Question

HORIZONTAL GROWTH AT KOLEDA PURERENT, INC.

CASE SYNOPSIS

The case of Koleda PureRent, Inc. illustrates how a smaller firm can achieve market power and survive through horizontal integration. Growth, however is only the beginning of a successful strategic process. It does not in sure long-term success, as there are numerous strategic challenges for this and other firms in similar circumstances. The firm has reached a size that could attract the attention of larger competitors. This new level of competition would increase the hostility and complexity of the external environment. Due to the new larger size, the firm will also encounter internal problems in such areas as management and logistics.

THE COMPANY

Koleda PureRent, Inc. is a small and relatively new firm. It initially was located in the eastern U.S., and was incorporated over ten years ago with more than one hundred retail rental stores. These stores appealed to the desire of consumers lacking cash or credit to rent products for a short time period. The firm struggled along, fighting problems that come from small size and inadequate cash flow. Being small meant paying high interest rates for a line of credit, and lacking clout when buying additional supplies and equipment for its stores. After nine years of slow growth, Koleda PureRent, Inc. decided to change strategies. The time appeared to be ripe for faster horizontal growth. Koleda PureRent, Inc. using financing from a friendly bank, bought out a similar-sized competitor located in its competitive area for $ 20 million in cash. In addition, it purchased 51 percent of the stock of a larger rental firm in the south-eastern U.S. for $ 18 million. These actions meant that in one year it had more than tripled in size and in the market it served. It then organized itself geographically, with three layers of management below the president. Store managers reported to 55 regional managers, who in turn reported to 11 regional vice-presidents. Compensation for both regional and store managers was tied to store performance. Corporate headquarters has centralized purchasing, financial planning, personnel, training, individual store evaluations and site selection.

THE INTERNAL ENVIRONMENT

STRENGTHS

The firm has an excellent MIS system that each unit of merchandise and each rental agreement. The computer at each store is connected to the main computer at corporate headquarters. Each day’s activity is compiled for stores by region. Management has access to daily, weekly and monthly data in order to make precise decisions about personnel, about merchandise, about stores, and about regions. Since all merchandise goes directly from vendors to stores, no warehouse or storage costs are incurred. Various vendors are used to help keep merchandise prices competitive. Growth rates in revenues per store have been increasing at 18 percent a year.

WEAKNESSES

The biggest weakness facing Koleda PureRent, Inc. is the inefficiencies associated with absorbing the two chains it purchased. Regional managers and store managers must learn new methods and new information-gathering guidelines. Organizational cultures are slow to change.

THE EXTERNAL ENVIRONMENT

OPPORTUNITIES

The rent-to-own industry has been consolidating for several years. The biggest problem facing the independent store or the small chain is a lack of adequate financing. Koleda PureRent, Inc. was fortunate that it found a bank to provide the cash needed for expansion. Current and future trends indicate that industry consolidation will continue. Koleda PureRent, Inc. should aggressively continue to seek acquisitions or merger partners to avoid being left out of the industry changes. If smaller firms will be squeezed out of the industry, Koleda PureRent, Inc. must pursue growth to insure survival. Current social trends appear to be growing. The U.S. continues to be an itinerant society. People move more, so they need to own less. People want to do more, but lack storage for ownership of things. Many people lack both cash and credit, so the purchase of furniture and appliances is difficult. Rentals and rent-to-own activities will continue to be a growth industry. Koleda PureRent, Inc. must take advantage of this trend to enhance per store sales and increase cash flow for repayment of bank loans.

THREATS

The rent-to-own industry is highly competitive. In 1994, the ten largest firms accounted for 37 percent of the total industry sales. The rental industry must also compete with discount and department stores for customers. Another serious threat is the growth of the credit industry. Credit cards are available to almost anyone, giving people more choices when considering a major purchase. Rent-to-own stores may lose potential customers to big discount and department stores that offer easy credit or access to their credit cards. The rent-to-own industry is heavily regulated and further legislation at the national level is being considered. Restrictions on interest rates and fees, on contract language and disclosure, and on lending in general would increase costs and further limit the profit potential of the industry. Other near term costs that are expected to increase are shipping rates, taxes, fuel/energy, and paper costs. Investors will shy away from an industry where profits are falling and firms are consolidating.

QUESTIONS

Q1. What are the problems and benefits associated with each strategy?

Q2. What would be the best choice of action?

Answer 1

1) There are sevarl strategies that the company may pursue with given threats and opportunities. Threeof them are - More expansion through buying more small competiting firms; exapnding the operation through increasing size of firms geographically; Diversification.

Lets discuss problems and benefits of eachs tratgey as follows -

First stratgey - more horizontal expansion : The biggest strength of this strategy is that it will able to have more market share as it will merge with more small companies. Another strength is that it has some networks with banks which provide it finnace as it did in first acquisition, so it is possible that it may get success to get more fund for further horizontal integration. Another benefit is that the company will not have to start from scratch as the acquired or merged firms will already be working in the industry. Additionally some competition will wipe out with such expansion.

However the biggest problem is that the industry see trend of consolidation implying that almost every large company will try to acquire small firms or to merge with other large firms. This will incraese the worth and hence price of each firm ready to be sold/merged. Another problem is the suspect of getting enough funds from the financial market to finance such expansion. Another notable problem will be related to absoroption of acquired firms as the company is laready struggling coping up with culture of new acquired firm.

Second stratgey : Exapnding scale of operation by the compnay itself through expanding store size, activities etc. This has benefit of not focussing on changing structure, culture, absorbing new acquired firms. It will create employmnet opportunities that may help getting finance or subsidy from government or social organizations. Economies of scale will emerge.

The problems with the second strategy includes huge investment, starting from scratch, regulations limiting capacity to increase operation size etc.

Third Stratgey : To diversify: As the thretas are coming from another industry, from credit firms and from department stores as well. The firm may diversify its operation and may enter into departmental store industry where side by side it can offer consumers discount on purchaisng goods or provdiding credits for goods and if not they can still rent at credit. This will reduce the competition from another industry working as sibstitute, it will diversify the risk, it will help reap advantage of other industry such as growth and attrcated investors.

Probelms will include landing into new industry with no epxerinec could be a great risk, it will require huge fund to diversify the operations.

2) AMongs the above provided, the stratgey of diversification seems best of choice. It has more benefits and lesser probelms. Infact problems could be solved easily than problems of other alternatives such as experts can be hired as promoters to diverse into departmental stores, finance can be bought from the new industry and the risk will be diversify greatly minimizinig it.