1

JOT’S 5-YEAR DEVELOPMENT

PATH

Team members:

ANH CONG TONG

ANH HONG NGUYEN

HUYEN THANH NGUYEN

YEN THI TRINH

CIMA Global Business Challenge

2013

Hanoi University

Cactus team

TABLE OF CONTENT

1 INTRODUCTION....................................................................................................................3

2 PRIORITIZATION..................................................................................................................3

3 FAULT IN NEW FLYING SPACESHIP TOY.......................................................................4

4 LATE DELIVERY...................................................................................................................6

5 VOLDANIA’S PROPOSAL....................................................................................................8

6 NEW PRODUCT DEVELOPMENT – DIVERSIFICATION STRATEGY........................11

7 ETHICAL ISSUE...................................................................................................................13

7.1 Distribution of late delivered products between main customers and small customers......13

7.2 Bribery in Voldania proposal...............................................................................................13

8 SUMMARY OF ISSUES AND RECOMMENDATION......................................................15

9 REFERENCES.......................................................................................................................16

10 APPENDICES........................................................................................................................18

APPENDIX A: SWOT ANALYSIS..............................................................................................18

APPENDIX B: PEST ANALYSIS................................................................................................19

APPENDIX C: PROBLEM 1 – FAULT IN NEW TOYS.............................................................21

APPENDIX D: PROPOSAL 1 – NEAR-SHORING IN VOLDANIA.........................................25

APPENDIX E: PROPOSAL 2: DIVERSIFICATION STRATEGY – NEW APPLICATION......28

APPENDIX F: PROJECTED INCOME STATEMENT...............................................................30

2

Team members:

ANH CONG TONG

ANH HONG NGUYEN

HUYEN THANH NGUYEN

YEN THI TRINH

1 INTRODUCTION

Jot is a famous electronic toys company that established in 1998 by Jon and TaniGrun. After

becoming very popular in its home country, and growing considerably large demands for its

products, Jot started to outsource manufacturing in China and now all of its manufacturing is

based in China. By the end of 2010 sales revenue exceeded €8 million and the company had

achieved significant sales revenue growth each year. Jot has seen its sales revenue rise by 16%

for the fiscal year 2010 and by almost 18% in the fiscal year 2011. Currently, Jot has 34 products

and solely 2 target group users, the age between 3 - 5 and 5 - 8.

Jot has its own in house design team that is responsible for researching new trend and design

new toys. Annually, Jot runs around 5 to 6 new products each year.

With the ascent in the cost-base and the bad business practice in Chinese manufacturers (the late

delivery of products), Jot is considering transferring the part of manufacturing to Voldania, a

country in Eastern Europe. The plan is outlined on the 5-year period with the purpose of

gradually switching production from China to Voldania in ever growing quantities.

At present, Jot faces 2 critical problems and 2 proposals to consider that have direct effects on its

5 year plan.

2 PRIORITIZATION

IssueImpact

(H/M/L)1

Likelihood

(H/M/L)

Timing

(ST/MT/LT)2

Prioritization

Order

Fault in new toys H H ST 1

Late delivery M H ST 2

Near-shoring proposal M M MT 3

Diversificationstrategy M L LT 4

1 High, Medium, Low

2 Short-term, Medium-term, Long- term

3

In the scenario, Jot management must confront with 4 issues. To successful handle these

challenges, this report recommends the prioritization for 4 issues based on some criteria:

Direct impact on core business activities (profits, cash flow, reputation, stakeholder

relationship…)

The likelihood of occurrence

Timing of the issue (issues can be delayed resolving or not)

Based on these criteria, the fault in new products is the most urgent issue because of its severe

influence on corporation’s reputation and bad management can lead to serious product-harm

crisis. Similarly, but less severe, the late delivery of products also affects Jot’s reputation and

customer relationship, but has less financial impact than the previous problem.

After dealing with two problems, Jot’s management should contemplate about two proposals.

The first proposal is the near-shoring proposal in Voldania that will save business an amount of

outsourcing costs. Besides, the near-shoring proposal can be the remedy for future late delivery

issue; thus, it should be implemented as soon as possible. New product development proposal is

crucial as a new diversification strategy that can magnify corporation’s image. However, Jot can

delay handling this issue because it has little immediate impact on Jot’s current performance.

3 FAULT IN NEW FLYING SPACESHIP TOY

A number of customers have reported a fault in battery design of new flying spaceship toys for

the 2012 Christmas which causes batteries too hot to touch and smoke after more than two-hour

recharged. There are 12 reported incidents.

