CIMA 2014 CASE REPORT

Team name: Fantastic Dream Sichuan International Studies University

Team Members: Gu Yang Nie Kaiyu Liu Lu Adviser: Li Jiang Pan Yao Qian Qingyi

TABLE OF CONTENTS
1 Executive Summary 2 Introduction 3 Strategic Analysis
3.1 Company Analysis 3.2 Industry Analysis 3.3 SWOT Analysis

4 Issues Analysis and Recommendations

4.1 Prioritization of Issues 4.2 Core Competencies Issues 4.2.1 Late Delivery of a Hull from Topcrest 4.2.2 JKL 4.3 Diversification and Marketing Plans 4.3.1 New Design Supplier for Surania 4.3.2 Sales Staff and Agents 4.3.3 Racing Boat 4.4 Accident at Work

5 Appendices

1. EXECUTIVE SUMMARY
This report aims to prioritize, analyze and evaluate the current issues facing Merbatty. The report begins with a strategic and financial analysis of Merbatty and the industry. The 4 main issues Merbatty facing have been categorized into 2 broad categories, namely issues that threaten business and profitability and plans relating to expansion and marketing. The first issue is the late delivery of a hull from its supplier Topcrest. The team recommends that in the short term, Merbatty should cancel the contract with Topcrest and complete the order on time and find more suppliers in the long term. The second issue - JKL, is the second largest shareholder of Merbatty, but Alberto Blanc, the Chairman, still views Merbatty as his personal property. Also, Alberto is fond of doing charity, but JKLs Investment Director, Simone Lellet thinks it is absolutely a cost. The recommendation is that Merbatty should strengthen the communication of the shareholders. Alberto needs to remove his idea that he can control Merbatty completely. The final issue is the ethical implication from accident at work. The accident arose from one of Merbattys employee, called Paulo, arrival for work high on drugs. He fell off and broke his leg .His addiction to drug reminds us to show concern for the ethical issue of the company. With regard to expansion and marketing plans, Jesper (Marketing Director) wants to build and race a speedboat in the competition. But his father, Alberto (chairman) disagrees with him. Merbatty should accept the proposal in relation to the racing boat. This is due to the increasing demand for the large boat and this increasing demand will enhance brand awareness. The interior design supplier for the new boat building facility in the Middle East is still not found. There are two design companies available: Cooper Designs and Arabian Interiors. Merbatty should choose Cooper Design as it has a long history and a good reputation. Stefan Gil (sales director) wants to employ sales staff to replace the agents, but Marie Lopp (HR director) has a recognition of agents work. It can be dealt with by combining both sale staff and agent.

Finally, the five year plan is evaluated. From the evaluation, Merbatty should increase its total profits and continue expanding market share.

2. INTRODUCTION
Merbatty, founded in 1979, is a luxury boat building company specializing in wealthy, successful individual and corporate clients. In order to achieve the expected sales, Merbatty adopts custormising interior design and production management software system to increase productivity and improve resource utilisation. Merbatty has devised a five year plan that aims to achieve the following milestones by 2017: - Number of boats commenced in the year -Increase by 78.57% to 500 in 2017 - Sales revenue -Increase by 99.20% to 1,000 in 2017 - Operating profit -Increase by 80.26% to 137 in 2017

3. STRATEGIC ANALYSIS
3.1 Company Analysis Merbatty has adopted the custormisation model to differentiates itself from other companies and has built a strong customer base. This model was possible as Merbatty possess core competencies among the similar products. The model represents a further 11% on top of basic selling prices and also relies on remaining in close contact with suppliers. 3.2 Industry Analysis Merbatty competes in the luxury boat building industry, espeially in the US and Europe. In 2012, the luxury boat building industry generated approximately $5.5bn revenue. Over 5 years to 2012, the industrys revenue decline at a rate of 8.6%, and expects an average annual revenue of 6.9% in the 5 years to 2017. Although Merbatty has held a global market share of 8% in 2012, it still has so much risks. Five Forces Substitute ---strong

There are a large number of domestic and international builders of luxury boats, which together produce a range of over 180 different models. The better the price offered by substitutes, the more likely customers will switch. New entrants---strong

The threat from new entrants is high because the strength of the barriers is low. Rivalry--strong

As the boat industry is not dominated by a few large companies, rivalry is intense. It is difficult to differentiate your product.

