Business Acumen Simulation BUSINESS CASE STUDY

Transcription

1 Business Acumen Simulation BUSINESS CASE STUDY Version 1.0 Copyright 2012 BTS Asia Pacific

2 BTS Asia Pacific 110 Amoy Street #02-02 Singapore TEL: Copyright 2012 BTS Asia Pacific Version 1.0

3 Table of Contents INTRODUCTION... 1 PROGRAM MODULES... 2 OVERVIEW OF BEGOOD... 3 INTRODUCTION... 3 OPERATING SUMMARY... 3 REVENUES... 4 COST STRUCTURE... 4 INCOME... 4 OUTLOOK... 4 MARKET AND COMPETITIVE LANDSCAPE... 5 COMPETITIVE MARKET... 5 TOTAL VALUE PROPOSITION... 5 PRODUCTS AND SERVICE... 5 A PRODUCT... 5 B1 PRODUCT & B2 SERVICE... 6 C/X PRODUCTS... 7 CUSTOMER SATISFACTION... 7 MANAGEMENT DECISIONS... 8 MARKETING... 8 FORECASTING OPEN MARKET... 8 REQUEST FOR QUOTES (RFQs)... 8 PRICE... 8 ADVERTISING... 9 SALES FORCE... 9 CREDIT TERMS... 9 RESOURCE DECISIONS... 9 PLANT LABOR ENGINEERS TECHNICIANS OVERTIME AND EXCESS CAPACITY COSTS PLANT CAPACITY NEW PLATFORM DEVELOPMENT RESEARCH & DEVELOPMENT (R&D) STRATEGIC INITIATIVES FINANCE EXTERNAL FINANCING SPECIAL LOANS PERFORMANCE METRICS REVENUE GROWTH OPERATING INCOME (EBIT) FREE CASH FLOW (FCF)... Error! Bookmark not defined. RETURN ON INVESTED CAPITAL SHAREHOLDER VALUE ADDED (SVA) FINAL SUMMARY Copyright 2012 BTS Asia Pacific Version 1.0

4 Welcome to the management team of Begood and the Business Simulation. Understand the cause and effect relationship of business decisions and leadership behaviors on business and financial performance.congratulations! After a long and thorough selection process, Begood s Board of Directors has recommended that you join the executive management team that will assume control of the company. You will be part of an elite team of executives who will manage Begood for the next three years. During this time, your company will be competing against four similarly positioned companies in an aggressive business environment. In order to help you better manage your company, we recommend that you read the following Case Study which will give you a description of Begood and the businesses that it is involved in. In addition, you will learn about some key issues that are affecting the company and your management team. While you are reading the Case Study, you may want to keep the following questions in mind: What are the main business activities of Begood? Who are its customers and competitors? What are the factors that are impacting Begood s profitability the most? What are Begood s strengths, opportunities, weaknesses and threats? What would be your strategy to take Begood forward over the next three years and drive Economic Value Added? Note: Don t be overly concerned with the details keep focused on the big picture. INTRODUCTION Please bring a calculator to the workshop. Experience tells us that the better prepared you are, the more successful and rewarding the workshop will be. Copyright 2012 BTS Asia Pacific Version 1.0 Page 1

5 Business Simulation PROGRAM MODULES Applications Session and Follow-Up During your three-year tenure as a member of Begood s executive management team, you will employ a customised, computer-based planning tool to assist you in making high-level decisions. The simulation represents aspects of Keppel s businesses and market realities. It is important to remember, that while it is similar to Keppel it is not a replica. Your team will be competing against four other Begoods in one dynamic market. Know-How Sessions During the workshop, you will participate in a number of different lecture/discussion sessions called Know-How sessions that will introduce you to financial concepts and business tools for improving growth, profitability and decision-making. Knowledge gained from the Know-How sessions is applicable both to the simulation and to your job at Keppel. At the completion of the simulation, your team will be asked to create a presentation that summarises the key learning points from the workshop. In addition, you will be asked to develop a personal action plan. The personal action plan will include commitments for growth and profitability improvements that you can personally implement at Keppel, upon your return to the workplace. If you have any question, please do not hesitate to call us at BTS. Your contact person is Calvin Fawle. Calvin s address is calvin.fawle@bts.com and telephone numbers are We look forward to seeing you at the workshop! Feedback Sessions Following each simulation decision round, you will receive an analysis of your team s decisions, as well as those of your competitors, in a Feedback session. The goal of these sessions is to stimulate ideas for applying Keppel s strategy back in the workplace. Copyright 2012 BTS Asia Pacific Version 1.0 Page 2