3.1 Impact

Reputational impact

When the fault problem is publicized, as Jot is wholly responsible for the fault, Jot brand name

(synonymous with quality electronic toys) would be tarnished. Furthermore, if not handled

promptly and properly, the fault issue might become product-harm crisis, which could even

destroys completely company’s reputation and brand equity, as well as customer base, like in the

case of Firestone Tires.

4

Strategic impact

The fault issue may have negative effect on Jot’s strategic position as a company differentiates

by quality. As well as customers (especially 7 main retailers) would probably have more

influence on Jot. Moreover, Jot may have to launch early its strategic CSR plan, as the plan may

assist to mitigate the unfavorable impact of product fault problem.

Financial impact

Due to the crucial problem about spaceship’s quality, Jot has high probability of losing 3,200

units of sales, €128,000 in terms of revenue and €51,200 of gross profit.

3.2 Potential solutions3

1. Recalling toys, refunding for consumers, writing off all fault products. It is the simplest way to

quickly deal with the problem. The total estimated loss is €198,400.

2. Recall toys, making improvement, giving fixed toys for end-users. Financially, the

improvement cost is €60,000 – same as total loss if all flying spaceships are successfully sold.

3. Recalling toys, doing improvements, making super-effort (providing customers 2 options): get

repayment or get improved product (plus 10% discount on a next purchase for end-users only).

In total, it may cost Jotabout€103,409.4.

3.3 Recommendations

The optimal course of actions for Jot to manage this issue is option 3.

Justification

Financially, option 3 would be reasonable as the real loss of option 2 could be much more than

€60,000, and not too high as option 1.

Based on the assessment table (Appendix C), the risk inherent is high so company needs have

immediate actions to mitigate negative impact of this problem. Retailers and end -customers,

whose opinions directly affect Jot’s brand and reputation - may perceive Jot as responsible and

trust Jot even more. In addition, Jot could conveniently make the first move to establish the CSR

3 Detail calculation provided in Appendix C

5

program. Furthermore, even though it seems that the financial lost is really high in the short

term, the super – effort can help Jot to support long-term growth, as the example of Johnson &

Johnson company with the proactive recall campaign for its Tylenol products in 1982.

Actions to be taken

In short run

Jot should designate the “recall coordinator” leading the corrective team (This team will

take the overall responsibility for successful recall and image restoration plan).

Jot should implement 2 phases prudently, with the “Toys hospital” campaign(details given

in Appendix C):

- First phase: Prompt response to reassure the public and express Jot’s social

responsibility.

- Second phase: Re-introduce of the fixed toys.

In long-run

Jon Grun should inspect thoroughly the effectiveness of operation system in specialized

company in EU (that is in charge of checking the prototype toys) as well as the Quality Insurance

team to ensure that any fault issues will not happen again. Then he should arrange some training

courses about standard product risk management to equip personnel with necessary skills and

knowledge in addressing future unexpected incidents.

4 LATE DELIVERY

Gull - one of Jot’s manufacturers in China announced that Gull only accomplished 75% orders,

corresponding to 1,800 units for the deadline of 4 November, 2012. Gull cannot provide the

remaining until 15 December. Michael Werner is conjecturing whether delivering all 75% to 7

large retailers or equally to others distributors and continuing to cooperate with Gull.

4.1 Impact

Reputational impact

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As Jot breaches the contract with customers by belated delivery, especially during the bustling

Christmas season, Jot’s brand image and relationship with customers might undergo

inevitablydamaging consequences. A shortage of production that may disrupt the value chain and

sales of retailers, plus the fault problem effect may lead to customers’ considerable

dissatisfaction over Jot and reduction in Jot’s customer base.

Strategic and financial impact

The late delivery may cause Jot to lose bargaining power over retailers, principally the 7 large

ones. Jot might incur expense on distribution costs for transporting late delivered toys and

compensation for customers. Additionally, Jot may also lose sales of these products during the

peak season (sales in quarter 4 accounts for up to 51% of annual sales) as retailers may terminate

the violated contracts.

4.2 Potential solutions

There are 4 potential solutions regarding two decisions: whether Jot should share 1800 units equally between customers based on proportion of their order to total order and use Gull to manufacture the remaining 600 units.

4.3 Recommendations

It is recommended that Jot should distribute all 75% of products to main customers and use

another manufacturer to finish the 600 units.

