CIMA Global Business Challenge 2014 - Final

CIMA Global Business Challenge 2014

CIMA 2014 商业精英国际挑战赛

Report for Merbatty

This report is prepared by Team: Fantastic 4

From: Xiamen University

Team member

Team leader: Zheng Wei

Team member 1: Cheng Haitang

Team member 2: Fu Xueying

Team member 3: Meng Jie

CIMA英国皇家特许管理会计师公会(Chartered Institute of Management Accountants) T. 400 820 4080 E. [email protected]. http://gbc.cncima.com

Content

1 Introduction ................................................................................................................................................ 5

2 Terms of Reference .................................................................................................................................. 5

3 Identification and Prioritization ................................................................................................................ 6

4 Discussion of Issues ................................................................................................................................. 8

4.1 New Design Supplier for Surania ................................................................................................ 8

4.2 Late Delivery of a Hull from Topcrest ........................................................................................11

4.3 Sales Staff ....................................................................................................................................12

4.4 Racing Boat ..................................................................................................................................14

4.5 Accident at Work ..........................................................................................................................15

4.6 JKL .................................................................................................................................................16

5 Ethical Issues ..........................................................................................................................................17

5.1 Philanthropy ..................................................................................................................................17

5.2 Employee ......................................................................................................................................17

6 Recommendations ..................................................................................................................................18

6.1 New Design Supplier for Surania ..............................................................................................18

6.2 Late Delivery of a Hull from Topcrest ........................................................................................18

6.3 Sales Staff ....................................................................................................................................19

6.4 Racing Boat ..................................................................................................................................20

6.5 Accident at Work ..........................................................................................................................20

6.6 JKL .................................................................................................................................................20

7 Conclusions .............................................................................................................................................21

8 Appendix ...................................................................................................................................................22

8.1 SWOT Analysis ............................................................................................................................22

8.2 PEST Analysis ..............................................................................................................................23

8.3 Porter’s Five Forces Analysis ....................................................................................................24

8.4 Prioritization ..................................................................................................................................25

8.5 Factors in Choosing New Design Supplier for Surania .........................................................27

8.6 Financial analysis of new design supplier for Surania ...........................................................28

8.7 Financial Analysis of Late Delivery ...........................................................................................32

8.8 Assessment of Agents and Sales Staff.....................................................................................33

8.9 Breakeven Analysis of Racing Boat ..........................................................................................34


1 Introduction

Formed in 1980, Merbatty is a luxury boat building company based in a northern

European country. With growing global profile and competitive products, the company

has enjoyed rapid growth during the last decade. In 2012, Merbatty became listed on

a European stock exchange and by that time it had won a global market share of

around 8%.

Merbatty is now ambitious to expand its business further and has made a five-year

expansion plan. Its third facility in Surania is near completion and a forth one is

planned to be built in 2016. Despite its overall going smoothly, Merbatty needs to

carefully evaluate several strategic proposals and deal with problems it now faces in

order to achieve its five-year plan and fulfill its mission.

2 Terms of Reference

In this report we will prioritize and discuss each of the six scenarios and two ethical

issues facing Merbatty in either financial or non-financial aspect (or both). After that

we will provide our recommendations.


3 Identification and Prioritization

Issue 1 New Design Supplier for Surania

The third facility in Surania is due to be opened in February 2014 but the interior

design supplier has not been decided yet. One potential supplier, Cooper

Designs, has a good reputation and offers to design for all Merbatty’s boats if

possible. Another one is Arabian Interiors which specializes in Arabian design

style and is ambitious that with its help the facility’s capacity would be used up

by local sales by 2017, and this projection doubles the proportion that Sales

Director Stefan previously estimated (50%).

Issue 2 Accident at Work

One employ Paulo went to work high on drugs and broke his leg. As a close

friend of Paulo, Jesper knew his drug addiction before but chose to ignore it

and did not stop him.

Issue 3 Racing Boat

Jesper is keen to get Merbatty involved in speedboat racing, adamant that this

would not only increase the company’s publicity but also bring extra sales of

performance motorboats like P-3000. However, high cost and high uncertainty

make Alberto strongly doubt the feasibility.


Issue 4 Sales Staff

Merbatty now faces a choice between going on using sales agents and opening

its own sales offices. Sales Director Stefan does not want to change current

sales mode, stating that agents always work hard and are loyal friends of

Merbatty, whom we had better not turn into enemies. However, HR director

Marie argues that only through our own sales staff could Merbatty maximize its

own benefits and grab the chance of the new market.

