1-ITDFBJ_ the Intellect Mob

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The Intellect MobJots Business Challenges and

Strategic Recommendations

Manipal University

Dubai, UAE

1 November,

2012

ABHILASH LEELADHARAN, ADRIAN GEORGE FERNANDES, FIONA

ARLEEN MATHIAS, SYED AHMED ALI

MENTORS NAME: DR AFTAB RIZVI


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INDEX

S.NO TOPIC PAGE

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

INTRODUCTION

FAULT IN NEW FLYING SPACESHIP TOY

OPTIONS

RECOMMENDATIONS

DELAY IN CHRISTMAS PRODUCT DELIEVERY

RECOMMENDATIONS

NEGOTIATION PROCEDEURE

NEAR SHORING PROPOSAL IN VOLDANIA

FINANCIAL ANALYSIS

STRATEGIC ANALYSIS

OPERATIONAL ANALYSIS

EDUCATIONAL APPLICATION- 9 TO 11 YEARS

SUITABILITY

FEASIBILITY

ACCEPTABILITY

CONCLUSION

APPENDIX 1

APPENDIX 2

APPENDIX 3

APPENDIX 4

1

2

5

7

10

11

12

13

14

15


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Introduction

Jot is a toy company located in Europe Started in 1989. Its success is based mainly on

the brand image of the organization and a good foothold in its local market. The

business model is such that it only caters to children above 3 years and below 9 of age.

It specializes in its designs and adds basic electronic features in its toy which make it

light up, or say something; an attractive feature for children. All of Jots manufacturing is

done in China and storage facilities for these products are rented in Europe.

Jot is facing several issues which, if not dealt with prudently can be disastrous to the

organization in terms of profitability and goodwill. (Appendix 1SWOT analysis). Some of

the challenges Jot faces are, fault in the flying spaceship toys, and delay in delivery of

Christmas toys. Jot also has a couple proposals to analyze; shifting of manufacturing

from China to Voldania (a European country) and diversifying product line from toys to

educational apps for ages 9-11 years.

The intellect mob will analyze these situations in detail and provide the optimal solution

to Jot for perusal. The scenarios are prioritized based on

The direct impact on Jots financial and operational condition if not dealt with

the time when the challenge occurs and response time needed

long term effects on Jots Business operations

The most critical problem is the fault in the flying spaceship toy as a defective product

in the market would heavily tarnish brand image, goodwill and also lead to loss in future

sales. The second scenario that will require immediate attention is the delay in delivery

of Christmas toys, this will cause a problem with retailers without whom Jot cannot

function. The third priority is given to the proposal of shifting manufacturing to Voldania

in Europe and the last priority is given to the introduction on the new 9-11 age group

educational application as its delay does not affect the organizations working.


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Fault in new flying spaceship toy

Jots haste in introducing the flying spaceship toy, to meet the Christmas season

demand hassled to unexpected setbacks. The problems arose due to design flaw

resulting in emission of heat, associated to the insulation around the electrical circuitrywhich is compromised when the toy is overcharged. There have been twelve reported

cases, two of which have complained emanation of smoke from their toys. All major

retailers have shown discontentment.

The possibility of tarnished brand image arises as a result of the composition of loss of

reputation in the eyes of the retailers as well as the customers, resulting in loss of

market share. The negative publicity resulting from this problem will also affect sales

drastically.

Jot has the following options in order to tackle the problem at hand

1. Writing off the product completely is an option, which will show the retailers and

customers that Jot does not give substandard products to its customers, but this

may lead to loss of market share. Writing the product off completely will lead to

exponential losses as a result of scrapping 6000 units worth24 each which will

be incurred due to the refunds given to all retailers, further cost will be incurred in

recalling products from retailers and consumers which is about3 per product.

Miscellaneous cost will include cost of storage till the product is dumped,

apology campaigns to customers and retailers, and also the damage to goodwill

will be incalculable.

2. Investment in modification of the insulation around the circuitry in the spaceship

will present an opportunity to show Jots dedication to its retailers and customers

by showing them the extent to which Jot is willing to satisfy its customers. After

the additional10 for the insulation, the initial24, recalling costs, and

redistribution costs Jot is forecasted to cover its investment with no chance of

profits assuming forecasts are 100% accurate (Appendix 2). The downside to this

option is that if the product displays the same or any other fault for that matter,

the brand image and goodwill will suffer greatly, leading to probability of losses.


