scasher mgmt471w sbu strategic plan final
TRANSCRIPT
BALDWIN CORPORATION SBU Strategic Plan: High End Segment 2019‐2022
Chief Executive Officer Deborah Chiffon Chief Financial Officer Caroline Zhao Vice President – Human Resources Eric Guzowski Vice President – Marketing Sascha Asher Vice President – Operations Jennifer Deas Vice President – Technology Garrett Carson
April 29th, 2010 MGMT 471W Section 2: Professor Brown
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Table of Contents
Item: Page:
Targets:
SBU Mission Statement
SBU Objectives
3
3
Background Analysis – External:
Industry Analysis 4
External Factor Evaluation Matrix 12
Competitive Analysis - Competitive Profile Matrix
14
Background Analysis – Internal:
Strengths & Weaknesses - Internal Factor Evaluation Matrix
16
Strategy Formation:
TOWS Matrix 18
NBD Matrix 20
Strategy Matching & Selection
22
Strategy Evaluation:
Qualitative Evaluation – QSPM Matrix 23
Quantitative Evaluation – Financial Statements 26
Quantitative Evaluation – NPV Analysis 30
Strategy Selection – Optimal Strategy
32
Strategy Implementation:
Action Plan 33
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Targets: SBU Mission Statement
“The mission of the Ultimate Division (High End segment) is to provide its customers with the
most-advanced technological products on the market that meet and exceed their needs without
sacrificing product quality.”
SBU Objectives
Our main goal is to maintain our leading position in the high-end sensor industry by retaining our
competitive advantages and quick response time to our customer’s demands. In order to keep our
promise, and in view of expected continuing market growth, we have established the following
3-year-term objectives for our current strategy:
o Conduct relentless R&D to keep segment products on or close to exact yearly customer
specifications set by established demand drift rates
o Plan to introduce a new product in order to better meet our customer’s age requirement
o Achieve/maintain a 85% - 95% product awareness for Boost and potential future products and
a 100% segment accessibility index
o Produce the highest-quality products in our industry (i.e. highest MTBF among competitors)
o Increase segment sales by 15% to 20% each year
o Remain profitable
All the aforementioned objectives are to be met while keeping a positive segment net
contribution margin and achieving/maintaining the highest total market share in our sector, even
during potential future expansionary periods.
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Background Analysis – External: Industry Analysis
Definition: The High End / Digital Imaging Sensor Industry
The Baldwin Corporation competes in the sensor industry, providing a vast assortment of sensors
that appeal to diverse groups of customers in different technological industries ranging from
movement detection to aeronautics.
The focus of this report is on one of Baldwin Corporation’s subdivisions, the Ultimate Division,
which competes in an industry that supplies state-of-the-art digital-imaging sensors to its
customers in the digital camera industry. While we adopted a Niche-Differentiation strategy and,
hence, currently only specialize in producing the latest sensors in form of Charge-Coupled
Devices (CCD) for use in digital cameras, this division still competes closely with other
companies manufacturing sensors in that segment. These are very close in terms of technical
specifications, making them suitable for reengineering in order to make them viable substitutes
for our own sensors.
Digital Imaging Supply Chain
Note: Supply chain is simplified and only shows relevant participants.
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Porter’s 5-Forces Model
Risk of Entry by Potential Competitors
1. Economies of Scale: Increasingly Significant
The economies of scale are already very notable at this point, while not quite as impressive
as one can observe in the low-cost sensor industries due to much smaller production volumes
in the High End industry. These are continuously increasing year-by-year along with the
growth rate, giving the established companies lower variable costs in the process. When
comparing these costs with what a new entrant would face, the reductions through economies
of scale are significant. The current competitors are eight years ahead on the experience
curve, making it extremely difficult for new entrants to realize similar gains within a
reasonable time frame.
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2. Brand Loyalty: Very High
While customers may be somewhat inclined to switch among currently established brands
due to very similar technical specifications, they are very unlikely to switch to new market
entrants. For one, the customer awareness for the top four products ranges from 85% to 95%
due to substantial marketing expenditures, making it almost impossible for a new entrant to
establish an adequate position in the customer’s mind. Only years of costly advertising
exposure would yield acceptable results. Additionally, a new entrant does not have the option
to offset this disadvantage through predatory pricing, as customers in the High End segment
are very price insensitive (low price elasticity).