Issue 5 JKL

JKL’s representative Simone knows Jesper’s feud with Alberto and financial

director Andreas’ high involvement in helping children. She feels that Alberto

treats the company as a personal property and charity has cost Merbatty too

much.

Issue 6 Late Delivery of a Hull from Topcrest

Hull Supplier Topcrest recently allowed a new lucrative order to jump queue,

which would lead a two-month delay of Merbatty’s order. They claim that this

will not happen again and provide some compensation. But Procurement

Director Paul is extremely angry and is thinking about replacing Topcrest with

another supplier.

Considering the prioritization of all issues, Merbatty should focus on overall interests

of the whole company, which can be influenced by five factors: Financial, Strategic,

Reputational, Urgency and Internal Effect. Different factors are endowed different

weights (the figure below the factor in the table). Then all issues get their final scores

and rankings as given below (detailed discussion of factors is shown in Appendix 4).


Issue Financial

0.25

Strategic

0.25

Reputati

onal

0.2

Urgency

0.2

Internal

Effect

0.1

Score Ranking

1 4 5 2 4 1 3.55 1

2 2 1 4 5 5 3.05 5

3 5 4 3 1 1 3.15 4

4 4 5 2 2 3 3.35 3

5 2 3 2 3 4 2.65 6

6 3 2 5 5 2 3.45 2

4 Discussion of Issues

In order to achieve better understanding of overall external environment around

Merbatty, we made SWOT, Porter’s Five Forces and PEST Analysis covered in

Appendix 1, 2 and 3. The results will help support our discussion in this report.

4.1 New Design Supplier for Surania

4.1.1 Factors

There are five factors that we take into consideration in choosing new design

suppliers for Surania (shown in Appendix 5):

Social & Cultural Background – The two suppliers have two different social and

cultural backgrounds, customers prefer either of them may be different in terms of

region.

Connection with the Middle East – The extent to what the two suppliers

connected with the Middle East differs, and stronger connection with the Middle

East may reduce transportation expenses and bring more local sales.

Technology – Equipped with latest technology will save cost, guarantee design


quality and increase customer satisfaction (more interaction).

Price – Design service fee will affect cost and profit directly.

Special advantage – Both suppliers have their special advantages, which may

bring Merbatty different potentials.

4.1.2 Financial Analysis

Assumptions in our financial analysis base on above factors. Price affects

contribution margin directly, while all other factors, especially sociological

backgrounds and connection with the Middle East, influence the structure of customer

group and hence affect choosing which design suppliers.

For both plans we discuss the optimistic, neutral and pessimistic scenarios. If we

choose Cooper designs, we may run the third facility at full capacity in 2017, with 90

orders from Middle East and 90 orders from other countries (the optimistic scenario).

However, if our competitors also enter this market and apply a much more aggressive

growth strategy, we may lose customers and only have 23 orders from Arab in

2017(the pessimistic scenario).

If we choose the second company, with the help of the Sheik and the Arabian style

which mainly reflects intimate connection with the Middle East, we may have 180

orders totally from Arabian customers (the optimistic scenario). But this strategy may

be too aggressive and too optimistic and in 2017 we may only have 90 orders from

Arabian customers (the pessimistic scenario).

Also, as the second company only designs Arabian style, it will have very limited

customers from countries other than the Middle East. So we assume that if we

choose Arabian Interiors, we will only produce boats for Arabian customers in Surania

facility.


Based on the assumptions above, we calculate contribution margin in each scenario

follows to help choose one interior design supplier. All the figures have to be traced to

Appendix 6(1-5).

As the table shows, for each scenario, whether it is the optimistic one or the

pessimistic one, contribution margin made each year by choosing company 2 is

bigger than that by choosing company 1 except for the year 2014. Comparatively,

Merbatty could gain more long-term merits by cooperating with company 2.

Additionally, by looking further into the financial date in Merbatty’s 5 year plan, it is not

difficult to find that the planned structure of customer base from different places could

not match well with the current and additional production capacity. Thus, the structure

could not support planned capital expenditure with enough cash inflow. Appendix

6(6-8) illustrates why the company should change original plan and alter to target the

market of Middle East. Fortunately, choosing company 2 as the design supplier could

attract more customers from Middle East which brings with demanding cash inflow

within its capacity. Thus, it reinforces the argument of choosing Arabian Interiors.

