Toll Brothers Incorporation: Company Detailed Analysis

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Introduction

Investment destination is a major factor that is considered by most investors in making their investment decision. Effective selection of the most feasible economic sector to invest in, involves comprehensive scanning of the environment. This enables the investor to analyze the various investment opportunities that are presented within the economy. In the recent past, the real estate investment vehicle has attracted many individual and organizational investors. This is due to the low volatility characteristic of the real estate investment compared to investment in the financial sector investment. Recently the real estate has been hit by the economic downturn. This has resulted into many people opting to rent homes rather than owning (David, 2006, 6).This presents and opportunity to various firms that have diversified their investment within the real estate sector of the economy, for instance the Toll Brothers. The paper presents a case study analyzing the operation of Toll Brothers incorporation. The objective is to illustrate the various strategies and policies that can be incorporated into the firm’s operation so that it can attain a high competitive advantage.

Organization background

Toll Brothers Company was established in 1967 with its founders being Bruce E. Toll and Robert. Its headquarters are at Horsham in Pennsylvania. The firm operates as a public limited company upon its incorporation in 1986. It deals with designing, building and financing of homes and apartments for the single family homes within various luxury areas of United States. The firm also deals with the designing and building of golf courses and country clubs within these areas. It is located in six regions and operates within 21 states of the US. During the year end 31 October 2008, Toll Brothers operated within 323 communities where it owned a total of 22,560 home sites. The firm also owned or entirely controlled through options an approximate 17,224 home sites of the proposed 137 communities. The firm has a total of 4,655 employees. Its shares are publicly traded since the firm is listed within the New York Stock Exchange market and the Pacific Exchange.

Mission statement

The operation of toll brothers is dedicated at ensuring that it provides comfortable homes and recreation facilities to a wide number of high and middle income earners all over United States.

Vision statement

The management of Toll Brothers is intends to increase the number of high quality and upscale residential buildings within US. This will involve the consideration of the price sensitive nature of the consumers.

Objectives

Toll Brothers Incorporation intends to boost its level of profits by 25% within its 2008/2009 financial year. This will enable the firm operate break from the loss of $ 297,810 that it incurred during the 2007/ 2008 financial year. With regard to market share, the management also intends to acquire a significant market share of 30% within the US real estate sector.

The management of the firm has formulated a strategy aimed at ensuring the expansion of the firm’s scale of operation.

Strategies

In order to achieve the above objectives, the management of the firm will continue to expand its geographical scale of operation. Initially this will include building luxury residential homes in all US states. The homes will be incorporated in the firm’s rental scheme. The expansion strategy will also entail the firm venturing into foreign market. This will be through the integration of the foreign direct investment strategy. This will result into the firm increasing the number of its annual buildings to 9,000. This represents an increase by a margin of 1,000 homes from its 8000 mark in the year 2005.

Firm’s external opportunities

The chances of success of Toll Brothers are high. This is due to the change of trend that has been witnessed within the real estate sector. Currently, most people prefer renting homes rather than owning. This is due to the increased cost of financing that is charged by the financing firms. These firms have also become more stringent in terms of issuing loans to invest in the real estate. This has made it costly for individual home owners to establish their own homes (David, 2006, 8). This presents an opportunity for Toll Brothers Incorporation in that it can establish more homes to meet the demand in the market.

On the other hand, there is a change in the tastes and preferences amongst the home owners with regard to architectural designs. The architectural field is experiencing rampant changes with new designs emerging. Since the firm is involved in architectural designing, there is increased opportunity for the firm to integrate these designs in its home and golf course building and designing. This will result into increased competitive advantage for the firm.

Firm’s external threats

The financial crisis has resulted into adverse effects within the housing industry. This has especially affected the mortgage sector. On the other hand, there is an increase in uncertainties in relation to the political environment. This has resulted into an increase in terrorist attacks which are a risk to the housing industry. In US, the housing industry has in the recent past come under tight government regulations through various Acts, for instance the Emergency Economic Stabilization Act. The increase in the unemployment rate in US also presents a challenge to the firm due to the decline in the income level amongst the consumers. The increase in competition has resulted into a decline in land available for development within US. This results into an increase in the cost of the land which limits the investment opportunities available for the firm (David, 2006, 10).

