Essay, Research Paper: Ust Inc.

Project #1
Olga Kononova
BMGT495
I.
Tobacco is a plant that grows in a wide range of soil and climate conditions. Its non-edible leaf is
dried and used to produce cigarettes, pipe tobacco, cigars, chewing tobacco and snuff. Companies
that manufacture and market cigarettes, snuff, cigars, chewing tobacco, and other tobacco products,
are tobacco industries.
UST Inc., through its subsidiaries, operates predominantly in the tobacco industry as a manufacturer
and marketer of moist smokeless tobacco products, and also produces and markets premium wines.
The Company operates primarily in the United States.
The Company's principal smokeless tobacco products and brand names are divided into moist and
dry categories. Under the moist classification, the Company's brands include Copenhagen, Skoal
Long Cut, Skoal, Copenhagen Long Cut, Red Seal, Skoal Bandits and Rooster. The Company's
products under its dry category include the brands Bruton, Cc and Red Seal. The Company markets
its moist smokeless tobacco products throughout the United States, principally to chain stores and
tobacco and grocery wholesalers. Approximately 35% of the Company's gross sales of tobacco
products are made to five customers, one of which, McLane Co. Inc., a national distributor, accounts
for 19.7% of the Company's consolidated revenue.
The Company is a producer of premium varietal and blended wines. Chateau Ste. Michelle and
Columbia Crest Varietal Table Wines and Domaine Ste. Michelle sparkling wine are produced by
the Company in the state of Washington and marketed throughout the United States. UST Inc. also
produces and markets two California premium wines under the labels of Villa Mt. Eden and Conn
Creek. Approximately 60% of the Company's wine sales are made to 10 distributors, none of which
accounts for more than 26% of total wine sales. Substantially all wines are sold through state-
licensed distributors with whom the Company maintains satisfactory relationships.
The Company's other operations include the international operation, which markets moist smokeless
tobacco in select markets, and the cigar operation, which manufactures and markets the premium
cigar brands Don Tomas, Astral and Habano Primero.
II.
Mission Statement.
Today we are leaders on the smokeless tobacco market; one of our products is marketed to ‘‘smokers who can’t smoke’’. Our goal to increase operating efficiency and provide you best service through our Sales Tracing and Reporting System (STARS) . We also take care about your health, prohibit our seller to sell our product to not adult people.
This statement does not clarify what technology they use, concerns for survival, growth and profitability and self-consept.
III.
Table1
External Factor Evaluation Matrix for UST, Inc.
Key External Factors Weight Rating Weighted Score
Opportunities
1.Internet Advertising 0.05 1 0.05
2. Global Expansion 0.15 1 0.15
3. Technological Development 0.20 2 0.4
4.Increased demand due to public banning of smoking 0.05 3 0.15
5. More social pressure to quit smoking, thus leading users to switch to alternatives 0.10 3 0.3
Threats
1. Legislation against the tobacco industry 0.15 2 0.3
2. Increasing competition 0.10 3 0.30
3. Bad media exposure from FDA 0.10 2 0.20
4. Environmental protection laws 0.05 1 0.05
5. Smokeless tobacco market is concentrated in one region 0.05 2 0.10
TOTAL 1.00 2.00
The EFE Matrix for UST Inc., illustrates that at least two main factors affecting industry, as
indicated by the weight of 0.15(Global Expansion) and 0.2(Technological Development). UST was
not pursuing strategies that effectively capitalize on this opportunity, as indicated by the rating of 1
and 2 respectively. The total weighted score of 2.00 indicates that UST is below average in its effort
to pursue strategies that capitalize on external opportunities and avoid threats.
b)
Table.2.
The Comparative Analysis of Financial Ratios UST, Inc.
1997 Chg, % 1996 Chg, % 1995
I. Liquidity Ratios Current ratio
UST, Inc. 2.653 80.599 1.469 71.38 1.548
Quick Ratio
UST, Inc. 0.734 25.68 0.584 15.41 0.636
NWC
UST, Inc. 275325 91.17 144017 78.96 153847
II. Activity Ratios ACP
UST, Inc. 17.39 (14,88) 20.43 (9.37) 19.19
APP
UST, Inc.
