1. A
RMOUR
T
RUE
R
ENT, LLP.
CASE SYNOPSIS
The case of Armour
TrueRent, LLP. 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 ensure 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. Armour TrueRent, LLP.
THE COMPANY
Armour
TrueRent, LLP. is a small and relatively new firm. It initially
was located in
the Central U.S., and was incorporated over ten years ago with
2. 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 ti me 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, Armour TrueRent, LLP.
decided to change
strategies. The time appeared to be ripe for faster horizontal
growth. Armour
TrueRent, LLP. 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 North-Central
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.
3. 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 Armour TrueRent, LLP. 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
4. 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. Armour
TrueRent, LLP. was fortunate that it found a bank to provide the
cash needed
for expansion. Current and future trends indicate that industry
consolidation
will continue. Armour TrueRent, LLP. 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,
Armour
TrueRent, LLP. 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. Armour TrueRent, LLP.
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
5. 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 different strategies are
available to this firm Armour TrueRent, LLP.? (Hint: More
horizontal growth,
Increase store sizes/activities etc. etc.) Give at least three other
strategies.
6. (2 Marks)
Q2. What are the problems and
benefits associated with each strategy? (2 Marks)
Q3. What would be the best choice of
action? Why? (1Mark)