Justification

1800 units may be small to be shared equally to large number of retailers. Additionally, seven

large retailers have significant influence over Jot and could substantially affect Jot’s business (as

up to 68% of Jot’s sales in 2011 were to seven main customers). The late delivery plus the fault

problem could lead to higher influential strength of these key retailers (with which they can

claim higher promotional allowances, extend trade credit payment…) and worst, Jot’s loss of

major customers.

Gull cannot fulfill its contract could be due to the rumor that Gull has been prioritizing

production to higher margin orders. As well as the fact that Jot is seriously considering partly

outsourcing in Eastern Europe, it is pretty rational that Jot should forfeit the contract with Gull.

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In addition to that, Gull would deliver the remaining 25% on December 15, yet a majority of

people shop before this day(only about 23% of Europeans and 11% of Americans prefer

spending from December 15 - 24 according to 2012 Deloitte surveys).

Actions to be taken

In short - term

Receive 1800 units from Gull then terminate the contract, ask for compensation and

negotiate to acquire product samples, molds or incomplete 600 units if feasible.

Find another supplier, especially who tendered for this order, that can complete the work as

quickest as possible for remaining 25% before the festive season at an acceptable unit price,

then transfer product samples and mounds to them to save time.

Explain reasons of late delivery with customers and provide appropriate compensations.

In long - term

Rank manufacturer options as back-up plan for each order as this problem may happen in

the future.

Implement electronic data interchange (EDI) system which not only enhances Jot’s

efficiency but also allows more timely and effective communication with suppliers, retailers

and customers. However, due to current dearth of IT expertise and funding required for high

initial cost of EDI, Jot may consider outsourcing this practice.

5 VOLDANIA’S PROPOSAL

5.1 Advantages of near-shoring in Voldania

Lower manufacturing cost per unit

The most apparent advantage in near-shoring consideration is the lower unit price to be charged

to Jot, which is the decisive factor in choosing outsourced manufactures. Total revenue,

incremental cost and profit in the two countries in the 5-year horizon are following (details given

in Appendix D):

Total in 5-year horizon Voldania China

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Revenue (‘€) 9,100,000 9,100,000

Incremental cost (‘€) 4,008,646 4,471,334

Incremental profit (‘€) 5,091,354 4,628,666

Average unit price charged to Jot by manufacturers (‘€) 5.841/ unit 6.388/ unit

It is projected that the cost saving when manufacturing in Voldania, which is mostly generated

by lower logistics costs, would be approximately 10.3% compared to in China. However, if Jot

gives personal donation of €25000 for Grot, cost saving will be reduced to 9.32 %.

Greater speed-to-market

If Jot outsources to Voldania, it may have shorter lead time thanks to more proximate

geographical location. The more the lead time is reduced, the lower inventory storage costs and

just - in - time inventory would be feasible, protecting Jot from risks of loss, damage, or

obsolescence. Furthermore, Jot could become more responsive to changing customer demands.

Thus, increasing the speed to market might be regarding as competitive advantage and profit

improvement instrument for Jot.

Diversification

Jot would be also able to diversify their production, expose to new technologies of Voldania,

utilize a more versatile and flexible workforce, overcome obstacles such as cultural or time

differences, and reduce risks of heavily relying on manufacturing in one country such as adverse

policy changes.

Reducing the risk of Intellectual Property Infringement

According to the USCBC 2011 China Business Environment survey results with up to 93%

approved, one of the issues remains entrenched in USCBC’s top 10 list is the companies’

inability to protect and enforce their Intellectual Property Rights (IPRs) in China because of the

loose in Chinese laws and regulations. Thus, shifting production to Voldania may lower the

lingering risk relating to IPR protection.

5.2 Disadvantages

Set-up logistics costs

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Extensive human and financial resources are required to design and implement a new logistics

system in Voldania, including activities such as site visits, types of transportation assessment,

new logistics data system, etc.

Weaken relationship with Chinese manufacturers

Once Jot moves a part of its operation to a completely new country, the high level of repeated

business, good understanding and commitment with Chinese manufacturers may be deteriorated.

Ambiguous Voldanian manufacturer’s performance since Jot has not worked with any

Voldania’s companies.

5.3 Recommendations

It is recommended that the proposal should be accepted. Jot should gradually shift part of

manufacturing to Voldania as increasing wage rates in China would raise Jot’s input costs, thus

losing Jot’s cost advantage. Once Jot moves to Voldania, at least 9.32% of costs would be saved

compared to China in 5 years.

