- Advertising & Promotion Strategy
Advertising is very useful tool used in marketing area, especially in launching the new products. However, its powerful effect was ignored by Jingle Bell’s top managers at beginning of the business. The result was obvious that sales of the second period was not satisfying, only 44% finished goods were sold. Although this result was mainly caused by the low price competition and the wrong forecast in market share, it should be admitted that without any design in advertisement and promotion made the situation even worse. The new products could hardly get the customers’ attention without the associated advertising package. According to the feedback from period 2 and 3, advertising seemed more efficient as a market lever comparing with pricing strategy. For instance, in period 3, Super Toy Ltd.’s AJAX products accounted for 15% market share under the price of £1.3 per unit. Compared with that, another company Win-Win, only had 12% portion of total market with the extremely low price £ 1.12. The major difference between them was Super Toy spend £3500 on advertising. The total market demand of AJAX in period 3 was around 1million. Thus Win-Win’s gross potential losses in sales would be nearly 200 thousand pounds. From those previous survey and analysis, Jingle Bell began to focus on advertising and promotion activities. Since period 4, Jingle Bell has adopted advertising-intensive policy. The expense on advertising per each period was around £10,000 to £15,000. The design of advertising package was highly flexible in coordination with the major company objectives. For instance, in order to sell out the exceed finished stock, a great amount of advertising input in period 4. In period 7, due to the increase in productivity, £30,000 advertising expenses were tied up in order to raise the sales. Also, the advertising was used to balance the adjustments in price.
Production
Production is the core concept in the manufacturing industry. For Jingle Bell, the main objective of a successful production manager was to provide customer-satisfied quality products with highly efficient productivity and lowest costs.
- Operation Capacity & Productivity
Because Jingle Bell was a new business, the first important thing in its operation was to decide the capacity of the business. This should be determined by the current market situation, financial support and the availability of labour resources. Based on the previous market research and the £400,000 set-up capital, the operation capacity was designed as its productivity around 160,000 units per period. 97 employees and 10 supervisors were recruited in the second period. However, after failure of selling the rest half finished goods in period 2, it was obvious that the previous designed capacity was larger than the really market needs. In order to sell out all finished goods stock and reduce the huge labour costs, a big redundancy has been made in period 4. The number of workers decreased by 43% to 55. This approach worked quickly. Until period 5, there was no finished goods stock existing. However there was serious problem as the consequence of this, low work efficiency! In period 4, because the existing operators were strongly affected by the big redundancy, the current working efficiency has plummeted to 77.5%. Low working efficiency has directly caused two problems in operations: 1) restriction in productivity; 2) Increasing costs due to labour resource waste. After Jingle Bell successfully solved the stock problem, the products were totally sold out nearly every period. The limited operation capacity has directly restricted the Jingle Bell’s profitability in future. Thus how to match the gap between the current capacity of business and the market requirement has become the operation managers major concern during the following period. Though the 8-period expending, the number of operators has gone up again to 80. However, due to the continuous recruitment, the efficiency never reached the normal level.
Apart from increasing the price, to minimize the production costs is another way to enhance the profitability. Thus one of main tasks of operation managers in Jingle Bell is how to reduce the production costs to increase the profit margin. The chart 2 below shows Jingle Bell’s production costs allocation in details:
From chart 2, it can be seen that labour costs consists of the major part of the total cost of production, around 60% at the end of 2003. Following that, it was other production overheads, account for about 20% of total costs. The rest of the sections were all under 10%. Hence, in order to reduce the production costs efficiently, those two areas need to be focus first. Due to the wage of the operators are fixed, the most possible way to reduce the labour costs is improving their efficiency. However, because of the big redundancy during period 4 and the following recruitment for expending, the efficiency level have not returned to the normal level until the end of 2004. Although its C/S ration reduced, the weight of the labour costs has increased at 2004 to 63%. On the other hand, Jingle Bell has noticed that larger operation capacity could reduce the production overheads on average. The unit costs of production of AJAX and ZORO have decreased from £1.16 and £1,72 to £1.04 and £1.59 respectively since the company expend its capacity. Also it can be proved in terms of change in Contribution to Sales Ratio.
Contribution to Sales ratio = Costs / Total sales
This ratio can be uses in place of net profit margins to measure the contribution of products of a business. (Cox, D. & Fardon, M., 1997) The lower ratio indicates the reduce in costs relative to the sales. From chart 2, the total costs C/S ratio has decreased from 0.764 to 0.715, which means a successful reduce in its total production costs.
The inventory will exist because there is a difference in the timing or rate of supply and demand. (Slack, N. et al, 1998). An appropriate stock approach can maintain the normal operations in the lowest stock control costs. Jingle Bell’s managers mainly focus on material stock control and finished goods inventory control.
1. Raw Material Stock
Jingle Bell original adopt the low level stock strategy. Materials were ordered on monthly and delivered in certain amount according to the current operation capacity. This strategy was adopted to reduce the waste in stock control. However, the inaccuracy in forecasting the demands has caused the insufficient material problem which needed to require the material in higher costs and without credit permission. After clearly analysing the stock situation, managers decided to enhance the stock level and reduce the material order times by considering its limited stock holding costs. Due to this strategy, Jingle Bell still kept the sufficient materials when there was lacking of the supply.
