BaldwinTM. Confidence in a Sensortized World. Colleen Soberay Sharon Lind Jana Grenn Mirjam Jennings. March Baldwin Team 1

Transcription

1 BaldwinTM Confidence in a Sensortized World BUSINESS PLAN March 2007 BALDWIN TEAM Colleen Soberay Sharon Lind Jana Grenn Mirjam Jennings Baldwin Team 1

2 Table of Contents Executive Summary 1.0 Highlights Mission 1.1 Keys to Success 1.2 Objectives 1.3 Products 2.0 Market Analysis Summary 3.0 SWOT 4.0 Marketing and Pricing 5.0 Strategy and Implementation Summary 6.0 R & D 6.1 Production 6.2 Supply Chain & Inventory Management 6.3 Financial Plan 7.0 Management Summary 8.0 Baldwin Team 2

3 Executive Summary 1.0 The Baldwin Company is a producer of environmental and health-related sensors. Baldwin adopted the Cost Leadership PLC strategy focusing on broader markets and lower costs. Low-end, traditional, and high-end products will be the focus of Baldwin product development. As a PLC firm, the Baldwin Company will focus to minimize costs through efficiency and expertise. We will maintain a minimum investment in the performance and size segments initially, but may revise this trend depending on market conditions. Our company will pass cost savings on to our customers through highly automated low-end and traditional product manufacturing. Additionally, Baldwin will maintain the quality of our low-end and traditional products to gain an additional competitive edge outside of offering lower prices. Moderate automation will be used for our high-end products to preserve quality. Baldwin will not only focus intently on its product development and marketing. It will also focus on its overall operations to keep its investors happy and its operations at a cost level exceeding expectations. To do this, the Baldwin Team must keep its operations streamlined on both inbound and outbound operations. The first priority is to implement supply chain and inventory management practices. Finally, the Baldwin Company will implement new policies and procedures, train and reward employees, and invest in plant and equipment in an effort to reduce general and administrative and labor costs and maintain optimum plant capacity. Our business plan highlights the Baldwin Company marketing strategy, research and development strategy, implementation of new business practices and outlines Baldwin s financial situation. The Baldwin Company looks forward to becoming the leader in sensor development both in cost and quality. COST LEADER WITH PRODUCT LIFE-CYCLE FOCUS low price PLC Baldwin Team 3

4 Mission 1.1 Vision To be an innovative cost-effective leader in sensor development. Mission To ensure all manufacturers can incorporate affordable and innovative technology into their products. Providing manufactures with affordable, reliable sensors they will in turn, be able to offer customers a better product at a better price. Our mission will guide the overall strategy of this organization as we strive to meet or exceed our customer s needs. Keys to Success 1.2 Keys to Success and Critical Factors for the Next Year: Automation Test marketing of media, PR, pricing, and product endorsement plans Goal of recouping production start-up costs for possible new products Recovering automation costs by year 3 Supply chain and inventory management Meeting customer buying criteria Keys to Success for Baldwin Company Sensors Production: Cost Efficiency production, inventory, administration Product Quality Marketing & Management Increased capacity New product lines Baldwin Team 4

5 Objectives 1.3 The Baldwin Company has set aggressive sales goals for We plan to meet our targeted sales goals by first, meeting customers top two buying criteria, and, secondly, by offering prices slightly below competitor prices. In order to offer lower prices, our main objective is to construct state-of-the-art facilities. By increasing automation from the onset, albeit incurring PPE expenses, our low-end and traditional products will be priced to reflect a lower-cost of production. The sales targets by market segment are: Low-end:2400 units Traditional: 2500 units High-end: 600+ units Costs will be controlled to maintain projected margins at these sales levels. A characteristic of LC-PLC firms is to monitor its margins. If sales exceed our goals additional production and stepped-up marketing activity will be implemented quickly. In addition, we will also invest in Total Quality Management to reduce material, labor, R&D, engineering, and administrative costs. Automation We will increase automation to seven in year one, followed by an increase of one unit of automation until automation levels of nine are reached for low-end and traditional products. We expect to recoup automation costs after several rounds. Products 2.0 Baker Traditional customers seek proven products using current technology. Bead Low End customers seek proven products, are indifferent to technological sophistication, and are price motivated. Bid High End customers seek cutting-edge technology in both size and performance. Bold Performance customers seek high reliability and cutting edge performance technology. Buddy Size customers seek cutting edge size technology. Baldwin Team 5