3. Absolute Cost Advantages: Very High
While material and labor costs are generally higher in our segment than in others, giving the
High End segment a lower cost advantage in those areas, significant industry-wide
investments in TQM initiatives in the areas of Material Cost Reduction (11.65% industry
average) and Labor Cost Reduction (13.64% industry wide) would put new entrants at a
significant disadvantage. Major initial investments would have to be made in order to benefit
from the same results. Furthermore, new entrants also need to raise and invest significant
amounts to acquire the factors of production and also do not benefit from savings through the
Reduction in Admin Costs initiative (54.8% average industry wide) that current competitors
add to their bottom lines.
4. Customer Switching Cost for Buyers: Currently High
Since our customers are few in numbers (B2B) and usually buy our sensors in immense
quantities, switching costs are likely to be fairly high. That is, as long as the sensors remain
significantly different in terms of structure for use in different products. Should any
competitors go for a more main-stream engineering approach, making designs more and
more alike, switching costs could be drastically lowered.
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5. Government Regulation: Minimal
There are currently no applied government regulations that would hinder an entry of potential
competitors.
Rivalry Among Established Companies
1. Industry Competitive Structure: Growth Industry, Oligopoly
The competitive structure is quite clear. As of now and for the foreseeable future, the high-
end sensor industry can be considered as a growth industry, which is lead by an Oligopoly.
Despite the fact that Oligopolies usually are characterized by a market dominance of very
few companies, say two to three, the structure here is nowhere close to being fragmented, as
the six competitors also are the only ones in the market - no extra “small fries” are present.
2. Demand Conditions: Increasing Demand
Obviously, there is always a certain amount of rivalry among competitors (hence their name)
to gain more market share and reap higher profits than the other companies. Competition is
always welcome as it encourages innovation. Since, as mentioned before, this is a growth
industry, the rivalry here is more of a healthy competition for dominance rather than a
struggle for survival. The continuous growth assures that each company has a chance to
acquire new customers who enter the market, rather than having to solely rely on attempting
to lure customers away from competitors.
3. Cost Conditions: Problematic
Overall, costs are extremely high in this industry, be it labor, material or any other related
cost. There are really only two ways to significantly reduce the cost structure: TQM
initiatives and higher automation. All companies have invested heavily in TQM initiatives to
lower relevant costs, giving neither a significant advantage over the other but still result in
noteworthy savings. A higher automation saves on labor cost but gives a competitive
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disadvantage as it slows down R&D. These issues, while cutting severely into overall
segment profits, are offset by the continuously increasing demand, so that these costs can be
overcome through volume (economies of scale). However, as price expectations are lowering
every year and the growth stage may abruptly turn into shakeout, rivalry may intensify
tremendously in the near future.
4. Height of Exit Barriers: Surmountable
The exit barriers are high but not insurmountable. Each of the companies in the high-end
industry also compete in other sensor industries, making the elimination of one sub-branch
“emotionally” and financially easier, as the overall corporations are not solely dependent on
the high-end sector. The main concerns are obviously plant, machinery, and labor. Since all
sectors are growing, workers may be able to be relocated and retrained for handling the
somewhat similar machines in the other industries. The machinery can be sold at a minimum
rate of 50% (unless a buyer offers more), keeping the losses manageable.
Bargaining Power of Buyers
This is indeed an important factor. The bargaining power of buyers is quite elevated. As noted,
we do not provide sensors for individual customers but instead for large companies (B2B) that
use these sensors in their products. This means that the number of buyers is fairly low and the
size of their orders enormously high, making the competitors extremely dependent on these
buyers. Fortunately, this dependency is mutual, as our buyers need our sensors to make their
products and the choice of suppliers is very limited. Furthermore, as noted earlier, the switching
costs remains fairly high as the current sensors are not (yet) uniform. However, the technical
expertise of the buyers gives them the option to enter the industry themselves should the prices
sway too far from what is expected.
