Venture opportunity screening

I originally wrote this article, “Venture opportunity screening” in November 2003.

Anopportunity has been screened for the export of handcrafted goods fromSingapore and the venture appears attractive. New technology and newbusiness processes are used by the venture to provide small retailersof antiques clocks, gifts, handicrafts and home décor with handcraftedgoods from Asia by 15 Kg air parcels, delivered in 7 days. The averagevalue of each consignment is S$800 and credit card payment, with order,gives UK retailers 4 weeks to 7 weeks credit with the card company,whilst the venture is assured payment by VISA and Mastercard monthly.Direct mail and telemarketing are used to create and penetrate themarket and bilingual staff are close to Asian suppliers and possesssuperior customer service skills.

A quick screening of the newventure identifies the potential market of small UK retailers and thegross margin is estimated to be 50%.  The competitive advantagesidentified are identified as low fixed costs, control over costs,location and people advantages. The value created is 10% profit aftertax and an IPO exit mechanism is foreseen after 3 years.

Theopportunity concept takes advantage of the recent halving of prices forTranspacific freight and international call costs in the last couple ofyears and new techniques for receiving assured payment frominternational customers. The new venture strategy is to penetrate 10%of the market of UK retailers who sell antiques, clocks, gifts,handicrafts and home décor.

The market profile is of reachablecustomers who seek product variety. The competition is fragmented andmarket sizes are estimated as S$20M, S$80M and S$100M in the UK, US andEurope, respectively. The venture economics profile is of low capitalrequirements and favourable free cash flow characteristics. The time tobreak even is 15 months. The IPO exit mechanism is estimated to harvestS$2M for the founder in three years. The venture provides a good fitwith the goals of the founder and a bilingual team will be createdwithin the first 2 years of operation. Strategic differentiation fromthe competition is by superior customer service, use of technology,pricing and product quality. The market entry strategy is to createcustomer awareness that it is now possible to quickly receive qualityAsian goods in small quantities at a competitive price from the newlyformed company.

The reasonsfor makingthe company believe thatthe idea is an opportunity are concerned with the main components ofcustomer need, premium pricing, underlying value creation proposition,market niche and product mix. Small UK retailers need a variety of highvalue products to differentiate themselves from the larger UK retailersand to compensate for their lower lever of sales activity. They arerequired to purchase goods in modest volumes from wholesalers and UKmanufacturers to realize wholesale discounts and are prepared to pay apremium to reduce their investment in inventory. The new venture has anunderlying value creation proposition of supplying UK retailers directin more frequent, smaller volumes to reduce inventory and to takeadvantage of lower freight costs and international telemarketing callcosts. The marker niche of UK retailers selling antiques, clocks,gifts, handicrafts and home décor is chosen to avoid dealing with theend-user consumer, whose average order value would be unlikely toexceed S$100, unacceptably increasing the administration costs. Theproduct mix is carefully chosen to include only those items whose salesprice to weight ratio is high, to ensure low air parcel distributioncosts (as a percentage of the selling price). There are currently nosubstitutes for the marketing mix of premium priced products promotedby direct sales and telemarketing from Singapore.

The newventure seeks to improve upon the existing value chain by eliminatingthe warehouses of UK wholesalers. This is achieved by employing the‘just in time' distribution technique that has been successfully usedwithin manufacturing industries for the last 20 years to reduceinventory costs. The product strengths are the uniqueness of Asiandesigns, handcrafted features, unfamiliar materials, unusual colours,peculiar symbology and aesthetics. The product weaknesses are unprovendemand, freight costs, fumigation certification for wooden items,humidity control requirements and the non-uniformity of designs.Existing competitors in the industry have been assessed. Direct mailcosts are estimated to be S$1,000 per thousand contacts, telemarketingIDD call costs are S$10 per hour and the web-host charges 1½% pertransaction and S$70 per month. The distribution costs have beenestimated and are 22% of sales. Value chain physical, margin andinformation flows have been mapped and they reveal that the suppliersbenefit from high percentage margins, which are moderate inabsolutedollar terms.