6 INTRODUCTION Begood is a leading manufacturer, sales and service company that specialises in the aerospace, automation controls and chemical industries. Begood has been a successful company but its current situation does pose some challenges. Today s Begood was formed approximately fifteen years ago after splitting from another corporation. Since the split the Company has acquired a number of other organisations which has resulted in its current diverse range of products, customers, and markets. Though it is one of the Top 100 companies, Begood now faces some intense competition. The wave of consolidation in the market has created four large, similarly positioned companies. Begood must have a solid business strategy and understanding of market trends in order to succeed in this competitive business environment. Begood has been a leader in all of its major markets. However, in the past few years, the company has had some difficulty cutting costs, generating profits and increasing revenues and free cash flow. Products have become less differentiated and as a result, margins have been squeezed. In addition, there has been a downturn in the economy and suppliers have lowered their forecasts for the near future. These and other issues are threatening Begood s overall market position. OVERVIEW OF BEGOOD OPERATING SUMMARY In recent years, Begood has been struggling to produce consistent results and improve growth. While the company is still restructuring, its largest and most profitable business, aerospace, is suffering the worst economic cycle in decades. Consumer confidence is at an all time low and doubts have surfaced in Begood s ability to successfully lower costs and increase profitability. It will be up to the company s new management team to turn this situation around. Begood does have a solid portfolio of products and services that it provides to its customers. If excess spending can be reduced as customer satisfaction and market share increase, the company will see itself in a very favourable position for the future. Operating Summary Total Sales $1 Billion EBIT $63 Million Net Income $25.5 Million Free Cash Flow $137,000 SVA Million Market to Book 0.83 Market Cap $194 Million Share Price $28.79 Market Share 20% in all markets Currently, Begood sells products and services in three different markets A, B and C. The company assembles designs and customizes its products in its own manufacturing facilities. Begood also markets and advertises these products. The human resources department manages the training, development, recruitment and dismissal of all employee groups including sales force, plant personnel and engineers. As a newly appointed member of Begood s executive management team, you will be running the company for a period of three years. You will be making decisions regarding A, B and C products and service, marketing, human resources, plant management, and finance. It will be your mission to improve the competitive position of Begood by increasing sales, operating income and free cash flow. Begood generated approximately $1 billion in revenue in Year 0 from the sale of its A, B, and C products and services. As Begood s newly appointed management team you will have the task of increasing this revenue base, while decreasing expenses. It will be important for you and your team to recognize that these products and service are sold to a diverse group of customers who have different buying characteristics and expectations. A successful management team will be able to effectively apply market data, trends and segmentation information to increase profitability and exceed customers expectations. Copyright 2012 BTS Asia Pacific Version 1.0 Page 3

7 REVENUES Begood Revenue Breakdown: C/X Products 20% A Product 48% INCOME In Year 0, Begood had net income of roughly $25.5 million. Though Begood did generate approximately $72 million in operating income (EBIT) from the A business, management will have to focus on growing income from all businesses in an effort to increase profitability. Begood Operating Income by Product: 20% B Product & Service 32% Begood generates revenues from its products and services. Most of the company s sales emanate from the A business which represents 48% of total revenues. A products are sold in the open market and through a Request for Quotes (RFQs) bidding process. Begood sells B1 products and B2 service contracts. Additional revenues are generated from the three different C products and an X by-product. COST STRUCTURE Begood s new management team will have to pay close attention to reducing its cost structure. Over the past year there has been a significant downturn in the economy. Customers have cut their production forecasts for the next few years in anticipation of a decline in consumer demand. As a result, Begood s customers are much more price sensitive than they were in the past. In addition, new technology has driven down the differentiation between products on the market. Begood can no longer rely on its strong brand name to charge higher prices and earn higher margins on its products. 15% 10% 5% 0% A Product B1 Product B2 Product OUTLOOK C/X Products There are several challenges ahead for Begood. The company and its new management team will have to face a very challenging business environment along with four other competitors who are all vying for market share. If Begood s management team can develop a solid business strategy, apply market data, adapt to customer trends and focus on providing total value solutions, the company should see its profitability and free cash flow increase thereby maintaining its leadership in the industry. As a result, management should try to focus on offering a more differentiated product to its customers by adding features or customisation levels. Margins may also improve if Begood can successfully offer its customers total value solutions rather than individual products to meet their needs. Copyright 2012 BTS Asia Pacific Version 1.0 Page 4

