Span of control

From my experience, an optimal span of control is seven sub-ordinates. At lower levels of the organization,
however, where there is less interlocking, or where responsibility is concerned more with the performance of specific tasks, the span of control may be larger. It varies widely in different organizations from three to twenty.

A number factors influence the limit of span of control and these include:
- Technology (Cell phones, email, and other forms of technology that facilitate communication and the exchange of information make it possible for managers to increase their spans of management over managers who do not have access to or who are unable to use the technology)
- organization level
- job complexity (Subordinate jobs that are complex, ambiguous, dynamic or otherwise complicated will likely require more management involvement and a narrower span of management).
- job similarity (The more similar and routine the tasks that subordinates are performing, the easier it is for a manager to supervise employees and the wider the span of management that will likely be effective.)
- supervisory specialities
- measure of overall organization effectiveness
- the nature of the organisation
- the ability and personal qualities of the manager including the capacity to cope with interruptions (Some managers are better organized, better at explaining things to subordinates, and more efficient in performing their jobs. Such managers can function effectively with a wider span of management than a less skilled manager)
- the amount of time the manager has available from other activities to spend with subordinates
- the ability and training of subordinate staff (Managers who supervise employees that lack ability, motivation, or confidence will have to spend more time with each employee. The result will be that the manager cannot supervise as many employees and would be most effective with a narrower span of management)
- the effectiveness of co-ordination and the nature of communication and control systems
- the physical location or geographical spread of subordinates (The more geographically dispersed a group of subordinates the more difficult it is for a manager to be in regular contact with them and the fewer employees a manager could reasonably oversee, resulting in a narrower span of management)
- the length of the scalar chain

If the span of control is too wide, it becomes difficult to supervise subordinates effectively and this places stress on the manager. With larger groupings, informal leaders and sub-groups or cliques are more likely to develop, and these may operate contrary to the policy of management. There may be lack of time to carry out all activities properly. Planning and development, training, inspection and control may suffer in particular, leading to poor job performance. A wide span of control may limit opportunities for promotion. Too wide a span of control may also result in a slowness to adapt to change or to the introduction of new methods or procedures.

If the span of control is too narrow, this may present a problem of co-ordination and consistency in decision-making, and hinder effective communications across the organisation structure. Morale and initiative of subordinates may suffer as a result of too close a level of supervision. Narrow spans of control increase administrative costs and can prevent the best use being made of the limited resource of managerial talent. They can lead to additional levels of authority in the organisation creating an unnecessarily long scalar chain.

Downsizing, in which firms attempt to cut costs by eliminating positions, has become popular among major corporations in recent years. This strategy has had an impact on decentralization and span of control. Employees who used to report to managers whose positions were eliminated have been assigned additional responsibilities. Span of control has become wider in downsized companies, and workers have become less specialized as they have taken on additional duties.

Renewable energy growth

Annual renewable energy investment has increased from $63 billion in 2006 to $104 billion in 2007 and $120 billion in 2008. In the four years from end-2004 to end-2008, solar photovoltaic (PV) capacity increased sixfold to more than 16 gigawatts (GW), wind power capacity increased 250 percent to 121 GW, and total power capacity from new renewables increased 75 percent to 280 GW, including significant gains in small hydro, geothermal, and biomass power generation. During the same period, solar heating capacity doubled to 145 gigawatts-thermal (GWth), while biodiesel production increased sixfold to 12 billion litres per year and ethanol production doubled to 67 billion litres per year.

Annual percentage gains for 2008 were even more dramatic and wind power grew by 29 percent and grid-tied solar PV by 70 percent. The capacity of utility-scale solar PV plants (larger than 200 kilowatts) tripled during 2008, to 3 GW. Solar hot water grew by 15 percent, and annual ethanol and biodiesel production both grew by 34 percent. Heat and power from biomass and geothermal sources continued to grow, and small hydro increased by about 8 percent.

During 2008, the United States became the leader in new capacity investment with $24 billion invested, or 20 percent of global total investment. The United States also led in added and total wind power capacity, surpassing long-time wind power leader Germany. Spain added 2.6 GW of solar PV, representing a full half of global grid-tied installations and a fivefold increase over Spain’s 2007 additions. China doubled its wind power capacity for the fifth year in a row, moving into fourth place worldwide. Another significant milestone was that for the first time, both the United States and the European Union added more power capacity from renewables than from conventional sources (including gas, coal, oil, and nuclear).

It’s impossible to separate the ‘technical’ and ‘financial’ aspects of the subject of renewable energy from the ‘politics’ which surround it. This is because the technical/financial/political aspects are intertwined; an available energy supply is the cornerstone of any economy and politicians are extremely interested in how economies perform. Politicians like short-term solutions and are reluctant to introduce measures which will make them unpopular.

Power generation using fossil fuels creates many economic externalities that are not taxed or banned by governments to control their use. For example, coal-fired power generation creates the negative externalities of emissions of mercury, NOx, SOx and COx. Many governments don’t limit these negative externalities, created by the power producers, for fear of impact upon the cost of electricity. Consequently, power generation using fossil fuels will always cost less than renewable energy until governments protect their citizens and the planet from the adverse effects of the emissions of mercury, NOx, SOx and COx.

Obviously, people do prefer renewable technologies. It is up to governments to use legislation and fiscal measures to create a level playing field where renewable energy cleanliness is rewarded and fossil fuel negative externalities like emissions of mercury, NOx, SOx and COx are penalized at the correct scale. By this method, renewable energy costs from sources like; solar, wind, tidal and hydro would be equal to those costs achieved with ‘clean’ fossil fuel power generation.