Scenario Year

Company 1 Company 2

Middle Eastern

customer's

demand(Number

of boats)

Other

customer's

demand(Number

of boats)

Contribution

margin €m

Middle Eastern

customer's

demand(Number

of boats)

Other

customer's

demand(Number

of boats)

Contribution

margin €m

Optimism

2014 10 10 16.4992 10 0 10.0224

2015 32 33 53.45512 65 0 65.1456

2016 58 57 95.03768 115 0 115.2576

2017 90 90 148.4928 180 0 180.4032

Neutralism

2014 10 10 16.4992 10 0 10.0224

2015 16 33 37.57928 52 0 52.11648

2016 29 57 66.26272 94 0 94.21056

2017 45 90 103.842 135 0 135.3024

Pessimism

2014 10 10 16.4992 10 0 10.0224

2015 8 33 29.64136 32 0 32.07168

2016 15 57 52.37136 58 0 58.12992

2017 23 90 82.01272 90 0 90.2016


4.2 Late Delivery of a Hull from Topcrest

First, we look into the financial losses. By adding discount and opportunity costs up

and deducting compensation, we find that we should not give up Topcrest for the total

loss is much lower than that of changing supplier. Detailed calculation is in Appendix

7.

Besides, Merbatty has been a long standing customer of Topcrest and has built up a

very strong relationship with Topcrest’s design and manufacturing team. Topcrest

also has a reputation as one of the top three hull manufacturers in the world. The

quality can be guaranteed by Topcrest, while working with another hull supplier will

have high uncertainty.

Therefore, we suggest Merbatty accept Topcrest’s series of compensation.

Meanwhile, we suggest various additional options here:

1. Sign an agreement with Topcrest that if similar situations happen again, they have

to make up for no less than all the opportunity cost we estimate and the discount

asked by customers. This can protect Merbatty from any financial loss caused by

the delay, but reputation of Merbatty will still be harmed to some extent.

2. Continue to cooperate with Topcrest while looking for an alternative supplier and

signing an agreement with it that whenever Merbatty need, it should provide

priority service to Merbatty at a “higher price”. At the same time sign with Topcrest

that if similar situations happen again, it will lose Merbatty’s order and have to

compensate with no less than the “higher price”. (They can still get the original

payment.). This can make sure that Merbatty suffer no delay of product and

reputational loss, but it is not easy to find the alternative supplier and sign such

agreements with both sides.

3. If the “idle time” is inevitable, take advantage of it in another way. Merbatty can

carry out staff training such as learning corporate culture or technology, or provide


employees with the right to take vacation with a lower salary. This will not reduce

financial losses but may bring some benefits in another way.

4.3 Sales Staff

To get an objective view about the comparison between sales staff and agents, five

aspects should be taken into consideration.

1. Work efficiency

Agents’ income comes from commission– a percentage of the final revenue of the

boats they sell, which encourages them to work harder. However, because they are

not “real” employees of the firm, they may do anything else or even work for others.

A mixed compensation mode may reduce their working enthusiasm. But as a

stakeholder of the company, they will work totally for the company for promotion and

awards.

2. Customer resources

Agents already have a large pool of customers, so cooperating with them can

maintain relatively stable customer resources and a predictable growth in the next

few years. Ending their contracts may result in the loss of some customers. However,

they may rely on existing customer resources and do not exploit new potential

market.

If we build our own sales staff team, we may suffer from less exposure to customer

resources at first and sale staff cannot sell product around the world as agents do.

However, we can rebuild contacts with existing customers and find new customers by

the more direct and high-quality service provided by our own sales office.

3. Target market and service quality

Agents search for all potential customers who may buy any kind of luxury boats,


which can catch a wider range of customers. However, they do not pay special

attention to our target market of large-size boat buyers at which our development plan

aims. Meanwhile, they offer similar service to all customers, which might lead to lower

service quality.

Understanding and obeying the firm’s development plan, sales staff will focus on a

relatively narrower but more targeted market. At the same time, they can offer

immediate and customized service with high quality.

4. Sales cost

Agents get paid of 4% of selling revenue. In the long run it can be a huge cost which

will decrease firm’s profitability greatly.

Using our own sales staff has to open sales office around the world, which requires

enormous investment in the short term. However, due to a fixed compensation mode,

building sales staff teams can reduce cost in the long term.

5. Employee loyalty and turnover

Agents’ working incentive is commission so they may have less loyalty to the

company. And they may easily turn to other companies or even other industries to get

higher income.

As a stakeholder of the firm, they show stronger loyalty and lead to a lower turnover

rate.

All the advantages and disadvantages of two sales models are represented

specifically in Appendix 8.


