Friendly Cards Incorporation Harvard Case Solution & Analysis

INTRODUCTION:

The Friendly Cards Incorporation was founded by Wendy Beaumont in 1978, with a view of offering different greeting cards to the public for many occasions. With her abilities and expertise, Ms. Beaumont has helped the company to grow rapidly and increased the revenues and Retained Earnings of the company through internal growth strategy and acquiring different other related businesses. Now she wants to expend the business further and realizes that future growth is needed.

PROBLEM STATEMENT:

The industry is being conquered by the Big 3 companies, namely: Hallmark, Gibson and American Greetings. They were leaders in terms of market share, and the other competitors are mostly small family driven and privately owned firms. The main problematic characteristic of the firms in the industry is the high fixed costs, mainly due to: the requirement of highly diversified product line, large investment in the distribution function and high inventory cost. The leaders of the market tend to enjoy greater market share as they threaten the new entrants to enter into the market. For this reason the card industry is highly capital intensive and highly competitive. In recent years, the number of companies has decreased by around 15%.

Additionally, the high competition leads to a lower margin of revenues because of the highly sensitive price factor. Also, sales were seasonal in nature with peak periods during holidays. Sales are seasonal in nature with peaks during major holidays.

Ms. Beaumont expanded her business by acquiring other similar companies for cash and equity investment. 1st they acquired Lithograph Publishing Co. and registered these companies in the Stock Exchange. Soon after, Friendly has swiftly prolonged by purchasing Glitter Greetings of Lansing, whose basic business was selling cards to supermarkets. Afterwards, it acquired Edwards & Co. of Long Beach, whose business was selling juvenile valentines through discount stores, drug stores, chain stores and a variety of other stores, as well as, to wholesalers and supermarkets. These acquisitions helped Friendly Cards Inc. to enhanced its business.

The primary problem Friendly Cards Inc. facing was that its business’s Twenty-five percent of sales are from prepackaged boxes, which have a higher return than regular greeting cards due to lower handling costs and lower return rates. Over 55% plus of sales take place in a 3 month holidays period. In the last year, The Friendly had purchased over 100 million envelopes for the use of the company with the investment of $1.5 million. After that event, the management of the Friendly Cards Inc. suggested to Ms. Beaumont that the company should go for either to purchase envelope making machine or to acquire the company whose business best suits to the company’s requirements or to equity financed the company to pay off its debts.

Question No. 1: Should Friendly invest in equipment to enable the company to make rather than to buy it envelopes?

Answer:

As per the calculations, estimates and reasonable judgment, as shown in the appendices, buying envelope making machine would generate an extra $218,000 every year of machine operations. On the brighter side, this amount could be used for making payments to banks and avoid interest expenses. The machine would be able to minimize the expenses as well. As marginal expenses in terms of Materials would be minimized as waste of material would not be possible in the machine. On the other hand, extra labor would be hired and the company would need and extra warehouse space since the machine would be able to produce all the envelops needed by the company. The suggestions would be Friendly Cards Inc. should purchase the envelope making machine. The company would be able to save and pay back its loans by $218,000 a year. This will also lower all three ratios on which the bank has put restrictions and with the help of this the company would be able to take loans from banks on easy agreements. In 1988, the loan/receivables ratio will cut to 0.88 from 0.9, interest-bearing debt/equity ratio will shrink from 2.62 to 2.43 and liabilities/equity ratio will decrease from 4.04 to 3.77. Friendly Cards Inc. just have to invest $500,000 in order to purchase machine and an extra $200,000 as a working capital requirement, invested only once but on the other hand the company would be able to save $1.5 million on 100 million envelops and would generate $218,000 positive return. It would be suggested as a clever move to purchase the envelope machine and gain a positive cash flow of $218,000 a year.....................

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