FAT
UST, Inc. 0.395 6.18 0.372 5.3 0.375
Total Assets Turnover
UST, Inc. 1.695 (- 0.17) 1.698 1.92 1.663
Inventory turnover
UST, Inc. 0.829 (8.6) 0.907 (10.28) 0.924
III. Debt RatiosDebt Ratio
UST, Inc. 0.47 (27.69) 0.65 (24.8) 0.625
Debt to Equity
UST, Inc. 0.228 (35,59) 0.354 (32.94) 0.34
Times Interest Earned
UST, Inc. 95.46 (19.09) 117.99 (57.11) 222.6
IV. Profitability RatiosGPM
UST, Inc. 0.81 (1.21) 0.82 (0.73) 0.816
Operating Profit Margin
UST, Inc. 0.537 (4.28) 0.561 (3.76) 0.558
Net Profit Margin (NPM)
UST, Inc. 0.313 (1.57) 0.318 (4.86) 0.329
ROI
UST, Inc. 0.530 (1.85) 0.540 (3.1) 0.547
ROE
UST, Inc. 1.02 (37.8) 1.64 (30.14) 1.46
Earnings Per Share
UST, Inc. 2.366 (4.28) 2.472 (35.93) 3.693
c)
Table 3
Internal Factor Evaluation Matrix for UST Inc.
Key internal factors Weight Rating Weighted score
Internal strengths
1. Great sales tacking and responding system(STARS) 0.10 4 0.40
2. Increased in sales 0.15 3 0.45
3.Leader in the smokeless tobacco market 0.05 4 0.20
4.Highest profit margin and return on assets 0.10 4 0.40
5.Introducing new products 0.10 4 0.40
6.Good product planning 0.10 3 0.30
7. Good image (discourage the use of its products by minors) 0.05 3 0.15
8. Good diversification 0.10 3 0.30
Internal weaknesses
1. Increased expenses 0.10 1 0.20
2. Most properties located in one area 0.05 2 0.10
3. Decreasing net earnings 0.10 1 0.10
Total 1.00 3.00
The firm’s major strengths are STAR, introduction of a new produce, highest profit margin and
return on assets, leader in the smokeless tobacco market as indicating be rating 4. The major
weaknesses are location and earnings. The total weighted score of 3.00 indicates that the firm is
above average in its overall internal strength.
c)
Table 4
A competitive Profile Matrix
UST Inc. Conwood Pinkerton
Critical Success Factors Weight Rating Score Rating Score Rating Score
Advertising 0.20 4 0.80 4 0.80 3 0.60
Product Quality 0.15 3 0.45 3 0.45 3 0.45
Price Competition 0.10 3 0.30 3 0.30 4 0.40
Management 0.10 3 0.30 3 0.30 3 0.30
Financial Position 0.10 3 0.30 3 0.30 3 0.30
Customer Loyalty 0.10 2 0.20 1 0.20 1 0.0
Global Expansion 0.20 1 0.20 1 0.20 1 0.20
Market Share 0.05 4 0.20 3 0.15 2 0.10
TOTAL 1.00 2.75 2.70 2.45
5.
SPACE Matrix for UST Inc.
Financial Strength Rates
The current ration 2.65 is higher than required, and than total industry average(0.87) 4.0
The leverage ratio is low the required and than in industry (UST 0.89 Industry 1.28) 1.0
The UST net earnings was 439,138 down to 6% 2.0
Net sales increased to 2.18 % 2.0
9.0
Industry Strength
Growth potential 3.0
Financial stability 4.0
Capital intensity 4.0
11
Environmental Stability
Inelastic demand -6.0
High barriers to entry into market -5.0
Stable market -4.0
-15
Competitive Advantage
The UST has large custom base -4.0
The UST has good advertisement -2.0
-6.0
Conclusion
ES Average is –15/3=-5 IS Average is + 11/3=3.6
CA Average is –6/2=-3 FS Average is +9/4= 2.25
Directional vector Coordinates: x-axis: -3 + (+3.6)=0.6
y-axis: -5 +(+2.25) = -2.75
The UST should pursue Competitive Strategies.