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3. A third, long term option is recalling the product, returning the money to all the

customers and shipping it to China and using its parts to create a new product

with a new design eliminating the chance of associating this product with the

flawed product. The downside to this approach will be that the spaceship toy

may not be in demand, or have smaller cheaper substitutes, the retailers may not

respond well to the same kind of product due to the past experience. Also Jot will

show a loss this year of240,000 reducing its profitability substantially.

4. The final option is temporarily recalling the sold toys (2800 units) from retailers

and consumers, and make changes in the charger of the toy. Installing an auto

shutdown which turns the electrical supply off as soon as the battery is fully

charged. This course of action will allow Jot to clear its brand name showing its

customers that even a problem of 1% is taken seriously by the organization, to

uphold customer satisfaction, illustrating the companys corporate social

responsibility.

Recommendation

We recommend option number 4 which is the most favorable path for Jot at this

moment. The change in charger though -incurs cost- is comparatively cheaper than all

other options presented to Jot.Appendix 2shows details of costs of each of the options.

Implemented correctly Jot can eliminate the problem while maintaining its brand name,

goodwill and stay in the good books with the retailers and consumers as well.

Chargers with automatic shutdown options are frequently seen in remote control toys.

One supplier of the NI-CAD battery charger which is used for RC toys is available in

South Africa, (Appendix 2shows the costs involved in imports and redistribution). The

profits made from this option are approximately three times any other option. We

recommend that the toy should be recalled simultaneously while the chargers are being

procured so as to resupply all the toys avoiding unnecessary waste of time,

demonstrating efficiency.

It is important to understand that the problem is not necessarily with the toy, customers

are given clear instruction on the usage and battery charge needed. Yet temporarily


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recalling the product in the name of corporate responsibility can allow Jot to use this as

an opportunity to show its customers that the company is loyal to them and socially

responsible. We also recommend Jot to post an apology letter to its customers, Fisher

price toy manufacturing giant recalled around 10 million of its products on October 1,

2010 and posted an apology article by the CEO to the customers titled because we are

parents too. This made fisher price very popular among its customers and increased its

net sales in the following years. Jot can keep its heading as we manufacture toys for

ourchildren. Jot would be wise to provide new toys all together for the 2 cases which

witnessed smoke from their products.


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Delay in Christmas product delivery

Gull, Jots supplier in China has declared that, he will not be able to deliver the assigned

order of 2400 products completely, rather only 75% of it. The other 25% he claims will

be delivered by 15th

December 2012, instead of 4th

November which is the deadline.There are two tasks present, first is what action needs to be taken against Gull for his

breach of contract. Second, on accepting the partial order a decision needs to be made

on the division of the order amongst big and small retailers.

Recommendation

In regards to the contract Gull has performed a material breach. To tackle this situation,

we recommend Jot keep its retailers well informed in order to maintain their trust, and

uphold Jots goodwill. The best option available to Jot is to renegotiate the contracts

terms with Gull and the retailers.

Negotiating procedure

1. Consult with the retailers about the issue in hand, if they disagree to accepting

75% of the order now and 25% later then Jot is left with no option but to file a suit

against Gull. However, if the retailers agree then Jot can for renegotiations.

2. A new contract should be created for the current acceptance of the 75% of the

order.

3. The contract must also include a condition that if Gull does not supply the

remaining 25% by December 15th then Gull will be responsible for the loss

incurred by Jot, and the retailers. Dishonouring this contract would lead to an

anticipatory breach of contract by Gull.

4. The contract should be terminated after all transactions are completed with Gull

and thereof ending business with Gull, this will not affect Jot as future prospects

of near-shoring are analysed in this report.

5. If these conditions are not accepted by Gull then Jot should go ahead with a suit

which is in Jots favour.


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From the 1800 products (75%) that will be delivered on 4 th November 2012 we

recommend Jot distribute it to retailers in the percentage sale they contribute to Jot. Since

68% of the sales Jot makes are to the 7 major retailers, it is only logical to give them 1224

units (68%) of the total units they ordered, and supply the rest to the smaller retailers.

When the 25% is received from Gull the remainder of the consignment must be supplied

to the retailers.


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Near Shoring Proposal in Voldania

The proposal to shift production gradually from China to Voldania is one that if

successful can prove to be the beginning of a new era for Jot. The stakes are high in

such a proposal and hence a detailed and heavy analysis was done in 3 majorsegments of the proposal:

1. Financial Analysis:

Liquidity: Two factors are the key to identifying the liquidity of the

proposal:

Distribution costs: The distribution costs are substantially lower from

Voldania to Jot as against China to Jot proving Voldania to be the

reasonable choice.

