Asia is not the latest fad. Low wages and the abundance of labor have been exploited by distributors and wholesalers of all countries.

"IN THE ELECTRONICS industry, the world of logistics is dominated by the shift of production to Asia, the need for globalization and even greater demand for a global supply chain" ("South China Morning Post", 2006)

In 1978, Bernard Lester of Lester Electronics (LEI) realizing what low cost product acquisition could do for his company, struck a deal with a nine year old, respectable Korean manufacturer Shang-Wa.

The business does not hold still, and companies forced to compete across borders and continents. To become real global player cheap supply is not the only needed component. Therefore companies are acquiring and merging internationally, creating partnerships and joint ventures with governments and companies abroad. Lester Electronics is forced to deal with new global influences on business and evaluate it's business future security.

Lester Electronics Situation Background

Lester Electronics and Shang-wa Electronics business deal turned into a 35 year relationship with mutual benefits. The exclusive distribution agreement secured LEI as a sole distributor of Shang-wa capacitors in the US market. Mr Bernard Lester used his company sole distribution right along with the relationship between LEI and two other US manufacturers to create a product line aimed at original equipment manufacturers and small local distributors. The CEO's of both companies, Bernard Lester and John Lin, became friends and Mr Lester invited John Lin to LEI's board of directors. LEI grew into a profitable enterprise with current revenues of $500 million. The company went public in 1984 and for past three years posted over 100% annual growth in net income, 58% increase in revenue for the past year with almost no derogatory changes in the balance sheet and healthy organic growth.

Shang-wa Electronics significantly benefited from its relationship with LEI. Shang-wa capacitors represent 43% of LEI revenue. Shang-wa posted a double digit revenue growth for 3 consecutive years generated a healthy 10% profit margin of 10.9 million. The growth of net income is outperforming the revenue growth for the same period and the positive 34 million increase in company assets coming from categories such as account receivables, increase in capital assets creates an impression of a healthy company. John Lin has expressed interest in retirement and mentioned to Mr Lester an interest in joing venture for LEI and Shang-wa.

Before the discussion of possible joint venture materialized, LEI and Shang-wa are individually approached by larger companies who express interest and intent of their acquisition. Transnational Electronics Corporation (TEC) is seeking to purchase Shang-wa, while Avral Electronics, S.A. is pursuing Mr. Lester for purchase of LEI.

Issue Identification

Key issues surrounding the two companies stem from their financial dependence on each other and a 35 year old agreement secured more by handshake then by solid contract. "If sturdy fences make for good neighbors, then solid contracts make for strong strategic partnerships." (MIT Sloan Management Review, 2005) The latter is absent between these companies, placing the 43% of LEI revenue under significant risk. Shang-wa acceptance of sale will undoubtedly lead to LEI loss of exclusive supplier relationship. The scenario suggests that LEI currently does not have another international source for capacitors capable of filling in the Shang-wa void. If LEI attempt to acquire Shang-wa it could face a bidding war with TEC a much larger opponent and would have to produce funds for the purchase.

Opportunity Identification

Ð'* The issues are forcing LEI to do something and can lead LEI into multiple opportunities. LEI could formally discuss the benefits and costs in creating a joint venture with Shang-wa.

Ð'* LEI has the opportunity to increase business and capital investment by purchasing Shang-wa out right.

Ð'* LEI and Shang-wa could sell their companies to their perspective buyers

Lester Electronics Problem Defined

As the previously discussed issues portray, Lester Electronics faces multiple external and internal issues. Facing unavoidable external business changes, and in effort to remain a strong domestic distributor while capitalizing on new global opportunities, Lester Electronics has the opportunity to re-evaluate and change the companies current business practices to secure prosperous future for it's shareholders.

Lester Electronics End-State Goals

Lester Electronics and Shang-wa Electronics goals should be the following:

Ð'* Lester Electronics enters a joint venture with Shang-wa which leads to friendly acquisition of Shang-wa.

Ð'* Lester Electronics remains preserves the current revenues and remains a strong company in electronics market and stands to benefit regardless if the company is sold or left to operate as independently.

Ð'* Lester Electronics is able to avoid unfriendly acquisition from Avral Electronics, S.A.

Ð'* Shang-wa is able to avoid unfriendly acquisition from Transnational Electronics Corporation.

Alternative Solutions for Lester Electronics

In the previous week paper, the learning team performed a study to identify potential alternative solutions to maximize LEI's shareholders' wealth. Number of possible solutions where identified to achieve the stated goals. The solutions are:

Create a joint venture between LEI and Shang-wa

Diversify supply chain to minimize single vendor dependency

Increasing sales and revenue by 10%

LEI acquires Shang-wa.

The Alternatives Analyzed Against the Goals

UOP nine step problem solution model offers the methodical process of analysis of alternatives in terms of their support toward the

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