SUMMARY
A business strategy is to be implemented for Élan Boats using animplementation framework. My prior work identified the strengths,weaknesses, opportunities and threats facing Élan. These analyses werepreviously summarized to enable strategic options to be considered forthe implementation of the chosen business strategy.
Threestrategies were previously identified for Élan using the BCGgrowth-share matrix, KSF, Porter's five forces, driving force analysis,SWOT analysis, value chain and industry evolution approaches and thefirm is identified as falling into one of three strategic groups. Thethree strategic options of divestiture, the original strategy and agrowth strategy are evaluated and a growth strategy is formulated tohave 6 sustainable competitive advantages in addition to the strategicasset of the American Skiermodel. The long-term and short-term objectives of the firm areidentified and converted into functional strategies for implementation.Detailed tasks are constructed to implement the strategy and sixperformance measures are assigned measurements for evaluating thesuccess of Élan's implementation of the growth strategy. Incentives forthe successful future growth of Élan are presented and potentialbarriers to implementation are identified.
Summarizing the conclusions and recommendations for Élan, using the growth strategy:
(1)Change company funding from debt-finance to equity-finance and removeliquidity concerns, plus provide working capital for growth.
(2) Increase annual revenue growth forecast from 20% to 60% to aim for market leadership within a decade.
(3) Implement customer relationship management and focus growth strategy at 2nd and 3rd largest customer base in the U.S., i.e. California and Florida.
(4)Match (or even better) constant innovation record of market leaderswith release of innovative product designs in 2003, 2006 and 2009.
(5)Increase manufacturing cost efficiency through value engineering,alternative material sources and changes to direct labour compensationpackage to increase gross margin from 29.6 to 40%.
(6) Reduceoverheads (office and management payroll, sales consulting,advertising, marketing, professional fees) to increase net profit from1 - 5% to 10%) and exploit market leaders' high overhead weakness inmature market.
STRATEGY FORMULATION
Importantdrivers were previously identified for use in formulating a strategyfor Élan Boats. The firm is within one of three strategic groups withinthe industry and three business strategies are considered for Élan.
Divestiture strategy
Thisstrategy would involve the owners in selling the business to acompetitor or new entrant and is supported by the BCG growth-sharematrix approach, KSF approach and Porter's five forces approach. TheBCG model places the firm in the low-growth and low share quadrant ofthe matrix. It identifies Élan as a cash trap, because it will beperpetually absorbing cash, and a candidate for divestiture. The KSFapproach shows that Élan lacks most of the key success factors for theindustry and which are possessed by the market leaders, i.e. economiesof scale, constant innovation record, large dealership network andcustomer loyalty. Porter's five forces model illustrates theindustry as having a low profitability potential for Élan. Buyers havehigh bargaining power with a choice of 14 boat builders. The bestengine maker is locked into the market leaders, whose three firmsdominate two-thirds of the oligopoly market.
Current strategy
Thecurrent strategy is not supported by SWOT analysis, value chain orindustry evolution approaches. The SWOT analysis shows that Élan hasthe critical weaknesses of projected low profitability/liquidity/marketshare and major threats of customer loyalty to the market leaders and amature inboard runabout boat market. The value chain analysis revealsthat the primary activities of operations, outbound logistics andmarketing in Élan's current strategy are not those of a potentialmarket leader. The industry evolution approach places the inboardrunabout boat industry at the mature stage of its life cycle and Élan'shigh variable costs and large product range are not supported by thisapproach.
Growth strategy
Agrowth strategy removes the conflicts between the objectives within thefirm's current strategy. The modified objectives support Élan's currentmission statement. The current strategy does not support Ben Favret' sgoal to be the "true market leader in profitability, quality,manufacturing cost efficiency and eventually sales", as quoted by Nairnand Strickland (2003:179). Élan's current business plan, using 20%revenue growth, would place the firm only mid-position in the 14inboard runabout boat manufacturer's market share league table in adecade's time. A growth strategy places Élan as a market leader in adecade. The fixed and variable costs within the business plan for thefirm's current strategy also do not support Ben Favret's vision. Agrowth strategy, incorporating changes to the current strategy'sprofitability and cost efficiencies, closes the gaps and re-aligns thefirm’s objectives to support the mission statement or vision.