Time: The time for the products to reach Jot from China as against

Voldania to Jot is also analysed. Being situated in Europe it is only logical

to assume that distribution costs will be cheaper in Voldania as opposed

to China. Since distribution is the most cost saving activity in this

proposal, the fact that its located near home, points towards the

conclusion, if Jot were to opt for near shoring its liquidity would increase,

it would take comparatively lesser time to place orders, get goods, and

distribute it to the retailers.

Since the cycle of distribution has become smaller, Jot will no longer have

its money frozen in the excess time the China distribution system will

take.

Risk: The most basic financial risk that will be avoided is the foreign

exchange risk, if it exists. If payment made to the Chinese manufacturer is

in yen () then automatically a risk or an opportunity risk arises, this is

eliminated if the distribution is shifted to Voldania because it will share the

same currency as Jots country.Also the donation of 25000 may not be

incentive enough for the Voldanian official to smoothen the process.


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Profitability: After analysing the 3 costsi.e. labour, machinery, and

distribution- it is clear that shifting Production to Voldania will be more

profitable as compared to Production in China, (Appendix 3)

From a financial point of view Jot would be Wise to go ahead with transferring

distribution to Voldaniabased on estimates- is less risky, presents higher liquidity and

proves to be more profitable.

2. Strategic analysis:

A switch of production to Voldania proves to be very profitable financially,

but may cause harsh implications in China during the Transition. The

production companies in China will not let go without a fight. Further the

news of being cut off, may de-motivate the production into making

mistakes, we suggest that Jot provide some clauses while renovating or

install clauses in the already existing contracts which protect it from such

accidental losses.

The other aspect is the beginning of a new relationship with Voldanian

manufacturers. Goodwill at this point will be the key aim of Jot making

sure that the manufactures dont feel manipulated. For Voldania, getting

business from Jot will be an opportunity that they will not want to miss andhence Jot will be backed by the Voldanian manufacturers and government

itself.

In a study conducted by embassy magazine of London 75% of the

respondents reported that they had an unfavourable view of Chinese

made goods, a similar poll conducted by Zogby Research International

showed 80% of respondents are apprehensive towards buying Chinese

products. Voldania from a strategic point of view couldnt have come at a

better time where China is being looked down upon.

Jots reputation may get effected if anyone were to leak out the idea of a

generous donation, especially when Jot is talking about showing

corporate social responsibility. Such donations often lead to smooth


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completion of work and is a practice followed by almost all however this is

unethical.

Judging from a strategic point of view the transfer of production may pose some

challenges but if they are dealt with utmost care, the potential gain can take Jot to a

whole new era.

3. Operations analysis: Operational efficiency can be reached through Voldania

through following ways:

Use of machinery to produce toys reduces time waste, which would be

present in a manual labour manufacturing.

Delays due to labour strikes, political instability would be eliminated

Quality control is easily checked

Since production will be done faster the distribution will also become fast

as Voldania is located closer in distribution and faster in production than

China

It will eliminate to some extent the need for Jot to store toys in rented

warehousesJust-in-time inventory system.

The analysis done above thus proves that Voldania is an opportunity and Jot should not

hesitate in grabbing. Not only will it reduce cost but also make efficient use of time but

also increase Jots liquidity which will help in reducing the working capital crunch.


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Educational application - 9 to 11 years

A new proposition regarding a childrens application for the age group 9-11 years has

been put forward by Alana Lotz. This proposition entails an educational impression

without losing the gaming experience. Evaluation of this proposition requires detailanalysis of the idea and its perceived market. The analysis is divided into three aspects:

1. Suitability:

There is no relation between the proposed idea of the application and the

age group 9-11 years (target market).

An understanding of the target market showcases a trend shift towards

gaming applications which have an underlying notion of education as

compared to applications wholly focussed on education with a touch of

gaming.

Statistical analysis conducted by NPD group showed that only 1% of

games are based on children genres. The targeted age group shows little

to none interest in simple education games.

2. Feasibility::

Jots bank has made it clear that it will no longer provide Jot with Loans,

however the overdraft facility still allows a loan of approximately half a

million Euros.