Wind power production

The success of wind power production depends on wind speed and the actual energy of the wind varies with a multiple power of the wind speed. Double the wind speed, and the wind energy increases more than eightfold.

A 2 kW wind turbine at a site with a wind speed of 12 mph may generate around 1300 kWh/year for a constant wind location, i.e. 150 watts for 8760 hours. At a wind speed of 19 mph, the output could rise to 6000 kWh/year and, at 23 mph, the annual output could be 15,000 kWh. Other factors limit turbine output at very high wind speeds. However, these figures show that good site selection is important for wind power project economics. If the wind only blows for part of the day or week then the number of kWh per year are reduced.

A windy site is starting point for any wind turbine project, but there are other factors too. Wind speed varies with height; the higher a turbine is raised above the ground, the better the wind regime. This benefits larger wind turbines that are placed on higher towers, but larger turbines tend to be more efficient anyway, so additional advantages accrue.

Depending on the efficiency of a wind turbine, there is a cut-off wind speed below which wind power generation is not considered economical. This figure depends on the efficiency of wind turbine design as well as on the turbine cost. With the turbines available at the moment, a wind speed as low as 10 mph is considered economically exploitable at an onshore site. Since offshore costs are higher, an offshore wind speed of 15 mph is needed to make a site economically attractive.

Once a potential site has been identified, it must be studied in more detail to confirm that it is suitable. Long- and short-term wind speed measurements will normally be needed to ascertain the wind regime. Figures for at least one full year will normally be required, longer if possible.

When wind passes over land, the unevenness of the ground and interference to wind flow from trees or undergrowth cause a significant amount of turbulence. Turbulent air creates an additional strain on a wind turbine blade, accelerating the onset of fatigue damage. In order to limit this damage as much as possible, wind turbines are normally placed on a tower, which is tall enough to raise the blades above this turbulent layer of air.

Most wind turbines have blades attached perpendicularly to a horizontal shaft and this arrangement imposes restrictions on the wind turbine design because the turbine must be raised on a tower for the blades to clear the ground and the turbulent layer of air next to it. Additionally, a yawing system is needed so that the rotor and generator enclosure can be rotated as the wind direction changes.

Alternatively, a vertical axis machine has all its weight supported by a ground-level bearing. However, the vertical configuration has not yet achieved significant commercial success.

Turbine working principle

A turbine is a means of extracting work from a fluid as it changes from a high pressure to a low pressure. A turbine consists of a shaft carrying a number of vanes or blades, and there is a transfer of energy between the fluid and the rotor. In a turbine, the fluid does work on the rotor.

For gas, steam or water turbines, the fluid is accelerated in a set of fixed nozzles, and the resulting high-speed jets of fluid then change their direction as they pass over a row of curved blades attached to a shaft. A force is exerted on the blades equal to the rate of change of momentum of the fluid, and this produces a torque at the rotor shaft. The momentum of the fluid in the tangential direction is changed and so a tangential force on the rotor is produced. The rotor therefore rotates and performs useful work, while the fluid leaves it with reduced energy. The velocity of the fluid is reduced to somewhere near the value it possessed before entering the nozzles.

For any turbine, the energy held by the fluid is initially in the form of pressure. For a turbine in a hydro-electric scheme, water comes from a high-level reservoir: in a mountainous region, several hundred metres head may thus be available, although water turbines are in operation in other situations where the available head is as low as three metres or less. For a steam turbine, the pressure of the working fluid is produced by the addition of heat in a boiler; in a gas turbine, pressure is produced by the chemical reaction of fuel and air in a combustion chamber.

The impulse (or constant pressure) turbine has one or more fixed nozzles, in each of which the pressure is converted to the kinetic energy of an unconfined jet. The jets of fluid then impinge on the moving blades of the rotor, where they lose practically all their kinetic energy and, ideally, the velocity of the fluid at discharge is only just sufficient to enable it to move clear of the rotor.

In a reaction turbine, the change from pressure to kinetic energy takes place gradually as the fluid moves through the rotor and, for this gradual change of pressure to be possible, the rotor must be completely enclosed and the passages in it entirely full of the working fluid.

It was during the oil crisis of the early 1970s that modern interest in wind turbines took form. From this period, the basic wind energy conversion system for power generation has gradually taken shape. Today, the basic system starts with a large rotor comprising two, three or four blades mounted on a horizontal shaft at the top of a tall tower. The blades interest the wind and capture the energy it contains, energy which causes them to rotate in a vertical plane about the shaft axis. The slow rotation of the shaft is normally increased by use of a gearbox, from which the rotational motion is delivered to a generator.

Lowest ammonia prices

The production of ammonia (NH3) is an energy intensive process. The Haber-Bosch process uses natural gas and air to create ammonia. It takes about 750 kg of natural gas and 30,000 MJ of energy to produce 1 tonne of ammonia. Hydrocarbon gas (CH4) is now used to create ammonia because hydrocarbon gas is cheap. A byproduct of this Haber-Bosch process is carbon dioxide, but other methods of ammonia production have been used in the past that don’t use hydrocarbons and don’t create carbon dioxide.

Currently, the Nymex (New York Mercantile Exchange) price of natural gas is near the 52-week low of $3.50 per million BTU.

Average ammonia prices today are less than half of those a year ago, and profits of ammonia producers are more than 50% down, due to the decrease in international ammonia prices. For example, Saudi Fertilizers Company reported last week that net profits of $128M for the 3 months to June were 60% down on a year ago.