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Bargaining Power of Suppliers
Again, as noted in the paragraph above, the dependency of buyers and suppliers is mutual. High
dependency, high switching costs, and a low number of suppliers give the suppliers a great
amount of bargaining power. Suppliers have a potential countermeasure as well, as their high
technical expertise may grant them the option to enter the buyers’ market (i.e. produce digital
cameras).
Threat of Substitutes
The threat of substitutes in the High End sector is fairly high. For one, the potential for other
sensors to be reengineered to fulfill similar needs is quite elevated due to the fast-evolving nature
of the technological field. Furthermore, new technologies may quickly emerge and make the
current sensors obsolete. Lastly, especially pertaining to the digital-imaging sensor Baldwin
produces, there already is a viable alternative to the CCD out there called the Active-Pixel Sensor
(APS), which essentially performs the same duties as the CCD. Any competitor could move into
the industry any day offering this alternative which would force current providers to lower their
prices, making this segment even more competitive and less profitable.
Industry Structure
The overall sensor industry is currently composed of five sub-industries, namely the Low End
sector, the Traditional sector, the Performance sector, the Size sector, and finally the High End
sector. Each of these sectors is populated by six major companies: Andrews, Baldwin, Chester,
Digby, Erie, and Ferris.
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While the sensors in the High End segment are very close in terms of technical specification,
each competitor produces sensors for a variety of different industries. Andrews, Chester, and
Ferris provide sensors to unspecified industries; Baldwin caters to the digital-imaging industry,
Digby to the medical industry, and Erie to the scanning, obstacle-detection, and optical-
navigation industry.
Note: Please refer to the tables below for a basic overview of the industry layouts.
Sensor Industry - 2018
Andrews Baldwin Chester Digby Erie Ferris
Market Share
9.5% 21.7% 13.4% 21.8% 19.3% 14.2%
Sales $152,168,935 $347,501,383 $214,632,514 $349,182,764 $309,438,338 $227,757,494
Profits $25,853,470 $50,185,855 $23,877,042 $54,067,222 $47,809,740 $11,792,175
Cumul. Profits
($51,836,367) $141,547,517 $70,292,443 $131,526,278 $114,493,943 $95,007,419
Contr. Margin
50.9% 39.6% 40.2% 47.1% 45.8% 32.9%
ROS 17.0% 14.4% 11.1% 12.8% 12.3% 13.8%
ROA 26.4% 24.5% 15.3% 19.7% 23.2% 6.0%
ROE -550.4% 44.3% 30.6% 34.2% 41.3% 11.8%
Leverage (20.9) 1.8 2.0 1.7 1.8 2.0
High End Subdivision - 2018
Segment % of Overall Sensor Industry 13.9%
Segment Growth Rate 16.2%
Company Andrews Baldwin Chester Digby Erie Ferris
Products Anvil Boost Cid Dixie Echo, Eve Fist, Feast
Market Share 10.4% 18.9% 13.3% 14.7%15.9%
+ 13.7% = 29.6%
11.2%+ 1.9%
= 13.1%
Contr. Margin 28% 22% 30% 30% 37%, 37% 25%, 2%
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High End Customer Buying Criteria - 2018
Rank Expectations Importance
1. Ideal Position Performance = 16.1
+ 0.9 expected yearly drift rate Size = 3.9
- 0.9 expected yearly drift rate 43%
2. Age 0 29%
3. Reliability MTBF 20,000 – 25,000 19%
4. Price $26 - $36
- $0.50 expected yearly price-range drift 9%
Industry Life Cycle
The entire sensor industry is currently in the growth stage of the industry life cycle. The High
End subdivision enjoys the third-largest growth rate in the overall sensor industry of 16.2%. This
means that sales and market share are expected to continue rising in the foreseeable future as
customers keep entering the market. This gives room for several opportunities and threats that
are related to the goal of capturing major pieces of the inflating sales pie. We will discuss these
in the next segment.
Opportunities and Threats
The opportunities and associated threats are numerous. As mentioned earlier, the sensor industry
is in a growth stage, promising notable returns for anyone ready to overcome the mentioned
barriers (if not already in the market) and incur the necessary investments to compete in this
industry. This poses a major threat to the Baldwin Corporation, which despite its lead, needs to
assess its overall strategic situation in the market place in order to make rational decisions that
will help it maintain its position while continuing to grow market share – and most importantly
for the shareholders – profits. In the next segment we will look at the Ultimate Division’s
competitive position and analyze how certain factors, external or internal, affect that position in
the High End sector and in the overall market place in general.