The analysis of Angry Birds cost suggested that the initial cost of

development and upgrading was 100,000 well over Alana Lotz estimate

of 30,000.

We wouldnt recommend Jot to use the overdraft facilities because the

interest on the overdraft is 12% which is very high.

The average price of educational applications estimates up to 3 to 5, as

mentioned above only 1% of spending from games is on childrens games;

this includes educational and non-educational games.

According to the Federation of American Scientists, Average annual

wages for computer programmers is56,270 for software engineers

64,210, for instructional coordinators 46,100, and multimedia artists and


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animators 46,100 (referappendix 4- employee structure application

development)

From the above, it is clear that financially it is not feasible for Jot to launch the

application. This plan can be implemented in later years when financial

condition is stronger.

3. Acceptability:

John Grun owns 30% of the shares and is sceptical about the idea, if his

wife chooses to take side with him that will account for 60% of the total

shares.

Seeing the strategic and feasibility analysis we conclude that the risk

associated to this proposition is too high. The costs are too high and the

chances of success minimal.

We recommend Jot to keep this idea aside, possibly for the future when the financial

status is higher and we recommend changing the idea from education to edutainment

where education is just an underlying notion.

Conclusion

The current challenges faced by Jot present incumbent opportunities which if seized

can prove very fruitful for Jots future. Changing battery chargers for the flying

spaceship will prove cost effective while maintaining brand loyalty. A law suit against

Gull can be filed, but doing so will lead to unnecessary waste of time and badwill which

can be completely avoided if Jot makes a new agreement with Gull while keeping the

retailers in the loop.

By shifting production to Voldania, we can not only save costs on manufacturing but

also on distribution network making the assets more liquid. The idea of launching an

application to diversify is an attractive one but is currently not feasible. Changing the

genre to edutainment will prove more profitable and has a greater scope of appreciation

in terms of current market trend but due to the lack of expertise and finance in this

segment, Jot is not in a condition to exploit this opportunity currently.


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Appendix 1

Strength Weakness

Positive brand image

Loyal customers

Presence in different markets

In house team of designers

Relation with suppliers

Licensed toys

Lack of finance

Underdeveloped Research

and Development department

Manufacturing errors

Leased warehouses

Inappropriate IT systems

Seasonal sales

Opportunity Threat Diversification of products

Other age groups

Near shoring

Utilization of overdraft facility

Public listing

Corporate Social

Responsibility

Other toy manufactures

Other game genres

Increasing costs of

manufacturing in China

Substitute products

Decrease in market share

(defective and delayed

products)


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Appendix 2

Following is the table showing forecasts of all costs incurred per toy ineach of the options in Euros (). The selling price of the Product as

established by Jot is 40

CostsOption

1Option

2Option

3Option

4

Production cost 24 24 24 24

Recall and apology cost 3 3 3 3

Shipment to China cost 4

Design cost 3

Raw material cost 2

Modification cost 10

Import of new product cost 3

Import from South Africa cost 3.4Redistribution of goods 1 1

Total cost 27 37 40 31.4

Profit/ Loss (-) (deducting costsfrom sales)

-27 3 -40 8.6


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Appendix 3

Year Quantity

Labour time hours

per unit Labour time per year

Voldania China Voldania China

1 60000 0.45 0.6 27000 36000

2 100000 0.45 0.6 45000 60000

3 140000 0.45 0.6 63000 84000

4 180000 0.45 0.6 81000 108000

5 220000 0.45 0.6 99000 132000

315000 420000

Labour pay per unit Labour pay per year


5 1.75 135000 63000

5.1 1.96 229500 117600

5.202 2.195 327726 184380

5.306 2.458 429786 265464

5.412 2.753 535788 363396

1657800 993840

663960 in favour of China

Machinery per unit Machinery per year


1.96 1.4 117600 84000

1.96 1.4 196000 140000

1.96 1.4 274400 196000

1.96 1.4 352800 252000

1.96 1.4 431200 308000

1372000 980000

392000 in favour of

China

Distribution cost per unit Distribution cost per year


1.2 3 72000 180000

1.272 3.18 127200 318000

1.348 3.371 188720 4719401.429 3.573 257220 643140

1.515 3.787 333300 833140

978440 2446220

1467640 in favour of

voldania

Total cost

Voldania China

324600 327000

552700 575600

790846 852320

1039806 1160604

1300288 1504536

4008240 4420060

totally 411680 is in favour of

Voldania


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Appendix 4

Documents

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