6 Market Analysis Summary 3.0 ENVIRONMENTAL SENSORS Baldwin manufactures electronic sensors. Last year, global demand surged more than 13%. New opportunities exist for Baldwin opportunities Baldwin will aggressively pursue through the Cost Leadership-PLC strategy. With Baldwin s new management team, a new strategic vision and refreshing new tactical skills, Baldwin will move into the next phase of growth against competitors. During the next eight years, Baldwin fully expects to be a market leader in the industry. Baldwin will purchase a competitive analysis between years 3 and 4 to capitalize on competitor weaknesses and monitor strategy. Current Market Share of Leading Electronic Sensor Companies Erie, 17% Ferris, 17% Digby, 17% Andrews, 16% Chester, 17% Baldwin, 16% Baldwin s manufacturing customer base puts Baldwin in a unique range of product sensors from bio-hazard neutralization to security systems to manufacturing controls. Baldwin Team 6

7 SWOT 4.0 STRENGTHS Resources or capabilities that help our company accomplish its mission Innovative company Global demand for sensors surged more than 13% Easy access to distribution network Sensors that communicate with most sensor brands and related equipment streamlining purchasing for our customers Strong management Company location (region) offers highly desirable employees Adequate land base available for growth and expansion Opportunity to improve and streamline production OPPORTUNITIES Outside factors that affect our company favorably Highly automate assembly lines Decrease labor costs with higher levels of automation Keep a balance of automation and innovation with Baldwin s high-end products Located in economic empowerment zone, offering some tax benefits Real-time supply chain for our customers invest with customers for VMI Automation allows quick up-grades to sensors to accommodate industry regulations WEAKNESSES Deficiencies in resources or capabilities that hinder our ability to accomplish our mission Competitors strategies unknown Lack of patent protection Initial investment could cause a need for an emergency loan. Need to automate upfront, but must recoup cost in short-term. Limits on demand THREATS Outside factors or situations that could affect the company negatively Client demand could shift to the competitor Substitution by competitor products Need to be prepared for new technology reducing the dependence on sensors or requiring enormous investment to keep up with new technology Competitors moving production out of the United States allowing them gain more market share Highly volatile market due to quick changing technologies Baldwin Team 7

8 Marketing and Pricing 5.0 Marketing The Baldwin Company adopted the Cost Leadership-PLC strategy focusing on broader markets and lower costs. Low-end, traditional, and high-end products are Baldwin s core focus, while the performance and size markets will be adjacent growth areas or high margin areas. Overall, we expect Baldwin s marketing budget to be below average for the low-end segment and low to moderate for our traditional and high-end segment. Keeping costs low for low- and traditional-end segments is a common LC-PLC strategy. Baldwin will market its products according to its three market segments. Our emphasis is on being the cost leader in the traditional and low-end markets, while delivering cutting-edge technology primarily in the high-end market and monitoring performance and size demands for our high-end customers. Below is the Baldwin Company s current situation analysis (2007) Traditional Baker Marketing Situational Analysis Low Bead High Bid Pfmn Bold Size Buddy Demand 7,387 8,960 2,554 1,915 1,984 22,800 Actual Unit Sales 7,387 8,960 2,554 1,915 1,984 22,800 Segment % of TTL Industry 32.40% 39.30% 11.20% 8.40% 8.70% Growth Rate 9.20% 11.70% 16.20% 19.80% 18.30% Primary Buying Criteria Main advertising media Proven products / Price / Current technology Print media / Direct Mail Price / Proven Products / indifferent to technology advances Print media / Direct Mail Primary Sales Force Strategy Distributor Distributor New cutting-edge technology Trade shows / Internet Highly reliable cutting-edge technology Web media / Cutting-edge size microsized Web media / Outside Sales Inside Sales Outside Sales Total Baldwin Team 8

9 Current Price and Price Structure Product Market Segment 2007 YE Price 2008 Demand 2009 Demand Baker Traditional $ ,067 8,809 Bead Low-End $ ,008 11,180 Bid High-End $ ,968 3,448 Bold Performance $ ,294 2,748 Buddy Size $ ,347 2,777 We will primarily use print media and direct-mail to develop consumer awareness for our traditional and low-end products, as these markets respond best to this type of media. However, a small, but important, mechanism to reach these two price conscious markets will be trade shows. While low-end and traditional customers respond only fairly to trade shows, we will select the types of trade shows that are proven to attract such customers. Our high-end product, Bid, will be showcased at trade shows. We will ingeniously display our high-end product at tradeshows that exude cutting-edge technology both in size and performance. We will provide hands-on interactive displays which engage our target customers. Our goal is to engage 90 percent of the people who come through the doors. Direct-mail, and web-media will serve as mediocre awareness builders for our high-end product. At the start of round one, our products market shares are as follows in the table below. Product Market Segment Initial Market Share Baker Traditional 13% Bead Low-End 17% Bid High-End 14% Bold Performance 17% Buddy Size 15% Baldwin Team 9