8 MARKET AND COMPETITIVE LANDSCAPE COMPETITIVE MARKET Begood offers its products and services globally. Growth in each of its business areas will be affected by economic and industry specific factors. The aerospace industry experiences its own cycle of growth and decline. Two of the largest customer bases are the airline manufacturers and defence and space contractors. The controls industry is less cyclical than the aerospace industry, though it is dependent on the commercial construction market. Its customer base includes building contractors and operators who are looking for cost efficient ways to solve their heating, ventilation and air condition (HVAC) needs. Growth in the chemicals industry depends on the availability and price of the raw materials. These customers are very diverse and seek affordable, quality products that meet their individual specifications. The company and its four competitors each have an equal 20% share of the A, B and C/X markets. It will be a challenge for Begood to determine the best means of growing a profitable business. Begood may decide to offer more customised products, offer total value solutions or simply steal market share from a competitor. TOTAL VALUE PROPOSITION Begood is seeking to meet and exceed customer expectations. To do this, the company must increase the value of the products and services placed with its customers while growing a profitable business and increasing cash flow. Begood will need to obtain and analyse market research to learn about the different needs and value criteria of its customer segments. For each product or service that is offered to the market each year, Begood will be making decisions regarding pricing, forecasting, features and customization levels, service levels, advertising, distribution channels and sales force. All of these elements are part of the overall value proposition that the company is offering to the market. You and your management team will learn more about the customer segments available to target as you continue your preparation to manage Begood. BEGOOD VALUE PROPOSITION: FEATURES & CUSTOMISATION ADVERTISING PRICE CUSTOMER VALUE CUSTOMER SERVICE PRODUCTS AND SERVICE DISTRIBUTION CHANNELS SALES FORCE Basic information on the products and services that Begood provides is presented below. As a member of the management team, you will be able to purchase market research to gain a better understanding of the needs of your different customers. The market research will provide you with essential information including: Market size and growth forecasts Customer purchasing criteria (value drivers) Feature and customization preferences Customer characteristics A PRODUCT The A product is a complex, electronic-systems product that can be found in both commercial and military aircraft. As a leading A product provider, Begood manufactures and installs the product during the latter stages of aircraft production. Since technology is evolving rapidly in this industry, demand for additional product features is high. Copyright 2012 BTS Asia Pacific Version 1.0 Page 5

9 A PRODUCT PROFILE Expected Growth Rate (Year 1) 2% Current Open Market Price (Per Unit) $75,000 Total Open Market Units Sold 4,400 Total RFQs Units Sold 1,100 Current Total Features 1 In order to be successful in the A market, Begood will have to focus on improving product quality while reducing its cost base. Begood has a strong presence in the market and its brand name is well known. Management should use this to the company s advantage. However, customers have become increasingly price sensitive. The downturn in the economy has struck the commercial aerospace industry fairly hard and Begood must ensure that quality and functionality are priced attractively to these customers. Defence and Space budgets have been increasing over the past year. These customers demand very high quality products for use in sophisticated aircraft and Begood should also be cognizant of these customers needs. There are two different channels through which Begood sells A product: open market and RFQs. In the open market, Begood uses its marketing mix to drive sales. There are five segments in the open market. Customers in each segment have their own purchasing criteria. Price, sales force, advertising, features and customer satisfaction are all elements of the value proposition that help drive sales in the A product open market. In general, customers are interested in reliable, high-quality and low maintenance/cost products. Currently, Begood generates most of product revenue from a large number of smaller projects that are sold in the open market. Begood sells larger projects through a closed bidding process or Request for Quotes (RFQs). A more detailed explanation of the RFQ process is provided in the Management Decisions section of the Case Study. B1 PRODUCT & B2 SERVICE The B1 product is a controls system that is installed in medium-sized commercial establishments. Begood is a highly recognizable brand name in the B market and its products have been in use for decades. Competitors used to have a difficult time selling B1 product due to Begood s dominance and market recognition. However, this is no longer the case. Customers have become increasingly price sensitive and new innovations in technology have lead to a less differentiated B1 product. Competitors products are cheaper and have the same level of sophistication as Begood s products. Begood will have to lower its cost structure while increasing its B1 product value proposition if it wants to succeed in this market. B1 PRODUCT PROFILE Expected Growth Rate (Year 1) 5% Current Price (Per Unit) $9,500 Total Units Sold 19,000 Current Customization Level 1 The B1 product is sold to customers either by B1 sales reps or via a two-step distribution chain. Begood technicians as well as external licensed technicians can install the product. In addition to the B1 product, Begood does offer its customers a contract to install and maintain the operating performance of the B1 product. This B2 service is sold to customers in the form of either a one-time installation and/or a one-year contract. Sales representatives establish and maintain customer relationships and are responsible for the sale of the initial product install. After installation, some customers may opt to purchase a one-year service contract. Begood s technicians will then manage any future preventive maintenance for these contracts. As customers do have the option of cancelling service contracts after one year, it may be difficult to retain customers. However, management does have the ability to increase the level of service that is provided to customers each year. Begood is a known provider of repair and overhaul services. If the company is successful in the total market, it may see an increase in aftermarket sales. Additional information regarding the open market and RFQ customer segments will be available for purchase during the workshop. Copyright 2012 BTS Asia Pacific Version 1.0 Page 6