4.4 Racing Boat

4.4.1 Suitability

Motorboat racing has a long history of over 100 years and is always seen as an elite

sport with worldwide popularity. Take the Formula 1 motorboat racing for example, it

is among the four games with biggest influence and highest audience rating (the other

three are Olympics, World Cup and F1 automobile racing). Ever since 1930s,

participating in boat racing has been a way of promoting luxury yachts. High-end

luxury brand Riva produced top speedboats during that time, which quickly became

stars on the river and brought extensive attention.

The participation of famous brand Ferretti in offshore racing would be another

example. In 1994, one of its founders Norberto Ferretti won the Class 1 Offshore

World Championship. After that the Ferretti team won the European Offshore

Championship in 1995 and both European and World champion titles in 1997. These

remarkable results proved the company’s strength in high-tech design and brought

Ferretti great international recognition. The corporation has now grown into the

world’s largest luxury boats producer.

4.4.2 Acceptability

To compensate for costs related to the racing boat, Merbatty needs to sell 16 extra

P-3000s over the two years to breakeven (see Appendix 9).

According to our research, it would be reasonable for Merbatty to enter speedboat

racing. It is probable to accomplish the sales growth and reach the breakeven point

considering the great influence of motorboat races and Merbatty’s chance to win.

Even at great costs, participating in boat races can increase international recognition

and brand value which help to attract potential customers. Merbatty experiences

http://en.wikipedia.org/w/index.php?title=Offshore_World_Championship&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Offshore_World_Championship&action=edit&redlink=1


constant growth these years and it’s time for the company to go further and this would

be a large chance to enter the world first-class.

However, there are also certain risks. Firstly, racing boat building is not Merbatty’s

area of expertise. It requires considerable financial resource, manpower and

technology input to complete the whole building process, and the final product may

still be not as good as those produced by current leading racing boat builders. Even

with a good boat successfully built, there is still no guarantee that Merbatty could win

the races with little experience. In addition, the extra sales of P-3000 would be

uncertain, which may result in financial losses.

4.4.3 Feasibility

Luxury yachts and racing boats building base on similar manufacture principles and

technology and they require similar materials, so Merbatty could easily start the plan

with its current advanced technology and skilled technicians. However, Merbatty must

understand that racing boats and yachts are built for different purposes. Speed is the

most important factor for racing boats whereas comfort may have a larger weight in

luxury yachts. Furthermore, racing boats design is significantly different from that of

yachts. To ensure the success, we suggest a supervisor who has rich experience in

racing boats producing be hired.

4.5 Accident at Work

4.5.1 Impact of the problem

The accident has both internal and external negative impact on the company. Inside

Merbatty, employees may feel unfair that friends of managers have privileges and can

do whatever they want even it is illegal. This may damage corporate spirit and reduce

staff’s satisfaction with Merbatty. If the accident is exposed to media, drug addiction of

employees will bring shame to Merbatty’s reputation. Besides, Merbatty will be


criticized for its poor HR management and the company’s sense of social

responsibility will also be doubted.

4.5.2 Potential solutions

This accident exposes Merbatty’s weaknesses in human resource management.

Firstly, some employees and managers have not paid enough attention to health and

safety issues such as drug addiction. Besides, there are no strict behavior rules and

effective supervision mechanisms. These give Paulo the chance to come to work high

on drugs and Jesper the right to ignore an obviously wrong behavior out of personal

friendship.

To solve the problem in the long run, Merbatty could either strengthen regulations

over all employees or give them trainings to raise their awareness of health and

safety issues. The former one is effective and has low cost but may repel employees.

The later one needs financial input in trainings but could be more welcomed.

4.6 JKL

JKL is the major investor of Merbatty and can exert significant influence. It can be

concluded that there are two potential problems:

1. JKL may feel that there is a feud between Alberto and Jesper, and many decisions

or even strategies are totally made by the Blancs.

2. JKL may assume that Merbatty has devoted too much to charitable work under the

influence of Alberto’s personal preference, which implies ignorance of all other

investors’ interest to some extent.

These potential problems may result in JKL’s dissatisfaction and deficiency of

confidence towards Merbatty, which can harm the unity of administration managers or

even cause negative influence towards JKL’s investment decision in the future.


To avoid such negative influences, Merbatty should try to show that there is a good

atmosphere among administration and Merbatty are always trying to maximum the

interest of all shareholders rather than just sacrificing Blancs family and specific

stockholders.

5 Ethical Issues

5.1 Philanthropy

Merbatty is keen on philanthropy in recent years, such as financially supporting

charitable events and organizations, encouraging staff to undertake charitable

assignments and helping kids understand “money”.