Actions to be taken

In short–term

Jot should implement the near – shoring proposal with 4 critical stages: Initial stage, selection

and implementation stage, contract preparation and finally transfer assets, personnel and process

to near-shoring companies(details given in Appendix D).

In long - term

Expand the scale of near-shoring project to gain the cost advantage.

Appoint the quality management team to supervise and audit the progress and quality

standards in the manufacturing places.

Maintain good relationship with existing Chinese manufacturers.

6 NEW PRODUCT DEVELOPMENT – DIVERSIFICATION STRATEGY

Alana Lotz is considering a diversification strategy by penetrating into new market segment (9-

11 age group) with smart phone application that has both gaming and educational aspects.

However, John Grun still hesitates about the success of the strategy because of the limited

experiences in this new area.

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6.1. Analysis

Suitability assessment

Developing educational game-based application is consistent with Jot’s brand recognition

(innovative educational toys) and 5 - year plans (increase revenue/profit/number of countries

sold in/number of products launched).

The application could help Jot exploit its opportunities: market development in Asia, Russia

and market penetration in European and USA (as the app is globally easy – accessible), and

new target segment.

Jot might also could mitigate some of its weaknesses, with the app: Less reliance on 7 main

retailers (as Jot directly distributes to end - users), totally responsible for the app

manufacturing and increasing unseasonal sales.

Feasibility assessment

Regarding human resources, Jot’s design team/marketing team has no experience/skills in

designing/marketing for an app before and if moving forward with the proposal, Jot is likely has

to hire or outsource an app – coding team. In respect to financial resources, it may be difficult for

now as Jot’s unexpected expense for the fault, late – delivery issues and obstacles in borrowing

more funds. The budgeted cost of developing new application is presented in Appendix E.

Acceptability

The financial returns are really high due to the absence of intermediaries (IOS platform: Jot gets

70% of the final sales to end – users, 30% given to app center and 99$ annual fee), especially if

the app is in – app purchasing (free to download and play at initial levels but costing if

continuing to play). And if successful, the Jot brand shall be much more recognizable.

Equivalently, the risks are as superior as the returns. As to the financial aspect, Jot could lose

about €60,000 if the app was a failure. However, it seems that the reputation of Jot would not

likely to be considerably damaged because this is a whole new market that Jot has neither ever

entered nor has any reputation before.

Regarding stakeholders’ opinions, Alana Lotz who initiated the idea, holds 20% of the shares.

Though, Jon Grun, who still has doubt, has 30% say in the company.

6.2. Recommendations

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It is recommended that Jot should proceed with Alana‘s Idea.

Justifications

It seems that it is wholly rationale and a necessary development for Jot to enter into the app

market. Firstly, Jot’s main products are all about education, as the current toy – sales trend is

toward computer assisted learning. Also, as console games are dying and children in the new age

group demand more sophisticated, complicated and internet – accessible toys, it looks like the

app market is a perfect fit. In addition to that as Jot brand is fairly popular, parents are likely to

support Jot by buying Jot’s products as their children grow up. Moreover, as the case of Angry

Birds, successful application may create opportunity for launching new toys, animation or hand-

held games.

The money issue could be solved and Jon Grun could be persuaded. And if implementing the

proposal now (3 months average), the app could be introduced at the toy fairs in February and

March.

Actions to be taken

Alana Lotz should have the design team develop and design the app (She could refer to

examples of Spelling city and The Seamless toy company), as well as hire an app –

specialized company to create the app. The app should be in – app purchasing and on IOS

and Android – 2 most popular platforms.

Marketing team should prepare Marketing plan to launch the app at the global toy fairs as

well as further promotions. One pretty good idea could be market the app on Jot’s packages

and toys themselves.

In the appropriate time, Jot should consider hire an in – house coding team (whether the app

is successful or not).

7 ETHICAL ISSUE

7.1 Distribution of late delivered products between main customers and small

customers

Ethical dilemma

Jot management encounters an ethical trade-off between providing 1800 units for main retailers

and share our equally products for all customers.

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Apparently, the ethical dilemma is closely related to the fairness and company’s responsibility

towards stakeholders. In this case, stakeholders are customers who should be treated with great

and equal consideration regardless of their size. This code of conduct reflects company core

value and professional duty of care.

However, if Jot follows this conduct, the business relationship with main customers who impose

large influence on company can be affected negatively. In addition, although Jot may not have

intention to treat customer unequally, it is probable that Jot’s main retailers can exert their

influence and force Jot to distribute all 75% for them.