The price of Gulf of Mexico anhydrous ammonia was $800 per ton in September 2008 but, by January 2009, the price had fallen to below $200 per ton. Anhydrous ammonia is now trading at around $160.00 per ton from the Gulf of Mexico and the Black Sea. The current price of ammonia is within the price range experienced during the 10-year period from 1998 to 2007 of $140 to $170 per short US ton.

The high proportion of natural gas used in ammonia manufacture means that, under most market conditions, a strong correlation exists between the price of natural gas and the price of ammonia. Historically, natural gas accounts for 70% to 90% of the cost of ammonia production. Additionally, the current low price is due to the global financial crisis, large remaining distribution stocks, and a late North American harvest season.

The non-functioning of credit markets constrained ammonia consumers in advance purchases, reducing demand. Ammonia suppliers overproduced, in anticipation of a high demand due to high commodity prices. Consequently, the current supply of ammonia greatly exceeds the demand and ammonia producers are curtailing production.

Ammonia supply is a complex issue and involves; ammonia prices, natural gas contract prices, opportunity costs of using natural gas to produce ammonia, ammonia production and inventory, production technology and capacity, and global competition with ammonia imports and exports.

Annual US production of ammonia has steadily declined over the last decade, whilst imports have more than doubled to satisfy the increasing demand and North America is the world’s largest ammonia importer. North America accounts for more than one-third of world ammonia trade and much of the US imported ammonia is from Trinidad. China consumes one-third of the world’s ammonia production but doesn’t have much impact on trading because it consumes almost all of the ammonia that it produces.

Production of ammonia in Western Europe had substantially decreased within the last decade, with the exception of Belgium and Germany, whilst Russian ammonia production has increased, due to the availability of cheap natural gas, the major ingredient of ammonia using the Haber-Bosch process.

Everyday ammonia leaks

After an ammonia gas leak, and for the second day, fire crews tackle a blaze at a food processing plant in Cudahy, Wisconsin. Residents near the plant had previously been evacuated.

This ammonia leak is the most recent in a catalogue of worldwide accidents involving this pollutant of key environmental concern that can cause serious or even fatal respiratory injuries …

6 July Belleville, Illinois
Residents in the immediate vicinity of a food processing plant were confined indoors after the St Clair County HAZMAT team found an ammonia leak.

6 July Waggaman, Louisiana
Residents reported burning eyes and strong odors following a release of ammonia when a heavy thunderstorm resulted in a power outage at a manufacturing facility.

5 July Cotswold Dene, UK
A factory had to be evacuated when a large ammonia leak needed firefighters with breathing apparatus to stem the leak in a refrigeration unit.

1 July Dallas, Texas
An ammonia leak prompted the evacuation of 70 workers from a food packaging company.

27 June Tertre, Belgium
Two people were injured when an explosion caused substantial damage to a fertilizer plant, caused by plant design weaknesses and operating procedure deficiencies.

27 June Alberta, Canada
Police closed off streets whilst HAZMAT units investigated an ammonia leak from three 682 kg ammonia tanks and paramedics checked workers evacuated from the facility.

25 June Lawrence, Indianapolis
An ammonia leak forced a few homes and a Wal-mart to evacuate when 4 cubic meters of ammonia leaked out of a tank in just 40 minutes, sending a cloud of ammonia into the air.

24 June Aurora, Illinois
An ammonia leak at a carbon dioxide liquefaction plant was caused by a sticking valve and a potentially serious situation was averted.

22 June Jefferson City, Missouri
A damaged regulator caused an ammonia leak, prompting the evacuation of a business whilst firefighters wearing HAZMAT suits investigated.

21 June Bayou La Batre, Alabama
Residents in the immediate vicinity of a food processing plant were confined indoors and an officer was transported to USA Medical Center after suffering from ammonia inhalation.

20 June Lumber Bridge, North Carolina
One person was killed and three people were injured when ammonia leaked at a food processing plant.

9 June Garner, North Carolina
38 people were injured and three fire fighters were treated for ammonia inhalation when a 130 cubic meter refrigeration system ruptured in the aftermath of an explosion.

The above incidents are only the ones that have been reported and I’d suggest that they are only a fraction of the total number of daily global accidental ammonia leaks.

Ammonia emissions produce environmental problems, from acid soil to biodiversity reductions and dust, which cause health problems such as asthma. Biomass burning creates ammonia and global ammonia emissions have more than doubled since pre-industrial times.

Exposure to high concentrations of ammonia can result in lung damage and death to humans, whilst ammonia in even dilute concentrations is highly toxic to aquatic animals.

Plastics technology

INJECTION MOULDING

Injection moulded parts can be produced with; ribs, varying thicknessand good surface finishes using all thermoplastic materials. Theorientation of molecules and reinforcement occurs during theprocess. High pressure, nonuniform polymer shrinkage andorientation can lead to warpage and shrinkage over ribs andbosses. Warpage is most apparent with crystalline materials andwith large, flat parts. Methods of controlling these effects aredescribed below.

Plastic granules are softened during injection moulding and forcedunder pressure into a cold mould through small orifices or gates. Pressure is maintained on the material after injection is complete soas to reduce shrinkage of the ribs and bosses as the materialcools. Pressure is higher at the gates because it will nottransfer effectively through the compressible and rapidly coolingmelt. The additional packing pressure leads to a higher densityof material near the gates and causes internal stresses. Thesestresses tend to be partially relieved when the part is removed fromthe tool, resulting in warpage.