Being devoted to philanthropy can not only make contributions to society and help

people in need, but also improve Merbatty’s social influence and corporate

responsibility. However, pushing employees to do charitable work may cause dispute

of violating employees’ right of choice.

Merbatty should carry on philanthropy in the future while abolishing compulsory

demand and collecting more advice about charitable work from employee

representatives and all directors.

5.2 Employee

It is urgent for Merbatty to cope with the accident that an employee broke his leg

during the working hours when high on drugs. What makes this issue more

controversial is that one director knew his bad habit but ignored it.

Allowing employees to take drugs has seriously harmed social responsibility of


Merbatty and employee’s health. It does not violate related regulations but reflects a

lack of humanistic care towards employees. What is more, it causes unfairness if one

can get privilege because of friendship with directors.

To mitigate these impacts, besides having the injured employee cured immediately,

Merbatty should punish him and the director. Additionally, standardizing principles,

regulations and discipline of staff management is necessary. What is more, justice

should be guaranteed by supervising directors’ behavior.

6 Recommendations

6.1 New Design Supplier for Surania

Merbatty should choose Arabian Interiors and then make efforts to reinforce

cooperation with it for long-term benefits.

To support planned capital expenditure, we suggest the company make full use of

production capacity and alter its customer structure in the five-year plan by increasing

the proportion of customers from the Middle East.

6.2 Late Delivery of a Hull from Topcrest

Considering all the factors especially financial effect, we suggest accepting Topcrest’s

offer and continue to cooperate with them.

Meanwhile, we recommend Merbatty to sign an agreement with Topcrest that if

similar situations happen again, they have to make up for no less than all the

opportunity cost we estimate and the discount asked by customers.


6.3 Sales Staff

We suggest that Merbatty should phase out agents and build its own sales

department. According to the firm’s situation and capital budget, we suggest taking

different actions aiming to different markets.

Suggested Action Explanation

Europe and the

U.S(mature

markets)

Stop employing agents and

set up sales office

immediately (by the end of

2013)

These two markets have

relatively stable customer

resources so Merbatty can

suffer least loss of revenue

and accumulate experience

Middle East(the

most potential

market)

Employ agents until the end

of 2015 and then open sales

office

Enter and occupy the new

market quickly within the

first 2 years before we try to

avoid more sales cost.

Asia and

Australia

(potential

markets)

Continue to employ agents

at these two markets until

the end of the five-year plan

(2017)and then open sales

offices there

Accumulate stable customer

resources within five years

before we try to avoid

further high sales cost

Latin America,

Africa and

others(less

developed

markets)

Continue to cooperate with

agents and do not consider

opening sales office there

within 5 years

These markets have

relatively fewer customers

and show little potential in a

short period


6.4 Racing Boat

We suggest that Merbatty enter speedboat racing, taking advantage of influential

motorboat races to increase publicity. In order to breakeven, Merbatty should strictly

control its costs, hire experienced racing boat building staff and organize a special

team for racing boats to maximize its chance to win.

6.5 Accident at Work

In the short run, Merbatty should commit to pay Paulo’s medical fees and send him to

receive drug treatment later to show its concern for employees.

In the long run, Merbatty should use the combination of the two solutions discussed

before. An effective supervision system should be made and applied; meanwhile

health and safety training should be held regularly.

6.6 JKL

When making decisions about important or long-term issues, Merbatty should hold

board meetings and consider every director’s advice. This can help to increase the

reasonability of decisions and build a good corporate image of protecting the benefits

of all investors.

Merbatty should choose Arabian Interiors and then make efforts to reinforce

cooperation with it for long-term benefits.

To support planned capital expenditure, we suggest the company make full use of

production capacity and alter its customer structure in five year plan by increasing the

proportion of customers from Middle East.


7 Conclusions

By all the analysis, Merbatty should follow above recommendations to solve all the

issues well, achieve the five-year plan and promote the healthy and benign

development.