Recommendations

To handle this ethical issue, it is of importance for Jot to consider judiciously about the impact of

insufficient products towards its customers. More specifically, those customers who suffer the

most from late delivery issue should be compensated with largest benefits.

Although Jot can incur the additional compensation expenses to settle down this issue, the

relationship with customers as well as customers’ loyalty will be retained. In addition,

company’s images as an objective entity can be publicly promoted, which can attract more

retailers in establishing business cooperation with Jot.

7.2 Bribery in Voldania proposal

As a part of Tani’s investigation, Jot encounters an ethical dilemma in outsourcing in Voldania

that whether it should give Grot 25,000 to not have any delay in bureaucracy. This donation may

help Jot speed up in bureaucracy and start production sooner. The dilemma creates a conflict of

interest for management between time reduction and acting ethically, by not participating in

bribery. Commitment in bribes can bring benefits for Jot but also destroy company since it

creates a result in the unethical way of not be honest and unfair for other company and severe

punishment from government in EU.

Recommendations

The issue needs to be handled critically, if Jot does not bribe, it may face a long waiting

procedures for conducting business in Voldania or even obstacle created by politicians.

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Therefore, Jot is highly recommended the use of lobbying to gain favorable relationship with

Voldania’s government and still act ethically. In specific, Jot should actively offer a toys

donation for local orphans, kindergartens and primary schools by left over inventory. This action

is not only establishing a good link between Jot and local government but also promoting the Jot

brand in Voldania.

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8 SUMMARY OF ISSUES AND RECOMMENDATION

Order of priority Problems Decision for short-term Decision for long-term

1 Fault in

new toys

Make immediate action

Coordination with

retailers for receiving

defective toys

Prepare for re-introduce

fixed toys

Inspect effectiveness of

operation system,

Quality Insurance team

Training course to

prepare for any future

incidents

2 Late

delivery

Receive 1800 units and

find other vendors to

produce the rest

Communicate with

customers and provide

compensation

Create tracking system

for customers

Order of priority Proposals Accept/ Reject

3 Near-shoring proposal Accept

4 Diversification strategy Accept

Ethical issues Recommendation

Distribution of late delivery Compensation for small retailers

Bribery in VoldaniaToys donation for local orphans, kindergartens , primary

schools

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9 REFERENCES

1. Carolina, 2012, Educational app for kid, Spelling City[online]. Available at URL:

http://www.kindertown.com/educational-apps-for-kids-spellingcity-video-review/

(Accessed 8 May 2013)

2. Chetanya Rajput,2012,The happy birds: Success story of angry birds[online]. Available at

URL: http://www.mbaskool.com/business-articles/marketing/1984-the-happy-birds-

success-story-of-angry-birds.html(Accessed 8 May 2013)

3. Consumer Product Safety Commission, Recall handbook [online].Available at URL:

http://www.cpsc.gov/PageFiles/106141/8002.pdf(Accessed 8 May 2013)

4. De Matos, CelsoAugustoandand Carlos A.V. Rossi, 2007,Consumer Reaction to Product

Recalls: Factors Influencing Product Judgment and Behavioral Intentions, International

Journal of Consumer Studies, 31, 109–16

5. John Greenwald, 2000, Firestone's Tire Crisis [online]. Available at URL:

http://www.time.com/time/magazine/article/0,9171,997759,00.html(Accessed 8 May

2013)

6. Reyna Suzi, 2002,Effective crisis management – Tylenol crisis[online]. Available at

URL:http://iml.jou.ufl.edu/projects/fall02/susi/tylenol.htm(Accessed 8 May 2013)

7. SenSankar and C.B. Bhattacharya, 2001, Does Doing Good Always Lead to Doing

Better? Consumer Reactions to Corporate Social Responsibility, Journal of Marketing

Research, 225-243.

