Group 1

Spring 2010

Founded in 1987, by John Abernathy, current CEO- Wife Jean is current CFO

Does electrical contracting for heavy industrial installations, commercial and office buildings, educational institutions, public works, and many specialized systems including maintenance services

Competes in the Southern California electrical-contracting industry

Well established company known for excellent customer service

NIAT declined from 2002 to 2005

Growing industry Regulated by local cities and states Moderate technological innovation Change in contracting industry due to

economy Fragmented

Rivals J & J, Buck Electric, Power

Plus!, Daniel’s Electrical Construction Co., McBride

Electric, and Champion Electric, Inc.

New Entrants

Geothermic Energy

SubstitutesNon-licenced

electrical contractors

BuyersCommercial/

industrial clients, public sector and

private homeowners

SuppliersElectrical

Wholesalers

Bargaining Power

Of buyers: High Of suppliers: Medium

Intensity of Rivalry

Very high

Threat of Substitutes

None

Barriers to Entry

Low

Bargaining Power

Of buyers: High Of suppliers: Medium

Intensity of Rivalry

Very high

Threat of Substitutes

None

Factors Weight Rating Product

Degree of Regulation

5 0.5 2.5

Degree of technological innovation

15 0.6 9.0

Intensity of competition

30 0.1 3.0

Industry growth rate

30 0.7 21.0

Size of potential market

20 0.8 16.0

Totals 100 - 51.5

Success Factors Weight Rating Product

Management 15 0.7 10.5Financial Strength 10 0.4 4.0Customer Service 25 1.0 25.0Brand Image 35 0.7 24.5Marketing 20 0.5 10.0Totals 100 - 74.0

Intense competition - Low barriers to entry - Many competitors

Basis of competition - Price [esp. public sector]- Quality - Reputation

A few very large national competitors But they go after large contracts

More direct competitors include Buck Electric, Power Plus!, Daniel’s Electrical Construction Co., McBride Electric, and Champion Electric

Buck Electric specializes in solar photovoltaic

Most competitors are doing residential construction field, whereas J & J Electric is focused more on commercial and public sector [classrooms]

• The target market is all residential, commercial, industrial, and public-sector electrical-contracting work in the Inland Empire

• Price-sensitivity is high, especially in public-sector bidding

• Growth rate was high in residential construction in mid-2000s

• Current customer needs are: quality, price, on-time completion, initial installation, bringing public buildings up to code, and energy conservation incentives

• Future customer needs are renovations and add-ons

Declining of commercial and industrial construction, due to recession of early 2000s

Energy Policy Act of 2005 was passed and, as a result, State and local government legislation increasingly addressed code updates for older buildings

Population growth was increasing, creating more potential jobs

Greater affordability and demand for alternative-energy installations such as solar photovoltaic, fuel cells, and microturbine-power plants

Greater demand for networked installations and security systems

0

1

2

3

4

5

6

2001 2002 2003 2004 2005

050

100150200250300350400450500

2001 2002 2003 2004 2005

0

1

2

3

4

5

2001 2002 2003 2004 2005

00.10.20.30.40.50.60.70.80.9

11.1

2001 2002 2003 2004 2005

-500

50100150200250300350400450

2001 2002 2003 2004 2005

0

10

20

30

40

50

60

70

80

2001 2002 2003 2004 2005

Safe Zone

The company is in strong financial condition, but NIAT is declining and ACP is too high

In 2005…• Revenues increased 2.62%• Current ratio is 2.82—good working capital• Debt-to-equity ratio is 55%—good financial

leverage• Cash is $108M—good for future investment• Z2-Score is 8.57—well in the safe regionHowever…• NIAT declined 20% to $136.9K • ACP is 63.3 days

Strong reputation for integrity, responsibility, and reliability

Strong working relationships in the private sector Additional estimator/project manager enabled J&J to

bid on larger projects Master Builder software allowed for more precise

bidding Ahead in the experience curve Revenues increased 2.62% Cash is $108 Million Z2-Score is 8.6

Capability

Is this capability valuable?