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Background Analysis – External: External Factor Evaluation Matrix
To begin, we will take a look at how Baldwin Corporation’s digital-imaging sensor industry is
affected by outside factors and how the current industry strategies respond to these effective or
potential influences. To do that, we will use what is called an External Factor Evaluation (EFE)
Matrix. The matrix lists six major opportunities that may exist in the current or outside markets
as well as six major current and possible future threats that the high-end sensor industry may
encounter soon or in the long term. Note that these are outside factors that cannot be directly
influenced by the company. The opportunities and threats were identified by pulling together the
collective knowledge of Baldwin’s executive officers and ranked in order of importance (or
threat level). Additionally, all factors were given a weight relative to their overall perceived
importance, all weights amounting to a total of 1.00 (100%). Then, each factor was assigned a
rating on a scale from 1 to 4 – 1 meaning that the current segment strategies respond poorly to
either an opportunity or threat and 4 meaning that the current strategies have a superior response
to the current/emerging opportunity or threat. Once both weights and ratings have been assigned,
each factor’s weight is multiplied by its respective rating to give it a weighted score. These are
then summed to get a total weighted score. This total score will range from a minimum of 1.00 to
a maximum of 4.00. A score closer to 1 then would mean that the company is currently not
responding adequately to potential opportunities and threats, while a score closer to 4 would
mean that the response is rather commendable. One can then infer that a score of 2.5 would mean
that the response to possible opportunities and threats is average.
(Discussion continued on page 13)
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External Factor Evaluation Matrix
Key External Factors Weight Rating Weighted Score
Opportunities
1. Lower material costs (i.e. outsource/integrate vertically)
.15 1 .15
2. Expansion of product line (introduce new product)
.15 2 .30
3. Expansion into new global markets (i.e. China) .10 1 .10
4. Diversification of product line (expand into other industries)
.10 1 .10
5. Grow company (i.e. acquire competitor) .05 1 .05
6. Take advantage of continuous growth and increase market share
.05 4 .20
Threats
1. Entry of new competitors or products .10 3 .30
2. Increase of labor / material costs .10 2 .20
3. Sudden end of growth stage .05 2 .10
4. Competitors form alliance or merger .05 1 .05
5. Newly-emerging technologies / substitutes .05 2 .10
6. Economic changes – drastic demand shifts .05 1 .05
Total 1.00 1.70
Keeping the above-mentioned grading scale in mind, one can quickly see from the matrix that
the total weighted score of Baldwin’s current strategies in the high-end sector in relation to
potential opportunities and threats lies quite a bit below average, with a score of just 1.70. In
other words, while this in no way means that Baldwin’s strategies are to be judged as poor (as its
current excellent market performance proves) it does mean that the Ultimate Division currently
does not effectively take advantage of potential opportunities and is rather ill prepared for
possible threats. This analysis suggests that the current strategies need to be modified in order to
better respond to these external factors, especially in the areas of expansion and diversification.
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Background Analysis – External: Competitive Analysis – Competitive Profile Matrix
Before we move on to the internal analysis, we will take a look at the Ultimate Division’s
position relative to its direct competitive environment. For this purpose, we will use the help of
the so-called Competitive Profile Matrix, which evaluates close competitors relative to their
performance in certain critical-success areas. As previously, Baldwin’s executive officers came
up with what they believed were critical factors to successfully compete in the high-end sensor
industry. Weights were assigned according to relative importance, cumulating in a total sum of
1.00. Then a rating scale was imposed that again ranges from 1 to 4 – 1 meaning the company
basically does not capitalize on this critical success factor and 4 meaning this factor is very well
implemented and the company is reaping the benefits from it. This time around, though,
Baldwin’s scores are put in direct relation with its two closest competitors. While none of the
five other companies in the industry compete directly with the Ultimate Division, as we are
following a Niche-Differentiation strategy in the digital-imaging industry, they still make sensors
that are close in terms of technical specifications which undergo a similar production process.