8. US-China Business Council, 2011, USBC 2011 China Business Environment survey

results [online]. Available at URL:

https://www.uschina.org/public/documents/2011/10/embargoed-membership-survey.pdf

(Accessed 8 May 2013)

9. Accenture, 2012, 2012 US Holiday Shopping Survey, page 14[online].Available at URL:

http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Holiday-Shopping-

Survey-Results-2012.pdf(Accessed 8 May 2013)

10. Deloitte &Touche, 2012, Christmas Spending Survey 2012, page 22 [online]. Available at

URL: http://www.deloitte.com/assets/Dcom-Ireland/Local%20Assets/Documents/

16

Consumer%20business/2012/ie-deloitte-Christmas-Spending-Survey-2012.pdf(Accessed

8 May 2013)

11. EDI Basics, 2013, Benefits of EDI [online]. Available at

URL:http://www.edibasics.co.uk/benefits-of-edi/(Accessed 8 May 2013)

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10 APPENDICES

APPENDIX A: SWOT ANALYSIS

Strengths Weaknesses

- Innovative and quality electronic toys

- Keeping up with industry trends

- Constantly launch of totally new

products each year

- Professional and experienced,

responsible key personnel

- Effective outsourced logistics system

- Good quality and clear marketing

literature

- Good relationship with China

manufacturers

- Heavy reliance on 7 large retailers

- Incurring lots of bank loans

- Totally dependence of manufacturing

process on outsourced manufacturers

- Asynchronous IT system

- Lack of separate IT manager and full-time

HR manager

- Seasonal nature of sales

- Fault in new flying spaceship toy

Opportunities Threats

- Global toy fairs between Jan and

March

- Market development in Asian and

Russian

- Developing CSR plan

- New market segment: smart phone

application with both gaming and

educational aspects for 9-11 age-group

- Market penetration in European and

USA

- Near-shoring in Voldania

- New trends in product

- Economic recession

- Infringement of Intellectual Property Rights

(China)

- Late delivery of toys in November 2012

- (Unpredictable fashion trends towards

licensed toys)

- Price fluctuations of electronic components

- Increase in cost-base in China (especially

wage rate)

- Development of online games and mobile

phone applications

- Compliance with changes in policy or

standard for toys (EU safety regulation)

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APPENDIX B: PEST ANALYSIS

1. Political/ legal environment

Product safety is the major concern with many rules and regulations: Toy Safety Directives

2009/48/EC, EN-71 Toy Safety Standard and CE marking, etc.

Dangerous products will be withdrawn out of market by RAPEX - the rapid alert system.

Toy Industries of Europe (TIE) - A trade association for the European toy industry (which

comprises over 25% of the total world toy market) plays an important role in this market.

2. Economic environment

European sovereign-debt crisis led to recession ⇒ Level of sales and level of bank loans

declined.

The inflation rate in the Euro Area was recorded at 2.20 percent in November, 2012.

Wage rate is increasing in China ⇒ Outsourced manufacture prices are higher.

Toy industry characteristics

- A highly innovative business sector: Approximately 60% of toys in the market each

year are newly developed products. In 2011, more than 90% of toy companies

operating in Europe put new products to the market, compared to less than 40% in

other industry sectors ⇒The success of the toy company depends heavily on its

capacity to innovate and introduce new products that meet changing consumer needs

and wishes.

- Highly seasonal: 60% of sales are recorded during the Christmas period (November -

December)

- In EU, approximately 80% of the toy sector is composed of small and medium sized

enterprises (SMEs), which have less than 50 employees.

Distribution channels

- Across Europe, most toys are sold in traditional retail outlets such as specialized toy

stores, which often account for 40% of toy sales, and super/hypermarkets.

- The market share of online sales is increasing. National differences do, however,

exist. For example, while online sales already account for almost 16% of toy sales in

Germany, only 0.5% of toys are sold online in Spain.

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3. Social environment

Demographic trend: Approximated 78.3 million children under 14 years live in Europe

(2010), about 15% of the total population. The falling birth rates and the aging of society

result in new challenges for the European toy industry.

Consumer trend

- Baby and infant articles were the best-selling toys in the EU in 2010 (market shares

19.4%), followed by games and puzzles (11.9%) and outdoor toys (10.9%). In 2013,

infant/ preschool toys are the most popular toy categories on the European market

followed by dolls, outdoor and sports toys, and games and puzzles. Together these

categories comprise over half of all toy sales in the EU. However, national variations

are evident, dolls are the most popular toy category in Italy and Spain for instance.

- Learning toy and online gaming has gained enormous popularity.

- Changing consumer tastes towards licensed toys results in inventory write down.

Consumer attitudes and opinions

- Price is more important than brand name.

- Uncertain about future financial situations ⇒ People spend less and save more.

4. Technological environment

Digital games played on tablets such as Apple's iPad or smart phones are putting pressure on

more traditional toys.

Electronic gadgets, computer and video games experience growth ⇒ Targeting sectors with

new technology-driven products offer future prospects.

Internet sales have been rising continuously.

Cost of new technology and electronic chips increases.

