Hampton Case Solution

UNIVERSITY OF WASHINGTON

Foster School of Business

ENTREPRENEURIAL FINANCE

Entre/Fin 457

Cash Budgeting

Please submit your balance sheet for December 31, 1979 and income statement for the four month period, September through December 1979, requested in question d below. There is no need to submit written answers to the questions.

Prepare:  Hampton Machine Tool Company                        9-280-103 Rev. 12/3/91

1. What is Hampton’s competitive position in the market place? Who are their suppliers? Who are the customers?

Porter’s five forces:

Competitive rivalry:  

Back in the days when Hampton Machine Tool Company (HMTC) was founded in 1915 and in the mid and late 1960’s, HMTC had a strong competitive position in the market with record production and profitability. In the beginning and the middle of the 1970’s the machine tool manufacturing business in St. Louis was hit hard and many machine tool manufacturing businesses were closed down, but HMTC survived. In 1978 and 1979 HMTC was getting back on track again after a few years of recovery. Since HMTC survived the crisis (a lot of competitors closed down= which means less competition) and because HMTC president, Mr. Cowins, is a widely respected man in the business community as an energetic and successful executive, HMTC must have a strong competitive position in the market. They have also been operating in the market for almost 65 years, which is a long time. HMTC has unfilled orders for 16,5 million dollars, which is money that HMTC with security is receiving. The reasons above are why HMTC has a strong competitive position in the market.

Supplier power:

Eletronics and labor

HMTC suppliers are companies that provides HMTC with raw materials and machine parts so HMTC can manufacture/produce new and specialized machines to their buyers. The suppliers bargaining power are not that strong if we look at raw materials, because raw materials are commodities so supplier power is low here. Supplier power for machine parts can either be higher or lower than HMTC. It depends on if it is a specific/customized machine parts or common machine parts. If it is a customized part the supplier will then have a higher bargaining power and vice versa if it is common part.

Buyers power:

The size of the company is the determine of is has bargaining power. (buyers power in the middle or Hamptons has more power compared to the buyers)

HMTC customers are military aircrafts and automobile manufactures in the St. Louis area. These two buyers have a pretty high buyers power, because they all belong in big industries that usually has a lot of money and therefore all manufactures are willing to produce products for/to them. Before 1970’s the buyers had more power because there were more manufactures to choose between, so the buyers power isn’t as strong as it has been. HMTC customers also pays a lot of the purchase amount upfront, which indicates that HMTC also has a little bargaining power over the buyers. In the end the buyers power is stronger then HMTC. Another factor that can effect the buyers power is the size of the buying company. If the company HMTC is selling to is small, then the buyers bargaining will most likely be low compared to HMTC and vice versa if it is a big company. So it can depend on the size of the buyer.

Threat of substitution:

Threat of substitution is not that high, because one of the only ways to substitute the manufacture is if the company (buyer/customer) starts producing the machines by themselves.

Threat of new entry:

Is low, because it requires a lot of start capital and is therefore a capital intensive industry. Companies needs to buy a lot of machines and tons of raw materials which is really expensive. There were also a lot of companies that closed under the crisis, which indicates that there are probably not a lot of companies who will like to enter the market.

1. Why did Hampton repurchase a substantial fraction of its outstanding common stock?  What is the impact of this repurchase on Hampton's financial performance?

There were some disagreements/dissidents or uncertainties between HMTC shareholders of the future of the company, so Hampton decided to repurchase stocks from the dissident shareholders. The reason for this can be to get rid of the dissident shareholders, so the shareholders agrees on the same path for the company and its future. Another reason can be to gain more control over the company and that can improve the trust and the price of the stock, because the outside will believe that Hampton knows that HMTC future looks bright and that is the reason why Hampton bought the stocks (insider information). Because of this the stock price will most likely rise.