Case Study, (Assignment 1)
HORIZONTAL GROWTH AT KOLEDA PURERENT, INC.
The case of Koleda PureRent, Inc. illustrates how a smaller firm can achieve market power
and survive through horizontal integration. Growth, however is only the beginning of a
successful strategic process. It does not in sure long-term success, as there are numerous
strategic challenges for this and other firms in similar circumstances. The firm has reached
a size that could attract the attention of larger competitors. This new level of competition
would increase the hostility and complexity of the external environment. Due to the new
larger size, the firm will also encounter internal problems in such areas as management and
Koleda PureRent, Inc. is a small and relatively new firm. It initially was located in the
eastern U.S., and was incorporated over ten years ago with more than one hundred retail
rental stores. These stores appealed to the desire of consumers lacking cash or credit to rent
products for a short time period. The firm struggled along, fighting problems that come
from small size and inadequate cash flow. Being small meant paying high interest rates for
a line of credit, and lacking clout when buying additional supplies and equipment for its
stores. After nine years of slow growth, Koleda PureRent, Inc. decided to change strategies.
The time appeared to be ripe for faster horizontal growth. Koleda PureRent, Inc. using
financing from a friendly bank, bought out a similar-sized competitor located in its
competitive area for $ 20 million in cash. In addition, it purchased 51 percent of the stock
of a larger rental firm in the south-eastern U.S. for $ 18 million. These actions meant that
in one year it had more than tripled in size and in the market it served. It then organized
itself geographically, with three layers of management below the president. Store managers
reported to 55 regional managers, who in turn reported to 11 regional vice-presidents.
Compensation for both regional and store managers was tied to store performance.
Corporate headquarters has centralized purchasing, financial planning, personnel, training,
individual store evaluations and site selection.
THE INTERNAL ENVIRONMENT
The firm has an excellent MIS system that each unit of merchandise and each rental
agreement. The computer at each store is connected to the main computer at corporate
headquarters. Each day’s activity is compiled for stores by region. Management has access
to daily, weekly and monthly data in order to make precise decisions about personnel, about
merchandise, about stores, and about regions. Since all merchandise goes directly from
vendors to stores, no warehouse or storage costs are incurred. Various vendors are used to
help keep merchandise prices competitive. Growth rates in revenues per store have been
increasing at 18 percent a year.
The biggest weakness facing Koleda PureRent, Inc. is the inefficiencies associated with
absorbing the two chains it purchased. Regional managers and store managers must learn
new methods and new information-gathering guidelines. Organizational cultures are slow
THE EXTERNAL ENVIRONMENT
The rent-to-own industry has been consolidating for several years. The biggest problem
facing the independent store or the small chain is a lack of adequate financing. Koleda
PureRent, Inc. was fortunate that it found a bank to provide the cash needed for expansion.
Current and future trends indicate that industry consolidation will continue. Koleda
PureRent, Inc. should aggressively continue to seek acquisitions or merger partners to
avoid being left out of the industry changes. If smaller firms will be squeezed out of the
industry, Koleda PureRent, Inc. must pursue growth to insure survival. Current social
trends appear to be growing. The U.S. continues to be an itinerant society. People move
more, so they need to own less. People want to do more, but lack storage for ownership of
things. Many people lack both cash and credit, so the purchase of furniture and appliances
is difficult. Rentals and rent-to-own activities will continue to be a growth industry. Koleda
PureRent, Inc. must take advantage of this trend to enhance per store sales and increase
cash flow for repayment of bank loans.
The rent-to-own industry is highly competitive. In 1994, the ten largest firms accounted
for 37 percent of the total industry sales. The rental industry must also compete with
discount and department stores for customers. Another serious threat is the growth of the
credit industry. Credit cards are available to almost anyone, giving people more choices
when considering a major purchase. Rent-to-own stores may lose potential customers to
big discount and department stores that offer easy credit or access to their credit cards. The
rent-to-own industry is heavily regulated and further legislation at the national level is
being considered. Restrictions on interest rates and fees, on contract language and
disclosure, and on lending in general would increase costs and further limit the profit
potential of the industry. Other near term costs that are expected to increase are shipping
rates, taxes, fuel/energy, and paper costs. Investors will shy away from an industry where
profits are falling and firms are consolidating.
Q1. What different strategies are available to this firm? (Hint: More horizontal growth,
Increase store sizes/activities etc. etc.) Give at least three other strategies
Q2. What are the problems and benefits associated with each strategy?
Q3. What would be the best choice of action?
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