SWOT analysis

Strengths Weaknesses Opportunities Threats
The firm’s superior experience in architectural designing has led to the firm attaining a high reputation within the real estate market. The large scale of operation is making organizational control to be complex There is an increase in the world population. This presents increased market opportunities due to increased demand for homes globally. Increased competition within the housing industry. More domestic and foreign investors have ventured into the homes market.
The firm has a strong financial base. This enables it to successfully invest in multi-million dollar capital projects. The economic cycles affect the rate of interest in relation to the mortgage. The increase in income levels amongst the consumers enable them to rent luxurious homes Some of the investors are mimicking the architectural designs, marketing and operational strategies that are used by the Toll Brothers.
The firm has superior project management human resources. This enables the firm to conduct comprehensive analysis of its projects before their implementation There are deviations in regard deadlines set for project completion resulting into distractions. Advancement in technological environment presents an opportunity for the firm to increase its competitive advantage The financial crisis has presents a risk to real estate investment due to the fluctuations in the rate of interest.
The firm has effectively segmented its market in relation to the income categories. This includes the high and the middle income communities. The firm has limited access to the international market Increased chances of the firm attaining the benefits of economies of scale. This will result from the integration of a strategy aimed at acquiring other building firm’s. Diseconomies of scale may result upon the firm expanding its scale of operation. This will increase the cost of operation for the firm.
The firm has effectively differentiates the homes it builds to meet the needs of the customers Increase in the cost of the building materials There is a change in consumer confidence in the housing sector due to the effects of financial crisis

Competitive profile matrix

Toll Brothers faces stiff competition from various firms within the residential construction industry of the economy. The major competitor is the Hovnanian enterprises incorporation (Romans, 2009, 2). The table below illustrates the rating of these companies

Critical success factor Toll Brothers incorporation DR. Horton Incorporation Hovnanian enterprises incorporation Pulte Homes Incorporation
Low price 5 3 4 3
High quality 5 3 5 4
Product customization 4 2 4 4
Financial base 5 4 4 3
Management and human resource 5 4 5 5
Geographical scale of operation 4 5 3 4
Total 28 21 25 23

Internal evaluation matrix

Internal strength Weight Rating Weighted score
Strong management team 15 4 0.60
Strong financial base 13 4 0.52
Market segmentation 7 3 0.21
Product differentiation 8 3 0.24
History of good reputation 12 4 0.48
Internal weaknesses
High sensitivity to economic cycles 10 2 0.2
Fluctuations of the interest rate 14 2 0.28
Complexity of control 11 1 0.11
Limited access to international market 10 1 0.10
Major weakness= , minor weakness= 2 minor strength = 3 , major strength=4
Total weighted score

External evaluation matrix

Opportunities Weight (%) Rating Weighted score
Increase in population 15 4 0.60
Increase in income level of consumers 10 3 0.30
Technological innovation 11 4 0.44
Benefits of economies of scale 10 2 0.20
Threats
Increase in competition 7 3 0.21
Mimicking of the firms operational strategies 10 2 0.20
Effects of financial crisis 11 1 0.11
Diseconomies of scale 9 2 0.18
Change in consumer confidence 7 3 0.21
Increase in price of building materials 10 4 0.40
Poor=1, Below average= 2, above average=3, superior= 4
Total weighted score = 100 2.85

Firm’s SPACE Matrix

Internal strategic position External strategic position
Competitive advantage Industry strength
-6= worst , -1= best
-1 Quality of the homes
-1 Image of the firm
– 3 Effective market segmentation
-2 Efficient management
Average= -1.75		 +1=worst, +6= Best
+ 6Barrier to entry
+4Potential of growth
+4Consolidation of firms
+5Financial access
Average=4.75
Total x axis score =3
Financial strength
+5Return on assets
+4Leverage
+6Liquidity
+5Cash flow
Average = 5		 Environmental stability
– 2 Price elasticity
-1Competitive pressure
-2Technology
– 4 Economic fluctuations (inflation)
Average= -2.25
Total y axis score=2.27

From the averages illustrated in the various quadrants (3 and -2.75), it is evident that Toll Brothers should pursue an aggressive strategy. This is due to the fact that the firm is in a higher competitive position in the residential construction industry.

Boston Consulting Group Matrix

Toll Brothers Company undertakes various activities in their operation which makes the firm to have diverse strategic business units (Tutor2U, 2009, 2). These include architectural designing, building homes, designing of golf clubs and country clubs, mortgages, house component assemble and landscaping. Using the Boston Consulting Group Matrix, the various strategic business units are categorized as either stars, cash cows, question marks, or the dogs.

Y axis High

The stars
Golf clubs
Country clubs		 Question marks
Mortgages
Cash cows
Home building
Landscaping		 Dogs
House assemble component

Low X axis

High Low

Y axis = rate of growth

X axis = relative market share

The golf club and the county club are classified as stars. This is due to the fact that they have a high growth rate and a high market share. As a result they generate high returns for the firm. The mortgage business unit is classified as question mark since it has a low market share and a high potential of growth. The low market share results from the high number of firms that offer mortgage facilities in the market.