10 B2 SERVICE PROFILE Expected Growth Rate (Year 1) 4% Current Price (Per Contract) $100,000 Total B2 Service Sold 500 Duration of B2 Contract 1 Year It is going to be a challenge for Begood to succeed in the B market. Competition is tough and the company will have to provide its customers with a better value B1 product than it has in the past. The high-end commercial customers are willing to pay more for the B1 product. However, they do require systems with an increased level of customization. Begood does have the ability to increase the customization levels of its product. If the company can provide a more sophisticated value proposition while reducing costs associated with the B1 product, Begood will be in a favourable position to increase its B1 market share profitably. C/X PRODUCTS The C product is a chemical raw material. It can be refined to form three different end products: C1, C2 and C3. C1 is a very basic form of the product and is used as a primary component in floor coverings. C2 is a more refined version of the C product and is used to make durable products. C3 is the most refined version of the product. C3 is extremely strong, very durable and has a high degree of heat resistance. Each year, the management team will have the ability to select the product mix that it will offer to its customers. Management may want to change the mix due to changing customer needs, profitability and expected demand for the products. C/X PRODUCTS PROFILE C1 Expected Growth Rate (Year 1) 1% C2 Expected Growth Rate (Year 1) 4% C3 Expected Growth Rate (Year 1) 10% C to X output ratio 1:4 Current X Price (Per Kilogram) $0.045 Additional information regarding the C and X products and customers are available for purchase at the workshop. CUSTOMER SATISFACTION Customer satisfaction has been decreasing over the past few years. Product feature and customisation levels are low and customers are not as happy with Begood s products as they once were. The company must enhance the value of its products in an effort to increase customer satisfaction. There are several other tools that the company can use to increase customer satisfaction including increasing employee satisfaction and offering sophisticated products. In this difficult economic cycle, it will be imperative to focus on your customers needs and keeping them happy. During the refining process of the C product, an X by-product is produced. Originally the by-product was disposed but after research proved that the X product could nourish and stimulate plant growth, it was sold on the market. For every one kilogram of C product produced, four Kilograms of X product is produced. X product is sold on the market at a set spot price. However, a portion of Begood s X product output can be sold at the company s chosen price. The company s ability to sell X product at its chosen price will depend on the quality of the product as well as X product customer satisfaction. Copyright 2012 BTS Asia Pacific Version 1.0 Page 7

11 Each year, the executive management team must make decisions to implement the Begood strategy. The decisions that the company makes depends on this strategy as well as its operating structure and market conditions. Begood s management team will be making decisions on: Marketing & Pricing Resources Sales & Distribution R & D Strategic Initiatives Finance MARKETING FORECASTING OPEN MARKET Each year, Begood must forecast sales figures for A and B1 products that are sold in the open market, B2 service contracts and demand for the three forms of C product. These forecasting decisions are critical to set each year, as they will guide Begood management in determining other decisions such as resources and financing. Based in the company s strategy and utilizing available data on expected demand each year, Begood s management will determine its target share of A, B1 and C products as well as B2 service contracts. This estimate will be based upon the opening market size and growth rate for the current year. There are two important risk factors that the company should keep in mind when making forecasting decisions. The first risk is when demand for the product or service is not as strong as anticipated. If this happens, finished goods inventory can be much higher than needed and capital will be tied up unnecessarily. On the other hand, if demand is much greater than anticipated, the company runs the risk of losing customers. If demand outweighs supply, customers who would have purchased the product or service from Begood may have no other option but to go to a competitor. The company may lose those customers forever. MANAGEMENT DECISIONS REQUEST FOR QUOTES (RFQs) It is expected that at least five large A customers will present Request for Quotes (RFQs) each year. Begood management may elect to submit bids on as many RFQs as it wishes. When bidding, management should consider some key elements of the value proposition, including price and proposal investment. Information will be provided regarding the size of the RFQ project and the maximum price the customer is willing to pay. Projects will be awarded to the company who best meets the needs of the customer on criteria such as feature offering, proposal budget, price and customer satisfaction. Begood will be able to purchase market research to learn more about large customers it may wish to submit bids for. Companies that are successful in the bidding process will have a solid understanding of its customers. More information on the RFQ customers will be available for purchase at the workshop. Begood will learn the number of bids won the year after the RFQs bids were made. Once the company knows how many bids it has won, engineering and plant resources can be allocated. PRICE Begood can use other tools price, advertising, features, customization, service levels, sales force, credit terms to differentiate its products and service in an effort to increase sales. One of the most effective differentiating tools at management s disposal is pricing. Begood s management team will have the ability to set prices for the A and B1 products, the B2 service and the X by-product. The price that the company charges for its products and service will affect the customer s buying decision. It will be up to management to decide on the optimal price levels. Remember, some customers are more price sensitive than others. Changes in price will be one way to affect market share allocation. However, other characteristics of the value proposition will also have an effect on customer value of Begood s products. Copyright 2012 BTS Asia Pacific Version 1.0 Page 8