For this analysis, the companies Digby and Erie have been selected due to their strong relative
market strength in relation to our own. Both of these companies were evaluated based on the
same factors and assigned a rating based on their relative performance in accordance with that
factor in the high-end industry. Each company’s ratings were then multiplied by their respective
weights to obtain a factor score. Each company’s factor scores were then added together to give
it an overall total score, which could then be compared to the other two company’s scores. The
minimum score is again 1.00, and the maximum achievable score is 4.00.
(Discussion continued on page 15)
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Competitive Profile Matrix
Baldwin Digby Erie
Critical Success Factors Weight Rating Score Rating Score Rating Score
Performance / Size meet customer criteria
.25 4 1.00 3 .75 2 .50
Marketing .20 4 .80 3 .60 3 .60
Low product age .15 1 .15 1 .15 1 .15
TQM investments .15 4 .60 4 .60 4 .60
Unique competitive advantage .15 4 .60 3 .45 3 .45
Market share .10 3 .30 2 .20 4 .40
Total 1.00 3.45 2.75 2.70
The scores show that Baldwin, with a score of 3.45, currently has a better competitive position
relative to the success factors than its competitors Digby (2.75) and Erie (2.70). This is mostly
due to Baldwin’s advantage in meeting the customer buying criteria better and following
marketing strategies that afford it with higher customer awareness and loyalty, as both of these
have the highest weights of .25 and .20 respectively. Perhaps the section “Unique competitive
advantage” should be explained a bit further. This section rates companies according to whether
they have a unique factor that distinguishes their product from one another. Digby and Erie
received a rating of 3 as they differentiate their products by not building them to exact customer
specification. Baldwin earned a 4 here because it produces the only product from the top-selling
ones that possesses an elevated MTBF, giving its product superior quality and reliability. Lastly,
one area that should be noted is the “Low product age” section, for which all three companies
have been rated poorly despite its importance. This in fact proves to be a soft spot in the market
that could quickly be exploited by other competitors if none of the three companies follow up
with younger products as requested by the customers.
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Background Analysis – Internal: Strengths & Weaknesses – Internal Factor Evaluation Matrix
Next, we will take a look at how different factors affect the Ultimate Division internally. For this
analysis we will use an Internal Factor Evaluation (IFE) Matrix, which is structured in a similar
way as the EFE Matrix. The factors have again been pooled by the collective input of Baldwin’s
executives and been ranked by importance, this time in the categories of internal strengths and
internal weaknesses. These are factors that the Ultimate Division can directly influence. As
before, weights have been assigned according to relative importance, which amount to a total
weight of 1.00. Ratings ranged again from 1 to 4, but this time they have a slightly different
meaning. The rating scale no longer evaluates responsiveness to outside factors but rather the
internal strength of that factor. For example, a rating of 1 means that this factor is a major
weakness of the company, while a rating of 4 is assigned to a major strength. A rating of 2 then
signifies a minor weakness and a rating of 3 a minor strength. Individual weights are then again
multiplied by their respective rating to obtain a weighted score. These are then summed to get a
final total weighted score between 1 and 4. A score closer to 1 means that the weaknesses likely
outweigh the strengths, while a score closer to 4 means that the strengths outweigh the
weaknesses. A score of 2.5 once more marks the point of average, demonstrating a balanced
relationship between the company’s strengths and weaknesses.
Looking at the total weighted score from the matrix analysis on the next page, one can see that
the Ultimate Division fared much better in terms of its internal competencies. The score of 2.75
puts it above average, meaning that its strengths somewhat outweigh its weaknesses. We need to
keep in mind, though, that the maximum score is a 4.00, which is still a full 1.25 points away
from Baldwin’s actual score, leaving much room for improvement. Furthermore, one can see that
all strengths except one have been rated with a perfect 4, suggesting that the internal weaknesses
impose themselves quite heavily onto the final score. In other words, while Baldwin possesses
excellent attributes that help it maintain its leading position in the high-end sensor market, its
weaknesses may become a significantly increasing issue in the future and therefore need to be
addressed as soon as possible.