Landscaping and building of homes are classified as cash cows. This is due to the fact that they have a low growth and a high market share. They generate high returns for the firm which makes them to be the foundation of the firm. The house assemble component of the firm are classified as dogs. This is due to the fact that they have a low market share and rate of growth.

Quantitative strategy planning matrix (QSPM)

Key factor Alternative one
Acquisition of competitors 		Alternative two
Internal expansion
Weight Attractiveness score Total of attractiveness Weight Attractiveness score Total
Strengths
Strong management team 0.1 2 0.20 0.8 1 0.8
Strong financial base 0.1 3 0.30 0.6 2 0.12
Market segmentation 0.14 1 0.14 0.13 4 0.42
Product differentiation 0.12 4 0.48 0.15 4 0.6
Good reputation 0.9 0 0.00 0.12 3 0.36
Weaknesses
Sensitivity to economic cycles 0.12 4 0.40 0.13 3 0.39
Interest rate fluctuations 0.13 2 0.30 0.10 1 0.10
Control complexity 0.8 3 0.24 0.17 0 0
Limited access to international market 0.12 1 0.12 0.16 1 0.16
Total sum of weights=100% 100%
Opportunities
Increase in population 0.09 3 0.27 0.14 1 0.14
Technological innovation 0.14 4 0.56 0.12 2 0.24
Increase in income levels 0.16 2 0.32 0.10 1 0.10
Threats
Increase in competition 0.08 4 0.32 0.11 1 0.11
Change in consumer confidence 0.18 3 0.54 0.15 0 0.00
Increase in price of materials 0.10 2 0.2 0.10 1 0.11
Effects of financial crisis 0.12 1 0.12 0.19 1 0.19
Change in consumer confidence 0.14 0 0.00 0.15 0 0.00
Total of the attractiveness of the scores 4.51 3.84

Score of attractiveness rating: 1= not acceptable, 2= possibly acceptable, 3= probably acceptable, 4= Most acceptable

Acquisition of competitor firm

Advantages

By entering into acquisition, the firm develops a higher competitive advantage. This is due to the fact that there is emergence of synergy from the merging of the two firms. The individual skills of the two firms are consolidated to give the firm a higher competitive edge. The ultimate result is that the effectiveness of firm operation is enhanced resulting into increased market share.

Disadvantages

However, acquisition of competitors may entail a lot of financial resources for the firm. If the firm does not have enough financial resources, it can end up into huge debts (David, 2006, 4). This may result into decline in the attractiveness of the firm amongst the investors.

On the other hand, the differences in culture amongst the merging firms may result into cultural shock for the employees. This may have adverse effects on the employees’ in relation to their performance.

Internal expansion

Advantages

Through internal expansion, the firm is able to advance its internal strength to a higher degree. This makes its operations to be more efficient resulting into the firm developing higher competitive advantage.

On the other hand the, there will be reduced chances of conflict within the organizational management. This makes the decision making process to be more effective for the organization.

Disadvantages

Expanding internally may be costly for the firm if it does not have sufficient financial resources. This may result into a high gearing ratio for the firm if it uses debt credit. In extreme situations, the firm may end up into receivership.

Strategy recommendation

From the QSPM matrix, the total attractiveness score for alternative one is greater than that of alternative two (4.51>3.84). This means that Toll Brothers should adopt strategy one, which entails the acquisition of competing firms. This strategy will enable result into actualization of the firm’s strategy. This is due to the fact that the firm will acquire smaller firms in residential construction industry that are geographically distributed in US.

Long term objective

The objective of the firm’s management in undertaking the acquisition of small competing firm’s strategy is to enable the firm increase its annual returns by a margin of 20%. This will enhance the firm’s financial base enabling it venture into the foreign market more effectively. The strategy will entail the firm acquiring at least one firm annually within the next two years.

Itemized cost of acquisition

Cost item Year 2010 2011
Cost $ ‘000’ Cost $ ‘000’
Legal cost 150 40
Employees wage restructuring cost 120,000 130,000
Management salary restructuring cost 140,000 150,000
Cost of acquisition 164,747 170,500
Total cost 424,897 450,040

Implementation of recommendation

In order to effectively implement this strategy, the management of Toll Brothers should scan the environment and identify the number of competing firms in the residential construction industry (Romans, 2009, 8). This will involve the firm conducting a competitor analysis in order to identify the competitor it can easily acquire and add value to the firm. Initially, the management should formulate a policy aimed at acquiring the small residential construction firms. This will result into the developing financial stability from the increase in the level of profits. With time, the firm will be able to acquire the large competitors.