The plastic melt must flow from the gates, through the narrow gapbetween cooled mould surfaces, to the edge of the tool. The gapbecomes narrower as the material flows because some of the meltsolidifies at the mould surface. The pressure, flow rate anddistance between the mould faces must be great enough, and the materialviscosity low enough, to fill the mould before the solidifying materialcloses off the flow path. For each material and part thickness, thereis a maximum practical flow length from a gate.

High pressures and narrow flow paths increase the orientation, whichbecomes greater as the gap freezes off. Therefore, theorientation at the centre of the part wall is much higher than at thesurface. For the same reason, orientation is highest near thegates. The gates should not be areas that are likely to sufferimpact or other stresses, such as chemical attack.

The maximum practical thickness of the part is about fourmillimetres. Above this thickness, cooling time becomesexcessive. The minimum normal thickness for injection moulding isabout one millimetre. Below this level, the party cools beforethe tool is filled and orientation is excessive.

The largest readily available injection moulding machines have a 3000tonf clamping force, which restricts part size to about one cubic metreor less, for more difficult and filled materials. The flow length ofthe plastics from any one gate is limited to about 500mm with a 3mmwall thickness. Therefore, multiple gates must beused for large parts. Gate design and position are very important forreducing part warpage and add to the complexity of the orientationeffects.

The surface finish of injected moulded parts replicates the mouldsurface as it cools in contact with the surface, except over ribs andbosses. Part design must be aimed at keeping ribs and bosses awayform the back side of visible surfaces, reducing material in the ribroot. With filled or reinforced materials, the surface tends tobe dull shows flow marks.

Cycle times vary from less than a minute to five minutes. Injection moulding is the most useful thermoplastic processingmethod. However, there are size limitations and a tendencytowards warpage in flat parts. Shrinkage over ribs can bedesigned around.

INJECTION COMPRESSION MOULDING

Injection compression moulding is sometimes known as coining. Theplastic melt is injected into the tool, which is held to a slightlygreater opening than the ultimately desired part thickness. Asthe amount of injected material approaches the desired part weight, thetool is closed to compress the material and to fill out the tool.

It is important for surface quality that the tool closure starts beforeinjection stops and that the injection be completed before the tool isfully closed. This ensures that the material flow front does not stop.

Pressure requirements and orientation effects are less because materialflows into the tool with the tool surfaces further apart thannormal. The rate of injection can be higher because the flow pathis more open.

As the tool is closed down to the final part thickness, the melt issqueezed to the edges of the tool. Orientation is less, becausethe final melt is not being forced through a narrow channel by highpressure from the gate. Packing around the gate is eliminated asthe injection is stopped before the tool is full. Flash isreduced because their is no sudden pressure break, such as occurs innormal injection moulding when the tool fill is completed.

Long glass fibre, up to fifty per cent of fifty millimetre long, can behandled if properly formulated, because the lower injection pressuresand larger gates allow the fibres to pass through more easily. With lower built in stresses and less orientation, parts tend toexhibit much lower warpage when removed from the tool and lessdistortion and stress cracking in service.

Injection compression moulding is most useful for large area parts upto 1.5 square metres and for reinforced components requiring minimumwarpage. Sinkage over ribs is bad, or worse than withconventional injection moulding, because packing additional melt intoribs and bosses is not practical. However, the ability to addreinforcement could overcome the need to use ribs.

Although it is not widely used, injection compression moulding doesoffer the opportunity to overcome some of the size, orientation andreinforcement limitations of normal injection moulding. Injectioncompression moulding avoids the pressure peak obtained during normalinjection. This allows larger parts to be made on the same tonnagemachines as smaller parts. Internal stresses are lower because of amore even pressure distribution.

Flash is minimised, but a vertical flash tool is necessary. Thiswould normally have only one large, centrally located gate. Orientationis nearly eliminated. The need to use a vertical flash tool for thisprocess limits its ability to be used for many parts, because of partshape.

HOLLOW INJECTION MOULDING

Hollow injection moulding is a relatively recent development. High pressure gas is injected into the polymer melt flow at the nozzleof the machine or at the gates of a hot manifold system. The gas flowsthrough the areas of lowest viscosity at the hotter centre of themelt. Polymer injection is stopped before the part is full andthis allows the gas to fill out the molten areas. Final fillingof the part is by gas pressure.

The molten areas must be designed to form a continuous path from thegate and along the ribs for the gas pressure to be effective to theextremities of the part. Ribs must normally be widened at theroot to allow for air passage.

Rib shrinkage is reduced, or eliminated, by this process. Internal stresses and flashing are reduced, because the pressure peakis also eliminated, and this reduces warpage and finishing costs. Pressure on the mould is also reduced. Therefore, much lowermachine clamping tonnage is necessary and the production of longerparts should be possible.

Surface finish is similar to that found in normal injection moulding,with the added advantage of reduced rib shrinkage. The process appearsable to handle similar materials to normal injection moulding. Limitations on reinforcement are similar to those of normal injectionmoulding.

Hollow injection moulding may require heavier wall sections than normalinjection moulding and the process can be considered as being betweennormal injection moulding and foam injection moulding, with an improvedsurface. Various alternative processes, using the melt streaminjection of liquid or solid blowing agents, have been considered.

FOAM INJECTION MOULDING

Foam thermoplastic parts can be produced by adding a heat­activatedblowing agent to the plastic granules or by injecting gas into thepolymer melt in the injection moulding machine. Foaming does notoccur while the melt, containing the gas, is under high pressure in theinjection machine barrel. When the melt is injected into themould, the trapped gas can expand to produce a foam.

