When STC began they only competed against a handful of companies, and although they currently hold the dominant share of the market, this increase in competition could upset future revenue. Increasing competition in the ATE segment will inevitably induce price wars, which will further deplete the profit margin of the company. If price wars were to take place, Teradyne seems to be the reasonable winner. In fact, over the last 5 years, Teradyne has amassed a total of $280 MM net income using only 20% of sales for selling, general and administrative as compared to STC’s $67 MM net income and 33% GS&A. Based on this comparison STC is much less efficient to its competitor. Industry growth among the many related sectors also sheds light on possible growth rates. The highest average annual growth rate of 20% in the computer sector and the lowest figure of 12% consumer products imply that a reasonable sales growth for the next couple years should be within the range of 12% to 20%.
The industry that STC is in has short product life cycle, rapid technology obsolescence, and fast growth. STC’s strategy will beat the competition by maintaining leadership in ATE segment and competing in the large scale integrated (VLSI) circuits segment by chasing market share and spreading high R&D cost over large sales volume. The growth of ATE segment is largely fueled by the growth of electronic products, but this success can be segment dependent. Although the ATE segment with 28% annual growth is exceptional, the success in the ATE segment cannot infer the same success in the VLSI segment. Despite the aid of ATE segment growth, the historical sales growth would still be approximately 12.8% from 1980 to 1984. This implies that STC, with a history of averaging around 12% sales growth, is unable to outpace the competition, and the 30% sales growth seems far out of reach. Historical cost of goods sold for STC and three other primary competitors over the years is around 45% to 46% of sales; this shows that STC has not been able to position itself well enough to obtain the unrealistic growth projection of 41%.
It is recommended that STC reorganize its operations to further improve its net profit margin. STC’s goal to increase R&D to maintain their strength of being technologically advanced in equipment and software is a step in the right direction. As STC increases its commitment to R&D from 12% to 16%, it is crucial to improve its cost of operation. Currently cost of goods sold are 45% of sales and the cost of SG&A is 30% of sales. These are two of the largest operational functions that are eating into profits. Moreover, accounts receivable, inventory and fixed assets will continue to grow during this projected “boom”, stressing the already limited resources STC has and forcing the firm to continue to generate cash either through additional debt or the sale of more equity.
STC is leveraging its growth through financing and has not shown substantial growth in its sales to overcome the downward cycle of leveraging. The $66 MM in equity from common stock sales in 1982 and 1983 allowed STC to continue its operation without having to drastically reorganize its operations. Based on the conservative estimates STC’s debt is increasing faster then sales, the additional debt would have to be financed by increasing debt service or increasing equity. It is strongly recommended that Mr. Watson continue to look toward ensuring the future of STC products by investing capital into R&D and technology. Technology advances so quickly that in order for STC to keep their share of the market, they need to keep up with technology and innovation in order to increase sales and profits. In short, STC is in need of a major overall to its operations, STC must increase cash to concentrate on R&D and sales growth, increase company efficiency and quality, and reduce receivables and inventory. Additionally, STC could benefit by outsourcing its manufacturing operations to reduce costs and improve its financial position.
Science Technology Company – 1985
