Management Control Systems Case Study: Las Ferreteri­as De México, S.A. De C.V.

1. Introduction

La Ferreterias de Mexico de C.V

2. Company History

The company Las Ferreteri­as de M©xico, S.A. de C.V. (Ferreteri­as) was the second-largest retailer of lumber, building materials, and home improvement products and equipment in Mexico. Ferreterias operated 82 stores in Mexico City and throughout most of the northern regions of Mexico. Each of Ferreterias' stores of ered between 10,000 and 20,000 stock keeping units (SKUs) in a retail sales area, an outside lumberyard area, and a garden center. The total store areas ranged from 10,000 to 35,000 square feet. Ferreterias was founded in 1902 in a suburb of Mexico City by Fernando Gonzalez' grandfather. Over the years, the company added more locations. It was listed on the Mexican Stock Exchange in 1983. In 2012, Ferreterias had sales of 2,210 million pesos and profi ts of almost 120 million pesos (see summary fi nancial statements in Exhibits 1 and 2 ). 1 Starting in the late 1980s, Fernando Gonzales launched a major company expansion to take advantage of the growth in the Mexican economy. He thought that his company needed to emulate the methods of the large American homebuilding retailers, such as Home Depot and Lowe's, in order to survive. Thus, improving market share and improving operating efficiencies became Ferreteri­as' strategic priorities. The store managers enjoyed considerable autonomy. They were responsible for hiring, firing, and supervising their store's personnel. While the stores had the same architectural designs and some basic stock keeping requirements, the individual store managers were allowed to adapt their merchandise of erings, their inventory levels, and their advertising and promotional activities to their local markets, which were quite diverse. The store managers were given considerable latitude to reduce prices to move excess inventory or to meet competition. They were responsible for making credit-granting decisions, although for large accounts they were expected to ask finance personnel at headquarters to perform a credit check. And some aggressive store managers tried to generate new business by calling on prospective customers themselves. The 82 stores were organized into nine geographical regions. The regional managers, each of whom was a former store manager, provided oversight and advice. Their role was seen as an important part of the management structure because most of the store managers had little formal education. Only a few were college educated, and few of those had formal business education. Each region also contained a regional sales of ce with specialists who worked with larger customers, primarily larger contractors, in selecting materials and estimating costs. Sales to these customers, however, were made through the store nearest to the job.

2. Issues

Las Ferreteri­as de M©xico, S.A. de C.V. income statement as of 12/31/2012 (Ps 000)

• Net Sales - 2,216,540
• Costs of Sales - 1,582,670
• Gross Margin - 633,870
• Selling, General and Administrative Expenses - 377,580
• Depreciation Expense - 65,740
• Interest Expense - 14,320
• Total Expenses - 457,640
• Earnings before Taxes - 176,230
• Income Tax Provision - 58,240
• Net Earnings after Taxes - 117,990

Las Ferreteri­as de M©xico, S.A. de C.V. balance sheet as of 12/31/2012 (Ps 000)

• Assets Current Assets Cash and Cash Equivalents - 79,880
• Short-Term Investments - 5,430
• Accounts Receivable - 16,550
• Merchandise Inventory - 387,550 489,410
• Property, Less Accumulated Depreciation - 857,650
• Long-Term Investments - 8,720
• Other Assets - 14,060
• Total Assets - 1,369,840
• Liabilities Accounts Payable - 211,260
• Other Current Liabilities - 57,860
• Long-term Debt - 384,350
• Other long-term liabilities - 67,140 720,610
• Shareholder' Equity Preferred Stock ($10 par; 300,000 shares issued) - 30,000
• Common Stock ($20 par; 1,000,000 share issued) - 200,000
• Retained Earnings - 419,230 649,230
• Total Liabilities and Shareholder Equity - 1,369,840

STRENGTH

• Excellent sales staff with strong knowledge of existing products
• Good relationship with customers
• Good internal communications
• High traffic location
• Successful marketing strategies

WEAKNESSES

• Reputation for innovation
• Currently struggling to meet deadlines - too much work?
• High rental costs
• Market research data may be out of date

OPPORTUNITIES

• Similar products on the market are not as reliable or are more expensive
• Loyal customers
• Product could be on the market for Christmas
• Customer demand - have asked sales staff for similar product
• Cash flow problems
• Holding too much stock
• Poor record keeping

THREATS

• Competitors have a similar product
• Competitors have launched a new advertising campaign
• Competitor opening shop nearby
• Downturn in economy may mean people are spending less

3. Recommendations

As with domestic marketing, Las Ferreteri­as de M©xico, S.A. de C.V.) , have to decide how they are to compete in their chosen market. According to Porter, the principal sources of competitive advantage are lower costs of production and a differentiated product offering. Lesser financially endowed usually have the former, but may have to work hard to obtain the latter. Should firms not be able to obtain a cost advantage, one possible option is to ""outsource"" production. This is a very common phenomenon of developed countries. However, it does take careful coordination and setting up if it is to be successful. There are other strategies available to marketers other than low cost, these include market leadership, market challenger or market flanking. All these strategies require information on competitors as well as on "environmental" conditions.

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