12 Begood will not set pricing for the C products. These are considered to be commodities and the selling price will always be equal to the spot price in the market. Management can differentiate its C products by improving quality, allocating advertising and sales force as well as changing the production mix of the products. The company does have the ability to set pricing for the X product. A majority of the X product produced will be sold at a set spot price. However, the company may be able to sell some product at a higher price; generally about a 10% - 15% premium above the spot price. Any X product that is not sold at Begood s chosen price will be sold at the spot price. ADVERTISING To help increase sales and awareness of products, Begood has the ability to advertise its products. Management can set advertising budgets for the A, B and C products and services. In each case, the company should consider the different media used to communicate to its target audiences as well as customer responsiveness. Advertising for the products is done via magazine and trade publications, in-store displays and direct mail campaigns. SALES FORCE Currently, Begood has a dedicated sales force for each of its products and services. In each business, the sales force establishes and maintains customer relationships. In addition, the sales force will be the front line communication of any improvements in features or customization to customers. The sales force is a group of salaried employees who do not receive overtime. Each year, management will have to consider the appropriate number of sales people dedicated to each product or service. This decision will depend on the company s revenue and market share forecasts for that year. SALES FORCE SUMMARY Salary Attrition (Y1) No of SF A $80,000 15% 30 B1 $80,000 15% 100 B2 $80,000 15% 50 C/X $80,000 15% 88 The C/X product sales force of 83 is the total number of employees dedicated to those products. Management must allocate (by percentage) these sales people to a specific product line (C1, C2, or C3). Based on its strategy and expected market growth for each version of C, this allocation of sales force can help Begood meet its sales forecasts. CREDIT TERMS Begood has the opportunity to offer different credit terms for each of its products and service. Credit terms for the A products are for both open market and RFQ sales. The company may decide to offer shorter credit terms in an effort to increase cash flow. However, customers generally prefer longer credit terms. It will be up to management to consider the appropriate credit term for each product and service. The length of credit terms will have an effect on market share, sales and the company s cash position. RESOURCE DECISIONS In addition to its sales force, Begood also employs three groups of resources: (1) plant personnel, (2) engineers and (3) technicians. Each year, the company will have the ability to recruit, maintain or dismiss employees from these groups. There are costs financial and non-financial associated with these decisions. Begood s open market and RFQ forecasts, features, customization level and operating efficiency determine the resource needs in each group. Begood has always considered its personnel to be a highly valuable asset. Employee performance and teamwork are greatly appreciated and rewarded. However, there are some concerns for the new management team: the number of employees on hand, how well they are being utilized and the personnel turnover rates. Each year, the company will lose some of its employees due to attrition. Some employees are dissatisfied and move on to other companies, some relocate, others retire. New employees can be hired to replace the attrition. The attrition rate will vary for each personnel category. Employee satisfaction will also affect attrition rates. Copyright 2012 BTS Asia Pacific Version 1.0 Page 9