Suppliers power---moderate

Although Merbatty has a number of key suppliers, many other suppliers are available and switching are available and switching costs are low. The price is not controlled by one or two dominant suppliers. Buyers power ---moderate

As switching costs are low and customers can easily have full information, it is essential for Merbatty to put emphasis on advertising and promotion to create brand awareness. Threat to the Luxury Boat Building Industry Market (Chart) 3.3 SWOT ANALYSIS

Therefore, Merbattys priorities would focus on retaining market share because of the fierce competition and at the same time, expanding global and domestic market.

4. ISSUES ANALYSIS AND RECOMMODATION

4.1 Prioritisation of Issues The 5 main issues may be broadly categorized as follows: Given the direct impact of the issues which threaten business profitability, they are chosen to prioritize over expansion or marking plans. Among the issues that threaten the core business or profitability, the late delivery of hull poses a greater risk because it also means a two-month state delivery to its customer which will not only result in financial loss. ? The second issue is misunderstanding between JKL and Merbutty. This will influence the share price. Among the expansion and marketing plans, choice between two suppliers for Surania takes precedence as it involves Merbutty?s future plans for expansion in the Middle East. But also its reputation will suffer the choice between agent and staff. On the other hand, it also requires the company to act quickly. Though the racing boat proposal may increase the sales of P-3000, its effect on total sales is limited. The suppliers for Surania proposal will be the main driving force in sales growth and should therefore take precedence.

4.2 Core Competencies Issues 4.2.1 Late Delivery of a Hull from Topcrest Financial Impact

Due to the late delivery, 0.5% of customers may require a refund (according to the financial data given), which will reduce the profit in 2014. On the other hand, it also will reduce employees efficiency. Hence, Merbatty will lose a plenty of money and waste a lot of time. Strategic Impact

As Merbatty plans to expand its market, supplier s late delivery makes the relationship between supplier and Merbatty go worse and it will affect Merbattys later order. In that case, the target of boat building of 340 in 2014 will not be achieved. Reputational Impact

Reputation is an important part of a company, which is strategic for the future. Due to the late delivery, customer will doubt Merbattys ability of taking orders. It affects customers choice and makes Merbattys situation become worse because Merbatty is a new comer in the stock market. Potential Solutions to the Late Delivery Continue the contract with Topcrest

Merbatty accepts the fact that Tocrest has delivered the hull late, it will get approximately 118.5k from Topcrest and the boat customers will get 25k discount, so it will reduce Merbattys cost even though customers cancel their order. Because Merbatty is a key customer of Topcrest, when making further orders, Topcrest will take Merbattys order more seriously, it will benefit Merbattys future strategy.

Cancel the contract with Topcrest and find another hull supplier

To find another hull supplier to supply the hull at short notice, it will reduce the possibility of customer canceling the order, also, the market for its ability to resist risk assessment will be better. Although Merbatty and Topcrest have recognized the importance of working close for future designs, Topcrest did not see Merbatty as its important customer. Hence, merbatty should not take Topcrest as a main supplier anymore. Amend the contract and find another hull supplier

Late delivery is a fact that can?t be changed. What Merbatty has to do is to reduce the risks. Considering the close relationship with Topcrest and its compensation, Merbatty shouldn?t break the contract directly. Merbatty can reduce the order with Topcrest and find another hull supplier to complete the rest of the orders. Hence, Merbatty may not receive unsubscribe from customers. Recommendation Short-term

In the short-term , Merbatty wants to receive the hull as soon as possible. It will cancel the contract with Topcrest and complete the order on time ,which needs workers to work overtime. Although it will increase the cost, customers won?t lose their faith in Merbatty and Market reward will be more. Long-term

Merbatty wants to expand its market share in the long term. It need to reduce the risks at aspects, the most important one is the supplier. Hence, Merbatty should reduce the affect from suppliers. In this case, it needs more suppliers for one order. So Merbatty needs to find more suppliers to reduce the risks. 4.2.2 JKL Financial Impact

