Critical Analysis of Hollydazzle - Research Paper Example

1 Evaluate the projected income ment for Hollydazzle presented in Exhibit 2. What other costs should they consider in estimating the profitability of the venture It appears that the projected income statement for Hollydazzle is incomplete. In terms of estimating the profitability of the venture, they should consider the following costs too. -Average revenue per transaction -No. of transactions estimated -Average merchandise cost per transaction 2. a) Forecast Hollydazzle's operating income for the year ended June 30, 2000 if sales grow by 50% over forecasted sales for the June 30, 1999 year. Assume that Hollydazzle's prices and cost structure and relationships remain the same as in 1998, and as before, 1,200 new customers make purchases each month. Forecast Hollydazzle's operating income for the year ended June 30 No. of transactions 72000 Average merchandise cost per transaction $ .75 Revenues $ 666000 (9.25xtransactions) COGS Merchandise 54000 (.75x72000) Shipping expenses 53,280 Shipping income (53,280) Distribution Center Expense 30,000 Gross Profit $ 582000 Less Expenses SG&A 7,104 Advertising & Marketing 87,720 Computer Depreciation 7,000 Site Development 100,000 Site Maintenance 36,000 Total Expenses $237,824 Operating Income $ 344176 (Gross profit-Total expenses) b) Do you agree with John's analysis that increased volume will improve Hollydazzle's profitability Provide some analysis to support your answer. Yes, I do agree with John's analysis that increased volume will improve Hollydazzle's profitability. This could be justified from the following table. Item 1999 (estimated) Number of transactions 48000 2000 (estimated) Number of transactions 72000 Revenue 444000 666000 Gross profit 406500 582000 Operating Income 168676 344176 Total Expenses 237,824 237,824 The revenue, Gross Profit and the Operating Income have gone up when it was worked out that the volume of transactions will be increased by 50%, based on1999 figures. However, if the total expenses also were increased from the same rate, then it would have been different . In this situation, since initial costs are the same for both years, it leads to more operating income. In a normal business situation, we cannot expect an operating income during the first few years as one has to invest a thumping amount of initial cost. Even if a business can reach break even point at an early stage, it is a great achievement. As an etailer Hollydazzle has scope for increasing the volume with less effort and costs compared to any other retailer because customers are moving towards this direction faster than ever. 3. Hollydazzle can also consider outsourcing its warehousing and distribution function. It would have to pay MooV, a warehousing and distribution specialist who has worked with other etailers, 6% of total sales. Should Hollydazzle consider outsourcing its warehouse operations What other factors should Kristin, Eric and John consider in making this decision This will enable a business ventures to diversifying the revenue sources. Of course it will look like an additional cost. But this approach will minimize the current expenses by reducing the risk, staff and other resources such as monitoring time. According to Andrew Neitlich (2004), it will 'also lets you take advantage of people you know who might refer you work, even if it is outside your core market'. This is also some kind of Marketing promotion as their word of mouth will also carry some weight in expanding the volume of transactions. MooV seems to have experience in working with other etailers, which is good. Since the major concern of Holludazzle is the etailer than a land-based store business, they can relive from the hassle of land based activities if they could outsource this activity. However, it is at a price, which means they may have to pay 6% of their total sales to them. Instead of just passing it over to MooV, there are few aspects such as advantages and disadvantages Kristin, John and Eric have to consider before coming to any conclusions. One is to compare this new cost item (6% of the sales) with that of how much they had to pay for the same earlier. They have to work it out as a percentage of the sales to make it more meaningful. In determining the advantages and disadvantages of this prospective move, the time, the issues, and constraints they had to undergo in handling warehouse and distribution function have to be considered against how much they could achieve if they are relieved from this activity. Perhaps, their could be other avenues that they could think of using their time and energy in improving and expanding their scope. 4. John and Eric are keen to generate additional revenues for their business by getting etailers of complementary products to advertise on Hollydazzle's website. Kristin immediately set about allocating costs in order to analyze the relative profitability of the merchandising and advertising parts of Hollydazzle's business. Which costs, if any, do you suggest she should try to analyze and allocate, and why According to Andrew Neitlich (2004),in any business it is only 70% of profit that one should expect from any business from the direct customers. Rest 30% have to be from other related sources due to various risk factors such as facing down turn of any product etc; If the business has to rely on one which has faced a downturn, the whole business could collapse. Therefore, there should be other avenues of income from the same business. Hence, it is a good idea to enable complementary products to advertise on Hollydazzle's website. However, it is mandatory in any business plan to find out whether "saying yes to every opportunity or changing the plan midway without determining how it will effect the current plan, priorities, resources and the ability to deliver on the promise." (Andrew Neitlch). In relation to the new venture of generating additional revenues by getting etailers of complementary products to advertise on Hollydazzle's website, it is said that Kristin has set about allocating costs in order to analyze the relative profitability of the merchandising and advertising parts of Hollydazzle's business. I suggest that Kristin should try to analyze and allocate the following costs, within the reasons mentioned underneath. What are the prospective complementary products What are the capabilities and resources (men, money, materials and time) needed to update and maintain the additional products Since there is a need of a consistent methodology that leads to faster, cheaper, better design, how much additional costs would be needed for the same How much additional cost is needed to accommodate to advertise these complementary products What is the expected profit margin How much Holydazzle should charge for an average advertisement to cover the above What should be the criteria in deciding the rates for any particular advertisement, based on the specifications that determines the costs such as proportion, features, color combination and the number of spots per week etc; In the absence of proper analyzing of the above costs, it may not be cost effective . 