CORPORATE STRATEGY, SCA
Thereare three strategic groups in the inboard runabout boat industry, i.e.market leaders, U.S. National Championships qualified towboatmanufacturers, and the remaining nine firms. Élan and Infinity form thestrategic group of being U.S. National Championships qualified towboatmanufacturers but not being a market leader. Under the firm's currentstrategy, its only competitive advantage that is substantial,sustainable and supported is that it is a qualified towboatmanufacturer for the U.S. National Championships. The growth strategyremoves many of the firm's weaknesses, reduces competitor strengths andexploits competitor weaknesses. The growth strategy increases thenumber of sustainable competitive advantages to support Élan's vision,which may be expressed as,
Tosupply inboard runabout boats directly to water sports enthusiastsprimarily in the Gulf Coast region, bypassing boat retailers. Élan willeventually be the market leader, through business efficiencies andsuperior customer support.
The growth strategy supplements,
SCA 1 U.S. National Championships qualified boat manufacturer (current strategy)
with,
SCA 2 Market leadership position
SCA 3 High product quality, performance and superior customer service
SCA 4 Constant innovation
SCA 5 Financial stability of the company
SCA 6 High manufacturing cost efficiency
SCA 7 Low overheads
LONG-TERM OBJECTIVES
Of the six new SCAs associated with the growth strategy, three are long-term and three are short-term.
SCA 2 Market leadership position
Marketleadership provides many benefits such as; price setting (as opposed toprice taking), economies of scale, greater customer awareness andpreferential supplier terms. Ben Favret's vision is to be market leader… eventually. Élan's current business plan shows a 20% annualrevenue growth rate, inferring a market leadership position (with salesequal to MasterCraft and Malibu) about 25 years in the future. Althoughachievable, this growth exposes Élan to the penalties of being a minorplayer in the industry for a quarter-century. The growth strategyreduces this exposure to a decade by using a 60% annual revenue growthmodel. By this method, Élan have sales comparable to MasterCraft andMalibu in 2011. This assumes that the mature market size remains asthat detailed in exhibit 10 of Nairn and Strickland (2003:171).
SCA 3 High product quality, performance and superior customer service
"Priceand quality are the most important factors in brand selection",according to Nairn and Strickland (2003:160) and Ben Favret states thatinboard runabout boat customers are currently dissatisfied withoverpriced boats that under perform from competitors who do a poor jobof servicing customers. “American Performance Marine had beenbuilding its American Skiermodels “to the highest possible standards" since 1975, earning areputation for high quality, exceptional product performance, andcutting edge innovation", notes Nairn and Strickland (2003:178). Areputation for high product quality is a component of the growthstrategy but Ben Favret changed the company name to Élan in 2000 andcan no longer rely upon the past good quality reputation of AmericanPerformance Marine. Reputations take years to obtain, but only weeks todestroy. This long-term objective involves Élan implementing a companyquality assurance programme from marketing, sales, procurement,testing, delivery and customer service. Of particular importance areevery point in the chain where there is a customer contact e.g. boatshow marketing, factory tour, demonstration, warranty work, customercomplaint. The customer must be delighted with the service they receivefrom Élan for the firm to earn a reputation for high product andservice quality.
SCA 4 Constant innovation
Tobecome a market leader, Élan needs to match (and even better) theinnovative reputations of the current market leaders, who useinnovation to differentiate their products, in response to customerneeds, e.g. swim platform (1972), triple fins (1984), EFl engines(1990) and specialty wakeboard boat (1997). The long-term objective isfor Élan to introduce substantial product innovations every 3 years.
SHORT-TERM OBJECTIVES
SCA 5 Financial stability of the company
Thegrowth strategy relies upon Élan being financially secure in theimmediate future. The current business plan causes immediate liquidityconcerns from the start up of the company because the inventory on handcannot be converted into cash quickly. The current strategy would haveallowed the company's liquid assets to be insufficient to cover thecurrent liabilities, which are predominantly an operating loan andtrade creditors. The growth strategy needs Élan to change from being adebt-financed business to being equity financed. This could be throughemployee/owner stock ownership or stock ownership by an outsideinstitution. The market capitalization needs to be enough to providesufficient working capital to fund the 60% annual revenue expansion ofthe growth strategy.
