Vision Case study Solve

Vision

Case History:

Vision plc is a reputable manufacturer of a specialist range of optical and photographic equipment. At present, marketing activities are confined to its home market in Blinkland. The directors wish to achieve a net profit per annum of £150 million by the year ending 30 November 2009.

Financial Information

*Note 1*

The most recent forecast covering the three year period ending 30 November 2009, based on sales of products which were in existence at 1 December 2006 to existing customers, is as follows:

Year ending 30 November	2007	2008	2009
	£m	£m	£m
Turnover	100·0	105·0	110·0
Net Profit	40·0	42·0	44·0

*Note 2*

Vision plc manufactures a range of products within its three divisions, as follows:

Division

Astronomy This division manufactures telescopic equipment which is sold via mail order to private individuals.

Medical This division manufactures microscopes and associated equipment which are sold to hospitals and schools in Blinkland.

Outdoor pursuits This division manufactures a range of cameras and binoculars which are sold via mail order to private individuals.

*Note 3*

The following became effective on 1 December 2006:

1. The company created a new division called the Oceanic division which manufactures cameras suitable for underwater use. These are sold to clubs and societies that engage in scuba diving activities. Sales revenue is forecast to be £5 million in the first year of operation with an anticipated doubling of sales volume during each of the next two years of operation. Variable costs are forecast at 40% of sales revenue in the first year of operation and are expected to reduce to 35% and 30% during each of the next two years respectively. Fixed overheads are forecast at £1 million in the first year of operation and are expected to increase by 10% per annum during each of the next two years.
2. The company purchased the ‘Sound and vision’ chain of camera shops comprising a total of 30 retail outlets within Blinkland. Each of the 20 ‘out of town’ outlets is forecast to make a profit of £750,000 and each of the 10 city outlets is forecast to make a profit of £1 million during the year ending 30 November 2007. It is anticipated that profits of ‘out of town’ and city outlets will increase by 8% and 4% per annum respectively during each of the next two years.
3. The company purchased Racquets Ltd, a well-established manufacturer of tennis, badminton and squash racquets. Racquets Ltd made a profit of £15 million during the year ended 30 November 2006 and profit is expected to increase by £1 million per annum during each of the next three years.
4. A new camera known as the ‘Birdcam-V’ was launched. This camera will allow bird-watching activities to take place during the night, irrespective of prevailing noise and weather conditions. The Birdcam-V is the only camera on the market which has special ‘noise and weather’ filtering capabilities and has an expected life of three years.

The marketing director has estimated that at a selling price of £600 per unit, a total of 85,000 units per annum would be sold during the year ending 30 November 2007 and that each increase or decrease in the selling price of £10 will cause quantity demanded to decrease or increase by 1,000 units. The variable cost per unit is expected to remain constant at £180. Development costs amounting to £45,967,500 are to be written off evenly over the expected life of the Birdcam-V. The directors of Vision plc have agreed to adopt the combination of selling price and output that will maximize profit earned from sales of the Birdcam–V.

Case Findings:

1. Calculate the ‘profit gap’ that is forecast to exist at 30 November 2009:

Year ending 30 November	2007		2008		2009
	£000		£000		£000
Existing portfolio	40,000		42,000		44,000
Oceanic division	2,000		5,400		12,790
Shops	25,000		26,600		28,312
Racquets	16,000		17,000		18,000
Birdcam-V	25,000		25,000		25,000
Forecast profit	108,000		116,000		128,102
Target profit					150,000
Shortfall i.e. Profit-gap					21,898

*Working 1*

Birdcam-V

Using the demand function P = a – bq where:

P = selling price at which q units are demanded

a = price at which zero units will be demanded

b = change in unit price/change in quantity demanded

q = quantity demanded

b = 10/1,000 = 0·01

600 = a – 0·01(85,000)

600 = a – 850

∴a = £1,450

Demand function is P = 1,450 – 0·01q

Total revenue function = PQ = 1,450q – 0·01q²

Marginal revenue function = 1,450 – 0·02q

Marginal revenue = marginal cost∴1,450 – 0·02q = 180

∴0·02q = 1,270 and q = 63,500

Using the demand function P = 1,450 – 0·01q then

P = 1,450 – 0·01(63,500)

P = 1,450 – 635 = £815

Therefore profit per annum can be calculated as follows:

			£
Revenue	63,500	x £815	51,752,500
Variable costs	63,500	x £180	11,430,000
Contribution			40,322,500
Fixed overheads	£45,967,500/3		15,322,500
Profit per annum			25,000,000

