Expansion with Stan’s sound- option 1
Inventory: Cost of the items is less but we need to maintain a big inventory so it will get added on to the overall expenditure.
Investment: This comprises of inventories in the new shop, fixed cost associated with the shop and the initial investment needed for other expenses like advertising. The investment for the new expansion can be funded by adding more share capital but Mr. Kramer already has a loan to be repaid. So the company Stan’s sound can apply for a loan to a bank. Bank’s decision will be mainly based on debt to equity ratio, profitability and turn over.
- From the graph it is clear that the debt to equity ratio is at acceptable level of less than 0.5 in the few years. Decreasing Debt to Equity ratio means proper back of the loan taken previously.
- Its clear from the graph net profit of around 5 % is maintained. The first year loss can be attributed to the fact that it operated only for two months but the fixed expenses cannot be scaled down. The drop in the loss profit in 1977 can be attributed to Cen-Tex audio reducing its customer size.
- The absolute value of asset turn over(around 3.5) seems fairly acceptable
Hence it is more likely that the company will get their loan sanctioned.
Organisational complexity
Reporting structure: We have to appoint a new manager for the Wardlow shop. Since this increases the complexity of the structure, we have to form an efficient reporting structure which will form a basic frame work for future expansions as well.
Experience:Kramer and Porter have around five year experience in the field of standard audio equipments. They can use that skill in wardlowand to avoid the problems faced in a start-up.
Inventory maintenance:Since we have predominantly Stan’s sound shops we can use a buffer inventory for sales. This further increase in the cost but this helps to serve the customers sooner.
Suggested reporting structure is as follows.
Profitability
Profit margin: Since the population of Wardlow is less, the quantity sold will be scaled down. There is a high chance for capital getting locked in inventory. Also the profit margin is very less in standard audio products so we can expect less profit compared to Westville shop.
Competition factor: Competitors in Wardlow is limited. Hence there is a potential possibility to cover the Wardlow market if operated properly.
Risk factor: low.
Expansion with Cen-Tex Audio
Financial viability
Loan: We have the same chance of getting the loan sanctioned as in the previous option.
Inventory cost: Here the cost of inventory involved will be on the higher side since it specializes on customised products. Hence the loan amount could go up.
Profitability
Profit margin: Since Wardlow is a small city the proportion of people preferring luxurious customised audio will be less than the proportion in Westville. It gets multiplied by the less population hence the market scope is narrow.
Competition: Since there is limited competition, profit margin on customised products can be set on our own terms.
Risk factor: High. The potential market is narrow and population is less.
Organisational complexity
Reporting structure: In terms of reporting structure we can follow the same structure proposed for option 1.
Inventory maintenance: We should go for order-delivery system in Wardlow since that will reduce the amount of inventory in the shop. We cannot have a pooled resource since the orders are customised
Experience: Nil.
Expansion with Stan’s sound with few customizable options
This option suggests going for expansion with Stan’s sounds but also taking orders for customizable option. Here the orders will be routed through Cen-Tex audio, Westville.
Financial viability
Loan: The financial viability will be similar to that of expansion with Stan’s sounds.
Inventory cost: similar structure as in option 1.
Organisational complexity
Reporting structure: We have to frame a new department or allocate space for customizable options in the shop. Employing additional person for the department can be decided depending on the initial response for the department. Rest is similar to option 1.
Inventory structure: Pooled buffer inventory structure suggested in option 1 can be implemented here as well. Also there is no need for buffer inventory for customised radios.
Opportunity: Cen-Tex expansion is possible depending on the response by the customers.
Profitability
Competition: Limited
Risk: Moderate, risk of standard goods and to some extent customised gets added up.
Profit margin: Limited number of options for customization, so profit won’t be comparable to Cen-Tex audio. Customer preferences and choices met to some extent. Profit is more compared to the first two options.
No Expansion
Here we suggest for not expanding the company at this point in time. We could do restructuring of the current shops and building a foundation for the future expansion.
Financial implications and Profitability
- Here we have to find the profitability of individual shops since we cannot afford a loss in revenue.
- From the net earnings graph it is clear that company is operating with good profit. Drop in profit in 1977 is due to the drop in sales (graph) which can be explained by the shifting of the customers from Stan’s sound to Cen-Tex audio. This is an elasticity problem. We have to find whether it is short term effect or a long term problem.
- Both Cen-Tex audio and Stan’s sounds are interdependent in their saturation point.
- The profitability of Cen-Tex in Westville is not known. Since it is a new organisation it is tough to forecast the demand.
- Though we see a fall in the profits of Stan’s sounds it is reasonable to assume that we lost it to the Cen-Tex.
- We have to gain more market for Stan’s since the brand name is built on Stan’s sounds and not Cen-Tex.
Organisational complexity
Inventory: Investment on the inventory frontier can be made and increase the size of the buffer inventories. This will help in servicing the customer sooner.
Decision on option
Table comprising the analysis results is given below
From the table it is clear that expansion with few customizable options (option3) outweighs other options (assuming risk neutral)
Implementation plans:
- Lease the place after taking loan from the bank.
- Restructure the organisation
- Initial partnership was formed since company could not find committed employee. Same problem can arise now so we suggest one of the stake holders to run the business from Wardlow
- Run a campaign to create awareness among the local.
- Stock the inventories and start business.
Contingency plan
Problems could come because of the
- Inability of the partners to go to Wardlow to run the shop
- Inability to cover the costs from the loan secured
Suggestions:
We could go for a franchise in Wardlow. Since it is a franchise we get more investors coming into picture thus reducing the financial problem. Investors from Wardlow can manage the operations thereby reducing the necessity of Porter/Kramer/Howard relocating.
