Case 1: Strong Tie Ltd.

Background
Located in Winnipeg, Minnesota, Strong Tie Ltd. is a familyowned corporation that is still
owned by the Johnstone family. Strong Tie Ltd. designs and makes custom structural connectors.
These connectors are used to reinforce wood joints in the construction of houses, fences, and
other edifices. Strong Tie Ltd. has been a major leader in this industry, however there is growing
competition from low-wage countries such as China.
They previously had a market share of 70 percent but that number has now dropped to around 60
percent. The competition from China has a growing market share of 30% due to their more
affordable prices. Currently the Chinese corporations are not customizing their products but if
they did, then Strong Tie Ltd. would lose even more of their market share.
In recent years the cost of metal has gone up. This caused Strong Tie Ltd. to attempt to
implement a just-in-time strategy in order to save costs. They wanted to reduce inventory but the
strategy was inefficient for their business. With their high demand of customized goods, it was
difficult to forecast demand for their products. Strong Tie Ltd. also uses Net 60 payments which
is inefficient. Many of their clients go past the due dates when it comes to payment. Large clients
such as Home Depot are often late. Strong Tie Ltd. is losing available cash by this method of
payment since most of their payments are received late.
In order to reduce labor costs, Strong Tie Ltd. has reinvested its factories. They upgraded to new
equipment and faster computers. More labor was being automated in order to improve
competitiveness. Despite these efforts, Strong Tie Ltd. is still losing market share.
If Strong Tie Ltd. does not change their current situation, then they are expected to have a huge
loss. The CATO forecast will be negative and gross debt will continue to increase. There is a low
growth of .92 percent for the next three years. Strong Tie Ltd. will have a continuing loss of
market share to their competitors from China. It will be difficult for the company to continue to
compete with new competitors unless something changes.

Scenario 1
I was optimistic in my forecast for my first scenario. In my assumptions, Strong Tie Ltd. has
become more efficient in order to reduce the cost of goods sold every year. Sales are increasing
by $1000 every year. This dropped the variable cost estimate from 0.875 to 0.5 and resulted in a
change in the variable costs as a proportion of sales from -10,199 to -7030 in 2009.
Strong Tie Ltd. cannot reduce the amount of inventory they have due to their demand of
customized products so inventory was left the same. The increased sales dropped the working
capital estimate from .34 to .27. While the working capital estimate dropped, the growth
increased from a low .92 percent to 5.72 percent and the change of networking capital decreased
from -52 to -310.
The biggest cost for Strong Tie Ltd. was its capital replacement -24,328. Since this is mostly
affected by total fixed assets, Strong Tie Ltd. had to liquidate most of the assets and then buy
more assets later in order to improve their CATO. Although the resulting CATO was not a

positive number at -2545, the numbers are heading in a positive direction which is good for the
company although it can be a sign to investors that the firm is unhealthy.
Scenario 2
My assumptions were more pessimistic in the second scenario as Strong Tie Ltd. continues to
invest in its assets. Sales continued to drop as more clients purchased from low income countries
such as China. Strong Tie Ltd. continued to invest their money in more assets but did not change
their management of other areas of their income statement.
The declining sales resulted in a higher variable cost estimate of 0.95 rather than 0.875. As a
result, variables costs as a proportion of sales decreased to -9,658 in 2009 from -10,199. The
working capital estimate was also affected by sales and increased to 0.38. There is now a
negative growth of -3.18%.
The change in networking capital is now 175 compared its previous -52 and the cost of capital
replacement decreased to -27,325 from -24,328. The CATO forecast for the next couple of years
is expected to continue to decrease to -33,198 in 2011. Gross debts are expected to increase and
reach $90,308 in 2011.

Recommendation
It is my recommendation for Strong Tie Ltd. to come up with a new strategy in order to change
their CATO forecast and reclaim their lost market share. The most effective strategy is for Strong
Tie Ltd. to liquidate their assets. In my optimistic forecast, I sold most of their assets in order to
reduce their CATO as much as possible. Strong Tie Ltd. should also focus on a new marketing
strategy in order to increase sales and work on reducing the cost of goods sold. By following my
recommendation, Strong Tie Ltd. will see an improved growth rate and a better CATO forecast.