10 Product promotion funds will be greater in those areas which the product segment responds best. E.g., Print media is more effective for Baker than is . Product Print Media Direct-Mail Web Media Baker Traditional Bead Low End Bid High End Bold Performance Buddy Size Good Good Poor Poor Fair Good Good Poor Poor Fair Trade Shows Poor Fair Fair Fair Good Poor Poor Good Good Fair Fair Poor Good Good Poor Effective marketing requires coordinated effort among four main elements: Price Product Promotion Placement We have discussed promotion, now we turn to Baldwin s pricing strategy. Pricing Strategy Price captures value and customers expectations. The customer perceives various levels of value or benefit with particular prices and products. Price is an important component of a customer s perceived value. A customer often directly correlates a higher price of a particular product with a higher quality associated with that product. First and foremost, Baldwin will meet the customer s buying criteria. When price is in the top two criteria, Baldwin will ensure operating efficiencies to afford lower prices to consumers with the aim being the low-cost leader. However, where high, performance and size segments are concerned; Baldwin will monitor consumer trends and market prices. Marketing Strategy Consistency for Achieving Price The price setter must ensure the pricing actions of the company are consistent with the overall marketing strategy for the product as well as consumer buying patterns. Pricing strategies and tactics cannot be developed in a marketing vacuum. Baldwin Team 10

11 The flow chart below illustrates the interconnectedness of pricing to all marketing functions of the company. Target Segments Promotion Product Attributes Pricing Strategy & Tactics Distribution Positioning (Value Propositions) The table below illustrates price-quality or value relationship. Price Product Quality High Medium Low High Premium Value High Value Super Value Medium Overcharging Medium Value Good Value Low Rip-Off Poor Economy Economy Baldwin s products fall in the light blue shaded boxes of the table above. As such, the Baldwin Company will give much attention to its customers perceptions with regard to each client s needs and expectations. Moreover, Baldwin will follow the rules of price elasticity of demand. Price elasticity (E) is the responsiveness of customer demand to changes in the product s price. Elasticity captures the percentage change in unit demand resulting from a 1 percent change in price: E = % change in unit demand / % change in unit price Low-end products will be priced below industry averages, while traditional products will be priced slightly below or average. By highly automating our low-end and traditional products, and, after recouping capital investment costs, profit margins are expected to increase dramatically by round five. Because we will also increase total quality management for our traditional products, we will increase the traditional Baldwin Team 11

12 segment marketing fund to raise customer awareness above our competitors. Finally, as performance and size products evolve, pricing will be set such that Baldwin realizes high margins. This is possible if Baldwin meets customers top two buying criteria. The table below compares the importance of four criteria for our clients with respect to each of our three focus segments. Price is most important for low-end clients and second most important for our traditional clients. Positioning is the number one priority for our high-end clients, while price is their least concern. It is for this reason that we will only maintain moderate levels of automation for our high-end product. Product Price Age Positioning Reliability Bead Low-End Baker Traditional Bid High-End Bold Performance Buddy Size 1 st Priority; 2 nd Priority 53% 24% 16% 7% 23% 47% 21% 9% 9% 29% 43% 19% 19% 9% 29% 43% 9% 29% 43% 19% Strategy and Implementation Summary 6.0 Research and Development 6.1 Positioning, New Products, MTBF Ratings Our positioning strategy will focus on relatively quick R&D turnaround times for market share capture, in that Baldwin won t necessarily try to position all products on the ideal spots initially. However, Baldwin will compensate less-than-optimal positioning with lower but acceptable mean time before failure (MTBFs), passing the savings on to our wholesale original equipment manufacturer clients. Also understanding that longstanding client-manufacturer relationships are less costly to maintain than finding the cheapest manufacturer month-to-month, we will strive to keep our products consistent with what each market segment demands focusing on the top two customer buying criteria for each segment. Baldwin Team 12