13 PLANT LABOR Begood s plant labour is responsible for the production in Plant 1 and Plant 2. Management must hire labour for each plant, individually. Plant labour working in Plant 1 controls operations for both A and B products. Similarly plant labour working in Plant 2 controls operations for the all the C and X products. As Begood continues to expand its production of products, adds features and increases customization levels, more plant labour may be required. PLANT LABOR SUMMARY Annual cost per plant employee $60,000 Training cost (% of annual cost) 50% Overtime premium 50% Attrition Rate 5% Annual cost includes salary and benefits Overtime, up to 30% maximum Excessive hiring or overtime erodes employee and customer satisfaction ENGINEERS Begood s engineers play a critical role in the A product and feature development, B product customization and development of platform technology. The company will require a specific number of engineers per unit manufactured based on the open market volume, RFQ volume and productivity levels. Currently, Begood s engineers are allocated as needed among the A, B and C product lines. As the company adds more features and increases customization levels, more engineers may be needed. ENGINEER SUMMARY Annual cost per engineer $100,000 Training cost (% of annual cost) 50% Overtime premium 50% Attrition Rate 5% Annual cost includes salary and benefits Overtime, up to 30% maximum Excessive hiring or overtime erodes employee and customer satisfaction TECHNICIANS For customers that purchase the B2 service option, Begood s technicians maintain the service and repair calls, after the initial install is complete. It will be up to management to determine the adequate amount of technicians to respond to customer needs each year. B2 service placements will determine the utilisation rates for Begood s technicians. TECHNICIAN SUMMARY Annual cost per technician $75,000 Training cost (% of annual cost) 50% Overtime premium 50% Attrition rate 10% Annual cost includes salary and benefits Overtime, up to 30% maximum Excessive hiring or overtime erodes employee and customer satisfaction OVERTIME AND EXCESS CAPACITY COSTS On average, plant and engineering personnel work 1,800 hours a year. Begood s personnel will be able to work up to 30% overtime, or 130% in total utilisation. Overtime costs (time-and-a-half) are applied automatically if there is a shortage of personnel to meet manufacturing forecasts. The cost for overtime hours is 150% of salary. If there is an under-utilisation of labour (i.e. not being utilised at 100%), plant, engineering and technician personnel will still receive their full salaries. Begood management will decide the appropriate level of utilisation for each resource group, trying to optimise both employee engagement and customer satisfaction. PLANT CAPACITY Begood s products are produced in two different plants. A and B products are produced in Plant 1 while C and X products are produced in Plant 2. Over the next three years, management will face several challenges and should try to accomplish the following goals: Manufacture the units required to meet sales targets Maximise plant capacity utilisation and minimise production costs Copyright 2012 BTS Asia Pacific Version 1.0 Page 10

14 Minimise assets used in materials, works in process and finished goods inventory Minimise costs associated with poor quality and maximise production efficiency. Plant 1 hour is quantified in batches of 100,000 production hours. Currently, Plant 1 has 45 batches of plant hours, meaning that the maximum capacity of the plant is 4.5 million machine hours per year. Please note that plant capacity can not exceed 100%. PLANT 1 SUMMARY Capacity (in batches) 45 Plant utilisation rate (Year 0) 93% Investment cost (per batch) $2 Million Divestment revenues (per batch) $500,000 Each batch represents 100,000 hours of production Maximum plant divestment per year is 10% Plant 2 produces all of the C products and the X byproduct through a continuous flow process. Therefore, the plant is constantly manufacturing products. Plant 2 capacity is measured in batches of 35 million Kilograms. Plant 2 currently has 5 batches of capacity, thus maximum output capacity is 175 million Kilograms per year. Of the 100% production in Plant 2, management will decide how to allocate production of the three forms of C. There is a cost associated with changing the production mix in the plant. PLANT 2 SUMMARY Capacity (in batches) 5 Plant utilisation rate (Year 0) 100% Investment cost (per batch) $10 Million Each batch represents 35 million Kilograms of production Divestment in Plant 2 capacity is not possible Each year, management will be able to purchase and sell batches of capacity for Plant 1. Management will only be able to buy Plant 2 capacity, as selling Plant 2 capacity is not possible. The purchase of plant capacity may be necessary if capacity forecasts exceed 100%. Management may also choose to divest capacity in an effort to increase utilisation rates in Plant 1. Begood may not divest more than 10% of the existing batches in Plant 1 per year. There are pros and cons associated with plant divestment. Although the company does receive cash for every batch sold, a divestment decision may not be the best long-term choice. Divestment value of batches is much lower than investment costs. As the company continues to increase its production of products, management may opt to operate with excess capacity to accommodate future growth. NEW PLATFORM DEVELOPMENT In addition to the investment or divestment of plant capacity, management will be able to upgrade platform technology internally or via an acquisition. A technology upgrade will increase the quality of A products, thereby enabling Begood to better meet customers demanding needs. Platform upgrades will also streamline the A product production process. The internal expense that management incurs is an investment to procure engineers who will be dedicated to new platform technology development. Instead of developing the platform internally, Begood has the opportunity to acquire a company that already has the existing platform technology. Bidding for this company will occur in Year 2 during an open auction session. The company with the most attractive bid will acquire the new company and its platform technology. RESEARCH & DEVELOPMENT (R&D) Begood has long had a reputation for strong commitment to R&D spending. The company invests in two forms of R&D. The first investment comes in the form of new features for A products and increased customization levels for B1 products. The second is in the form of general long-term R&D. This investment is used to develop new products and technologies. Long-term R&D is also a powerful market indicator regarding Begood s commitment to the future success of its businesses and the development of cutting edge technology. This longterm investment could have a positive impact on customer satisfaction. STRATEGIC INITIATIVES Begood s management team will have the opportunity to invest in up to six initiatives, each year, that focus on customers, operations, materials, employees, technology and finance. Copyright 2012 BTS Asia Pacific Version 1.0 Page 11

