Tricky Widget Manufacturing - Case Study Example

Tricky Widget Manufacturing: An Analysis of the Business Plan 1. Introduction A start-up manufacturing company, Tricky Widgets Manufacturing or TWM intends to manufacture and sell heavy equipment machinery. To do this, it must secure start-up financing to support its own capital otherwise it cannot start operation and offer its products that include “Widget Basic”, “Widget DeLuxe”, and “Widget Premium” to commercial construction companies. Moreover, aside from meeting the growing demand for heavy equipment machineries, they need to establish their relationships with commercial construction companies so they can penetrate the market easily (TWM, 2001, p.1). For the above reasons, TWM created a mission statement aimed at offering high quality products at a very competitive price compared to other established commercial machinery manufacturers. They created a list of what they believed are the keys to success such as ensuring the highest level of quality in its product line, expanding and maintaining its referral networks, research and development, engineering, enhanced and efficient operations. They also made an industry and market analysis where they found the importance of distributors in marketing heavy equipment products, reputation and cost, and customer demand for reliability and versatility , fast after sales service, and availability of parts. Through market analysis, TWM realised the primary consumer of their products – the commercial construction companies- and the effect of the weakening global economy and consumer confidence (TWM, 2001, p.1). The following sections analyses TWM’s business strategy from their mission statement, start-up predictions, product range, and research and development plan, down to their financial strategy. 2. Analysis of the Business 2.1 The Mission and Realty For a start-up firm the content of the mission statement is very important in terms of realization and success of the company. Here, like many other leading business organizations, is aiming for the same product quality level at a competitive price. Moreover, TWM is also targeting specialization in certain heavy equipment machinery and will present itself as an innovative manufacturer that produce products with greater precision controls (TWM, 2001, p.1). By analysis, the first mission is common and somewhat a classic objective for those who want to excel and lead their chosen industry. However, the difference is that while TWM has the same objective, it is well aware of that specializing to the needs of the commercial construction segment can bring more opportunities particularly when you have product advantageous to the customer. The practicality of TWM’s mission statement seems acceptable but deeper understanding of mission statement may render it either obsolete or incredible. For instance, a mission according to Willis & Welch (2000), should be realistic in terms of constraints, goals, and capabilities (p.405) and for this reason, there may be some questions regarding the limited budget TWM has and the regulatory pressures that may be encountered along the way. More importantly, a mission should be based on the firm core competencies and resource (M3 Planning, 2008, p.7) because a company is expected to perform well if it intends to compete alongside well-known and established manufacturers. A mission statement therefore must be realistic and addresses what is achievable rather than what the company want to achieve eventually (Itzkovitvch & Till, 2003, p.14). In other words, a good mission statement is a realistic assessment of what TWM can do at this moment. For this reason, a mission such as “offering high-quality heavy equipment machinery” (TWM, 2001, p.1) which is “competitive in comparison to other premium commercial machinery manufacturers in the market” expressed with a limited budget and unsecured start-up financing is somewhat overwhelming for TWM. According to Lipsey et al. (2007), being realistic does not necessarily mean limiting yourself but rather recognizing your weaknesses and strengths (p.310). In other words, how TWM can be realistic with its mission statement when something so important to the success of the firm is missing. Note that TWM in its “Company Summary” statements is seeking to raise a staggering amount of £4.5 million in loans and another £500,000 from private investors before they can actually start and produce products with “greater precision controls” (TWM, 2001, p.1). A number of facts including results of industry and market analysis support the mission and there is no doubt that the biggest customers for TWM will come from the commercial construction sector (see Pie Chart below). In addition, depending on the reliability of the method used, the growth rate of major commercial construction companies is greater by 15% (TWM, 2001, p.5) Figure 1 - Pie Chart of Potential Customers (TWM, 2001, p.5) However, the question here is how TWM will going to reach these customers and how will it benefit from the growth rate of this sector. Moreover, if the sales strategy is to deliver sales of around £54 million for the first year of operation and another £62 million to the next then how can this be attained when almost 50% of required funding in the financial is yet to be acquired for the first three years (TWM, 2001, p.9). It does seem odd to reach a sale of around £116 million (54 plus 62 for the first 2 years) using only 50% of the capital. Note that the words “hopes” and “secure” in the executive summary of the business plan (TWM, 2001, p.1) depends on TWM’s ability to institute a