13 Additionally, any time a change is made to R&D, the product s perceived age is cut in half. Since the most desirable product age in the low-end segment is 7.0, and the age by the end of round one will only be six, it will be to our advantage to wait to modify until necessary. MTBF, which only accounts for 7 percent importance in a product s overall appeal, will be kept to a minimum to ensure low cost for our company as well as the client. We initially plan to minimally invest in the performance and size segments while watching the performance of these two segments in the coming years. Initially the prices in these two segments will be set at the high-end spectrum to recoup the cost of investing in automation in the earlier rounds. However, should the low-end and traditional segments become saturated by competitor products, the Baldwin Team may use the performance and size segments to change strategy. Both performance and size have higher growth and profit potentials, and by decreasing prices in the coming years, we may be able to use these products to increase market share and profits. The Baldwin team may also consider introducing a new product in round three or four depending on competitor market shares and strategies Low Segment-"Bead" Segment Boundaries & Ideal Spots 20.0 Size Performance Traditional High Performance Size Low Linear (Low) Our low-end product, Bead, will not be repositioned the first round. Rather its starting point of P=3.0 and S=17.0 since the ideal spot (P=1.7, S=18.3) despite the segment center (P=3.0, S=17.0) is closer to the trailing end of the market segment, and by market drift alone for the low-end (P +0.5, S +0.5), our current position will fare well in the following round, with no needed investment in R&D. Baldwin Team 13

14 25.0 Traditional Segment-"Baker" Segment Boundaries & Ideal Spots 20.0 Size Performance Traditional Low High Performance Size Linear (Traditional) Our traditional product, Baker, may be joined in round three by a new Baldwin market cohort Barbie. Baker will be repositioned from its starting position (P=5.5, S=14.5) to P=5.0 and S=15.5, plus its MTBF will be reduced to decrease cost and price. Market segment drift per round is +0.7 for Performance and -0.7 for Size. Even though the ideal spot for round one is P=5, S=15, the Baldwin Team will ramp up automation from the onset. As such, we will not need to move the product much to be close to the ideal spot. Like that of Bead, Baker s MTBF will be kept at 14,500, close to the bottom of the acceptable range of 14,000-19,000, again minimizing cost High Segment-"Bid" Segment Boundaries & Ideal Spots 20.0 Size Performance Low High Performance Size Traditional Linear (High) Our high-end product (see map above), Bid, will go from its starting position of P=8.0, S=12.0 to P=8.9, S=11.1, which is fairly close to the ideal spot for this first round high-end Segment (P=9.8, S=10.2). Market segment drift per round is +1.4 for Performance and -1.4 for size. If we had moved it much closer to the ideal spot Baldwin Team 14

15 in round one, the revised product would not have entered the market at a reasonable time in the year, thereby limiting its purchase time. To remain competitive, we will work to be as close to the ideal spot as possible. Our company will partner with OEMs for a migration strategy a sensor that our customers can use immediately with their new technologies. Both companies will then allow the package to drift into the traditional segment thereby keeping the demand for our sensor with the OEM traditional product. We are currently also considering entering another traditional and/or high-end product in the coming years. However, by moving the product each round, its age will continue to be reduced by half. Although an actual age of 0 years will be difficult to attain, we will continually move towards it, by adjusting position and MTBF. Since the high-end product s positioning and age comprise 72 percent of the importance with buyers, we will strive to optimize these two criteria first followed by MTBF (set round one at 25,000, within the acceptable range of 20,000 to 25,000) and price. Since MTBF is 19 percent of the product s importance, it was worth maintaining a higher level. Our other two products (shown below), Bold (performance market) and Buddy (size market) market segment drift per round is +1.0 for performance and -0.7 for size in the performance market and +0.7 for Performance and -1.0 for Size in the Size market. We plan to take advantage of the R&D efficiencies gained by segment rough cut overlaps in order to speed market introductions by newly-repositioned size and performance products. Once their market shares begin to dwindle in the succeeding rounds, the Baldwin Team will introduce new products to replace them, mostly in the segments that are least saturated by competitor products Performance Segment-"Bold" Segment Boundaries & Ideal Spots 20.0 Size Performance Low High Performance Size Traditional Linear (Performance) Baldwin Team 15