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Internal Factor Evaluation Matrix
Key Internal Factors Weight Rating Weighted Score
Internal Strengths
1. Superior marketing effectiveness (awareness, accessibility, survey scores etc.)
.15 4 .60
2. Product closely tailored to customers’ demands .15 4 .60
3. Highest segment product quality / reliability .05 4 .20
4. Excellent financial position .05 3 .15
5. Highest individual product market share .05 4 .20
6. Continuously relatively accurate forecasts (manageable inventory-holding cost)
.05 4 .20
Internal Weaknesses
1. Decreasing contribution margin .10 2 .20
2. Costly low automation .10 2 .20
3. High dependency on increasingly costly labor .10 1 .10
4. Aging product .10 2 .20
5. Niche strategy in only one industry .05 1 .05
6. Very narrow product line – only one product in the market
.05 1 .05
Total 1.00 2.75
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Strategy Formation: TOWS Matrix
Now that we have identified the major factors that affect the Ultimate Division externally as well
as internally, it is time to put these together in a single matrix in order to determine what kind of
strategies may be able to address the different internal and external issues. For that purpose, we
will be using the so-called Threats-Opportunities-Weaknesses-Strengths (TOWS) Matrix, which
attempts to match strengths and weaknesses with opportunities and threats.
On the next page, one can see the mentioned 3-by-3-box matrix. In the second and third box of
the first row, one will see the six strengths and weaknesses that had already been established in
the IFE Matrix. Likewise, box one of row two and box one of row three contain the pre-
established opportunities and threats of the EFE Matrix. The remaining boxes in rows two and
three are reserved for potential strategies that address as many of the related factors as possible.
For example, the SO-Strategies box displays strategies that address a multitude of factors from
the Strengths and Opportunities boxes. In other words, the strategies attempt to make use of the
given internal strengths to take advantage of external opportunities. Similarly, the WO-Strategies
box for example, displays strategies that attempt to overcome internal weaknesses to shield the
company from potential outside threats.
Each of the four Strategy boxes has been filled with two potential strategies, each of them
identifying in brackets which of the factors would be addressed by implementing that strategy.
So if we take a look at the WO-Strategies box for example, we see that the first strategy consists
of outsourcing the production of the firm’s sensors to China. This strategy would improve upon
the weaknesses of “Decreasing contribution margin,” “Costly low automation,” and “High
dependency on expensive labor.” Why? Because outsourcing the production to China would
significantly lower Baldwin’s labor cost, drastically lessening the enormous negative financial
impact of the low degree of automation to the bottom line, while at the same time increasing the
contribution margin. Furthermore, sending the production process to China gives Baldwin the
opportunity to acquire cheaper parts, lowering material costs (Opportunity 1 [O1]), and dip its
toes into foreign market waters, thereby addressing Opportunity 3 [O3].
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TOWS Matrix
Strengths – S Weaknesses – W
1. Superior marketing effectiveness
2. Product closely tailored to customers’ demands
3. Highest product reliability
4. Excellent financial position
5. Highest product market share
6. Relatively accurate forecasts
1. Decreasing contribution margin
2. Costly low automation
3. High dependency on expensive labor
4. Aging product
5. Only in single industry
6. Only one product in the market
Opportunities – O SO – Strategies WO – Strategies
1. Lower material costs
2. Expansion of product line
3. Expansion into new global markets
4. Diversification of product line
5. Grow company within industry
6. Increase market share
1. Form joint venture with Japanese company to produce quality digital cameras for foreign and domestic markets [S1, S2, S3, S4, O3,O4, O6]
2. Backward integration (acquire supplier) [S1, S3, S4, O1, O4]
1. Outsource sensor production to China (strategic alliance) [W1, W2, W3, O1, O3]
2. Acquire Andrews [W1, W6, O1, O2, O5, O6]
Threats – T ST – Strategies WT - Strategies
1. Entry of new competitors or products
2. Labor/material cost increase
3. End of growth stage
4. Competitors form alliance or merger
5. New technologies/substitutes
6. Drastic demand shifts
1. Forward integration – compete in digital-camera industry [S4, T1, T3, T4, T5, T6]
2. Invest in higher automation [S3, S6, T2]
1. Related diversification - build sensors for medical industry [W1, W5, T1, T3, T4, T5, T6]
2. Introduce a new product [W4, W6, T1, T4]
Note: Some factors may have been shortened or reworded in order to better fit into the grid.