Projected financial statements

Income statement for a period of three years

Item Year 2010
Amount in $ ‘000’ 		Year 2011
Amount in $
‘000’ 		Year 2012
Amount in $
‘000’
Total revenue 4,150 8,500 10,000
Revenue cost 3,000 3,200 3,400
Gross profit 1500, 5,300 6,600
Operating expenses
Cost of research and development – – –
General administrative cost 4000 4500 5000
Non recurring cost 300 400 5,00
Total operating expense 2,800 400 500
Operating income/ loss
Income resulting from continuing operations 120 130,000 135,000
Other income or expenses (300) 70.5 100
Interest expense 850 – –
Earning before interest ad tax expense (880) 70.5 120
Tax expense 100 35.5 25.5
Net profit from operations (continued) (870) 35 94.5

Projected balance sheet

Item Year
2010 		Year
2011 		Year
20122
Assets
Current assets 		‘000’ ‘000’ ‘000’
Cash and cash equivalent 1,600 1,800 2,000
Receivables 100 120 135
Inventory 4,000 4500 5000
Total current assets 5,700 6,420 7,135
Long-term investment s
Equipment, property and plant 200,000 240,000 270,000
Total assets 205,700 246,420 270,135
Current liabilities
Accounts payable 1,175 1150 1000
Current long term debt 135 125 100
Total current liabilities 1310 1275 1100
Long term debt 2,000 1,500 1,000
Total liabilities 3,310 2,775 2,100
Shareholders equity
Common stock 1,650 1,750 1,850
Retained earnings 2,900 3,200 4,000
Capital surplus 280,000 340,000 400,500
Total shareholders equity 284,550 344,950 406,350

Forecasted financial ratios

Year
Ratio 2010 2011 2012
Current ratio= current assets /current liabilities 5700/1310 =
4.35%		 6420/1275
= 5%		 7135/1100 = 6.4%
Quick ratio = (current assets –inventory)/ current liabilities 5700-4000
= 1700/ 1310
= 129%		 6420- 4500
= 1920/1275
= 150%		 7135- 5000
=2135/1100
= 194%
Debt to equity ration= total debt/ equity 2135/284,550
=0.75%		 1625/344950
=0.47%		 1100/406350
= 0.27%
Debt to asset ratio = Total debt/ Total assets 2135/205700
=1.04%		 1625/246,420
=0.65%		 1100/270,135
= 0.4%

Recommendation of specific annual objectives and policies

The management of Toll Brothers should ensure that the firm’s market share is increased with a two digit margin; that is a margin above 10%. There should be consistency in increase in market share annually.

To achieve this, the management should formulate a policy aimed at increasing its capital investment.For example; the management should increase its investment in machineries and equipment. Investing in current technology will enable the firm undertake its projects more cost effectively. The management should also formulate a policy aimed at ensuring effective human resource recruitment. There should also be integration of human resource training within the firm. This will ensure that the firm has the best human resource to execute its operations.

Strategy review and evaluation

The management should undertake comprehensive evaluation of the strategy before its implementation. In the initial phase, the management should consider the impact of the acquisition strategy in relation to various dimensions. These include financial implication and the effect to the firm’s human resource. Upon its implementation, the management should consider the resulting financial performance of the firm. This will enable the management determine whether the strategy is resulting to the firm’s success.

Conclusion

Competitive advantage is a key element in ensuring that businesses in various economic sectors succeed. To attain this, a comprehensive internal and external environment analysis should be undertaken. Various tools should be considered to enable the firm identify the most effective strategies and policies to implement.

Reference list

Alva, M. (2004). Toll Brothers, Huntingdon valley; CEO of the home builder has heard it all before. Investor Business Daily.

Biomedical technology entrepreneurship, (2004).Sample competitive matrix. New York: Drexel University.

David, J. (2006).estate . Seeking alpha.

Joseph, R. (2000). Toll Brothers press release: Investor daily names Toll Brothers

stocks amongst the 200 best stocks. Investor daily.

Max-pedia (2009) Max-Pedia.

Max-pedia (2009). .

Max-Pedia, (2009). .

Romans, C. (2009) Toll Brothers Incorporation company profile: information, business description, background information. Toll Brothers incorporation. Web.

Tutor2U. (2009). Product portfolio strategy: introduction to Boston Consulting Group Matrix.

Toll Brothers incorporation, (2007). SWOT analysis. Companiesandmarket.com. Web.

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