8 Appendix

8.1 SWOT Analysis

Strength

Two facilities guarantee the relatively broad market,

sufficient customers and high capacity

Being listed in 2012 can enhance its financing ability

Possessed a group of loyal customers and sales agents

globally

Stable suppliers and skilled boat building technicians

Good reputation resulting from its charitable donation,

business awards and etc

Possesses some advanced production technology such as

CNC, robot spray systems and etc

Weakness

Not finalizing interior design supplier increases future

uncertainty of Middle East market

Lack of own sales staff affects firm’s expansion and

increase the cost

Being listed can lead to dilution of administration

authority and bring some management challenges

Limited product model (only 15 types) may lead to

customer loss to some extent

Current staff turnover is relatively high (20%)

Opportunity

Growing customer base of wealthy, successful individuals

and corporate clients

Growing luxury boats market including some emerging

ones like Asia, Australia and especially Middle East

The wealthy remained high consumption level, in spite of

the recent tough economic times

Threat

Many international builders of luxury boats and the

market competition is intense

Growing popularity among chartering yachts, including

luxury boats


8.2 PEST Analysis

Political

Luxury boat industry and tourism have been greatly

encouraged by governments in the newly emerged

market such as China,

Laws and regulations on luxury boat building and tourism

are being amended and introduced especially in Asian

countries such as China

Economic

Growing customer base of wealthy, successful individuals

and corporate clients

Luxury boats market is growing including some emerging

ones like Asia, Australia and especially Middle East

Related service like luxury yacht clubs supply emerged

and achieved great success in Western European

countries and USA

Dozens of specific market segments in the industry of

yacht

Sociological

Expectations from the public that corporations should be

involved in charitable donations influence some

behaviors of firms

The rise of boat racing fixes people’s attention on marine

sport and promotes the development of the luxury boats

building industry

The wealthy tends to have boats in different places

around the world

Wealthy customers in Middle East prefer boats of larger

size

Technological

Some advanced technologies have been uses in modern

marine production including CNC machining, robot spray

system and etc

Some IT systems can help manage production efficiently,

such as “off the shelf” state-of-the-art production

management software system

CAD technology assists interior designer to accomplish

their work

Extranet allows customers to remotely view the current

condition for their boats


8.3 Porter’s Five Forces Analysis

Buyers

Power

Buyers are gaining growing bargaining power in choosing

varieties of company

Growing buyers have strict requirement of customized

interior design

Competitors

Power

Large luxury boat building companies in USA accumulate

strong strength and collect lots of wealth from past

efforts

Large American-based luxury boat building companies

provided with various types of boats and made great

efforts to introduce more advanced models

Luxury boat building companies in Asia has been so

successful recently that they have gradually penetrated

into European and USA market

Suppliers

Power

Major suppliers have been so successful that some

customer’s orders may be delayed such as Topcrest

Some key suppliers serve Merbatty’s competitors and

may reject new orders from the company

New Entrants

Power

More new boat building companies spring up in Asia

New entrants’ rapid growth is threatened by great

constraints given the limited information and advanced

technology in the high industrialized Western European

and USA markets

Substitutes

Power

Sales of new models increase rapidly with decline of total

units of sold yachts

A growing popularity among chartering yachts, including

luxury boats

More high-end entertainment products are emerging like

jet


8.4 Prioritization

Issue Financial

0.25

Strategic

0.25

Reputati

onal

0.2

Urgency

0.2

Internal

Effect

0.1

Score Ranking

1 4 5 2 4 1 3.55 1

2 2 1 4 5 5 3.05 5

3 5 4 3 1 1 3.15 4

4 4 5 2 2 3 3.35 3

5 2 3 2 3 4 2.65 6

6 3 2 5 5 2 3.45 2

Scores are based on:

Financial:

This factor measures how much profit or loss the issue can bring. Whether to build

racing boats can greatly affect the cost and revenue so it is given 5 points. The choice

of new design supplier for Surania may have an impact on the sales in the Middle

East in the future so it gets 4 points. Meanwhile, we also give 4 points to “sales staff”

due to its effect on the cost and sales growth. Late delivery from Topcrest can cause

limited financial loss, thus is given 3 points. The accident at work and the JKL issue

are weakly related to financial performance so they get 2 points.

Strategic

The credit given on strategic influence reflects how the issue affects Merbatty’s future

development direction like exploitation of new product and market. Because new

design supplier is significant for the market share and sales in the Middle East, it gets

5 points. Sales staff has enormous effect on sales model, sales scale and operating

cost so we also give it 5 credits. Racing boat is important regarding opening a new

market and selling promotion, thus deserves 4 points. The issue of JKL, late delivery


from Topcrest and the accident has diminishing and limited influence on the firm’s

strategy so they get a score of 3, 2 and 1 respectively.

Reputational

There are three factors being considered when we measure reputational influence on

issues: company image, product quality and corporate credit. Late delivery has the

biggest impact on corporate image and credit worthiness. And the quality of boat may

also get affected, so we give it 5 points. The accident at work could seriously damage

corporate image so it gets 4. Boats racing may draw public attention if Merbatty is

outstanding in a top-level event, so it gets 3. New design supplier, sales staff and JKL

exert bare impact on the firm so each of them is given 2 points.

