Lockwood Case: Strategy and Recommendations

Lockwood Case: Strategy and Recommendations

Situational Overview

Lockwood has been in a consolidation phase, in contrast to its previous history of sporadic and often unprofitable departures from its core businesses, and this is a trend that should continue in the future as the company reassesses its position and redeploys resources. Some information that would be very useful in determining an immediate and long-term strategy for Lockwood, such as overall debt levels, assets, group profits, etc., is not provided, and thus the recommendations include many assumptions, but regardless of the company's current financial position offloading projects that represent a cost burden and increasing expenditures in areas that will more likely yield returns makes sense. For that reason, based on the information provided by external consultants, it is recommended that Lockwood enhance its financial services and energy divisions while phasing out its packaging division and selling its forest product assets.

Each of these general strategic recommendations is discussed in detail below, yet they all come from the same basic need for the company to select core businesses that will guide its long-term strategy. For this reason, other general recommendations made are conservative growth and a period of reevaluation of corporate finance structure. Again, the details of current financing are not provided, however there are indicators n the case suggesting the company is heavily leveraged, perhaps to an undesirable degree. While the figures indicate a company with an abundant cash flow, a history of mishandling revenue and destroying profitability might be catching up with the company. Spending only on the most certain of projects during a period of realignment and perhaps discharging some company debt as part of the streamlining process might prove to be an advantageous strategic move in the long-run, along with the other specific recommendations made herein.

Financial Services

Though the financial services sector of Lockwood is still relatively new and is only moderately sized by industry standards, it is already able to generate fairly substantial revenue at a very low cost compared to other areas of Lockwood's business. The requested expenditure from this department of the company is projected to create a cash flow over the next decade of over two hundred million dollars, and more aggressive growth strategies can be pursued in the next several years if growth is achieved at the expected level after initial expenditures. A more aggressive growth strategy is actually warranted based on the information provided in the case, however this information was internally sourced and does not contain the level of detail and known accuracy in its assessment of the competitive environment to make these numbers entirely trustworthy or to engage in the level of aggressive expenditure and expansion that might otherwise be suggested. Instead, a moderate growth plan for the next three to four years, with the potential to increase growth more aggressively if targets are being met and the financial services industry progresses as predicted, will be the best way forward for this division of Lockwood. This will enable the company to take advantage of current trends that suggest a continued and growing high degree of profitability in the financial services sector (with appropriate expansion and diversification) while also remaining committed to increased conservativism and focus.

Energy

Lockwood's energy division is already quite profitable, but is also quite complex and growing in many different directions. While these interconnected areas of the company's energy concerns might all be necessary to the overall success of the division, they are also rather haphazardly aligned. This does not create an overall environment in the department that is conducive to aggressive growth, or to the funding of the many different projects and partnerships that the energy division of Lockwood is currently considering. Any one of these projects might be a good idea for the company to pursue, but not before it has its current operations in order, and even then the company should engage in one major energy project at a time until it has become more experienced in the various project types and areas. Sporadic entrance and departure from industries has been the hallmark of Lockwood's history and a major drain on its profitability, and it would be enormously foolhardy to fail to apply this lesson to the energy division. More controlled growth with greater levels of due diligence undertaken for each project is the way forward here.

For this reason, it is recommended that the many projects and partnerships requiring investments of multiple billions of dollars over the next several years be postponed where possible and concerned outright where postponement is not possible. It is recommended that the Florida pipeline project, which is seen as integral in maintaining current levels of competitiveness and which has been subjected to enough research and planning that full cash flow projections have been made (more than can be said for the other projects) go forward as planned, as this will require a minimal investment (totaling less than a billion dollars for the decade) and will provide substantial returns as well as cementing and expanding market share and real, internally-owned capabilities for Lockwood. Once this project is underway and the major changes within the company itself have been made, other projects can be considered and pursued in a more measured and carefully manner.

Packaging

Though some level of involvement in the packaging industry has been the only constant in Lockwood's volatile portfolio of businesses, it is clear that this division of the company is simply no longer profitable, and will likely be forced into a sale at some point in the coming decade if it is not offered for sale now. It is therefore recommended that the plants and other assets pertaining to the packaging industry be sold immediately, earning the company slightly over one billion dollars according to the estimates made by the consultants regarding the market value of these assets and properties. Keeping the packaging manufacturing operations going will still yield a positive cash flow for the next several years, though this cash flow is expected to decline to zero by year five and to grow increasingly negative thereafter, and as the spreadsheet shows over the course of the next decade operating the packaging part of Lockwood's holdings would come with a cost that, in net present value, would total almost forty million dollars. Keeping this division operational for four years and then selling the assets would generate a little over half a billion dollars in positive cahs flows form operations, however it is uncertain that the assets could be easily sold at that point or what the sale price would be -- as outdated technologies are one of the problems facing division, the value of these assets is only going to decline more rapidly as the properties and equipment age. The current estimated sale price of $1,200,000 is more than double the positive cash flow of operations from the next four years, making it very likely that cutting losses now and packing in the packing division is the most profitable move for the company.

Forest Products

The forest products division at Lockwood is like the energy division in that it is comprised of a complex set of assets and operations that support each other and that indeed are interdependent in their actual creation of value for Lockwood, yet that are ultimately separable and not all necessarily integral to Lockwood's best interests over the long-term. There is a lack of clarity in the information provided regarding some aspects of the forest products division, though in one area the information is quite straightforward: despite internal optimism, the external consultants make it quite clear that the competitive environment in the product-making area of operations is about to get a great deal more intense, with Lockwood ill-prepared to truly grow and meet the challenges that this will present to the company. With four newer plants able to produce higher qualities and quantities of products at more efficient rates all scheduled to come online within the next decade (and with two of these expected to be operational in the next few years), this area of the business is almost certain to become unprofitable for Lockwood.