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APPENDIX C: PROBLEM 1 – FAULT IN NEW TOYS

1. Risk assessment table

2. Potential loss of sale due to faults in new products

Units Loss

Unsold products in Jot’s inventory

3,200 units @ €40 €128,000

Loss in gross profit 3,200 units @ €(40-24) €51,200

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3. Estimated incremental costs among different possible solutions

Estimated Average Jot's price 2013Customers €13.42Mark – up 50 -100%Retail price €23.49

Solution 1 (write – off toys

completely)

Solution 2 (recall products

and make improvement)

Solution 3 ( recall products, provide 2 option for customers and compensate for end-users)

Repayment for recalled product4

€112000 €56,000

Improvement cost5 €60,000 €46,000

Compensation for end-user6

€1,409.4

Write-off cost7 €86,400

Total cost €198,400 €60,000 €103,409.4

4 Solution 1: 2800 units *€40Sol 3:50% of 2,800 units*€40 ( 50% chance customer choose repayment)

5 Solution 2 : 6,000 unit * €10Solution 3 : 0.5*2,800*€10 + 3,200*€10 ( 50% chance customer choose improvement)

650% of 1200 units * 10% discount on 23.49 average retail price

73600 units * €24

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4. Detailed courses of corrective actions for super-effort strategy

Designating the “recall coordinator” to lead the corrective team.

There are two phases that need to be implemented prudently

- First phase: Prompt response to reassure the public and express Jot’s social

responsibility.

+ Recall coordinator notifies the market surveillance authorities the preliminary

information about a product risk.

+ The recall campaign should be call “Toys hospital” and Jot could cooperate with

retailers to have banners “Toys hospital” at any place that receiving recalled

products.

+ Traceability plan

For products still in supply chain, Michael Werner should suspend any

manufacturing and distribution; after that, withdraw existing products from

distribution chain.

For products in the hand of public, Sonja Rosik should institute an effective

communication program to inform end-users about the fault issue and “Toys

hospital” campaign. This program includes decisions about content of message as

well as channels to broadcast information (TV news, Internet source and point-of-

sale announcement). The toll-free number was set up to handle customers’

inquiries.

For the convenience of customer, the team should negotiate with retailers for

cooperation of receiving defective products in retailing point-of-sale.

+ Compensation plan: Each end-user can choose between 2 compensation methods:

the repayment of full purchase price or the exchange of defective toy for the

“healed” toy plus the 10% discount voucher for the next purchase.

- Second phase: Re-introduction of the “healed” toys.

+ Design team takes charge of retrofitting the flying spaceship toys with improved

insulation.

+ Marketing and Sale Department launch the “healed” toys.

23

5. Human resources management

Although the new designer Indy Kapila is directly responsible for the toy defect, it is Alana Lotz

who approved the new toy design and made decision to rush it into production in time for the

2012 Christmas season.

Indy Kapila had some radical new designs to offer, meaning she has the ability to contribute

fresh creative ideas which have been Jot’s key success in the fierce toy industry. Hence, if Jot

could handle the employee well, she would become its valuable intangible asset.

Let her recognize the impact of problem, save her face by creating an open conversation

focusing on ways to restore high-level performance and suggestions for improvement.

Reassure the employee of her value to design team as well as the management’s willingness

to provide any support necessary to enhance the employee’s sense of accountability and

loyalty.

Offer coaching, development options and positive reinforcement to maintain performance.

24

APPENDIX D: PROPOSAL 1 – NEAR-SHORING IN VOLDANIA

1. Costs of continuing manufacturing in China

CHINA 2012 2013 2014 2015 2016

Production in units 60,000 100,000 140,000 180,000 220,000

Revenue 780,000 1,300,000 1,820,000 2,340,000 2,860,000

Labor cost (LR= €1.75/

unit, g = 12%)

63,000 117,600 184,397 265,531 363,483

Machine cost

(MC = €1.4/ unit)

84,000 140,000 196,000 252,000 308,000

Distribution cost (DC = €3/

unit, inflation rate = 0.06)

180,000 318,000 471,912 643,187 833,224

Total incremental cost 327,000 575,600 852,309 1,160,718 1,555,707

Total incremental profit 453,000 724,400 967,691 1,179,282 1,304,293

2. Costs when transferring part of manufacturing process from China to Voldania

VOLDANIA 2012 2013 2014 2015 2016

Production (units) 60,000 100,000 140,000 180,000 220,000

Revenue 780,000 1,300,000 1,820,000 2,340,000 2,860,000

Labor cost (LR= €5/unit,

g=2%)