Urgency

In terms of the urgency of events, how to deal with the accident at work and the late

delivery should be decided immediately so they get 5 points. New design supplier has

to be finalized before the open of the third facility in Surania so we give it 4 credits.

The issues of JKL, sales staff and racing boat have diminishing urgency and can be

considered later so they get credit of 3, 2 and 1 respectively.

Internal effect

Internal effect reflects how issues influence employee morale, corporate structure

and interpersonal relationship inside Merbatty. How to cope with the accident can

directly impact all these factors so it gets 5 points. The JKL issue can cause great

effect on relationship between investors and managers as well as investors’

confidence about Merbatty so we give it 4 credits. Sales staff issue gets 3 points as it

can change the current corporate structure,. Late delivery may increase pressure on

staff so it is given 2 credits. New design supplier and racing boat have little internal

influence so each of them gets 1.


8.5 Factors in Choosing New Design Supplier for Surania

Cooper Designs Arabian Interiors

Social &

Cultural

Background

International company

Enjoys a long history

Based in Western Europe

Local company

Young firm

Based in the Middle East

Connection

with the

Middle East

Has a Design center 200

miles away from Surania

Design center is very close

to Surania

Has strong connection

with local potential

customers

Arabian flavored design

Technology

Makes full use of CAD

systems

Provides an extranet

service

Employs local people who

are fully trained in the use

of CAD systems

Price €100K for a typical

middle-sized boat

€90K for a typical

middle-sized boat

Special

advantage

Good reputation

Can also provide design

service for customer in

other places

Limitless funds

Offers an aggressive

growth strategy


8.6 Financial analysis of new design supplier for Surania

(1) Average price of large size and small size of boats

Model Length(meters) Selling

price €m

Average

price €m

P-3000 35 4.4

P-2000 25 3.4

C-34 34 3.4

C-31 31 3.2

C-28 28 3

Large boats (above 25)

3.48

P-1000 20 2.9

P-Gold 19 2.8

P-Elite 18 2.3

C-23 23 2.5

F-1 22 1

F-2 20 0.8

F-3 16 0.6

Z-1 18 0.6

Z-2 16 0.5

Z-3 15 0.4

Small boats (below 25)

1.44

(2) Size of boats different customers prefer

Large boats Small boats

Percentage Arabian

customers preferred 60% 40%

Percentage customers

from other places

preferred

20% 80%

*Among the boats sold in 2012, about 20% are big boats (57/280), and the remaining 80% are

small boats. We assume that in Surania facility, orders from areas other than Arab will have the

same proportion. As Arabian customers prefer larger boats, we assume that among orders from

these customers, 60% will be large boats and 40% will be small boats.


(3) Contribution margin for large boats and small boats

€m(per

boat)

Selling price 4.4

Variable costs:

Hull and other materials 1.2

Direct labor 1.4

2.6

*In P-3000 costing, variable costs per boat=2.6m (assuming this does not include interior design),

so variable cost rate=2.6/4.4=59% (without interior design). We assume that this rate can be

applied to all models, then

Contribution margin per unit for large boats= 3.48*(1-59%) =1.4268m

Contribution margin per unit for small boats=1.44*(1-59%) =0.5904m

(4) Average contribution margin per boat

Contribu

tion

margin

per unit

for large

boats €m

Percenta

ge of

large

boats

preferred

Contribu

tion

margin

per unit

for small

boats €m

Percenta

ge of

small

boats

preferred

Deductio

n :

design

fee per

unit €m

Average

contribut

ion

margin

per unit

€m

Cooper

Designs

Arabian

custome

rs

1.4268

60%

0.5604

40%

0.1

0.00224

Other

custome

rs

20% 80% 0.65768

Arabian

Interiors

Arabian

custome

rs

60% 40%

0.09

1.00224

Other

custome

rs

20% 80% 0.66768


(5) Boats required to be built by Suranian Facility

Planned to

commence*

Built by

original

facilities**

Required

to be

built by

Suranian

Facility

2013 300 300 0***

2014 340 320 20

2015 385 320 65

2016 435 320 115

2017 500 320 180

*: Extracts from Merbatty’s 5 year plan (Key business statistics)

**: Assume that after 2013, the first two facilities will both reach full capacity every year.

***: Assume in year 2013, no boats is required to be built by Suranian Facility since the facility is

due to be opened a little later than originally planned in February 2014.