To achieve foaming, the part thickness must be at least fourmillimetres and, for low densities, a minimum thickness of sixmillimetres is necessary to achieve a reasonable foam structure.

Cycle times are much longer than with other processes because of thegreater part thickness. This is sometimes balanced by feedingmore than one tool from each injection unit.

Typical foam parts have a surface made up of collapsed cells, giving aswirl pattern similar to wood. A major advantage of the processis that the foaming action completely fills large ribs and bosses,leaving a flat surface. This is an excellent system for articlesrequiring a massive internal rib and boss system for stiffness,provided a high gloss finish is not required.

SANDWICH MOULDING

Sandwich moulding is used to produce parts with a skin of one materialan a core of a different material. The skin material is normallyunfilled and is chosen for its good surface characteristics, while thecore material is usually foamed to eliminate sinkage or reinforced toincrease stiffness.

The basic process relies on tow injection units connected, through aswitchable valve, to the gate system of a tool in a single clampunit. The skin material is injected and this is immediatelyfollowed by injection of the core material. The core material pushesthe skin material to the extremities of the mould, laying down asolidifying layer of skin on the cooled mouls surface as it passes.

With a reinforced core, the total thickness must be about onemillimetre thicker than for normal injection moulding. Sizelimitations are similar to those found in normal injection moulding,but multiple gating is difficult because the flow fronts always consistof skin material.

COMPRESSION MOULDING

Compression moulding is one of the few thermoplastic processing methodsthat allows the use of very long, or continuous, reinforcement. Flow moulding and stamping are two forms of compression moulding.

Flow moulding involves heated plastic, moving in three dimensions,under the pressure exerted by the cold mould to fill the mould,carrying any reinforcements with it. Ribs and bosses are filledwith plastic and reinforcement, but little true control ofreinforcement orientation can be achieved, even though orientedcontinuous fibre is used in the starting material.

Stamping is the deformation of a heated sheet of plastic under thepressure of a cold mould with minimal flow of material or change inreinforcement orientation. Only single thickness parts arepossible.

THERMOFORMING

Thermoforming is the forming of heated plastic sheet by the applicationof air pressure (pressure forming) or a vacuum between the heated sheetand the tool. The atmospheric pressure forces the sheet onto the tool,where it cools and retains the tool shape (vacuum forming).

It is impractical to form a reinforced sheet because of the lowpressure involved and the tendency of the sheet to tear. Orientationand crystallisation effects can be used to strengthen or modify thephysical properties of the plastic material, but such techniques are ofinterest only for low-cost food containers and similar items.

CONVENTIONAL BLOW MOULDING

Conventional blow moulding cannot handle reinforcement. The onlyeffect on the physical properties of the material caused by theprocessing is the tendency to orientate the molecules in the directionof the extrusion head. This can ultimately lead to failure of theproduct due too splitting in the direction of flow when subjected toimpact or stress corrosion.

INJECTION BLOW MOULDING

For injection blow moulding, an injection moulded preform is usedinstead of an extruded parison. The technique is particularlyuseful as a precursor for stretch blow moulding, in which blowing iscarried out at lower temperatures with mechanical means or preformshapes to ensure that biaxial orientation takes place. Stiffness andstrength are significantly increased by this process, as are otherproperties, such as resistance to the transfer of gases. Mostcarbonated beverage containers make use of this biaxial effect.

ROTATION MOULDING

A plastic paste or powder is placed in a hollow metal mould, which isthen heated and rotated so that the plastic melt coats the inside ofthe mould. The mould is then cooled while still rotating. Partsproduced in this way are difficult to reinforce because the fibres tendto separate from the plastics. Internal stresses are very low, butthere is a risk of polymer degradation due to exposure to air. Theprocess is used for decorative, nonstructural parts or as analternative to blow moulding.

Tags: plastic, injection moulding

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.

SWOT analysis

I originally wrote this article, “SWOT analysis” in February 2004.

SUMMARY

A case study by Nairn and Strickland (2003) of the Élan Boat Company is used to identify the strengths and weaknesses of the company and the opportunities and threats within the external environment of the company.  According to Nairn and Strickland,

“Ben Favret, professional water-skier, World Champion, V.S. Champion, and Pro-Tour champion, was resting on the dock after a slalom training run one afternoon when a call came through on his cell phone. Jay Blossman, his high school tennis partner and now politician, was on the other end. Out of the blue, Jay announced to Ben that he was buying American Skier, the competition ski boat company owned by financially troubled American Performance Marine. Ben instantly knew that Jay had found himself a great boat and suspected that he was getting a great deal in buying the company, but he also realized that while Jay was an excellent tennis player, Jay lacked the necessary insider knowledge about building, marketing, and selling ski boats. Excited and eager to be involved in this rare opportunity, Ben was on the next flight to New Orleans to meet Jay and look into the situation.

As Ben took the tour of the American Performance Marine plant in Kentwood, Louisiana, he learned that the company had recently filed for bankruptcy. Ben concluded that with his firsthand knowledge of the waterskiing industry and the boatbuilding capabilities that lay before him in the Kentwood plant, he and Jay ought to be able to resurrect the ailing company. With all the enthusiasm and high hopes of an entrepreneur entering the industry of a sport he loves, Ben Favret dove headfirst into building ski boats. In keeping with this excitement and attitude, Ben renamed the company Élan Boats.  The word Élan means ‘vigorous spirit and enthusiasm‘.”