16 Size Segment-"Buddy" Segment Boundaries & Ideal Spots Size Performance Low High Performance Size Traditional Linear (Size) Production 6.2 The Baldwin Company chose to follow the cost leadership in the product life cycle strategy. Our product portfolio consists of low-end, traditional, high-end, size and performance products. Baldwin plans to be the market leader primarily through its low-end, traditional, and high-end product lines. To offer customers a complete portfolio, Baldwin will initially have a limited market presence in the Performance and Size segments. Depending on market trends, Baldwin may choose to expand its market presence in these segments. Currently, the Baldwin Company owns five plants with assembly lines. Baldwin s plants are aligned with its strategy. Baldwin will focus mainly on low-end, traditional, and high-end markets. We estimate increasing demand of our low-end, traditional and high-end product lines by meeting customer buying criteria and reducing operating and administrative costs. Baldwin will closely monitor its operating income (OI) with increasing forecasts in OI once automation investment has been recouped. Baldwin Team 16

17 Production Situational Analysis Baker Bead Bid Bold Buddy Total Capacity next round 1,800 1, ,300 Units Sold Inventory Plant Utilization 66.00% % 45.00% 73.00% 63.00% Segment Traditional Low High Perform Size Awareness 55.00% 52.00% 49.00% 46.00% 46.00% Survey 18.00% 12.00% 21.00% 20.00% 27.00% MTBF in Years Sales/Employees Currently total sales at fiscal year end are: $101,073,437,000 and current employee complement is 700. Baldwin is currently producing $144,390,624 per employee in sales. Profit/Employee Total net profit fiscal year end was $4,189,000 making profit by employee only $5,984. Turnover Rate Baldwin had a turnover rate of 10% at which is average in this industry. Production observations Plant utilization is not being used to capacity in all but one assembly line. Additional labor must be hired or automation incorporated to bring plant utilization up. The Bid and Buddy product lines have an attractive contribution margin; however, customer surveys show a significant problem in those lines and all lines. The Baker and Bead products have high capacity needs in terms of demand, however, customer satisfaction is so low, changes must be made to greatly enhance the product line and provide much needed improvements. Also, Baker Baldwin Team 17

18 and Bead lie in the market segments with the lowest growth rate potentials, 9.2% and 11.7% respectively. The Bead product line has the lowest mean time before failure at 14,000 hours or 1.6 years, the Bold product line with the highest mean time before failure at 25,000 hours or 2.85 years. Bold has a high growth potential but it holds a small percentage of the total market. Potential for sales revenue growth on the Bold line is not as strong as other lines. The chart below is a snapshot of our current capacity at round one and how increases will be handled, should a second shift be hired. Segment Baldwin Product Name Baldwin 1 st Shift Capacity Baldwin 2 nd Shift Capacity Baldwin Production % by Segment TRADITIONAL Baker 1,800 3, % LOW Bead 1,400 2, % HIGH Bid % PERFORMANCE Bold % SIZE Buddy % Baldwin s strategy dictates heavy automation for Baldwin s low-end and traditional production lines in the first two years (note the blue highlights above). High-end manufacturing will be moderately automated to allow for increased efficiencies coupled with flexibility to maintain innovation. By round five, we expect automation levels of nine for low and high-end segments. As such, we expect lower profits in the first period. Baldwin will have an advantage in future years due to initial PPE investing. Higher automation levels will allow us to employ less, thus lowering labor costs, and alleviating problems due to labor strikes. The following table indicates current level of automation for each segment in our product portfolio: Segment LOW TRADITIONAL HIGH PERFORMANCE SIZE Product Name Bead Baker Bid Bold Buddy Automation Level Baldwin Team 18

19 As mentioned in the Executive Summary, the Baldwin Team will focus on low-end, traditional and high-end segments (as highlighted in blue) with low-end and traditional sensor products allowing for largest profits. Low-End Segment In this segment we plan to achieve an automation level of nine. In comparison with other segments, we assume these products will be presented on the market for the longest time. Low-end customers are first concerned with price when making a purchase decision. As with all of our products, quality will not be sacrificed for price. This will also give the Baldwin Team a slight competitive advantage over our LC-PLC competitors. Traditional Segment We will also increase current automation level for Baker, as well as capacity of the assembly line. While high automation is also favorable for the traditional segment if we are to compete with pricing, traditional customers expect a certain level of quality in this product line more so than low-end customers. High-End Segment Potential buyers of the high-end products are our most demanding customers. Therefore, our strategy calls for low to moderate (five or six) automation and increased quality control. We will offer a high-quality product at competitive prices. High-end products that move into the traditional segment will be produced on our higher automation lines. Size and Performance Segments Because these two segments are out of our core business, we will only maintain these products with little capital investment. However, we will monitor the market to determine if these products either drift into another segment or our strategy shifts focus on size and performance segments. Our decision to increase automation level or capacity is based on this assumption: Segment Least Expensive Most Expensive LOW Automation capacity TRADITIONAL plant size increasing automation HIGH capacity = automation According to our business plan, we plan to keep only enough inventory to satisfy demand. Should our inventory become too large at year-end, we will schedule less production in the following year. If we drop below the optimal level of inventory, our capacity will be readily available to produce more. The disadvantage of producing too little in the following year is either an increase in overtime or temporary workers or forgone profits. Our administration team will continue analysis of market demands. Moreover, as discussed later in the business plan, the Baldwin Team will implement supply chain and inventory management strategies. Baldwin Team 19