(6) Revenue required to achieve by Surania Facility from different customers

Year Total

revenue

required**

*

Revenue

achieve

d by

original

facilities

*

Revenue

required

for the

Surania

n facility

Revenue planned to

achieve through

customers from

Middle East

Revenue achieved by

facility in Surania

Total

Revenue**

*

Partial

revenue

carried

out by

original

facilities*

*

Middle

East

customer

s

Customer

s from

other

places

2013 555 502 53 50 0 50 3

2014 645 534 111 80 0 80 31

2015 740 534 206 110 0 110 96

2016 845 534 311 140 0 140 171

2017 1000 534 466 180 0 180 286

*: Assume in year 2013 revenue is constant with year 2012. And in later years original facilities

can reach their full production capacities. 534 = 502*100%/94%

**: Assume all the orders from Middle East have transferred to Surania.

***: Extracts from Merbatty’s 5 year plan (Financial data)


(7) Average price per unit from different orders

Percentage

of large

boats

order

Percentage

of small

boats

order

Average

price

per

unit*

Orders from Middle East 0.6 0.4 2.664

Orders from other places 0.2 0.8 1.848

*: 2.664 = 0.6*3.48 + 0.4*1.44;1.848 = 0.2*3.48 + 0.8*1.44.

Assume new models Merbatty is going to introduce do not lower the average price.

(8) Boats required to be produced compared with planned units

Year Orders from Middle

East

Orders from other

places

Total

units

required

to be

produced

Planned

units to

be

produce⑤

Number

of large

boats

required

to

produce①

Number

of small

boats

required

to

produce②

Number

of large

boats

required

to

produce③

Number

of small

boats

required

to

produce④

2013 11.26126 7.507508 0.324675 1.298701 20.39215 0

2014 18.01802 12.01201 3.354978 13.41991 46.80492 20

2015 24.77477 16.51652 10.38961 41.55844 93.23934 65

2016 31.53153 21.02102 18.50649 74.02597 145.085 115

2017 40.54054 27.02703 30.95238 123.8095 222.3295 180

① : Units = Revenue from Middle East customers/2.664*0.6

② : Units = Revenue from Middle East customers/2.664*0.4

③ : Units = Revenue from other customers/1.848*0.2

④ : Units = Revenue from other customers/1.848*0.8

⑤ : Extracts from Merbatty’s 5 year plan (Key business statistics)

Each year, total units required to be produced in Surania is more than planned figure, even in year

2017 it exceeds capacity.


8.7 Financial Analysis of Late Delivery

Topcrest Alternative

Compensation -143464① 50000

Discount asked by

customers 25000 18750

③

Opportunity cost 220375② 165281.25

④

Total loss € 101911 234031.25

①

Payment 1: 2948.8*30=88464 (Idle time: 1940*5%*152*10%*2=2948.8)

Payment 2: 25000

Payment 3: 30000

②

Opportunity cost=Idle time/Total working time*Revenue*Contribution margin ratio=

2948.8/(1940*152*12)*645*41%=0.220375million=220375

③

Assume the discount asked by customers varies with time of delayed delivery. (2months;

1.5months)

18750=25000*3/4

④

Opportunity cost=Estimated idle time/Total working time*Revenue*Contribution margin ratio

1940*5%*152*10%*1.5/(1940*152*12)*645*41%=0.16528125million=165281.25


8.8 Assessment of Agents and Sales Staff

Agents Sales staff

Advantages

Getting paid according to

sales increases working

initiative and avoids

negative work attitude

Prove effective according

to the sales growth in

recent years

Existing agents have rich

customer resource and

have built strong

relationship with Merbatty

Can focus on firm’s target

market and specific

customers so as to cater to

the development goal of

exploiting big boat market

more efficiently

Guarantees a higher

employee loyalty

Can decrease the human

and selling cost, in the

long run

Disadvantages

Current agents sold

smaller and cheaper

boats, which does not

match firm’s future plan

Lower loyalty and stability

Relatively high human cost

damages profitability

Fixed salary may cause

negative work attitudeand

affect efficiency

Lack of experience of

recruiting and training

sales staff increases

uncertainty and sales risk

Stopping cooperation with

current agents means loss

of some customer

resource and even

becoming enemies with

them


8.9 Breakeven Analysis of Racing Boat

€m

Sales volume x

Selling price per boat 4.4

Variable cost per boat:

Hull and other materials 1.2

Direct labour 1.4

Contribution margin per boat 1.8

Total contribution margin 1.8x

Total costs for racing boat 12+8*2=28

1.8x=28

x=15.56

Extra P-3000s = 16

Documents

CIMA Global Business Challenge 2014 - Final