It is Rocket Science_II_draftV3

8/6/2019 It is Rocket Science_II_draftV3

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Team ProjectStrategic Management – MGMT 6359

Team 3



• Overview

– Chester Company manufactures, markets and distributes electronic sensors throughout multiple market segments

– Its competitors have similar capabilities and they operate in a closed market placeconsisting of

– Customer have different buying criteria within each market segment

Introduction

• Mission & Objective- The company will strive to sell into every market segment

- Chester company will meet the top two buying criteria in every market segment



• Internal Analysis

– Products and Services

• The company produces, markets and distributes electronic sensors over multiple market segments.

• The company remains consistent with the Broad Differentiation Strategy and provides sensor products into all market segments.

• The company is successfully producing 7 products into fivemarket segments.

• In order to gain more market share new products areintroduced into the High End segment while allowing older products to drift downwards into the traditional market

segment

External & Internal Analysis

Product Market Segment

Cake Traditional

Cedar Low

Cid Traditional

Coat Performance

Cure Size

C+ High

Can High



• Internal Analysis

– Organizational Structure• Chester organizational structure is representative of a market structure,

grouping members into specific product line areas it wishes to sell into.

• The company maintains a collaborative organizational culture resulting inintegration, flexibility and sharing of resources across product linesboundaries.

• Chester’s organization culture and structure allows it to address thecompany’s operations with the combined expertise and support of themanagement group.

• The approach minimizes the possibility of one member’s error and capitalizeson all the resources’ knowledge and expertise.




• Competitive Analysis

– Competition is composed of 5 identical companies with revenues of $100 million in sales producing 5 product lines

– Competing companies within the industry: Andrews, Baldwin, Digby, Erie and

Ferris


• Rivals anticipated Strategic Moves – Andrew is expected to continue to reducing pricing slowly and have managed to

capture 48% of the size market.

–Baldwin & Digby are not relevant competitors and are viewed as struggling rivals.

– Erie will continue the Niche Cost strategy and reduce pricing while increasing automation to maintain contribution margins .

– Ferris will continue to compete on quality and marketing of their products keeping

pricing above average in relation to the industry



• Competitive Analysis – Despite increasing year over year sales, market share remains relatively flat

and therefore produces downward pressure on profits as prices begin todecline.


Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Trad. 11.81% 12.82% 12.55% 14.43% 22.87% 27.53% 30.33% 26.08%

Low End 20.39% 19.82% 20.18% 23.85% 16.97% 13.92% 16.78% 7.66%

High End 19.40% 17.14% 25.49% 13.50% 14.65% 19.66% 27.30% 33.08%

Perf. 20.40% 20.59% 17.77% 11.54% 12.70% 15.25% 16.56% 18.61%

Size 19.91% 17.04% 15.94% 12.18% 15.55% 18.24% 18.26% 18.33%



• Limited Market Share Growth

• Company has experienced limited market share increase over recent eight

year period

• Multiple product introductions into market segment(s) recommended

Problem Statement

• Reduced Profitability Due To Insufficient Automation

• Limited automation has resulted in lower then expected profitability for thecompany

• Increase automation levels over 5 years range for traditional product lines



Recommendation 1



Implementation

Recommendation 1

Segment Competing

Products

Total

Demand

Chester

Market Share

Projected

Growth

No.

Products

Traditional 8 11176 26 9.20% 2

Low End 7 15303 8 11.70% 1

High End 7 5458 34 16.20% 2

Size 6 4735 18 18.30% 1

Performance 5 4845 19 19.80% 1



• Limited Market Share Growth

• Goals and Objectives

• Increase market share while increasing earnings for shareholders

• Improve ROE, ROS and ROA due to additional market share

Implementation

Recommendation 1

• Recommendation• Introduction of new product (‘Cat’) into performance market

segment resulting in a higher end product in that area

• Two product offerings in the same segment will produceeconomies of scales and produce higher earnings.



•

Sales PerProductLine (Performance)

Implementation

Recommendation 1

Year0

Year1

Year2

Year3

Year4

Year 5 Year6

Year7

Performance 2018 2019 2020 2021 2022 2023 2024 2025

Total SegmentDemand

4845 5804 6954 8330 9980 11956 14323

17159

CurrentProduct(Coat)

902 1161 1391 1499 1796 2152 2578 3089

New Product (Cat) 695 1833 2295 2750 3294 3947Market Share CurrentProduct(Coat) %Captured

19% 20% 20% 18% 18% 18% 18% 18%

New Product (Cat)% Captured

10% 22% 23% 23% 23% 23%

Total Market Shareper Segment

19% 20% 30% 40% 41% 41% 41% 41%

Price Per Unit Coat 31 30.5 29.7529.2528.75 28.25 27.7527.25Price Per Unit Cat 30 29.5 29 28.5 28 27.5Projected GrowthRate

19.8



•

IncomeStatement Pro Forma(Performance)