The purpose of this report is to identify the firm's key capabilities and trends within the macro environment to develop a clear strategy for the Élan Boat Company.

The Basic Design School Model is the strategic framework for the analysis. External and internal appraisals are carried out. Key success factors within the external environment and the distinctive competencies of Élan are identified.

Opportunities exist for Élan if water sports receive greater publicity and because the profitability and customer service of the marketleaders is unsatisfactory. . The success of the company is threatened by a declining market (which is highly cyclical), the competition's established dealer networks, a poor powered watercraft safety record and suppliers locked into the industry leaders.

Élan's strengths are it's brand names of 'American Skier' and 'Ben Favret'. The company's weaknesses are its projected profitability and liquidity.

The seven conclusions and recommendations of this report are:

(1) Consider changing the position of the new plant, in 2004, from Covington to a location within the Great Lakes area, where demand is highest.

(2) Investigate rationalization of the company's product range with a view to reducing the product line from eight to one, two or three variants.

(3) Raise manufacturing efficiency and lower overhead costs to increase gross margins from 30% to 40% and net profit from between 1% and 5% to 10%.

(4) Increase the liquidity of the company to allow for depressed sales until an economic upturn in the U.S. economy.

(5) Reconsider the company's distribution channel philosophy of selling directly to customers without a dealer network.

(6) Develop a close supplier relationship with a top engine manufacturer who has both good performance and customer service records.

(7) Continue to associate Élan with safety, and actively promote activities which improve the safety of Élan's customers.

STRATEGIC FRAMEWORK

There are many schools of strategic management thought and they can be grouped as being either Prescriptive or Descriptive. Within the Prescriptive Group are the Design School, Planning School and Positioning School.  Mintzberg (1990:112) illustrates the Design School Model, and (applied to Élan Boats) it can be described as having eleven
components, and these are briefly described below.

External appraisal
An examination of the external elements will influence Élan's strategy options. This involves investigating customers, competitors, market and the environment. Where the environment is political, economic, society, technology and ecology considerations.

Threats and opportunities in the environment
The external appraisal will reveal the opportunities that Élan can exploit and the threats it faces. Opportunities can be regarded as positive trends and threats are negative trends.

Key success factors
Key success factors are competitive assets or competences that Élan need to compete successfully in the power boat industry. An absence of strategic necessities would be a
weakness and possession of strategic strengths will give advantage to Élan.

Internal appraisal
An examination of Élan's employees' skills, resources, innovations and financial position will disclose how the company may be constrained by it's capabilities and resources.

Strengths and weaknesses of the organization
Any activities that Élan does well will be identified as strengths from the internal appraisal. Any lack of resources or activities that Élan does not do well will be identified as weaknesses.

Distinctive competencies or assets
Distinctive competencies are the activities that Élan does exceptionally well. It's strategic assets are brand names or customer base that is strong, relative to Élan's competitors.

Social responsibility
Social responsibility is Élan's obligation, beyond that required by the law and economics, to pursue long-term goals that are good for society.

Managerial values
These describe how the company's managers establish, promote and practice Élan's values. The building of team spirit, influencing marketing efforts, shaping of employee behaviour and guidance for managerial decisions and actions are examples of the main purposes of managerial values.

Creation of strategy
Strategic alternative strategies need to be developed for Élan Boat Company for evaluation. These strategies should take advantage of environmental opportunities and exploit the company's strengths.

Evaluation and choice of strategy
Some of the criteria used for selection of a strategy from alternatives are scenario consideration, sustainable competitive advantage pursuit, organizational vision and objectives consistency, feasibility and their relationship to the other strategies of Élan.

Implementation of strategy
For Élan to succeed, the chosen strategy must be implemented and this involves
converting strategic alternatives into an operating plan.

KEY ISSUES

Current strategy
According to Nairn and Strickland (2003: 178), Favret and Blossman have the following mission statement for the new company, Élan:

"The mission of Élan Boats is to be hyper efficient in the manufacturing and marketing of Inboard Runabout Boats for recreational and competitive water sports enthusiasts. Élan Boats is dedicated to building long-term relationships with customers through superior training and customer support. We will do business consistent with the definition of the company's name. Élan - vigorous spirit of enthusiasm. Synonyms: Style, Confidence, Flair, Elegance, Flamboyance."

Additionally, Ben believes that an offensive attack on the major competitors is the best option and that Élan was "gunning for, and will take down MasterCraft, Correct Craft and Malibu". Nairn and Strickland (2003:179) quote Ben as wanting Élan to be the "true market leader in profitability, quality, manufacturing cost efficiency and, eventually sales."

Identification of Key Success Factors
A cost advantage, through cost efficiency, would be a strategic strength to any power boat manufacturer and Nairn and Strickland (2003:179) state that none of the industry leaders were particularly cost-efficient. A boat builder who was superior at servicing their customers would also have a strategic strength.  A strategic necessity is effective promotion.

Current performance assessment
Nairn and Strickland (2003:180) report that, as of 2000, Élan Boats had 30 clients. According to the FAQ page of Élan's website, the company has spent thousands of hours and dollars reconditioning their moulds, updating their facility and equipment. The FAQ page also quotes Ben Favret as saying, "getting boats built for factory demos and dealer sales was our first problem. We had to fully hire, train and manage an entirely new production team. That combined with dealing with vendors who were sceptical slowed us down this year. Our production was backed up through August and now we have caught up. That hurt because we could not make a strong sales effort this summer. Our Team Élan members have been very helpful in working with us to do demos and let other people experience our boats."