public offering and ability to acquire financing. By analysis, the key activity here is establishing a public offering or stock market launch so TWM can acquire funds from investors. However, it is important to note that start-up business seeking financing is different from businesses that are already established and just seeking to expand or change course (Weltman, 2001, p.8). This is because TWM need to impress their investors first before any real funding can be obtained. Therefore, funding through public offering may take time and it is very likely that if sufficient finance is not raised for the first two years, TWM will not get off the ground. A start up commonly needs a set-up cost, a starting investment in capacity, and a working capital to acquire the raw materials, salary, and so on (Brennan, 1998, p.86) thus if TWM is projecting £54 million in sales from its first year of operation then it must be capable of buying the required stocks. Unfortunately, examination of start-up summary and requirements reveal that TWM only has £100,000 start-up stock. 2.2 How Realistic is the Start-up Predictions Based on the business plan’s executive summary, the primary start-up prediction of TWM is successful sale of its Widget line. Along with its product’s versatility and precision, TWM predict rapid penetration of commercial construction sector through referral networks and “strong contact relationships”. Primarily, their managing executives who have a lot of experience in the equipment manufacturing industry brought about this prediction along with a sales forecast indicating utilization of extensive contacts in several major construction companies (TWM, 2001, p.6). The prediction is further strengthened by the belief that direct sales and onsite demonstration is more effective while product awareness through advertising can bring more sales (TWM, 2001, p.6). As a start-up firm, TWM already predicted their monthly sales in the first year of operation as shown below and noticed the gradual increase in sales of all products. A start-up firm, getting half of its capital from loans and private investors, unpopular among potential customers, and with untested products projecting an almost perfect sales growth in the very first 12 months of operation TWM prediction is somewhat idealistic. Let us assume that TWM really has a competitive edge because of the level of quality of its product and strong relationship with several major commercial construction companies, it will still face 5 major competitors that are in the business for the last 40 years (TWM, 2001, p.6). According to TWM’s own assessment of competition and buying patterns, their competitors’ product “practically sell themselves” because they are known and dependable (ibid, p.6). Similarly, TWM’s potential customers often prefer equipments manufactured by reputable companies such as Caterpillar (ibid, p.6). If this is true then how can TWM able to predict such a perfect sales growth in the first year of operation. Is these not considered? Are they entirely consumed by the notion of direct sales and demonstration? TWM’s start-up prediction is not realistic in the sense that instead of being modest about their entry into a market dominated by established organization, TWM seems so confident about the capabilities of their managing executives, realization of their unbelievable sales forecast, sure sales from direct selling and demonstrations, and others. More importantly, they seem entirely inspired by the notion that 55 established manufacturers will just sit down and watch them take the market while their long-time avid customers suddenly change their mind and go for TWM products. 2.3 The Product Range TWM will manufacture lifting equipments, which they call “Widget Basic”, “Widget DeLuxe”, and “Widget Premium” (TWM, 2001, p.3). Aside from being able to lift 50 tonnes, the Widget line is extremely precise lifting equipment ideal for girder installation and placement. The difference between these Widgets is in the capability of the grabber arm. For instance, the Widget Basic includes a large grabber arm that is limited to girder installation and placement, and a backhoe lifter that is ideal for land clearance. Similarly, the Widget Deluxe has the same features but with additional wrecker ball for building demolition. Aside from all these features, the Widget Premium has an additional elevating device capable of lifting 10 persons up to 10 stories high (TWM, 2001, p.3). In TWM’s market analysis, they are products similar to these Widgets manufactured by Caterpillar, Komatsu, Ingersoll Rand, and others but according to TWM they allegedly lack the versatility and precision in control of movement that Widget line has (TWM, 2001, p.1). In fact, TWM’s market segmentation analysis, the start-up firm assumed that large commercial construction companies will look for Widget DeLuxe or Widget Premium because they need heavy equipments that last longer, effective, easy to operate, and “extremely precise in control of movement”. Similarly, secondary market customers such as mid-size construction companies will look for Widget Basic and Widget DeLuxe for cost saving purposes (TWM, 2001, p.5). Although there are no technical details, these products as TWM claim may be competitive in the sense that it possesses features that commercial construction companies are looking for. For instance, in the market needs study of TWM there is an increased demand for high precision machineries, which TWM can take advantage of (TWM, 2001, p.6). Similarly, if TWM will push through with its direct selling and product demonstration approach, they could easily close a deal if these products are really more productive, precise, and cost effective. However, the success of these products still depends on the quality of the manufacturing process and engineering that are greatly influenced by research and development. It is important to note that the difference between Widgets and other machineries manufactured by well-established companies is very small. For instance, Caterpillar is a top player in the industry and known for quality, durable, and versatile products thus it is not surprising that they can also produce a more precise and cost-effective lifting equipment like the Widget. Moreover, the idea of having a product or lifting equipment that is more accurate in terms of movement is not extraordinary considering the rapid development in computer technology. 