Competitive strategies include backward, forward, and horizontal integration; market penetration; market development; product development; and joint venture.
6. Strategy Matching (10%)
What are some possible strategies that match external factors (threats and opportunities) with internal factors (weaknesses and strengths)?
Which of the company's current strategies appeared?
What is an underlying grand strategy or strategy theme?
7. A QSPM for UST Inc.
Critical Success Factors Strategic Alternatives
Market development Product Development Joint venture
Weight AS TAS AS TAS AS TAS
Opportunities
1. Increasing differentiation of the products 0.10 4 0.40 4 0.40 4 0.40
2. Increasing demand of the products 0.15 4 0.60 4 0.60 4 0.60
3. Increasing area of tobacco growth 0.10 4 0.40 4 0.40 4 0.40
Threats
1. Tobacco control 0.15 2 0.30 2 0.30 1 0.15
2. Possible stock of the product 0.10 1 0.10 1 0.10 1 0.10
3. Unstable partners 0.05 1 0.05 - - 1 0.05
4. New unknown market 0.10 2 0.20 - - 1 0.10
5. Low value of the dollar 0.10 1 0.10 1 0.10 4 0.40
6. New unfamiliar for customers product 0.15 - - 2 0.30 - -
1.00
Strengths
1. Profit rose 10% 0.15 4 0.60 4 0.60 4 0.60
2. New divisions 0.10 4 0.40 4 0.40 4 0.40
3. New product 0.15 4 - 4 0.60 4 0.60
4.Increasing Capacity utilization 0.10 4 0.40 - - 3 0.30
5. Attracting new customers 0.15 4 0.60 4 0.60 4 0.40

Weaknesses
1. The company is slow in globalization 0.15 - - - - 1 0.15
2. Increasing taxes 0.10 1 0.10 1 0.10 1 0.10
3.Increasing number of workers 0.10 1 0.10 2 0.20 1 0.10
Sum Total Attractiveness Score 1.00 4.35 4.7 4.87
AS= attractiveness Score; TAS= Total Attractiveness score
Attractiveness Score: 1=not acceptable;2=possibly acceptable; 3=probably acceptable;4=most acceptable
The most attractive strategies for the UST are product development and joint venture.
8.
A Pro Forma Income Statement and Balance Sheet for the UST Inc.
Pro Forma Income Statement Prior Year 1997 Projected Year 1998 Remarks
Sales 1,401,718 1,611,976 15% increase
Cost of Goods Sold 265,193 312,927 18% increase
Cross margin 1,136,525 1,299,049
Selling And administrative expenses 398,468 483,592 30% of sales,
Earnings before interest and taxes 738,057 815,456
Interest 7,451 7,451
Earnings before taxes 703,857 808,005
Taxes 264,719 161601 20% rate
Net income 439,138 646,404

Retained earnings 528,518 646,404
Pro Forma Balance sheet
Assets
Cash 6,927 10,390 Incr.100%
Accounts Receivable 67,702 135404
Inventory 319,666 560,000
Prepaid expenses and other current assets 31,753 45,965
Total Current Assets 426,048 751,759
Property, plant and equipment net 326,709 300,709 Add 2new plant $20 million each
Total Assets 826,714 1,052,468
Liabilities
Shot-term obligation 10,000 20,000
Accounts payable and accrued expenses 119,345 169,174
Income taxes 37,174 45,000
Total Current Liabilities 166,519 234174
Long-term Debt 100,000 140,000 Borrowed $40 million
Postretirement benefits other than pensions 73,868 76,868
Other liabilities 48,396 50,634
Total Liabilities 388,783 501,676


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