SCA 6 High manufacturing cost efficiency
Ahigh efficiency in the cost of manufacturing is a key objective in thegrowth strategy and is an integral part of Ben Favret's vision to bethe "true market leader in profitability, quality, manufacturing costefficiency...", as stated earlier. The manufacturing efficiency in thecurrent strategy would lead to gross margins of 29.6%, as shown inNairn and Strickland's (2003:181) income statement for the firm. Thegrowth strategy requires Élan to align with Ben's vision of highmanufacturing cost efficiency by increasing the gross margin to 40%. Avalue engineering analysis will prioritize where material costs can bereduced and labour efficiency increased with greatest impact onmanufacturing efficiency.
SCA 7 Low overheads
BenFavret assesses the market leader as having very high overheads due toit's large production facility. Élan's growth strategy exploits thiscompetitor's disadvantage, in a mature market, especially when salesmomentarily decline - effectively increasing the fixed cost componentin the market leader's total boat cost. However, Élan's current fixedcosts are a weakness and give rise to a meagre 1% to 5% net profit. Thegrowth strategy requires this to be 10% through reductions in; officeand management payroll, sales consulting, advertising, marketing,professional fees and miscellaneous expenses.
FUNCTIONAL STRATEGIES
The six additional SCAs, discussed above, fall into the three functional areas of Customer, Finance, and Internal.
Customer
Acquiringand retaining customers, to build strong relationships with, isdifficult in the inboard runabout boat industry for a new entrant likeÉlan. Porter's five forces model identifies the customer as havingloyalty to the market leaders and a high bargaining power because ofthe 14 competing firms in a mature market. The rivalry amongst existingfirms is intense because the market leaders aggressively compete toattract customers to maintain their economies of scale. Élan's vision,through the growth strategy, is to supply inboard runabout boatsdirectly to water sports enthusiasts primarily in the Gulf Coastregion, bypassing boat retailers and providing superior customersupport. This customer functional strategy may, at first glance, appearincorrect as it does not incorporate the distribution and marketing keysuccess factors of the market leaders and raises the issues of regionalmarketing, direct sales and customer support. Nairn and Strickland(2003:155) identify California and Florida as having the 2nd and 3rdlargest concentration of registered boats in the U.S., inferring that amarketing campaign in this region alone has the highest potential torealize the greatest return on marketing expenditure. Nairn andStrickland (2003:160) also identify that less than 5% of boat sales areinitiated by dealerships, whereas almost 60% of sales are from boatshows. Finally, a regionally based marketing initiative ensures closeproximity of customers, who increase the potential for superiorcustomer service in this regional market segment
Finance
Thesuccess of Élan hinges on the firm achieving a market leadershipposition within a definite time period of (say) a decade. A substantialamount of working capital is required to finance this growth becauseincreased expenditures are incurred ahead of increased revenues. Thefirm's assets are tied up in illiquid WIP and inventory (until a saleis realized), yet Élan's current strategy would rely upon debtfinancing, which gives rise to very liquid liabilities. For thisreason, the finance functional strategy (to support growth) requiresBen Favret and any other investors to relinquish a share of theirownership in return for equity financing to give liquidity to the firm.Alternatively, Ben Favret could match his enthusiasm for Élan's successwith a greater investment, thus avoiding dilution of his equity in thecompany.
Internal
Theinternal functional strategy can be subdivided into strategies for thesub-functions of administration, customer service, engineering andproduction.
Administrativeexpenses, according to the current business plan, erode the net incometo 1 or 5%. This provides no significant buffer to prevent Élan fromoperating at a loss and gives no retained earnings for re-investment.Management payroll, sales consulting, advertising, marketing,professional fees and miscellaneous expenses are potential items forsavings to be realized and to enable a net income of 10% to be achieved.
Customer serviceis an area where Ben Favret says that Élan's competitors are failing. Acustomer relationship management (CRM) programme would enhance thefirm's opportunity to provide superior service by creating customerprofiles and ensuring that every customer experience with Élan is agood one.