2.4 The Research Quality and Range A business plan typically contains well-prepared plans for product and services, marketing, management, operations, financial, and others ( Longenecker, 2008, p.115). Certainly, these plans did not come from nowhere, as they are products of a comprehensive and painstaking research (Ochtel, 2009, p.3). In this case, TWM appears well prepared as it presented a detailed start-up business plan complete with a start up requirements list, industry and market analysis, competition and buying patterns, sales forecast, and a financial plan. They even have time for a break-even analysis and projected profit and loss. Since there is no available information on how they acquire and how accurate these facts and figures are, the research looks somewhat extensive and convincing. By standard, TWM managed to come up with a complete business plan. Similarly, considering the amount of time and resources used for the research, the quality appears high and credible. For instance, the market analysis successfully shows the different growth rate of potential customers from major commercial construction companies down to small commercial construction establishments between 2001 and 2005. More importantly, it had identified the most likely consumers of TWM and the factors affecting the targeted market (TWM, 2001, p.4). Other notable research include market segmentation and market needs where specific requirements of potential customers were identified along with demands of modern structure designs (ibid, p.6). The competition and buying pattern research yield valuable information regarding the primary market competitors and factors contributing to their success. The sales forecast is another product of painstaking research but it appears independent of other research conducted for the business plan. It appears so idealistic and unaffected by the result of industry analysis and realities of a start-up firm. 2.5 The Financial Analysis The financial plan according to TWM is to raise some more funds from loan and private investment to cover the start-up cost for the next 3 years. However, the larger additional funds will be from investment coming from the IPO that occur after the start-up period or from year 3 to 5 (TWM, 2001, p.9). For this reason, TWM presented a break-even analysis based on the average total sales for the first year of operation as shown below. Figure 2 - Break-even analysis (TWM, 2001, p.10) Note that the break-even point in this chart is where the line intersects with zero thus TWM expect to break-even nearly after 48 units of production. This break-even analysis let TWM identify what they need to sell monthly. It is commonly calculated using fixed cost, variable cost per unit of sales, and revenue per unit of sales (Rainsford & Bangs, 1996, p.67). The importance of this analysis is the reality that once that break-even point is known, TWM will have a clear objective and target. TWM is undoubtedly keen in keeping its financial standing clear and presented the firms profit and loss table. The most interesting part of this table is the profit when TWM expects a steady growth of about 2% per year, which is reasonable in the sense that it is a start-up firm receiving the bulk of financing just after three years in operation (TWM, 2001, p.9). The cash flow projection is another helpful finance analysis since TWM planned to invite investors in the near future. The projected cash flow below suggests that the business is capable of supporting the cost of operation and anticipating a decrease in cash flow on the third month. The rest looks idealistic but the most important thing is it made a comprehensive analysis of its finances. The same goes to the projected balance sheet and the business ratio analysis that are somewhat idealistic but presented in an inclusive manner. 3. Conclusion TWM created a mission statement that seems idealistic since it does not relate on the reality of their finances and current situation in the market particularly the tough competition from well-established and trusted manufacturers. Similarly, their start-up prediction is somewhat overwhelming because it is based on unbelievable sales forecast and overconfident assessment of their managing executives. However, their product appears competitive and of sufficient range while their research is complete and high in quality. Although some part of their financial analysis is again idealistic, it is comprehensive and done in a manner a start-up firm should have in an effective business plan. 4. 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Lasser’s Finance & Tax for Your Family Business, John Wiley & Sons, United Kingdom Willis L. & Welch G, (2000), Aging Power Delivery Infrastructures, Volume 12, CRC Press, United States Read More