15 In order to stay focused on the strategic direction that management has chosen, the annual selection of initiatives should be in alignment with the overall strategy of the company. To manage this challenge successfully, Begood s management team should evaluate the changing market trends and customer preferences closely. By investing in these initiatives, the company will be able to implement process improvements to reduce cycle time, production costs and accounts receivable days for example. Initiatives also target areas such as productivity training for personnel, sales and marketing campaigns, and digitization. FINANCE Due to the current income and cash position of the company, there are significant pressures that are placed on Begood s management team. These internal and external demands require the company to maximise income and increase free cash flow. Some key objectives that Begood s management should focus on include: Growing the business profitably Maximizing Begood s net income by reducing costs and redundancies Increasing Begood s free cash flow by focusing on generating internal funding Investing in smart business opportunities to help generate strong returns on investments. Create positive Return on Investment. EXTERNAL FINANCING Ideally, Begood will be able to generate sufficient cash to cover its obligations each year. If the company finds that it does not have enough funds to do so, it has the opportunity to issue capital units (a combination of long-term debt and equity). Begood will pay interest on the funds needed to finance operations. In the event that Begood finds itself in an excess cash position, the company may choose to retire some of the capital borrowed or issue annual dividends to shareholders. SPECIAL LOANS If Begood discovers itself in a negative cash position at the end of any year, the company will receive special loans to cover its costs. This type of loan is automatically generated and repayment of the loan will be automatically deducted from any positive cash flow from the following year. However, interest rates are significantly higher than for capital units. It will be in management s best interest to ensure an adequate cash balance to finance operations rather than obtaining funds via special loans. FINANCIAL METRICS Cash 5% Long-term Debt 8% Special Loans 25% Tax 40% WACC 10.7% Share Price $26.28 PERFORMANCE METRICS In order to measure its success in the market and deliver results that meet shareholder expectations, the company tracks a few key measurements: Revenue growth, Operating Income growth and Return on Invested Capital and Economic Value Added. REVENUE GROWTH One of Begood management s objectives will be to grow revenues by a minimum compound annual growth rate (CAGR) of 5% by the end of Year 3. In addition to increasing market share, the company should also try to increase sales by better meeting and exceeding customer expectations. Through offering increased feature and customisation levels, Begood should be able to charge higher prices for more appealing products. Compound Annual Growth Rate (CAGR) Revenue (or Income) This Year Revenue (or Income) Base Year 1 Year 1 CAGR is the percentage growth rate achieved year after year. The percentage is taken by dividing the present revenue or operating Copyright 2012 BTS Asia Pacific Version 1.0 Page 12

16 income by base year revenue or operating income, in this case it is Year 0. GOOD LUCK! If you know the Year 0 revenue and operating income figures, and you are running the company for three years, what should your revenue and net income target be? OPERATING INCOME (EBIT) Operating income or Earnings before Interest & Tax (EBIT) are the funds that are left over after all costs and expenses associated with operations are deducted. Profitable top line growth will be a priority for Begood s management team. Strong revenue growth must be accompanied by successful cost reduction. However, the company should be prudent in cutting costs. It will not be wise to cut costs that could lead to revenue growth. By improving operating income, the company will generate cash internally thereby strengthening its overall cash position. Begood has the objective of achieving an Operating Profit margin of 12% by the end of Year 3. RETURN ON INVESTED CAPITAL Return on Invested Capital (ROIC) is a measure of how efficiently a company uses the money (owned or borrowed) invested in its operations. It will be Begood s management team s goal to maximise ROIC during the three years. ECONOMIC VALUE ADDED (SVA) A positive EVA will occur when Begood s Net Operating Profit after Tax (NOPAT) exceeds its cost of capital. A positive EVA will be generated when the (Return on Invested Capital (ROIC) is greater than the Weighted Average Cost of Capital (WACC). FINAL SUMMARY Your task as a member of the executive management team of Begood is a challenging one. The company s future is in your hands. Success will require a thorough understanding of the company s current position as well as setting a sound strategy that you and your team are committed to implementing. At the end of the case study you will find more detailed information about Begood s management decisions from last year. This information can help Begood s new management team set a vision, goals and strategies for the next three years. Copyright 2012 BTS Asia Pacific Version 1.0 Page 13