Implementation

Recommendation 1

IncomeStatement ProForma

Year 1 Year 2 Year 3 Year 4 Year 5 Year6

Year 7 IncomeStatement ProForma

Year1

Year 2 Year3

Year 4 Year 5 Year6

Year7

Cat Product 2019 2020 2021 2022 2023 2024 2025 Coat Product 2019 2020 2021 2022 2023 2024 2025

Sales 20652 53523 65899 7758691318 107445

Sales 35052 40960 43421 51129 60187 70828 83323

Variable Costs: Variable Costs: Direct Labor 6196 16057 19770 2327627395 32234 Direct Labor 10516 12288 13026 15339 18056 21248 24997Direct Material 8674 22480 27678 3258638354 45127 Direct Material 14722 17203 18237 21474 25279 29748 34996Inventory Carry 25 64 79 93 110 129 Inventory Carry 42 50 53 62 73 86 101

Total VariableCosts

0 14894 38601 47527 5595565859 77490 Total VariableCosts

25280 29541 31316 36875 43408 51082 60094

ContributionMargin

0 5758 14922 18373 2163125459 29956 ContributionMargin

9772 11419 12105 14254 16779 19746 23229

Period Costs: Period Costs: Depreciation 445 1173 1469 1760 2108 2526 2526 Depreciation 506 576 766 993 1266 1593 1593R&D 1000 500 400 400 400 400 400 R&D 400 400 400 400 400 400 400Promotions 1400 1400 1400 1400 1400 1400 Promotions 1400 1400 1400 1400 1400 1400 1400

Sales 750 750 750 750 750 750 Sales 1500 750 750 750 750 750 750Admin 310 803 988 1164 1370 1612 Admin 526 614 651 767 903 1062 1250

Total PeriodCosts

1445 4133 4822 5298 5822 6446 6687 Total PeriodCosts

4332 3740 3967 4310 4719 5205 5393

Net Margin/EBIT -1445 1625 10100 13074 1580919014 23268 Net Margin/EBIT 5440 7679 8138 9944 12061 14541 17837 Long Term DebtInterest

620 885 814 736 652 562 463 Long Term DebtInterest

620 885 814 736 652 562 463

Taxes 259 3250 4318 5305 6458 7982 Taxes 1687 2378 2564 3223 3993 4893 6081

Net Profit -2065 481 6036 8020 9852 11994 14823 Net Profit 3133 4416 4761 5985 7415 9087 11293



•

CashFlow (Performance)

Implementation

Recommendation 1

Cash Flow Startup Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Performance Segment 2019 2020 2021 2022 2023 2024 2025

Income

Proceeds of Loan 16000 8000

Sales

Cat 0 20652 53523 65899 77586 91318 107445

Coat 35052 40960 43421 51129 60187 70828 83323Cost of Goods Sold

Cat 0 14894 38601 47527 55955 65859 77490

Coat 25280 29541 31316 36875 43408 51082 60094

Total Income 16000 9772 25177 27027 32627 38410 45205 53185

Expenses

Capacity & Automation 14266 11962 7292 7778 9317 11162 11162

R&D 1400 900 800 800 800 800 800

Promotions 1400 2800 2800 2800 2800 2800 2800

Sales 1500 1500 1500 1500 1500 1500 1500

Admin 526 924 1454 1755 2067 2432 2862

Change in Inventory 354 267 354 202 208 245 287

Taxes 1687 2637 5814 7541 9298 11351 14063

Long Term Principal (1st Loan) 1089 1179 1277 1383 1498 1622 1757

Long Term Interest 1241 1150 1052 946 832 707 573

Long Term Principal (2nd Loan) 544 590 639 692 749 811

Long Term Interest 620 575 526 473 416 354

Total Expenses 0 23463 24484 23508 25870 29484 33785 36968

Yearly Cash Flow 16000 -13690 693 3519 6757 8926 11421 16217

Begin. Cash Flow 0 16000 2310 3002 6522 13279 22205 33625

Ending Bal. 16000 2310 3002 6522 13279 22205 33625 49842



•

Balance Sheet &Payback Period (Performance)

Implementation

Recommendation 1

Balance Sheet for Startup Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

PerformanceSegment

2019 2020 2021 2022 2023 2024 2025

Assets

Cash 16000 2310 3002 6522 13279 22205 33625 49842Inventory 354 621 975 1176 1385 1630 1917

Total Current Assets 16000 2664 3623 7496 14455 23590 35255 51759

Plant & Equipment 14266 26229 33520 41298 50615 61778 72940

AccumulatedDepreciation

951 2700 4934 7688 11062 15180 19299

Total Fixed Assets 0 13315 23529 28586 33610 39554 46597 53641

Total Assets 16000 15979 27152 36082 48065 63143 81852 105401

Liabilities

Long Term Debt 16000 14911 21188 19321 17299 15110 12739 10171Total L iabilities 16000 14911 21188 19321 17299 15110 12739 10171