Financial review
Naim and Strickland (2003:179) quote Ben Favret as saying that he wanted Élan to be "the true market leader in profitability and manufacturing cost efficiency". Élan needs gross margins and net margins (after tax) in excess of 40 percent and 10 percent respectively, to achieve this. Acceptable liquidity is also required.

Industry stage and trends
The current stage of the power boat industry in it's half-century history and current trends amongst the 17 manufacturers will influence Élan's chances of success.

Market trends and segmentation
If the market is expanding and demand within Élan's targeted segment is buoyant then this would be favourable to the company.

Customer preferences
Élan and some of it's competitors have boat model features that are designed to cater for customer preferences for wake form and control. However, customer preferences are
not fixed and change over time.

Value chain
Nairn and Strickland (2003:179) report that "Élan planned to bypass boat retailers and sell directly to the end user". However, this strategy appears to have changed as the FAQ page of Élan's website, states that Élan are making their first run at setting up their dealer network now and completing the few remaining Team Élan openings.

HCA (Human Capital Assessment)
Ben Favret did not purchase American Performance Marine as a going concern and, therefore, did not acquire any human capital with the purchase. Nairn and Strickland (2003:178) note Ben’s thoughts that, because of his own connections in the industry, [he had] the ability to recruit top talent in manufacturing, sales, and marketing". This he subsequently did and the FAQ page states that he recruited; a general manager with 22 years expertise (Mary Travis), a sales and development manager with 17 years experience (Darren Landry), and a top fibreglass consultant (Rick Delone).

Distinctive competencies
Élan's distinctive competencies are mainly strategic assets as, when the case study was
written, the company had only been trading for 10 months. These strategic assets include the 'American Skier' and 'Ben Favret' brand names.

Competitor analysis
An analysis of competitors such as Mastercraft, Classic Craft, Malibu and Infinity will reveal their strengths and weaknesses.

ANALYSIS

A situation analysis is made using the external and internal analyses of Mintzberg's Design School Model. Condensed opportunities, threats, strengths and weaknesses are described.

Opportunities

Customer
(a) World Games include waterskiing and wakeboarding.
(b) ESPN X-Games and the Gravity Games include wakeboarding.
(c) Gravity Games drew 370,000 spectators and high TV ratings.
(d) New Cable Parks are a way to introduce potential new boat buyers.
(e) Gulf Coast customers targeted in Texas, Louisiana, Mississippi, Alabama.
(f) Better service, delivery, sales force efficiency with regional advertising.
(g) Élan plans to sell directly to the end user, bypassing boat retailers.
(h) Under marketed competition ski boat segment to be targeted.
(i) "Free week of ski school" to be offered to water skiers and wakeboarders.
(j) Élan had 30 customers in 2000 and projected 50, 60, 72 in '01, '02 '03.

Competitors
(a) MasterCraft has high overheads due to large facility, marketing, etc.
(b) Correct Craft sales fell 17.2% in 2000 due to poor marketing, competition.
(c) None of the industry leaders are particularly cost efficient.
(d) Leaders vulnerable to unhappy buyers, sliding profits, excess capacity.
(e) Ben wants Élan as market leader in profitability, quality, cost and sales.
(f) Élan will achieve cost advantage by revamping it's activity cost chain.
(g) Élan aim to offer a better boat than the competition at a lower price.
(h) Competitive offensive aimed at rivals who service customers poorly.
(i) Objective to win disenchanted customers with service oriented company.

Market
(a) U. S. is largest boating I water skiing nation in the world.
(b) Estimated that waterskiing interest will double if it becomes Olympic event.
(c) Boating industry held approximately 200 boat shows annually across U.S.

Environment
(a) International Water Ski Federation lobbying IOC hard.
(b) Cruise control and driver videotaping have allayed IOC's concerns.
(c) Waterskiing came very close to being included in the 2004 Athens Games.
(d) IWSF is now focusing it's sights on the 2008 Games in Beijing.
(e) Ben anticipates investing in a new facility in Covington Industrial Park.
(f) Team Élan launched to get qualification for Regional and National events.

Threats

Customer
(a) A 2001 sales decline would mean fewer people trading up in 2002 to 2005.
(b) Excessive customer dissatisfaction with overpriced/underperforming boats.

Competitors
(a) Technology and innovation accelerate in economic downturns.
(b) MasterCraft has exclusive Gravity Games towboat provider 3 yr. contract.
(c) Indmar has exclusive customization program with MasterCraft and Malibu.
(d) Indmar has private label with MasterCraft for electronic fuel ignition.
(e) Indmar has considerable name recognition and brand awareness.
(f) Indmar is visble at grassroots waterskiing competitions.
(g) Customer loyalty to MasterCraft, Malibu and Correct Craft is entry barrier.
(h) Three industry leaders have large dealer networks and scale economies.
(i) Three industry leaders have greater supplier bargaining power.

Market
(a) Waterskiing participation fell 18°J'o from 7.2 M in 1998 to 5.9 M in 2000.
(b) Motor boating and waterskiing are ranked 13th and 40th for participation.
(c) Boating industry suffers during periods of economic decline.
(d) Decline in recreational boater numbers accelerated in 2001.
(e) PWC sales fell 54°J'o from 200,000 in 1995 to 92,000 in 2001.