Value engineering and activity based cost analysis of the American Skiermodel will identify those materials and design features that can bechanged to improve manufacturing efficiency. Additionally, productinnovation is an ongoing process that should result in substantiallynew and innovative design features being brought to market every threeyears.
Production atÉlan gives rise to a gross margin of 29.6%. This margin doesn't give asufficient contribution to fixed costs and production techniques,labour efficiency, compensation levels need to be changed to raise thegross margin to 40%.
TASKS / ACTIVITIES
Themost important part of the growth strategy is it's implementation.Whist the strategy may be expertly formulated, it may fail if notcorrectly implemented. Having formulated the growth strategy, setlong-term and short-term objectives and grouped them into manageablefunctional strategies, the strategy is actually executed at thetask/activity level.
PERFORMANCE MEASURES
Measurementof how well the firm manages to implement the growth strategy can drivethe behaviour of Élan's team. Six key performance indicators arederived to measure the success of Élan in sustaining their competitiveadvantages.
Balanced scorecard position of key performance indicators
Market leadership position - 60% annual sales growth
High product quality - 1% warranty work as a percentage of sales
Constant innovation - 3 years between new product release
Financial stability - liquidity ratio of 1.0
Manufacturing efficiency - 40% gross profit margin
Low overheads - 10% net profit margin
Theabove scorecard is shown with the KPls in a balanced position. However,many relationships exist between the 6 SCAs and Élan need to be carefulthat improvements in one performance are not at the expense of anotherperformance. Lower overheads can be obtained by decreased advertising,which may jeopardize the market leadership goal. Superlative qualitymay be achieved by increased direct labour hours, which would reducemanufacturing efficiency. There are many relationships between the 6sustainable competitive advantages.
REWARDS / INCENTIVES
Acommon choice faced by all new businesses is whether to grow thecompany or not to grow the company. The basic problem with Élan'soriginal strategy is a conflict between the owner's enthusiasm/visionfor growth and the bare facts contained in the business plan, SWOTanalysis, competitive forces analysis, etc. The business plan showsinsufficient working capital for real growth and substantial operatingexpenses. The only way for a new business to be allowed tosubstantially grow is for the owners to accept growth in the marketvalue of the business at the expense of immediate personal payrollwithdrawals and for the company to be financed through equity shares.The employees of Élan may be offered alternative compensation packages,with lower payroll amounts compensated by stock options. "Onecharacteristic that distinguished Malibu from it's competitors was itsemployee stock ownership programme", states Nairn and Strickland(2003:176).
POTENTIAL BARRIERS TO IMPLEMENTATION
Thereare two major potential barriers to implementation of the growthstrategy and these are concerned with financing the business andmanufacturing efficiency.
Financing the business
Aspreviously discussed, the success of the growth strategy relies uponbeing able to change the way that Élan is funded, from being debtfinanced to being equity financed. To allow this to happen, and to makemarket leadership a possibility, the current owners have to relinquisha large proportion their share in the company to private individualstockholders or to a funding institution to raise the marketcapitalization required. The growth strategy is only executable if theowners are agreeable to this action. Additionally, the working capitalrequired to meet the market leadership goal is substantial and thegrowth strategy is only viable if sufficient shareholders provideenough total shareholder capital.
Manufacturing efficiency
Nairnand Strickland (2003:178) state that American Performance Marine waspoorly managed and had high manufacturing costs. The firm had beenmanufacturing the American Skier model for 25 years, since 1975, andobviously had much know-how and the firm had travelled a long way alongthe experience curve. It's assumed that the original workforce isretained by Élan in the company purchase and, therefore, its difficultfor labour efficiency to be increased, unless fundamentally differentways of boat manufacture can be adopted, before the economies of scaleare realized. This leaves Élan with the problem of developing newmanufacturing techniques, reducing compensation or reducing materialcosts. Compared with the market leaders, Élan's material purchases arevery small and further discounts would be difficult to obtain. Difficulty in increasing manufacturing efficiency is a major potentialbarrier to implementation of the growth strategy.
REFERENCES
Nairn, F. & Strikland, A.J. 2003, 'Élan and the competition ski boat industry', in Thompson & Strickland (Eds) Strategic Management Concepts and Cases, 13th edn., New York: McGraw-Hill pp. C-153 - C-183.
No comments:
Post a Comment