2. How the use of Ansoff’s product-market matrix might assist the management of Vision plc to reduce the profit-gap:

Igor Ansoff’s product-market matrix is as follows:

• Market Penetration

With regard to existing products it would appear that a strategy of market penetration is being followed, whereby attempts are made to sell existing products into existing markets. This is a low risk strategy which is most unlikely to lead to high rates of growth, reflected in the forecast increase of 2% per annum in the years ending 30 November 2008 and 2009. Management seeks here to increase its market share with the current product range. In pursuing a penetration strategy the management of Vision plc may to some extent be able to exploit opportunities including the following:

• Encouraging existing customers to buy more of their brand
• Encouraging customers who are buying a competitor’s brand to switch to their brand
• Encouraging non-users within the segment to buy their brand

‘Strengths’ within the current portfolio will need to be consolidated and any areas of weakness addressed with remedial action.

• Market Development

The purchase of the retail outlets will enable management to sell existing products via new channels of distribution. The products of both the Astronomy and Outdoor Pursuits divisions could be sold via the retail outlets. Very often new markets can be established in geographical terms. Management could, for example, look to promote the sale of microscopes and associated equipment to overseas hospitals.

• Product Development

The launch of the Birdcam-V is an example of a product development strategy whereby new products are targeted at existing markets. Very often, existing products can be improved, or if an organization possesses adequate resources, completely new products can be developed to meet existing market needs. Some of the main risks here lie in the ‘time to market’ and product development costs which frequently go well beyond initial estimates.

• Diversification

The purchase of Racquets Ltd is an example of diversification on the part of Vision plc since the products and markets of Racquets Ltd bear no relationship to the existing products and markets of the company. In this regard the diversification is said to be unrelated.

The establishment of the Oceanic division could be regarded as a related diversification since existing technology will be used to develop new products for new markets. The success of this strategy will very much depend on the strength of the Vision brand.

Recommendations:

The design of the matrix will focus the attention of the management of Vision plc on strategic responses in order to promote growth in profits. Use of the matrix will enable management to evaluate and select alternative strategic options in order to reduce or eliminate the ‘profit-gap’. Management will be able to use information relating to the past in assessing the potential future benefits that may derive from the adoption of alternative strategies. The model, like many other models, has little predictive capability. However, in using the model, management will be able to take into account the level of risk attaching to each of their strategic options. For example, the adoption of a strategy of market penetration entails the lowest risk whereas a diversification strategy has the highest risk especially when the entry strategy is not based upon the core competencies of Vision plc.

The Motherhelp Company

History:

TMC, which is based in Happyland, manufactures and markets disposable nappies for babies and infant children. Disposable nappies are made of super-absorbent chemicals, paper pulp and plastics.

TMC has been very successful since its formation in 1996. It has established a very strong brand name and its products are sold by all leading pharmacies and supermarkets in Happyland. TMC has a strong organizational culture with high levels of employee motivation and satisfaction throughout the organization.

Financial Information:

Available information regarding the disposable nappy market size and TMC’s revenue is as follows:

The marketing director of TMC has obtained information that the birth-rate in Happyland is projected to fall after 2010. However, the number of years over which the projected fall might take place cannot be forecast with any degree of certainty.

The directors of TMC are most concerned that in spite of the growth achieved during recent years, there remains a projected ‘planning gap’ at the end of 2012. In view of this fact the directors of TMC are considering the acquisition of The Comfy Baby Company (CBC), a competitor, which had revenue of $155m during 2008 from sales of its disposable nappies. None of the directors of TMC have any previous experience of such an acquisition. The directors of TMC have heard that CBC has experienced workplace culture based problems during recent years.

The government of Happyland has recently issued a green paper, designed to encourage discussion and potentially pave the way for legislation, concerning the environment in which they stated their concerns about companies such as TMC whose entire revenues derive from sales of non-biodegradable products.

Requirements:

1. Explain the term ‘planning gap’ and discuss other suitable alternative strategies to closing the planning gap which the directors of TMC might have considered prior to giving consideration to the purchase of CBC:

A ‘planning gap’ is the gap between the forecast position based upon an extrapolation of projected current activities and the forecast of the desired position. The planning gap is most often measured in terms of demand but may also be reported in terms of net profit, return on capital employed etc.

TMC has a projected market share of 22% at the end of 2010. It is clear from the information given that the directors of TMC have a target market share which is higher than this, hence the planning gap.

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