17 Appendix: Financial Reports Copyright 2012 BTS Asia Pacific Version 1.0 Page 14

18 Finance Report Year 0 This Year (0) Free Cash Flow (000) 137 Cumulative Free Cash Flow (000) - Revenues (000) 967,136 EBIT (000) 62,768 Cash (000) 55,399 CAGR Earnings 0.00% CAGR Revenue 0.00% EVA (9,943,654) C/X B Revenues A B Operating Earnings C/X A Special Loans (000) - Long Term Debt (000) 292,582 Common Stock (000) 106,900 Retained Earnings (000) 102,425 Net Earnings (000) 25,477 External Credit Days 47 Internal Credit Days 10 DSO 57 40,000 20,000 - Cash Flows (20,000) Net Earnings Non Cash Items AR Inventory AP Capital Assets Finance Cash Flow Cash A/R F.G. W.I.P. Materials Plant Other A/P Assets 700, , , , , , ,000 - (100,000) (200,000)

19 Profit and Loss Statement Year 0 (values in 000) A B1 B2 C/X Total Revenues 458, , , , ,136 Cost of Goods Sold Materials 96,800 53,598 20,718 93, ,469 Labor 58,285 25,840 36,000 30, ,134 Subcontractor 19,625 19,625 Engineering 79,225 6,723 85,948 Unit Manufacturing Cost 234,310 79,438 76, , ,176 Depreciation 7,323 1,677-5,000 14,000 Poor Quality 52,434 15,843 25,691 93,968 Repair & Overhaul/ Supply 29,146 10,830 39,976 Total Cost of Goods Sold 323, ,788 76, , ,120 Gross Margin 135,663 93,925 35,257 34, ,016 Gross Margin % 30% 47% 32% 18% 31% Selling Expense 23,500 20,000 9,500 11,040 64,040 General Expense 5,044 13, ,534 25,145 Administration Expense 33,021 19,265 17,120 14,892 84,298 R&D Expense 1,518 11, ,765 R&D Expense Corporate 50,000 Other Expense Other Expense Corporate - Total Operating Expenses 63,083 63,579 27,120 32, ,248 Operating Income 72,580 30,346 8,137 1,704 62,768 Operating Margin % 16% 15% 7% 1% 6% Total Extraordinary Items - Earnings Before Interest and Taxes (EBIT) 62,768 EBIT % 6.5% Net Interest Expense 20,307 Taxes 16,985 Net Income 25,477 Net Income % 2.6%

20 Balance Sheet Year 0 (values in 000) Assets Year 0 Year -1 Liabilities & Equity Year 0 Year -1 Current Assets Liabilities Cash 55,399 62,000 Current Liabilities Accounts Receivable 152, ,747 Accounts Payable 67,439 69,600 Total Current Assets 207, ,747 Other Current Liabilities - - Special Loans - - Inventories A Total Current Liabilities 67,439 69,600 Materials 9,927 7,471 Work In Process 29,658 25,719 Long Term Debt 292, ,582 Finished Goods 12,830 8,511 Other Liabilities 2,800 2,800 Inventories B1 Materials 5,358 4,991 Total Liabilities 362, ,982 Work In Process 1, Finished Goods 3,050 2,782 Equity Inventories C/X Shareholders Equity 106, ,900 Materials 9,357 7,586 Retained Earnings 102,425 84,163 Work In Process Net Earnings 25,477 25,000 Finished Goods 1, Total Equity 234, ,063 Total Inventories 73,002 59,185 Total Liabilities & Equity 597, ,045 Plant 140, ,000 Other Assets 177, ,113 Total Assets 597, ,045

21 Cash Flow Statement Year 0 (values in 000) Opening Cash Balance 62,000 Cash From Operating Activities Net Earnings 25,477 Depreciation 14,000 Loss on Sale of Plant - Increase (-)/ Decrease (+) in Accounts Receivable (9,361) Increase (-)/ Decrease (+) in Inventories Product A Product B1 Product C/X Totals Finished Goods (4,319) + (267) + (529) = (5,116) Work In Process (3,939) + (141) + (27) = (4,107) Materials (2,456) + (367) + (1,772) = (4,595) Increase (+)/ Decrease (-) in Accounts Payable (2,161) Increase (+)/ Decrease (-) in Other Current Liabilities - Net Change in Working Capital (25,340) Net Cash From Operating Activities 14,137 Cash Used In Investing Activities Net Capital Investments(-)/ Divestments (+) (14,000) Net Cash From Investing Activities (14,000) Free Cash Flow 137 Cash From Financing Activities Decrease (-) from Dividend (6,738) Increase (+)/ Decrease (-) in Equity - Increase (+)/ Decrease (-) in Long Term Debt - Increase (+)/ Decrease (-) in Special Loans - Net Cash From Financing Activities (6,738) Net Cash Flow (6,601) Ending Cash Balance 55,399