It's estimated that the new venture will capture¼, 1, 2 and 5% of the market in years 1, 2, 3 and 4 of the venture. Thebusiness goal is 10 % of the market, with sales of S$2M, in 5 years.The product cost represents 36% of the sales price, gross margin is 36%of the sales price, fixed costs are 16% of the sales price and profitbefore tax is 12% of the sales price. Resource needs to launch thecompany are modest. The cash flow conversion cycle has been forecastedand a preliminary cash flow analysis has been created. The break-evenchart shows that the venture needs to ship three consignments everycouple of days (or 28 consignments per month) to break even.

Capitalwill be raised for the business in two stages, at launch and afterthree years of operation by way of an IPO. The launch capital ofS$100,000 is to be invested by the company owner. The marketcapitalization for the IPO, after 3 years, is estimated to be S$2M.This is based upon forecasted earnings (net profit after tax) of S$0.1Mfor 2007 and S$0.2M for 2008, giving a P/E ratio of between 10 and 20.The IPO opportunity will attract investors from Singapore governmentagencies, institutions and individuals. The company owner intends toharvest the venture by means of selling the company via the IPO. Thisis estimated to occur in three years time, in January 2007. The harvestprospects are good if the forecasted growth and required margins can beachieved. The company would be source of strategic value to exportersof other products based in Singapore, or to importers based in the UK.As there are no other firms currently delivering this product andservice mix, a company contemplating entry may be a logical buyer. Thebusiness asset requirements are low and, if the owner decided to exit,it would cost less than S$20,000 in lost lease deposits and depreciatedfixtures, fittings, equipment and other venture launch expenditures.This amount seems reasonable, with respect to the venture's potentialand risk. Expenditure after launch can be adjusted to match the levelof sales activity witnessed, so as not to run out of cash beforesecuring enough profitable customers to sustain a positive cash flow.

Thestrategic analysis of the competitive landscape estimates that the fourcompetitor categories are large UK importers with warehousing,specialist UK manufacturers, UK manufacturer's brokers and internethobbyists with no marketing who have market shares of 50%, 25%, 20% and5%, respectively. Marketing tactics for each competitor vary. Profilesof the competition in year 2003, for price/quality and marketshare/profitability have been created.  The main manufacture ofthe handcrafted products, by definition, is not subject totechnological change. However, the required quality assurance,fumigation and humidity control processes involve technology that willtake six months to two years to develop, implement, install andmaintain. The new venture has the competitive advantage of being inclose proximity to the suppliers of the goods and an additionaladvantage can be gained by hiring staff who speak Mandarin andIndonesia Bahasa.  The new venture is also able to work with itssuppliers to assure quality and meet fumigation and humidity controlrequirements. The new venture can be price competitive if theadvantages of low fixed costs, zero/low inventory costs, low suppliercosts and higher customer value (through increasing their inventoryturnover) more than compensate for the new venture’s higherdistribution costs of delivery by air parcel. The new venture’smarketing positioning, relative to the competition, has been chosen. UKspecialist manufacturers and manufacturer's brokers are vulnerable tocompetitors, like the new venture, being able to offer good qualitysubstitute handcrafted product designs from Asia. Once penetrated, thissection of the market will always remain vulnerable to the newventure’s competitors and they will lose market share if the quality ofthe new venture’s products can be maintained. Another vulnerability ofthe new venture’s competitors is in the creation of awareness in UKretailers that handcrafted Asian goods can be procured direct from thenew venture.

The founder's vision is to change the way manygoods are exported from Singapore, by offering superior customerservice and good quality products, using staff skilled in CRM and byusing new business processes. The company aims to inspire its staffthrough leading by example, on the job training and by continualemployee attendance at CRM business management training seminars andcourses. The founder has many years of international businessmanagement experience with a large MNC throughout America, Asia andEurope and many years of experience in project management andengineering in Europe with various companies.    He isvery knowledgeable about logistics, procurement and sales andpossessesthe skills required for the venture's success. Additional bilingualpersonnel are required in Mandarin, Bahasa and English.  These newstaff members will be attracted to the venture after the first sixmonths of launching the company. The founder has previously managedprocurement and export of industrial products from America, Asia andEurope.