20 Supply Chain and Inventory Management 6.3 Baldwin will adopt several practices to avoid the high-cost and pandemonium associated with the bullwhip effect. Moreover, it will adopt separate, but overlapping, strategies for its inbound supply chain and for its outbound supply chain. Baldwin will implement three approaches. First, it will implement Vendor Managed Inventory (VMI) practices. Second, it will implement wireless technology to increase efficiency in production supply inventory (inbound supply) management. Baldwin will also implement Target Costing in its low and traditional segments since price is a top buying criteria. Outbound Supply Wireless Technology VMI Inbound Supply First, The Baldwin Team will adopt the VMI for its outbound supply chain inventory to be sold. Because we are a manufacturer of sensors used in other manufacturers products, through client relations, it is feasible to adopt the VMI approach. The VMI approach will require a significant time investment by both our company and our clients. This is an investment that will pay-off for all involved with increased efficiency, time management and enhanced customer service. A brief overview of VMI model to be adopted is as follows. Baldwin will have realtime access to its customers sales and stock levels electronically. That is, we will be able to see the potential need for an item before the item is ordered as well as routine needs of our clients. The Baldwin Team can view its customers sensor inventory and sale of goods. This allows the Baldwin Team to forecast its sales, production and inbound inventory needs more realistically based on client data. The Baldwin Company is responsible for generating our customers sensor orders. Secondly, the Baldwin Team must be efficient at managing its production materials to develop sensors. Implementation of wireless technology is vital in the role of Baldwin Team 20

21 inventory management. If it is to reduce operation costs, the Baldwin Company must streamline inbound procurement, transportation, inventory storage, materials handling and scheduling and control of materials. Moreover, our wireless technology will be connected to our VMI model for effective collaboration. It is paramount that inbound supply receives as much attention as the production of inventory for our clients. This wireless technology will allow engineers (R&D) to update design and material information online as products evolve with new technology requiring variations in production materials. Production workers will use barcode software (VMI) to scan products requiring material refill orders. VMI is also linked to the production line s material-order schedule which is linked to the research and development and to the procurement department. Furthermore, materials received into the production plant will be simultaneously entered into material inventory records using barcodes. This information is available to all departments instantaneously. Mobile computer software compares what materials are used in the production of sensors to what remains in material inventory. Mobile computers also allow for increased efficiency with production workers direct and accurate communication regarding material inventory and with the design team needs. Inbound and outbound inventory management is essential in the overall supply chain and Baldwin s bottom-line. Coupling VMI practices with wireless technology for inbound supply streamlines the Baldwin Company s operations. Baldwin Team 21

22 Financial Plan 7.0 Baldwin Current Financial Situation as of FY 2007 Baldwin Company Balance Sheet FY2007 Assets Liabilities & Equity Cash $3,434 Accounts Payable $6,583 Accounts Receivable $8,307 Current Debt $0 Inventory $8,617 Long Term Debt $41,700 Total Current Assets $20,358 Total Liabilities $48,283 Plant & Equipment $113,800 Common Stock $18,360 Accumulated Depreciation ($37,933) Retained Earnings $29,582 Total Fixed Assets $75,867 Total Equity $47,942 Total Assets $96,225 Total Liabilities & Equity $96,225 Baldwin Company Income Statement FY2007 Sales $101,073 Variable Costs (Labor, Materials & Carry) $72,513 Depreciation $7,587 SGA (R&D, Promotion, Sales & Administrative) $8,978 Other (Fees, Write-offs, TQM & Bonuses) $0 EBIT $11,996 Interest (Short Term & Long Term) $5,421 Taxes $2,301 Profit Sharing $85 Net Profit $4,189 Baldwin Team 22