JKL, as Merbattys biggest investor, which holds 28% shares of the company, but Alberto Blanc, the Chairman, still views Merbatty as his personal property after the company became listed in 2012. If the news of the contradiction is known to the public, the share price will be affected. For example, shareholder s dispute of 58 city affect the company greatly before companys IPO. Strategic Impact

The companys executives and shareholders are in lack of communication, so Simone doesnt know the benefit of doing charitable work for the company. Alberto still considers Merbatty as his private property, but he can not think that now. JKL will not be happy to see that and will doubt his investment. In that case, Merbatty will drop into high risk. Potential Solutions to the Problem Strength the communication between its shareholders

The weak link must be changed. Mebatty should take this communication into a serious part, the good relationship between the shareholders is very important for company development. Strengthen Albertos credibility between shareholders

If Alberto wants to implement his plan successfully, he needs the support from shareholders. Therefore, it is important for company to increase its credibility. Recommendation Merbatty should strengthen the communication between its shareholders, hence, JLK will know much more about its main ideas. Furthermore, the company does charity because all its profits are from society. Also, Alberto needs consider if he controls Merbatty completely, whether the company will develop rapidly or not. 4.3 Diversification and Marketing Plans

4.3.1 New Design Supplier for Surania Background The new boat building facility in the Middle East is nearly completed. But, the interior design supplier is still not found. Lukas Dian (Technical Director-Design) has selected two design companies: Cooper Designs and Arabian Interiors. Market Factors Recent years, the demand for luxury boat especially the large boat is increasing. Because of the Arab Spring, the Middle East is a potential market. As the market has become more competitive, the need to live up to what the customer wants, the customer gets has become more important. Financial Factors Merbatty want to open Middle East market, and it has a revenue of 40m which generated in this region 8% market share. In Merbattys 5 years plan, they are respectively 180m and 18%. Customer Factors The buyer of luxury boat is wealthy who would not care much about the selling price but more about the boat itself and are tend to buy larger boat. To attract more customers, the most important thing for company is service. Factors of Interior Design A preference for the advanced technology system id aroused. There is a CAD system which allows customers to remotely view the current design for their boat at any time. Due to the use of this technology, the system used in the luxury boat is slowly changing. Recommendations

Based on all of the factors above, Lukas Dian should choose Cooper Designs. Cooper Designs has a long history and a good reputation. It provides service that allows interaction between designer and customers which leads to more reliable results. 4.3.2 Sales Staff and Agents Background Stefan Gil (sales director) wants to employ sales staff to replace the agents, but Marie Lopp (HR director) has a recognition of agents work. Also the solution will affect compans strategy. Factors Proposal Intends to Achieve In order to meet the sales forecast for next five years, intensive marketing and advertising will be required. By 2017, Merbatty expects sales growth to increase by 99.20% to 1,000m.Such targets can partly be achieved by the use of more visible marketing. Endorsement of Stefan Gils Opinion Because agents are worldwide with abroad range of customer sales network, they know what the customer sales network, they know what the customer needs and know to sale the boat to which particular individuals. And because agents have kept cooperative relationship with Merbatty for a long time, they are familiar with Merbattys products, and can sale them better. Endorsement of Maice Lopps Opinion Merbatty uses sales staffs, they can communicate with customers directly, grasping the market demand quickly. Because using sales staff, Merbatty can reduce the delivery cost. Thus, the price of boat decrease, Merbatty may have competitive prices. Sales staff also can make customer get close to Merbatty. Thus, Merbetty can get more information to improve its competitive. Factors Affecting the Proposal

Agent

Due to agents are all around the world, more and more people will be convinced that Merbatty is a brand indeed which is accepted widely. The most important one is that agents can know more about the culture of target market so that they can sell boats more efficiently. However, there are still some problems. The agents of Merbatty cant bear the risk directly. Thus, they may sale product negatively or may not. In reality, its hard for Merbatty to control the activities of its agents. In a way, Merbatty was dominated by its own agents. Sales staff