135,000 229,500 327,726 429,789 535,804

25

Machine cost

(MC=€1.96/unit)

117,600 196,000 274,400 352,800 431,500

Distribution cost 72,000 127,200 188,765 257,275 333,289

Total incremental cost 324,600 552,700 790,891 1,039,864 1,300,591

Total incremental profit 455,400 747,300 1,029,109 1,300,136 1,559,409

2012 2013 2014 2015 2016

Cash saving when producing in Voldania

2,400 22,900 61,418 120,854 255,116

3. Detail short - term action for near-shoring in Voldania

Initial stage

- Examine the company’s value chain thoroughly to find possible cost reduction stage

and improve overall efficiency

- Work with Voldania’s government for bureaucracy problem

- Identify ineffective Chinese manufactures (such as Gull) to terminate or consolidate

contracts

- Determine type of products to near-shoring

Selection and implementation stage

- Select suppliers: Consult local commerce representatives or outsourcing procurement

specialists to identify potential partners, as well as conduct on-site or remote

assessment based on manufacturing tenders’ submission of data, especially in terms

of facilities and quality control processes.

- Choose companies charging competitive unit price and complying with Jot’s

requirements

Contract preparation

- Construct short-term contracts to reduce inherent risks of new business relationship

26

- Negotiate contract terms and conditions involving all aspects of manufacturing,

quality and logistics requirements with penalty clauses or bonus payment

- Determine specific timescales for initial production

- Transfer assets, personnel and process to near-shoring companies

27

APPENDIX E: PROPOSAL 2: DIVERSIFICATION STRATEGY – NEW APPLICATION

1. Estimated initial investment of new application

Assumption: 3 months for completion of new application project

Hourly rate of £35 for design test

Daily rate of £300 for developers

Initial investment Complex application – Two platforms

Design € 9,000

Development €30,000

Testing € 8,000

Total €47,000

2. Estimated annual charges

Developing new application

Fixed costs + $99 (= €77.228) per year for Apple store

+ Application maintenance + Upgrade charge: 12.8% *€47, 000 = €6,000 per year

Total FC: €6077.22/ year

Variable

costs

30% * Sales revenue

81.00 USD = 0.78 EUR28

3. Estimated profit (loss)

Projected sale9 - free app with in-app purchases: Average revenue: €0.73/app

Projected number of download: based on the industry average10 for 2015. From that date,

it’s expected that the number of download will grow at 20% per year.

2012 2013 2014 2015 2016

Estimated downloads

3,000 9,000 120,000 150,000

Estimated sale revenue

€2,190 €6,570 €87,600 €109,500

Fixed cost €6077.22 €6,077.22 €6,077.22 €6077.22 €6077.22

Variable cost 0 0 0 0 0

Initial investment

€47,000

Estimated profit (loss)

(€53,077.22) (€3,887.22) €492.78 €81,522.78 €103,422.78

9http://www.forbes.com/sites/chuckjones/2013/03/31/apps-with-in-app-purchase-generate-the-highest-revenue/ : Industry average revenue for a fee application with in-app purchase is $0.93/app (= €0.73/app)

10http://www.pocketgamer.co.uk/r/iPhone/iPhone/news.asp?c=20680 : Industry average for the number of download for an average application is 101,024

29

APPENDIX F: PROJECTED INCOME STATEMENT

2010 2011 2012 2013 2014 2015 2016

Revenue

Issue 111

Issue 212

Issue 313

Issue 414

Other Expense (assume equal 94.5%

of revenue)

8,371

7918

9,866

9315

11,568

(103.409)

0.0

2.4

(62)

10931.97

13,124

22.9

12402.4

14,791

61.418

13977.8

16,840

120.854

15914.1

19,260

255.116

18201.05

Operating profit 453 551 473 744 875 1,047 1,314

Operating profit margin

5.41% 5.58%

4.09% 5.67% 5.91% 6.62% 6.82%

Finance income 12 13 15 17 19 22 25

Finance expense 201 213 248 280 315 357 405

Profit before tax 264 351 240 481 579 712 934

Tax expense (30%) 79.2 105.3

72 144.3 173.7 213.6 208.2

Net Profit 184.8 245.7

168 336.7 405.3 498.4 653.8

11 Faults in new products

12 Late delivery of toys

13 Near-shoring proposal

14 Diversification strategy – New application30