Department Of Business

Forman Christian College

(A Chartered University)

(Fall 2017)

Entrepreneurship:

Rapidrill case analysis

SUBMITTED TO:

Sir Wasif Khan

SUBMITTED BY:

Muhammad Adeel Rana

Zain Khalid
 RAPIDRILL BUSINESS OPPURTUNITY:

Rapidrill has a great opportunity to start the business it is due to the following
factors:

 Growing Industry (Past Behavior of market):

The market of the rotary drill is substantial, has demonstrated a 10 percent
annual growth for the past six years. It certainly gives an idea that this is one
of the best industries to start business with.

 Experienced Team:
The principals of Rapidrill have collectively accumulated in excess of 70
years of marketing, engineering, manufacturing and general management
experience with rotary drills and have formed a new company to design and
produce rotary drills based on their assessment of conditions in the industry
which they believe create a viable business opportunity favorable to their
planned program.
There are five former employees of Indiana tools which is a leading
company for the rotary drills. There work was so perfect that they made the
company market share to increase from 9 percent to 22 percent. So with all
the experience and performance in the past, this team can certainly take
Rapidrill to work effectively.

 Product Design:
While the manufacturing and design decisions use a rationale higher facility
utilization and increased value added, they, in fact force rotary drill designs
that do not provide the best solution to market application requirements.
Contrary to this Rapidrill plans to meet the most present market requirement
by making rotary drills available in three different sizes which are as
following:
1. D-30 K for 6” diameter and smaller holes
2. D-40 K for 6” to 8” diameter holes
3. D-70 K for 9” to 12” diameter holes
 Low Cost Production:
Rapidrill has the opportunity to achieve cost saving over competitors from 9
to 12 percent in total manufacturing and selling expenses. It is due to the fact
that the major existing competitive manufacturers have high costs and high
fixed investments, in both manufacturing facilities and distribution
organization. They are also producing drills at near capacity.
This gives Rapidrill chance to exploit competitor’s weakness by making use
of simple assembly shop operations, located in low rent area, and utilizing
the most cost effective components (specially the compressors whose
manufacturers are 27).

 Future Projects requiring rotary drills:

There are several factors which support the ‘requirement’ of rotary drill in
future. Of the 88 percent of energy reserves in US are of coal, while at
present only 18 percent of the energy consumed is provided by the coal. To
meet the future requirements US will be using coals which require the use of
rotary drill for processing. Similarly there are other factors which also
support coal surf mining market for the rotary drills. The forecast shows the
requirement of 4000 rotary drills to be in operation in future as compared to
the present 1000 working drills.

WEAKNESSES IN BUSINESS:

 It seems that the entrepreneurs of the company “Rapidrill” are living in a

dream world far away from the reality. Their thinking and perspective to
start the company is too unreal, as they believe that they can achieve the best
share in the market just on the basis of low cost. They believe that they
could have a competitive advantage on all types of drill manufacturers just
on the strategy of low cost. But in reality, this could not happen as cost is
just not the only factor to efficiently compete in the market and beat down
all the competitors. A company could never be perfect in every perspective
and can never specialize in all types of products it is producing. The
management of Rapidrill is assuming that they could totally specialize in all
types of drills that are being most demanded in the market for different
 purposes i.e. Large drills, Broad line drills and water-well drills just by
lowering their costs and giving high distributor margins.
 Another weak strategy of the company is that they are planning for 5 years
assuming that in coming 5 years they could get the highest market share and
would become the best drill company in the market, But they are not aware
that within the next 5 years market position could totally change and there is
a possibility that some other competitor enters the market and provides drills
on even lower prices and better in quality than Rapidrill and this may lead
Rapidrill to unable to achieve their goal.
 All the 5 partners of Rapidrills who formerly worked on different positions
in the company “Indiana Tools Inc.” are now joining hands to start their own
venture and compete against their previous company. There is a great
possibility that Indiana Tools Inc. may take up some legal action against
them for providing the identical products i.e. drills and competing against
them. Even Negotiation on this issue has been done by the both companies
by exchanging legal letters, but there is still the chance that after seeing
Rapidrill’s success in the market, ITI may take some legal action against
Rapidrill to save its dominance and market share in the industry and this
action may harm Rapidrill a lot.
 The management of Rapidrill is not considering the concept of Economies of
scale, which clearly explains that costs decreases with an increase in
production. Instead, they are believing that more efficient production of
drills can be done by producing them on a very small scale in a small
assembly shop located in a low rent area and using the most cost-effective
raw materials. If any other competitor uses the full capacity of their
manufacturing plant and uses most cost effective raw materials, they could
produce drills even more cheaply and efficiently as compared to Rapidill,
this uncertainty could cause the company to fail.
 Rapidrill is entering into the market viewing the significant opportunity of
heavy demand for drills due to emerging trend of coal surface mining
production and projects to overcome future energy shortage. For these
projects, the existing supply of drills by other manufacturers in not
insufficient, so Rapidrill is viewing this opportunity quite favorable for
entering the market. But as the company intends to produce drills on a small
scale in a small assembly shop, they would not be able to produce too much
 of the drills to fill the required drill demand in the market. In a low space
area only a few number of drills could be produced yearly which would be
insufficient to fill up future exceeding demand for drills.
 Another flaw in Rapidrill’s strategy is that they are heavily depending on
debt financing for starting the company and are planning a very less equity
ratio as compared to debt. Three large banks have agreed to provide them
loans for this purpose. If any of the bank Denies from providing credit
facilities to the company due to any reasons, then Rapidrill will face a hard
situation for operating in the market. Due to shortage of funds, they would
not be able to efficiently perform in the industry. Another problem they may
face in this perspective is that due to new company status and riskiness in
the market, banks may provide them loans on high interest rates which will
eventually increase the costs of the company and will enable them to
compete on the basis of the cost.