Sales staff can sell to customer directly and they can gather a mass of first-hand data. Furthermore, compared with the agents, they are more loyal to the company. Nonetheless, the disadvantage is that its bad for Merbatty to develop itself and utilize most optimum distribution of resources. If Merbatty uses sales staff, it may pay extra money and spend much more time to train people. On the other hand, sales staff will spend much time to know about Merbattys products. Recommendations Agents and sales staff both have their own advantages and disadvantages. Merbatty should combine these two types of ways to sell products. On the one hand, agents can help Merbatty expand their markets, as they know what customers need and how to satisfy them. On the other hand, Merbatty can train sales staff to communicate with customers. It is good for Merbatty to analysis the market and to make good decisions. Although, Merbatty may spend extra money and time, it will help Merbatty expand maket and get more profit. 4.3.3 Racing Boat Background

Jesper (Marketing Director) wants to build and race a speedboat in the competition and this step will lead to more sales of Merbattys performance motorboats, the P-3000 specifically. But his father Alberto (chairman) thinks this act will cost too much and racing is of high risk. Suitability Assessment Supporting factors Merbatty is planning to produce a wider range of mew models, which will enable Merbatty to offer customers a wider selection of boat sizes and engine capabilities. Lukas Dian, technical director design, believes that there is a strong opportunity to build larger boats which would be in the range of 35 to 40 metres in length, which will have a bright market prospect in the Middle East. The press launch of Merbatty?s first 38 metre boat in May 2013 had a good response. There is an increasing demand for large boats. The Five-year plan includes opening of Merbatty?s third boat building facility in September 2013. Because there is an increasing trend for the boats ordered by customers in the Middle East to be the larger models, so this new facility will specialise in building larger boats. From Appendix 2, sales revenue are analysed by home base of customers.

Sales revenue will increase from 40m to 180m between 2012 and 2017 in Middle East. Its the second largest booming region next to Europe. Acceptability Assessment Risk assessment If the sales of p-3000 boats cannot be up to 25, this may not reach the breakeven

point. Besides, 20m of fixed cost is a large number. So if the market prospect is not as good as the expectation, it will make a big loss. Benefit If the sales of the third building facility in Middle East are in a good condition, as this is in a great possibility, there will be a good beginning for large boat market and Merbatty will be in a virtuous circle. Feasibility Consideration Merbattys research shows that skilled labour is available in Surania and also there are sufficient skilled employees at Mebattys exiting boat building facilities who are willing to be seconded to the new facility. Merbatty already has sales agent located in Surania who has been selling Merbatty boats for over 15 years, and they will continue generating sales through his established reputation and contacts. In addition, Merbatty has recently appointed four additional sales agents in other countries in the Middle East region. Recommendation Based on the above assessment, this proposal should be accepted. This is due to the increasing demand for the large boat and this racing will enhance the brand awareness. This will give the Merbattys large boat market a good beginning. 4.4 Accident at Work Background One of Merbattys employees called Paulo arrived for work high on drugs. He fell off and broke his leg .Paulo is a good friend of Jesper (marketing director). Jesper was aware of Paulos drug taking habit but decided to ignore it. Dilemma

Merbatty has encountered 2 ethical issues. The first dilemma is whether Jesper should ignore Paulos drug taking habit. On the one hand, it is Jesper s responsibility to take reasonable care for the health of his employees and erase potential risks in the work place. On the other hand, Paulo is his good friends and Jesper is concerned about if he informs Paulo, their friendship may come to an end. The second ethical issue is that Paulo goes to work after taking drugs. It evidently breaks the code of conduct for employees and this careless behavior will pose a threat to other co-workers. Recommendation For the first issue, Jesper should tell the company that Paulo has been taking drugs. As a marketing director, he should act in the interest of the company. After that, he should comfort Paulo and offer help if he needs because they are good friends. For the second issue, Paulo should obey the code of conduct for employees. As a result, every employee has the duty to obey the rules set out by the company.

5. ACHIEVABILITY OF THE FIVE-YEAR PLAN

Based on the Appendix 1, the year on year growth rates forecasted increase from 10.56% to 18.34% for revenues and 10.53% to 14.17% for operating profits with operating margin remaining relative constant. From Appendix2 we can see the market share in Middle East increases significantly from 7.97% to 18%. Europe still the main market makes up about 40% of the total revenue. The remaining 5countries havent changed much during 5 years.

Sales revenue 2012

Planned sales revenue 2017