Significant assumptions are made in the screening of thenew venture. It’s assumed that the sales projections are realistic andthat customers will purchase the goods without first being able totouch and see them, apart from the photographs and specifications inthe new venture’s catalogue. The ability to recruit local staff withgood customer service skills and understanding of UK dialects, namesand customs is assumed. It’s also assumed that the implementation ofsupplier quality assurance will be successful and that customers acceptthe new venture’s terms of payment. The downside consequences ofinvalidity to these assumptions are lost growth opportunities if salesprojections prove to be unrealistic and the company could be forced tocease trading if it is found not to be possible to recruit local staffwith good customer service skills and UK knowledge. If product qualitycannot be controlled then customer returns and lost trade could costseveral tens of thousands of dollars in refunds to the credit cardcompanies, who demand 100% customer refund guarantees. The maximum costof liquidation, to the founder, is less than S$80,000 and is tolerable.Bankruptcy is not tolerable by the founder for participation in thisventure.

The risk of the venture is rated as medium as it ismanaged by financial bootstrapping and with the use of milestones.Before the IPO in three years time, the business is initially funded bythe founder. The founder's investment is moderate and break even isestimated to occur in the 15th month of trading.Bootstrapping is used between break even and the IPO listing tominimize the company's exposure to financial risk. Borrowing could beused to promote growth, but this would increase the risk. Milestonesare placed along the venture's path to the IPO, as checkpoints, beforefurther resource commitments are made. The first milestone is placedafter the first six months of operations. This marks the transition ofthe company into leased premises with a shop front and a commitment toengage two staff before the end of the first year. The precondition forpassingthis milestone is that the direct mail and telemarketingcampaign have generated more than one hundred positive responses orenquiries and that the receipt of the first few purchase orders isimminent. Similar milestones are placed every six months to matchadditional resource commitments with previous, current and future salesactivities.  A schedule for week-by-week action steps, during thefirst six months, has been created.

The value proposition can beenhanced by communicating to retailers the true cost, to them, of theircurrently low inventory turnovers and how the new venture company couldassist them to increase their inventory turnovers, thereby reducing theamount of their capital tied up in stock. The new venture could improvetheir value proposition by appointing agents or distributors in the UKto penetrate the 90% of the target market that they don't envisageinfiltrating by direct mail and telemarketing alone.   The sequence of customer database generation, direct mailing andtelemarketing batch sizes could be changed to improve the fit byfocusing on a pilot study. The sequence could be changed so that 500targeted customers are contacted four months ahead of the plan tostatistically infer the likely response from 5000. Staff could be addedearlier than planned to divide the tasks of CRM database creation,direct mail and telemarketing between staff and the founder. The fitcould also be improved by eliminating the need for premises with a shopfront for local sales. Local sales are expected to be low, so moreeconomic business premises could be used in an out of town industrialarea. The free cash flow characteristics are at their optimum withadvanced payment commitment and retarded payment for logistics andresources. However, the value chain could be extended to manufacturethe products ourselves. The major risk, after venture launch costs, isthat the initial marketing investment of S$10,000 does not createcustomer awareness, enquiries and orders at the magnitude planned bythe new venture. The risk/reward balance could be adjusted byincreasing or decreasing the marketing investment.