Entry Strategy of the company:

From the above discussion it is very clear that the entry strategy of the
company seems fine exploiting the competitors with the low cost strategy.
Proper designing of the products according to the market requirement also
adds value to their product. Keeping in view the future demand for the
growth is also an important factor which they have considered.
However I might do differently by starting the business in an area where I
can work in future. Starting the business in small area is cost effective but
you have to see the future expansion of your business. So maybe I would
start the business in a bit larger area to make sure that in future when the
demand of the product will be rising due to the coal projects I could make
more production as well.
 Financial Analysis:
In order to have an idea about the future progress and worth of the business we can
analyze using financial ratios. For this purpose we will consider the values after 5
years of business which is 1976.

 First we will calculate Gross Margin ratio for the analysis.

Gross margin ratio = Gross Profit/Net Sales
Year 1976: $6106000/$13, 680000 = 0.44%
Gross Margin is the ratio which expressed that how much profit company
makes after paying off its Cost of Goods Sold. In the Rapidrill case, the
business has a good projected Gross margin which is 0.44%. The gross
margin keeps on increasing till 1976. To increase it further Rapidrill should
further decrease there manufacturing cost.
 Now for the further analysis we will calculate the Net Margin ratio. The 1st
year has less Net Margin ratio because initially the revenues are less and
operating costs will be more. Lets calculate for the year 1976.
Year 1976: Net Margin ratio = Net Profit/Revenues = 1,484000/$13680000
= 10%
The ratio comes out to be less than the Gross margin which means that
Rapdrill need to further reduce the operating costs.
 No let’s calculate the future value of the business after 5 years in the year
1976.
No of years n = 5
Assumed rate of return is 37

Present Value = $368460

Future Value = $368460 x (1+.37) ^5

 FV = $1778251

Percentage change = (368460-$1778251)/ $1778251 = -0.79%

This shows that change of investment is good for the company.

 If we calculate the Discounted Earnings of the business, we have to discount

the future projected cash flows to present value.

For this we will apply the formula of Discounted Cash Flows:

D.C.F = CF1/(1+r)^1 + CF2/(1+r)^2 + CF2/(1+r)^3………

=457000/(1+0.37)^1 +$1047000/(1+0.37)2 + $1624000/ (1+0.37)^3 +

2519000/ (1+0.37)^4 + 3167000/ (1+0.37)^5 = $2894264

 Finally we will calculate the P/E ratio.

Price/Earnings ratio = Market value of Share/Earning per Share

= 14/1 = 14 (assumed)

Hence through the financial analysis we conclude that Rapidrill has a good future
growth.

 In this case, it is clearly seen that Rapidrill is heavily relying on the debt
financing and planning a very less equity investment. Other than this, they
plan to acquire some amount of funds from other investors through stocks
and shares. This total investment from other investors covers up to almost
30% of the total capital of the company. They are mostly depending on loans
and credits from banks to raise their capital. One reason for this high debt
financing preference may be the tax shield given by the Government on debt
financing. Companies that use credit for investment have to pay a certain
interest amount to the credit institution. To cover up this, Government gives
them leverage on the tax which decreases the cost of capital. This in turn
increases firm’s cash flows and makes more cash available to the firm.
Basically, Government subsidizes the cost of debt financing relative equity
financing and that is why firms find debt financing more cheap and feasible.
The best financing strategy to be used by a firm is a mix of both debt and
equity to perform efficiently in the market.