Environment
(a) Spare money is not used for boat-related expenses during recessions.
(b) Income restrained households will depress prices if opting out of boating.
(c) Waterskiing as an Olympic sport has been delayed over driver concerns.
(d) PWCs had a bad reputation with boaters & law enforcers from rowdiness.
(e) There were 83 fatalities associated with PWCs in 1997.
(f) There were 506 deaths and more than 11,000 injured in the last decade.
(g) PWC injuries are six times greater than motor boat injuries.
(h) Blunt trauma is the leading cause of PWC related deaths.
(i) Many new regulations are imposed on PWC use because of bad record.

Strengths

Brand/firm association
(a) Ben knew Jay had found a great boat and a great deal in buying company.
(b) Company had been building to highest possible standards since 1975.
(c) Company had earned a reputation for quality, product perf. and innovation.

Relative cost
(a) Company purchased at low price, giving low overheads and no debts.
(b) Élan Boat company was started with a low capital expenditure.
(c) Inherited R&D, shaping and mold design can cost in excess of $400,000.

Innovation
(a) American Skier is over 600 Ibs. lighter than any other boat on the water.

Management capability
(a) Ben Favret is excited and eager to be involved in this rare opportunity.
(b) Ben Favret has first hand knowledge of the waterskiing industry.
(c) The Kentwood plant is already constructed with boatbuilding facilities.
(d) Ben has entrepreneur enthusiasm entering industry of the sport he loves.
(e) Ben renamed the company Élan, meaning vigorous spirit and enthusiasm.
(f) Ben is a professional water skier and World, US, and Pro-Tour Champion.
(g) Jay Blossman is a politician and high school tennis partner of Ben Favret.
(h) Ben has the ability to recruit top talent in manufacturing, sales, marketing.
(i) Ben will make history as the first professional skier to buy a boat company.
(j) Élan's facility in Kentwood had capacity for 150 units a year.

Weaknesses

Profitability
(a) Projected 1 % I 5°k after tax net income contradicts Élan's profitability goal.
(b) Projected 29.5% gross margin conflicts with Élan's profitability goal.
(c) Projected current ratios of 1.5, 1.7,2.1 give liquidity concerns.
(d) Projected acid test ratios of 0.6/ 0.66 for 2002/2003 cause for concern.
(e) Diminishing cash flow from operations too low to cover current liabilities.

Brand/firm association
(a) American Marine had been unfocused, poorly managed, undercapitalized.
(b) American Skier plant closed it's doors in Jan '01 and filed for bankruptcy.
(c) American Skier had high debt, high production costs, poor management.
(d) Élan prevented from strong sales effort because of backlogof work.

Management capability
(a) Jay Blossman lacks necessary insider knowledge about ski boat industry.
(b) Ben Favret fully hired, trained and managed entirely new production team.

Critical issues
The critical issues for the Élan Boat Company are:
(1) Long-term demand for personal watercraft is declining.
(2) American Skier and Ben Favret brand names are Élan's strategic assets.
(3) Élan's profitability and liquidity are cause for concern.
(4) The personal watercraft industry performance is highly cyclical.
(5) Competitors have established dealer networks.
(6) Suppliers have exclusive agreements with competitors.
(7) Poor safety and a bad user reputation influence PWC demand.

CONCLUSIONS AND RECOMMENDATIONS

Élan Boat Company is operating in the U.S. PWC market that has been contracting since 1996. The Kentwood plant is not located within the highest demand area of this market. If the plant is to be relocated in 2004, as stated by Nairn and Strickland (2003:180), then a location within the Great Lakes area should be considered.

'American Skier' is the brand name that end-users recognize. It is doubtful as to whether Élan Boat Company benefits from having three varieties of this model and five more boat varieties in the Volante and Eagle ranges. The design, tooling, set-up and material costs for these eight product variations should be analyzed. This may reveal that Élan's product line should be reduced to between one, two or three product varieties.

Élan's profitability is at variance with it's mission statement and Ben's goal to be the "true market leader in profitability…” is not reflected in projected gross margins of 29.5% and net margins (after tax) of 1 % to 5%. These figures need to be a minimum of 40% and 10% respectively. This could be achieved by increasing manufacturing efficiency and reducing overheads. Élan's projected assets may cause liquidity problems as most are in the form of inventory and the cash flow from operations does not cover current liabilities.  Inventory levels and the amount of working capital should be investigated.

The demand for personal water crafts, as luxury goods, is reduced when the U.S. economy is on the downside of the economic cycle. This means that Élan should have sufficient financial reserves to support the company until the economic upturn, and they should look at the sensitivity of Élan's finances to reduced sales during this period.

Nairn and Strickland (2003:179) state that "Élan planned to bypass boat retailers and sell directly to the end user."  This would be done through advertising.  Dealers are used to sell personal watercrafts because it is the type of product that potential customers prefer to see in reality so that they can touch it, sit in it and walk around it.  It is recommended that Élan should re-appraise their distribution channel strategy.

Indmar is the most popular engine and this supplier, naturally, has created close relationships with the market leaders. As Élan had less than 1/₆% of the competition ski boat market in the second quarter of 2001, according to Nairn and Strickland (2003:171), it is possible that the market leaders may not regard Élan as a serious threat and a supplier relationship between Élan and Indmar may be possible.

The poor historical safety associated with personal watercraft use influences sales. Élan promote safety on their main web page and offer ski schools. This is a good strategy and it is recommended that this should be built upon.

REFERENCES

'Frequently asked questions', Élan Boat Company. Retrieved: from http://www.elanboats .com/elanfaq.htm.

Mintzberg, H. 1990, ‘Strategy Formation - Schools of Thought', in J.W. Frederickson (ed) Perspectives on Strategic Management, Harper Business, New York.

Nairn, F. & Strickland, 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.