2. Finish Goods Stock
Because of the misoperation in period 2, the exceed finish good stock became the big problem to Jingle Bell. However, after solving this problem, the situation has become no finish good stock available. It was actually undermine Jingle Bell’s ability to cope with contingency. Thus it is an area that needs to be improved.
Personnel
The major task of personnel sector in Jingle Bell was set up as providing support for both employers and employees to ensure that all the tasks have been done properly through them.
The first challenge that personnel managers met was how to deal with the big redundancy made in period 4 and maintain the morale of the rest employees. It was clearly that the approach of dealing with redundancy was not efficient. The lacks of communication and useful motivator cause the low production efficiency for a long time.
During the Jingle Bell’s following expending, personnel officer adopted more appropriate approach to fit with the needs of the business. The recruitment procedure was divided into several periods in order to minimize the negative effects on productivity. Also the sufficient training was provided for new employees fitting with their position quickly.
EXTERNAL EFFECTS
Apart from the internal activities it took, as an organisation in the opening market, Jingle Bell cannot avoid the impacts from the external environment. Some of these impacts have greatly affected its performance. There were mainly two external impacts on Jingle Bell over the last two years.
- Increasing demands in toy market
Nearly the end of 2003, there was a high market demands for AJXA and ZORO because of the Christmas sales. Even after selling out all finish stock, the demands were not matched. In order to cope with it, Jingle Bell had to adopt the overworking schedule. However, the labour costs increased.
- The Lack of material supply
Around period 10 there was a threat of potential war that caused the difficulty in finding sufficient material supply for next two periods. Because Jingle Bell has raise it stock level, its operation has not been seriously affected by this impacts in a short term. But until the end of the 2004, the rest stocks will not be sufficient for the next year.
ANALYSIS OF THE PERFORMANCE
After the above evolution of Jingle Bell’s performance in terms of production, marketing and personnel, the annual financial reports of 2003/2004 has been made to interpret it financial performance through two years.
Manufacturing and Profit & Loss Account
According to the Manufacturing and Profit & Loss Account 2003/2004, (chart 3), there was a significant improvement in Jingle Bell’s sales and profit performances. Its annual turnover and net profit reached £1.38 million and £0.19 million respectively at the end of 2004. The sales has increased 36% compared with the figure last year. Simultaneously, the gross profit of Jingle Bell has risen by 64% to £0.39 million. Although the costs has increased as well, the contribution to sales ratio has declined which means the profitability has increased. (See interpretation in Production sector). Also it can be seen that there was an appropriate control in Administration & Expenses section. Though the input of the advertising was nearly three times than the previous year, the huge decrease in financial charge (interest) sector and successful control in general overheads resulted in only 14% increase in administration costs. Thus the improvement in net profit was significant, tripled in 2004.
Cash Flow Statement
A cash flow statement is simply a summary of cash received for the period and cash paid. It contains some extremely useful information because it gives a lot more detail about the movement in the cash position. (Dyson, J. R., 2001). The cash flow is vital because it’s possible for a business to be profitable without necessarily having the sufficient cash resources to keep it going.
The above chart 4 illustrates the change in cash flow statement between 2003 and 2004. From chart 4, Jingle Bell has good cash flow performance in both two years. Compared with 2003, Jingle Bell has more sufficient cash available in its cash account at the end of 2004. However, it should be point out that too much cash tied up in debtors would enhance the risks.
Balance Sheets and relevant ratio analysis
The annual balance sheet provides a company the overall information about the structure of the assets, liabilities and equity across a financial year. Jingle Bell’s Balance sheet 2003/2004 (chart 5) shows the change in its structure of assets, liabilities and equity over two years.
According to chart 5, there was a significant increase in equity (shareholder funds) from £0.46 million to £0.65 million, rising by 40%. Also the decrease in Jingle Bell’s liabilities was noticeable, from £39,000(2003) to zero at the end of the 2004. In order to interpret the information more specific, a range of ratios will used to analyse.
This range of ratios could interpret the profitability of the business. The most common one is Return on Equity ration (ROE). It defined as
Return on equity ration (ROE) =Net profit/average equity
This ratio is a measure of the efficiency with which a company employs owners’ capital. A high ROE ratio expresses the efficient use of the shareholder’s capital and high profitability.
Jingle Bell’s ROE for 2003 and 2004 are:
ROE (2003)= £61,049/(£461,049 +£400,000)= 14.3%
ROE (2004)=£188,612/(£461,049+£649,661)= 34.0%
From the two figures, it is clearly that the efficiency of using equity has been improved over the two years.
Profit Margin is used to measure the earnings squeezed out of each pound of sales. It expresses like following:
Profit Margin= net profit (after taxation) / total sales
Jingle Bell’s profit margin for 2003 and 2004 are:
Profit margin (2003)=£61,049/£1,013,388=6%
Profit margin (2004)=£188,612/£1,380,603=13.7%
Obviously, the profit margin of Jingle Bell is high. And its rapid increase in the second year indicates the continuous improvement in profitability.