23 Baldwin Company Statement of Cash Flows for FY2007 Cash Flows from Operating Activities Net Income (Loss) $4,189 Adjustments for Non-Cash Items Depreciation $7,587 Extraordinary Gains/Losses/Write-offs $0 Changes in Current Assets & Liabilities Accounts Payable $3,583 Inventory ($8,617) Accounts Receivable ($307) Net Cash from Operations $6,434 Cash Flows from Investing Activities Plant Improvements (Net) $0 Cash Flows from Financing Activities Dividends Paid ($4,000) Sales of Common Stock $0 Purchase of Common Stock $0 Cash from Long Term Debt Issued $0 Early Retirement of Long Term Debt $0 Retirement of Current Debt $0 Cash from Current Debt Borrowing $0 Cash from Emergency Loan $0 Net Cash from Financing ($4,000) Net Change in Cash Position $2,434 Baldwin Team 23

24 Baldwin s Financial Analysis Below is a list of the Baldwin s financial performance measures. The numbers used in these calculations were taken from the 2007 financial statements above. Contribution Margin = 28.3% Net Margin = 11.9% Return on Sales = 4.14% Working Capital = $13,775 Current Ratio = 3.09 Days of Working Capital = 49.7 days Leverage = 2.01 Cumulative Profits = $4,189 Market Capitalization = ($0.32) Margins Baldwin Stock price at close $40.16 Shares Outstanding 2,000,000 Market Cap in $M $80 Book Value $23,97 Dividend $2 Yield 5% P/E Ratio 19.2 Rating of Baldwin Bonds B Contribution Margin = (Sales VC)/Sales = ($101,073-$725,13)/$101,073 Contribution Margin = 28.3% A healthy contribution margin should be above 30%, but Baldwin s contribution margin falls currently below 30%. The company needs to review its marketing strategy (do the customers hate the product?), its production strategy (are labor and material costs too high?) or its pricing strategy (are the price cuts too big?). Net Margin = Contribution Margin Period Cost Net Margin = EBIT = $11,996 Net Margin = $11,996/$101,073 = 11.9% Net Margin is the amount products contribute towards profits. A Net Margin below 20% means Baldwin has too many expenditures (idle parts, depreciation) or too much SGA (diminished returns on promotion and sales budgets). Currently, Baldwin has a contribution margin of 11.9%, thus this margin needs to be improved. Marketing needs to review its promotion and Baldwin Team 24

25 sales budget strategy while production should review its expenditures as well. In addition, net margin initially will possibly be negative in some segments due to increased automation in the low-end and traditional segments, but Baldwin plans to recoup this cost in later rounds and plans to improve net margins as time progresses. Return on Sales = (Net Profit/Total Sales) Return on Sales = $4,189/$101,073 = 4.14% Profits ROS looks at the entire company s after-tax margins. Baldwin needs to have a decent ROS, which cannot be achieved unless net margins are excellent. An ROS below 5% means Baldwin either pays too much in Other expenses (currently not the case), or the firm is leveraged too high ($5,421). Initially Baldwin will be highly leveraged to pay for the initial increase in automation levels but restructuring of the financial leverage will be achieved in later years when the cost of automation has been recouped. We will aim to keep leverage between 1.5 and 2.5 in the later years to attract not only stock holders, but also bondholders. Baldwin s target profits in the coming years are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Possible Net Loss $ 1.5 Million $ 3 Million $12 Million $16 Million $21 Million $27 Million $35 Million Initially, projected profits for year one, two, and three may even be negative as we improve our production facilities to meet increased customer demands and increase automation. However, we expect future profits to rise as we decrease PPE costs and introduce TQM to streamline our overall operations. Working Capital Working Capital = Current Assets Current Liabilities Working Capital = $20,358 - $6,583 Working Capital = $13,775 Our goal is to put Working Capital to work in order to gain interest. Baldwin Baldwin Team 25