5. For the year ended June 30, 1999, Hollydazzle's actual performance was as follows: it had 50,000 transactions and revenues of 0,000. Actual average merchandise cost per transaction was .75. Based on this information, what was the company's actual gross margin What factors explain the difference between this value and Kristin's forecast Based on this analysis, what potential management concerns do you have about the first year's performance What responses would you consider to deal with these concerns a)If Holltdazzle.com had 50,000 transactions, its revenue becomes 462500 as the average revenue for transaction is assumed as the same $9.25 as earlier. There does not seem a much difference in the number of transactions, as they have already planned to have 48,000 on the basis of 4000 per month. However, this has led to an actual Gross Profit of $582000.Similarly, a difference in the profit margins has been occurred as the actual average merchandise cost for transaction has fallen from the initial estimation of $ 8.50 to .75 cts. Similarly there seems an operating income of $ 344176. b) What factors explain the difference between this value and Kristin's forecast The factors which made a difference to Kristine's forecast is mainly due to the wrong estimation of the merchandize cost per transaction. This is basically due to following the sample of FunDays International as it was also dealing with a similar enterprice. However, since Hollydazzle.com enterprise was running it as an etailer, other than their initial web development expenses, they do not have much in terms of land level transaction expenses. Therefore when Kristin has allocated $444000 for 48000 transactions at the rate of $8.50, actual cost came down to $37500 as the cost was only .75 . c) Based on this analysis, what potential management concerns do you have about the first year's performance Although Hollydazzle.com enterprise has a vast scope for future development, there are some potential management concerns that they have to adhere to. When speculating any figures, it is always better to follow logical reasoning. If they could have had a brainstorming regarding their estimates, they could have reached a more realistic merchandising cost rather going by the figures of FunDays International. Second management concern is the need of a well structured common Strategic Business Plans with an activity schedule for monitoring purposes. d) What responses would you consider to deal with these concerns Hence I consider that three of them along with their stakeholders , review the situation and formulate a proper Business Plan by discussing with all the players. So that it is easy to incorporate their views and get them involved in the preparation of the Business Plan and the related documents. By doing so, everybody will have a sense of ownership to the plan and be focused to realize the objectives. 6.What three key indicators would you suggest be used by Hollydazzle's management to judge performance on an on-going basis Explain why you chose those metrics (There is no indication of formulating a Business Plan for Hollydazzle although they have mentioned the activities taken over by Kristin, John and Eric. It has to be mentioned at this point, that every company which has become successful has reached it through a clear, feasible and relevant Strategic Business Plan. Although it appears that Hollydazzle already have some of the components of a Strategic Business Plan, we suggest that Hollydazzle should formulate their business plan based on their vision first, before proceeding any further.) Assuming that Hollydazzle has a Business Plan, following three key indicators could be suggested to judge performance on an on-going basis. Objectives, strategies and responsibilities of the Activity Plan are in progress on time as scheduled Everyone in the Team of the enterprise is working towards the same goals Management of Hollydazzl is exercising the discipline and management leadership to implement the plan, as decided Above three has been selected taking for granted that the Business Plan has scope for continuous quality improvement , responsive to customer feed back and horizontal and vertical communication to assess the emerging needs etc; If the above concerns are being covered in the activity plan, then the key indicators that I suggest be used by Hollydazzle's management should be the above three. The main reason is that the above three indicators are in the hub of the whole progress as explained below. Activity Plan (of a Strategic Business Plan) is formulated taking into consideration the vision, mission, goals, and the objectives to be achieved by the enterprise within a particular time span. Since someone has to take the lead responsibility, each activity is assigned to a particular member of the team. Unless such activities do not happen on time, it will affect the other activities, goals and objectives of the whole business. Therefore, it is important to ensure whether assigned tasks/activities are being performed by respective individuals. To find out whether everyone is working towards the same goals, is also a key indicator. Of course there could be some working towards other directions either through ignorance of the whole big picture of the business, or due to his/her personal agendas. If that is the case, it could be detrimental to the overall progress of the business enterprise. Hence it is important to find out whether everyone is inline with the set goals and objectives of the enterprise. Similarly, it is also crucial that the management is exercising the discipline and management leadership to implement the plan, as decided. If the management lose the focus or does not monitor the progress, it is possible for others to go astray. Nobody can take things for granted and assume that things could just happen. Perhaps, there could be unforeseen issues that they did not take into account at the planning stage. Hence continuous monitoring by the management and be alert to the emerging trends is also a must. Andrew Neitlich (2004) Reference: Andrew Neitlich (2004), from (http://www.cwc.org/market/mkt4.htm Read More