Is this capability rare?

Is this capability costly to imitate?

Is this capability non-substitutable?

Competitive consequences

Performance implications

Master Builder Software

Yes Yes Yes No Sustainable competitive advantage

Above-average returns

Public-Sector Projects

Yes No No No Competitive parity

Average returns

Customer Service

Yes Yes No Yes Temporary competitive advantage

Above-average returns

Criteria for Sustainable Competitive Advantage

Not competitive with price wars in private sector Limited geographic expansion into different markets Low “hit rate” in public-sector bidding (1 in 15) Declining NIAT Very high ACP because of high A/R in public-sector

projects High ratio (9:1) of public- to private-sector projects No technical expertise in low-voltage applications,

alternative-energy-source installations, or system wiring

Principals have differing visions for the company

Low barriers to entry Increased price of raw materials Supply shortages

How can J&J…

… expand into private projects?… expand into other sectors and other

geographic areas?… keep up with its competitors?

Should J&J…… reduce its ratio of public to private projects?… pursue more community-college and

university bond projects?… become a general contractor?… broaden its services offered to include

home-audio or security systems, low-voltage installations, or installation of alternative-energy-power sources

… expand into other high-growth areas in California and neighboring states?

1. Reduce ratio of public/private jobs

2. Expand geographically

3. Offer advanced technical services

Become more selective in pursuing public projects But pursue the lucrative community-college and

university bond projects Get more residential-remodeling and commercial work Do more market research within the growth areas Form strategic alliances with corporate developments

Hire a marketing consultant to help promote the company’s name in the private sector

Continue working closely with other general contractors Continue the company’s culture of outstanding service and

ethical operations Continue current programs Increase market share Finance through cash and debt

Expand to other high growth areas in Southern California Expand into Northern California Increase market share Open new locations—one at a time—in developing parts of

the Inland Empire Acquire small 1–3 person firms in the right locations that

have the right skill sets Continue bidding on school and community-college projects

—but now in an expanded area Improve the hit ratio through better estimation of future

costs Continue the company’s culture of outstanding service and

ethical operations Continue current programs Finance through cash and debt

Begin offering high-tech services such as home-audio or security systems, low-voltage installations, or alternative-energy-power sources

Increase market share Seek and hire individuals (not all at once) with the experience

and expertise to install both systems and alternative-energy-power sources

Form strategic alliances with manufacturers of alternative-energy-power sources and telecom/network systems

Cross-train employees in these new areas Continue current programs Continue the company’s culture of outstanding service and

ethical operations Finance with cash and debt

Criteria

1. Reduce ratio of

private/public jobs

2. Expand geographical

y

3. Offer advanced technical services

Profitability P 5 7 9

Growth in revenues

P 5 8 7

Competitive Advantage

P 5 7 9

Investment required

N -3 -7 -7

Overall riskiness N -6 -7 -4

Overall Score 6 8 14

Increase revenues 15% and NIAT 10% Increase market share Aquire resources necessary to advance technology

Raw materials and operation equipment Hire individuals who are experienced in both new

and current systems Implement training and development programs Market to new and existing customers Continue the company’s culture of outstanding

service and ethical operations Maintain customer loyalty Continue current programs

If competition is severe in offering new advanced technical services, causing revenues to lag projections by 15%, then J&J should intensify its marketing efforts

Increase revenues 20%/yr and NIAT 15%/yr Increase market share Offer price incentives for first-time customers Maintain customer loyalty Form strategic alliances with manufacturers of

alternative-energy-power sources and telecom/network systems

Cross-train employees in these new areas Stay current with the latest technological advances Continue the company’s culture of outstanding service

and ethical operations Continue current programs

If copper-wire costs increase, causing NIAT to lag projections by 15%, then J&J should use R. F. Romex wire instead of electrical conduit