CASE ANALYSIS 1: THE ULTIMATE AIR CONDITIONING POWER CONVERTER

In 2016, Manuel Santos, an entrepreneur, came up with a gadget which can make air
conditioners temporarily functional even without electricity. Using his invention, air
conditioners can be plugged to his gadget, which in turn is attached to an ordinary car
battery. This allows the cooling appliance to work for one hundred hours without electricity.

Brief History

After graduating in 1995 with a degree in Mechanical Engineering, Mr. Santos was
employed in a company specializing in refrigeration. The young graduate learned much
about the business while contributing a novelty idea (electric fans using conventional
transistor batteries; dual source with electricity as the main power source). The company,
however, did not pursue his ideas, prompting him to set up his own business in 2005.

In the next 10 years, his company sold modest volume of the new product, but the sales
generation did not satisfy him as the company experienced a little higher than breakeven
sales. His company had realized not profits but well below his expectations (see table
below)

TABLE 1.1 5 YEAR INCOME STATEMENT OF THE COMPANY

(VALUES IN '000 PESOS)
2011 2012 2013 2014 2015
2,0 2,2 2,3 2,1 2,3
SALES 00 00 00 00 00
COST OF GOODS 1,4 1,5 1,6 1,4 1,6
SOLD 00 40 10 70 10
6 6 6 6 6
GROSS PROFIT 00 60 90 30 90
OPERATING 4 4 4 4 5
EXPENSES 00 60 70 20 00
OPERATING 2 2 2 2 1
INCOME 00 00 20 10 90

TAX 30% 60 60 66 63 57
NET INCOME AFTER 1 1 1 1 1
TAX 40 40 54 47 33

The Product and the Process (air conditioner)

The product is a converter whereby the electrical requirements of an air conditioner (below 1.5
horsepower) can be supplied by an ordinary car battery (minimum of 1SM). With the use of the
gadget, the cooling unit can function up to 1 hundred hours of continuous operation. Beyond
the time frame, the car battery will need recharging.

The Limitation

While no equipment at present can match the capabilities of the invention (no car battery can
power up an air conditioning unit at present), the gadget needs improvement in the practicality
of usage. A car battery will have to be detached from a car, or a battery specifically for the use
of emergency air conditioning will have to be purchased. In addition, the useful life of the
gadget per operation is up to one hundred hours only.

The Feedback and the Aftermath

While the sales appeared to be steady, the feedback on practicality and features of the product
greatly discouraged Mr. Santos. He asked his bookkeeper to present the four-year financial
performance, but the staff could only produce the consolidated figures (performance of the
dual electric fans and the air condition converter were combined) as records were not
maintained.

TABLE 1.2 FOUR- YEAR INCOME STATEMENT OF THE

COMPANY
(VALUES IN '000 PESOS)
2016 2017 2018 2019
2,5 2,6 2,40 2,5
SALES 00 00 0 00
COST OF GOODS 1,7 1,8 1,68 1,7
SOLD 50 20 0 50
7 7 72 7
GROSS PROFIT 50 80 0 50
OPERATING 4 4 47 4
EXPENSES 00 60 0 20
3 3 25 3
OPERATING INCOME 50 20 0 30
1
TAX 30% 05 96 75 99
NET INCOME AFTER 2 2 17 2
TAX 45 24 5 31
Mr. Santos had previously thought that his company’s profits will double by 2019 but it did not
turn out that way. In addition, he could not find out the true performance of his gadget alone
as the records were not completely available.

After 14 years into the business, Mr. Santos had decided to sell his business to M. Manalang
Enterprises for a very small amount. He then decided to return to work as an employee in
another industry.

Questions:

1. Was Mr. Santos a typical entrepreneur? Explain or defend your answer.

2. If you were Mr. Santos, would you do the same decision? Why or why not?
3. Was there a misjudgment on the part of Mr. Santos evaluating his business?