Tags: Venture opportunity screening

Small enterprises

I originally wrote this article, “Small enterprises” in October 2003

CASE STUDY : BURT’S BEES


An opportunity is defined as consisting of an idea and other components.The following enterprise case study allows comparison with othercompanies in the industry and shows little investment, small marketshare, low wages and low productivity for Burt’s Bees. It is explainedthat the company's success is due to it's uniqueness, Roxanne'squalities, her family, marketing and resource management. The companyshould keep to it's plan of producing in North Carolina to allow thevalue of the company to continue to grow, prior to harvesting. According to Timmons and Spinelli (2003:106):

“Roxanne Quimbysat in the president's office of Burt's Bees newly relocatedmanufacturing facility in Raleigh, North Carolina. She was surroundedby unpacked boxes and silence from the unmoving machines with no onethere to operate them. Quimby looked around and asked herself, "Why didI do this?" She felt lonely and missed Maine, Burt's Bees' previoushome. Quimby had founded and built Burt's Bees, a manufacturer ofbeeswax-based personal care products and handmade crafts, in centralMaine and wasn’t convinced she shouldn't move it back there. Sheexplained:

“When we got to North Carolina, we were totallyalone. I realized how much of the business existed in the minds of theMaine employees. There, everyone had their mark on the process. Thatwas all lost when we left Maine in 1994. I just kept thinking 'Why didI move Burt's Bees?' I thought I would pick the company up and move itand everything would be the same. Nothing was the same except that Iwas still working 20-hour days.”

Quimby had profound doubtsabout this move to North Carolina and was seriously considering movingback to Maine. She needed to make a decision quickly because Burt'sBees was in the process of hiring new employees and purchasing a greatdeal of manufacturing equipment. If she pulled out now, losses could beminimized and she could hire back each of the 44 employees she had leftback in Maine, since none of them had found new jobs yet. On the otherhand, it would be hard to ignore all the reasons she had decided toleave Maine in the first place. If she moved Burt's Bees back, shewould face the same problems that inspired this move. In Maine, Burt'sBees would probably never grow over $3 million in sales, and Quimbyfelt it had potential for much more.”

The difference between an idea and an opportunity

Anopportunity consists of a market, timing, resources, networks and anidea. An idea is a component, or part, of an opportunity. An idea is ofacademic interest only when, judged in isolation and is inert, untilcombined with the other factors to create an opportunity.

Ideacreation is the entrepreneur’s first step to realizing a favourableopportunity. An idea needn't be owned by the entrepreneur and could beregarded as a tool. It could be licensed from another company orestablishment. An idea must interact with other components to create anopportunity, but many ideas need to assessed till the right one ischosen to become part of an opportunity. It might be a great innovationor may simply be a more effective way of doing something. Insight orexploration may generate an idea or it may be accidentally stumbledupon.

Opportunity construction is the next step in theentrepreneurial process where the idea is positioned in the real world.The idea is combined with marketing and economic factors to form theopportunity and to determine the likelihood that a gap between marketneeds and wants can be filled. A real need in the market must besatisfied or created and the timing should be right. An opportunityshould add value for the buyer and both profit and growth potentialsshould be high for the entrepreneur.

It could be argued that opportunities, the real world viability of ideas, are more important than the ideas themselves.

What can be learned from the case study?

Fivefacts can be learned from the case study, in comparing Burt's Bees withother companies in the same industry. Investment, market share, salesper employee, value added and wages are all very different betweenBurt's Bees and the industry average.

Investmentby Burt's Bees is significantly lower than the industry average of$13,898 per production worker. This is evident in the company'sdescription of un-automated processes.

Market sharefor Burt's Bees is only 0.015% of the total toilet preparationindustry. This should not attract the major market player's attentionto compete.

Sales per employee for Burt's Bees’ 44 workers is only 21% of the industry average.

Value addedper Burt's Bees' production workers is significantly less than theindustry average of $377,541 per production worker due to no investmentin automation and an unproductive, unskilled workforce - as describedin the case study.

Wages for Burt's Bees' production workers are less than half the $10.93 per hour average for the industry.

Otherinformation could be derived from the case study, but not withcertainty.  Assets cannot be compared because it's not known ifBurt's Bees leases or has bought, for example, vehicles for the salesrepresentatives. Additionally, the ratio of production tonon-production workers can't be compared as the number of salesrepresentatives for Burt’s Bees is not stated in the case study. It'santicipated that there are proportionately less non-production workersat Burt's Bees than the average for the industry.

Why has the company succeed so far?