26 plans to offer a 30-day lag time for payment on Accounts Receivables while a 60-day lag time for Accounts Payable. We also plan to keep inventory costs low be not carrying inventory and using the JIT and VMI systems mentioned in our logistics section. Days of Working Capital = Working Capital/(Sales/365) Days of Working Capital = $13,775/($101,073/365) = 49.7 days Baldwin can operate for 50 days before Working Capital would be consumed. The goal is to keep Working Capital between days. Current Ratio = Current Assets/Current Liabilities Current Ratio = $20,358/$6,583 = 3.09 Leverage Currently, Baldwin has $3 of Current Assets for every $1 of Debt. The higher the number, the less risk for the debt holders (but higher risks for stockholders). Debt holders monitor current ratios. The Current Ratio should be around 2.0 so that banks and vendors do not worry about our financial obligations coming due. Initially, this ratio may not be ideal, but Baldwin hopes to correct this in future years. The financial structure of an organization is the relationship between debt and equity. This relationship is called leverage and addresses who is taking the risks and who receives the wealth created by the company? Because risk and reward are linked there is competition among stakeholders for risk. Leverage = Total Assets/Total Equity Leverage = $96,225/$47,942 = 2.01 Maximum benefit is achieved when leverage falls between The higher the leverage, the higher the risk. Initially, Baldwin s leverage will be high since the company will improve its facilities. However, in future years, after the costs of improvements have been recouped, Baldwin plans to have a leverage between 1.5 and 2.5. Wealth Creation Wealth creation is examined under three measures, (1) cumulative profits, the sum of all profits, since new management took over the company, (2) cumulative free cash flow, the sum of all of all of the cash flows since new management took over the company and (3) market capitalization, the current value of Baldwin s stock price times shares outstanding. Cumulative Profits = $4,189,000 Baldwin Team 26

27 Profits do not look at issues related to additional investment and are not directly accessible to stockholders. Free cash flow addresses investment issues. Cumulative Free Cash Flow is the money left after investments, which Baldwin could either put in the bank, reinvest, or give to shareholders. Net Income $4,189 - Adj. for non-cash items $7,587 - Changes in CA and Liabilities Accounts Payable $6,583 Inventory ($8,617) Accounts Receivable ($8,307) Net Cash from Operations $6,434 Cash from Investing $0 Cash from Financing Activities ($4,000) Net Change in Cash Position $2,434 Free Cash Flow ($2,434-$4,000) ($1,566) Baldwin s Free Cash Flow is currently not creating wealth for the company. To improve it the company should (1) Improve its Working Capital, (2) Offer new stocks and (3) Increase its debt (which will increase its risk). Market Capitalization is the value the stock market places on the firm (stock price x shares outstanding). Baldwin plans to pay dividend on a regular basis after year three. Market Capitalization $80 ($40,16 x 2,000,000 shares) Market Capitalization = ($0.32) Baldwin Stock price at close round 0 $40.16 Shares Outstanding 2,000,000 Market Cap in $M $80 Book Value $23,97 Dividend $2 Yield 5% P/E Ratio 19.2 Rating of Baldwin Bonds B Baldwin Team 27

28 Management Summary 8.0 Team Baldwin draws its strengths from its diversity in its four team members: Colleen Soberay, Sharon Lind, Jana Grenn, and Mirjam Jennings. Colleen Soberay, Chief Marketing Director, brings a rich background of technology marketing experience. Ms. Soberay also served as a board member for a top Fortune-500 company as well as directed its marketing and client relations team. Ms. Soberay has extensive experience in branding. This combined experience totals more than 15 years. Ms. Soberay earned her marketing degree from University of Florida and her MBA from the University of Alaska. Sharon Lind, Chief Production Director, brings a broad experience to Baldwin s team having served in various management roles throughout her career, including: VP of Operations at the Alaska Native Heritage Center, Public Information at the Denali Commission, communications at Big Brothers Big Sisters of Honolulu and Director of Shareholder Affairs at The Aleut Corporation where she now holds the office of Chairman of the Board for that company. Sharon s diversified background brings a new approach to the production area at Baldwin. Her undergraduate degree in business administration and her extensive management experience will bring new and innovative ideas to the Baldwin team. Mirjam Jennings, Chief Financial Officer and Production advisor graduated with a BBS in Management and an MBA from the University of Alaska Anchorage. Mrs. Jennings has mainly worked for non-profit organizations and for the University of Alaska Anchorage. She has worked as a Disability Adjudicator for the Division of Labor and Workforce, Disability Determination Services where she interpreted rules, policies, and regulations established by the federal government regarding Social Security Administration. She brings a wealth of legal and financial knowledge to the team and has established relationships in the state and federal government, which may be beneficial for Baldwin s future. Jana Grenn, Chief Financial Officer and R&D advisor graduated with a BS in Business Administration with an emphasis in Marketing from Northwest Nazarene University and MBA from the University of Alaska Anchorage. Ms. Grenn has worked mainly for the State of Alaska at the Regulatory Commission of Alaska, as a Utility Tariff Analyst. She brings a vast knowledge of financial decision making and legal expertise. Baldwin Team 28