As noted, one determinant of a company’s debt capacity is the liquidity of its assets. (Higgins, R. C., 2001) Liquidity ratios measure the extent to which assets can be turned quickly turned into cash. Two common liquidity ratios are the current assets ratio and the acid test ratio.
Current assets ratio =current asset/ current liabilities
Acid test ratio=(current assets-stocks)/current liabilities
The only difference between them is that acid test ratio excludes the stock by considering the difficulty in disposing of stocks in the short time. Thus it is probably a better measure of the business’s immediate liquidity position than the current assets ratio.
Jingle Bell’s liquidity Ratios for 2003 and 2004 are:
Current assets ratio (2003)=£220,049/£9,000=24:1
Acid test ratio (2003)=(£220,049-£11,781)/£9,000=23:1
Because there were no current liabilities at the end of 2004, those two ratios cannot be calculated. However, it is obviously that the liquidity of Jingle Bell is extremely high. It allows the sufficient cash flow to cope with the normal operations and contingency. However, a guide of 2:1 is normally recommended. Jingle Bell has had too much unnecessary capital tied up in current assets and will eventually affect the efficiency of using capital.
If a business has sufficient assets to pay off the borrowed capital liability, the business is solvent. Because Jingle Bell’s total assets far more exceeded its liabilities both in 2003 and 2004 (56:1 & 64:0), the company has no solvency problem at all. However, too much assets could be idle in Jingle Bell’s current situation.
CHAIRPERSON’S REPORT
According to the overall evolution of two–year process and the final analysis of financial performance, it is glad to claim that Jingle Bell Ltd. has gained the remarkable success in the last two years. The company achieved the most of the tasks it made in terms of the profit, shareholder’s benefits and good reputation in market. Jingle Bell has made £0.25 million at the end of the 2004, gaining 47.6% return on capital over last two years. Simultaneously, its share price rose steadily by 41% to 141pence at the end of 2004, becoming one of the strongest in share market of toy industry. On the other hand, with the good reputation between customers, Jingle Bell has already successful fitted into the niche market and maintain the stable market share in toy market. However, behind the current success, there are still two major potential problems having been identified as following:
Limited Capacity Vs Excess Assets
This problem arises from the conflict between the limitation of Jingle Bell’s current operation capacity and its excess acquisition assets and the potential market demands. From the analysis of financial ratio, it has been clearly identified that liquidity and solvency ratios were extremely high. A great amount of assets were actually idle. Also from the review of the marketing area, there is still potential market for Jingle Bell’s products that could be proved by the previous sales performance. Hence, Jingle Bell must decide how to match the gap between the operation capacity and excess assets to ensure the most efficiency of using capital and assets.
- Low working efficiency
Operators’ efficiency has become the torment in Jingle Bell since the big redundancy was made to solve the stock problem. As the continuous expending in the following period, the efficiency has fluctuated due to the new recruitment. This problem has seriously restricted the productivity and cost control. If it cannot be solved properly, it will become the bottleneck in Jingle Bell future development.
After the problem identified, to expending operations capacity under the emphasis on the importance of personnel management has considered as the appropriate approach to cope with it. Hence all the accumulated profit over the two years will be reserved for the future expending. In addition, by considering the return on total asset is high, around 47(according to previous performance), a long-term bank loan could be taken to support the future expending.
FUTURE PLAN
Based on the good performance of the last two years and sufficient market research, Jingle Bell decide to put the efficiency of using capital as the top initiative in next year. Expending the business has considered as the most proper approach to achieve that objective. The whole expending plan during 3 years is listed as following:
- Enhance the current capacity (2005)
According to the previous sales and the feedback of the market. There is still certain amount of customer demands from current niche market. The forecast of market share for Jingle Bell is 8% to 10%, but the limited capacity restricted Jingle Bell’s portion under or around 8%. Also compared to start a new subsidiary operation, its profit margin is larger in the beginning period. Thus Jingle Bell has decided to set up a lager operators group in next year to match the gap during the 2005.
- Set up a subsidiary overseas (July 2005- June 2006)
After the niche market in U.K. has been fully fitted. Jingle Bell’s next step is to going to start a new larger subsidiary overseas. China, Philippines and Thailand are all taking into account as the future location due to the cheap labour costs and the convenient distribution to the potential Asia market. The final decision will be made after the specific market research has been made until the end of the 2005.
Take bank loan
When the specific decision is made about the location, a relevant bank loan could be taken in order to cope with the shortage of set-up capital. The duration of loan will be determinate by the available equity at the end of 2005and the profitability of new business. The subsidiary will be expected to yield the profit at the 2007. All loan are expected returned by the end of the 2008.
Reference
Cox, D. & Fardon, M. (1997) Management of Finance Worcester: Osborne Books
Dyson, .R. J. (1997) Accounting for non-account student Essex: Prentice Hall
Higgins, R. C. (2001) Analysis for Financial Management (6th Edition) Singapore: McGraw Hill
Slack, N. et al (1998) Operations Management (2nd Ed). London: Financial Times Pitman Publishing