The company success is due to the company's uniqueness, Roxanne's qualities, her family, marketing and resource management.

Thefacts given within the case study show that Burt's Bees is verydifferent from other companies within the industry. The company'sfinancial strategy creates a competitive advantage against similarsized companies.

Roxanne brings many desirable qualities to thecompany, acquired through her unforgiving background and because of hercharacter. Roxanne worked hard throughout her childhood in smallindependent ventures to raise money for college and afterwards, priorto forming Burt's Bees. According to Roxanne, "I liked buying andselling things well, adding value. Loved [the] freedom of starting abusiness, of not knowing how it would turn out.”

The interactionbetween the family, Roxanne and Burt, and Burt's Bees is favourable tothe company. The family's need for liquidity is low and profits havebeen retained within the company. There is no conflict between thefamily and the business, and Burt's readiness in agreeing with Roxanneto relocate from Maine to North Carolina demonstrates an ability toadapt to the changing requirements of the business and shows that thecouple share the same perspectives. Roxanne says about Burt that, "he'smy main sounding board and [he] gives me a lot of moral andpsychological support ... there's never been a conflictbetween us."

Burt'sBees' marketing of the product contributes to the success of thecompany. Being first in the market and positioning the new product inan un-served market niche helps. Roxanne knows her customers and thatthere are consumers living in urban areas who have "an unconsciousdesire for more simplicity and our products speak to that need." The product line was expanded to include other hand made crafts andbeeswax products like lip balm to appeal to the same market niche.

Resourcesare carefully controlled by the company. A bootstrapping approach isused to finance the company from retained profits. This means that thecompany has no debts and actually refuses to sell products to retailerswho don't pay their bills within thirty days. The resources of theNorth Carolina Commerce Department were used to identify new premiseson favourable terms. During the growth of Burt's Bees, the minimalamount of resources is used at each stage. New employees are hired onlywhen sales increase. Household kitchen appliances are used tomanufacture the product and, without a telephone, messages werereceived from a local health food store. Roxanne's willingness to sleepin the back of a truck at trade shows, the rental of the derelictschool house as a factory and low production worker wages are furtherexamples of the efficient use of resources. According to Roxanne,"Since the beginning of Burt's Bees, the company had never once dippedinto the red, had always turned in a profit and it's profits had alwaysincreased.”

What should Roxanne and Burt do now?

Roxanneand Burt have three options. They can sell the business, return toMaine or remain in North Carolina. They should remain in NorthCarolina, as explained below.

Sell the business
Roxannedoes not want to be at Burt's Bees forever and has other ambitions tofulfil, like living in India. Burt's Bees will be sold by Roxanne andBurt at some time in its business cycle. Now would not be the best timebecause the company continues to grow rapidly and it's foreseeable thatrevenues could be more than ten times their current levels if thebusiness is allowed to grow. The company has no tangible assets and theonly asset is intangible 'goodwill'. The company could be currentlysold to a willing buyer for, say, a few million dollars. However, withthe company's continued growth, it could be sold for several tens ofmillions of dollars within a few years. It is not advisable to harvestthe business at this moment in time.

Return to Maine
Theproduction workers at Maine have a good attitude. Yet, they areunskilled and this, combined with no automation, creates the lowproductivity in comparison to the industry average. Roxanne spent mostof her time alongside the production workers to give supervision and tosupplement the workforce. This left no time for Roxanne to focus onbroad management issues. New management could not be attracted to theMaine environment. The production facility could hardly meet currentdemand and sales were determined by the limited production capacity.The Maine facility incurs high transportation and payroll taxes. It isnot wise to retum to Maine, where company growth would be difficult andRoxanne would be frustrated.

