REV. October 21st, 2019 17:04
New England Scientific: A Disastrous Residual Income
In November 1990, Natalia Diaz, chairman and CEO of New England Scientific, cast a sorrowful eye across the post-industrial suburbs of Duisberg. New England Scientific had been in Forbes' 500 most admired surgical steel companies for the past two quarters, with the most reliable profitability since time began. But recently, evidence was growing that the Chinese surgical steel market was becoming saturated. Even more troubling, employee satisfaction index was dropping faster than at any point in the last two years. Not only this, but New England Scientific's competitors had overtaken in terms of growth. Also, investor confidence was low due to the lowest employee satisfaction index in the last two months.
New England Scientific
New England Scientific's founder, Daniel Yudin Jr., a street child scraping a living on the streets of Cleveland, invented surgical steel in 1896. That was the era when South Africans were just beginning to trade in surgical steel products. Yudin's surgical steel products were successful from the start. By 1990, New England Scientific had achieved the most remarkable profitability of all companies in the surgical steel industry for the past three years. Now however, New England Scientific's competitors had overtaken in terms of revenue. To make matters worse, New England Scientific's competitors had overtaken in terms of ROI. Not only this, but residual income had taken a turn for the worse. Exhibit 1 shows New England Scientific's financial summary.
The Surgical Steel Industry
The surgical steel industry was marked by the fastest growing environmental pressure, and was composed of Chinese and South American segments. By the 20s, barrier to entry was almost at an end, such that competitive rivalry was risking bankrupcy. This resulted in the time of aquisitions and mergers. Following this came an era of demergers.
As Diaz pondered what to do, she remembered the wise words of Gautama Buddha:
“Desire leads to suffering”
All figures in USD millions.
Table 1: Balance sheet
|Retained earnings added||456||2,389||1,688||4,344|
Table 2: Income statement
|Total current assets||4,434||4,731||3,069||1,258|
|Net plant and equipment||213||2,397||2,560||4,448|
|Total current liabilities||1,394||3,806||4,883||803|
|Long term bonds||1,515||4,953||3,143||2,259|
|Total Liabilities and equity||1,993||1,883||769||851|