Equity

Beginning Equity 0 0 1068 5964 16762 30766 48033 69114

Common Stock 0

Retained Earnings 0 1068 4897 10797 14005 17267 21080 26116

Total Equity 0 1068 5964 16762 30766 48033 69114 95230

Total Liabilities &Owner Equity

16000 15979 27152 36082 48065 63143 81852 105401

NPV $28,231.90

IRR 25%

Payback Period 5.15





Implementation

Recommendation 1

Riskitem

Risk Issues Cause Consequences Probabilityof

Occurrence

Impact Mitigation /Recommendation

1 Larger than forecastedinvestments in R&D,

Automation & Capacity

Forecastincorrect

Larger amount of debt being taken

on

M L - Build a buffer infor unforeseen

expenses into theforecast

2 Future Competition -Other firmsintroducing

new products

in the segment

H M -Better qualityproduct tailored tocustomer buying

criteria’s

- Reduction inmarket share

captured-Lower earnings



Recommendation 2





• Reduced Profitability Due To Insufficient Automation

• Goals and Objectives

• Increase Traditional segments contribution margin by 20% in five years

• Increase production efficiency

Implementation

Recommendation 2

• Recommendation• Traditional product lines automation to be increased to level 10

over the next 5 years.



Implementation

Recommendation 2

Products 2019 2020 2021 2022 2023

Cake 5,516 6,023 6,578Cid 3,494 3,816 4,167 4,550 4,969

Total 9,010 9,839 10,745 4,550 4,969

$ 4.0 X (No. units of Capacity) X (Increase in Level) =Cost of Automation Reduction

Each additional point of automation decreases labor costsapproximately 10%.



Implementation

Recommendation 2



• Income Statement Pro Forma (Traditional)

Implementation

Recommendation 2

Cake 2018 2019 2020 2021 2022 2023

Sales $32,113 $35,003 $38,153 $41,587 $45,330 $49,410

Variable Costs:

Direct Labor $6,655 $6,529 $6,405 $6,283 $6,848 $7,465

Direct Material $10,563 $11,514 $12,550 $13,679 $14,911 $16,252

Inventory Carry $479 $50 $50 $50 $50 $50

Total Variable $17,697 $18,092 $19,004 $20,012 $21,809 $23,767

Contribution Margin $14,416 $16,911 $19,149 $21,575 $23,521 $25,643

Depreciation $3,126 $3,407 $3,714 $4,048 $4,413 $4,810

SG&A: R&D $527 $574 $626 $682 $744 $811

Promotions $1,500 $1,635 $1,782 $1,943 $2,117 $2,308

Sales $1,590 $1,733 $1,889 $2,059 $2,244 $2,446

Admin $512 $558 $608 $663 $723 $788

Total Period $7,255 $7,908 $8,620 $9,395 $10,241 $11,163

Net Margin $7,161 $9,003 $10,529 $12,180 $13,280 $14,480



• Income Statement Pro Forma (Traditional)

Implementation

Recommendation 2

CID 2018 2019 2020 2021 2022 2023

Sales $38,540 $42,009 $45,789 $49,910 $54,402 $59,299

Variable Costs:

Direct Labor $12,331 $12,097 $11,867 $11,641 $12,689 $13,831Direct Material $13,598 $14,822 $16,156 $17,610 $19,195 $20,922

Inventory Carry $0 $50 $50 $50 $50 $50

Total Variable $12,611 $26,969 $28,073 $29,301 $31,934 $34,803

Contribution Margin $12,611 $15,040 $17,717 $20,609 $22,469 $24,495

Depreciation $1,493 $1,627 $1,774 $1,933 $2,107 $2,297

SG&A: R&D $420 $458 $499 $544 $593 $646

Promotions $1,800 $1,962 $2,139 $2,331 $2,541 $2,770

Sales $1,590 $1,733 $1,889 $2,059 $2,244 $2,446

Admin $615 $670 $731 $796 $868 $946

Total Period $5,918 $6,451 $7,031 $7,664 $8,354 $9,106

Net Margin $6,693 $8,589 $10,686 $12,945 $14,115 $15,390NPV ('000) $523.92

IRR (%) 12.3

Payback Period (Years) 1.89



•Risks

–Majority of risks are associated with the impact of financial constraints and human limitations in the business process.

Implementation

Recommendation 2

Risk item Risk Issues Cause Consequences Probabilityof

Occurrence

Impact Mitigation /Recommendation

1 Tie down of capital inprocess automation

- HighInventory levels

- No funds toinvest in TQM

initiatives.

M H - Build realisticproduction forecast

- Use of

expensiveemergency loan

2 Availability of cash toinvest in Automation

- High cost of borrowing

- Reduction inprofit margins

L M - Use of financialexperts to run

company finances- High debtlevels

3 Diminishing returns inlabor cost reduction

- Excessiveexpenditure in

Automation

- Erosion of company profits

L L - Build realistic staff levels and training

expenditure

Documents

It is Rocket Science_II_draftV3