Remain in North Carolina
Burt'sBees remaining in North Carolina is the only alternative that allowsthe company to grow, realize its full potential and become ready forharvesting for a price which is fair to Roxanne and Burt.Transportation costs and payroll taxes are lower in North Carolina thanin Maine. The location is more attractive to hire a management team tosupport Roxanne. This would release her to consider broad managementissues, rather than involve herself in direct supervision of theproduction workers. Operations in North Carolina require a change inproduction methods from manual to automated manufacture. This isnecessary to control labour costs and to ensure that future revenue isnot limited by the means of production, as it was in Maine. A largepercentage of the country's population lives within a twelve hour drivefrom the North Carolina plant and this places Burt's Bees closer to themajority of its customer base. Additionally, there is a greater supplyof labour in North Carolina that is skilled. Although more expensive ona wages per hour basis, it is expected that productivity gains, byusing skilled workers, will more than offset the higher hourly wages.

NEW ASIAN VENTURE BRIEF

Anew venture is proposed for the sale of Asian artefacts throughconventional high street retailing and export to Australia, NorthAmerica and Europe. Typical products include hand carved furniture andornaments from Indonesia and pottery from China. A market is alreadyestablished and the new venture has a competitive advantage by usingtargeted marketing and a low rental outlet. There are competitive,technical and financial risks involved and strategies are required tobe developed to reduce the impact of these risks. Supplierrelationships need to be developed and a shop layout is required. Abusiness plan needs to be created with monthly and quarterly budgets.

Market assessment

Thereis a market of Caucasian customers who purchase Asian artefacts whilston vacation, or residing, in the South East Asia region.  TheSingapore market is currently served by very small souvenir shops ormedium sized retailers located in prime, but expensive, shoppinglocations. Passing trade accounts for most of the business.  Amajority of the medium sized businesses have ceased trading and haveclosed in the previous two years. This is a result of lower revenuescaused by less travellers to the region recently and the migration ofexpatriates to their home countries during the recession. Continuallyhigh shop rental prices accelerated closure of the medium sizedbusinesses. The new venture will be located outside of expensiveshopping areas and will compensate for lower passing trade byattracting customers to the outlet through specialized marketing attourist hotels events and expatriate residential areas.  Theeconomic    and highly available Singapore transportsystem is an attribute. Additionally, export of goods via the Internet,using international courier, will complement over-the-counter shopsales. The local market will expand over the next three years of theeconomic cycle from it's current trough.

Risk determination

Thecompetitive risks of the new venture are that medium sized retailerswill return to the market in prime shopping locations and now useInternet technology for export of their goods.

The technicalrisks involve the compromise between high shop rental and passingtrade, import/export procedures, inventory range/value, web sitestructure/maintenance and payment mechanisms.

The financialrisks are commitments to fixed rental payments for a period, inventoryinvestment, supplier reliability, customer receivables and assuredrevenues.

Production planning

Agreementsneed to be signedwith up to six suppliers in ASEAN countries. Thecontracts are to cover logistics, product ranges, import/exportprocedures, scheduling, payment, cancellations, defaults, quality,agreement enforcement and contract termination.

The new ventureshop layout and telecommunication methodology need to be defined tosupport both the local and international aspects of the business. Aregister of non-current assets needs to be created to help costestimation.

Advice and guidance need to be sought from acquaintances in non-competing, but similar, existing businesses.

Cost estimation

Abusiness plan needs be created to provide a good estimate of initialcosts, expenses and projected revenues for the new enterprise. Theanticipated fixed costs are shop rental, fixtures, fittings, utilities,minimum inventory, minimum staff, telecommunications, computer hardwareand software. Variable costs are expected to be turned-over inventory,shipping, marketing and additional staff. Monthly budgets need to becreated for the first twelve months, followed by quarterly budgets forthe next two years.

Feasibility evaluation

Finally,the above mentioned risks to the success of the new venture arerequired to be analyzed to determine how they could be managed andcontrolled. Strategies to reduce the impact of competitive, technicaland financial risks to the business need to be formulated. Anopportunity screening task is required to be done for the proposedbusiness before the decision is made whether or not to proceed with theventure.

References

Timmons, J.A. Spinelli, S. 2003, New Venture Creation, Mc Graw Hill 2003

Strategic management

I originally wrote this article, “Strategic management” in April 2004.

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.