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Strategy Formation: NBD Matrix
Next, we will attempt to generate additional new strategies for the Ultimate Division with the
help of the New Business Development (NBD) Matrix, also known as the Ansoff Matrix. The
Ansoff Matrix is used to establish four potential growth strategies based on either focusing on
current products or creating new ones in the current or other outside markets. A quick look at the
matrix on the next page will clarify the actual layout. The top-left box is called the Market
Penetration quadrant and examines strategies that are based on strengthening the current
products’ positions in the current market with the goal of increasing market share. The box to its
right, the Product Development quadrant, favors strategies where the company remains in the
same market targeting the same consumers, but with new products. The bottom-left box signifies
the exact opposite. This quadrant demonstrates strategies that keep the focus on current products,
but tries to carry over and adapt these products to new market segments. Hence, this box is called
the Market Development quadrant. To conclude, we have the box on the bottom right, which is
called the Diversification quadrant. In this quadrant, strategies suggest to not only find a new
target audience, but to also provide this new market with entirely new products.
As one can see, each of these four quadrants has been filled with two potential strategies, ranging
from simply sticking to the status quo, over reengineering the current product for a different
audience, to diversifying into newly-emerging technologies in completely different technological
markets.
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New Business Development Matrix
Products
Existing New
Markets
Existing
1. Continue with current strategy, revising Boost every year for current customers
2. Make Boost a bit less powerful in order to shorten R&D cycle times (earlier market entry)
1. Introduce a new segment product that meets exact customer criteria (like Boost) but with a perfect age
2. Introduce a complementary non-sensor product that targets the same customer
New
1. Adapt Boost’s features for sale in other less-performance-demanding sensor markets (i.e. motion detection)
2. Reengineer Boost’s structure for use in other devices that demand similarly-high features
1. Build a brand new sensor with new features that would target other industries (i.e. medical, aviation)
2. Build Light-Emitting Diode (LED) displays for flat-screen televisions
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Strategy Formation: Strategy Matching & Selection
Lastly, after forming a multitude of potential new strategies, it is finally time to look at a few that
appear to be most promising while at the same time reasonable to implement , given our current
resources and core competencies. We will choose two strategies from the TOWS Matrix and/or
NBD Matrix in addition to our currently implemented strategy, NBD EE1 from our top-left box
in the NBD Matrix, for a total of three.
When one looks at the strategy boxes of the TOWS Matrix, it is easy to see that diversification
appears to be the overall most-effective solution to tackle the majority of the issues facing
Baldwin’s Ultimate Division. Obviously, it wouldn’t be possible to implement all the strategies
concerning diversification at the same time, so we have to look at the one that will initially bring
the greatest benefits. This strategy appears to be SO1, as it gives the division the opportunity to
integrate forward, giving it more control over the overall quality of the end product, while at the
same time diversifying its product line in order to minimize the tremendous risk of only
competing in one corner of the sand box. The beauty of strategy SO1 is that it essentially
incorporates the benefits of ST1, the standard forward integration, but at the same time also gives
Baldwin the chance to enter the global market place with the guiding hand of a Joint-Venture
partner, who is familiar with the competitive, economical, and political environment in that
country. SO1 then shall be our second strategy.
As our third strategy, we want to pick one that gives an alternative to diversification. The most
appropriate one in that category appears to be strategy WO2 from our TOWS Matrix. This
strategy suggests that we simply perform a horizontal integration, acquiring one of our
competitors, the Andrews Corporation. This strategy not only allows us to drop the total
competitor count from six to five, but this acquisition would actually come relatively cheap, as
Andrews has been in a shaky and unprofitable position for quite some time now. Additional
benefits would be that we acquire their capacity and demand, which would boost our economies
of scale and lower our overall costs as we can eliminate duplicate assets. This internal company
growth would not only provide us with an additional product, but also provide us with the
23
necessary leverage to defend ourselves effectively against potential new market entrants or
further product introductions.
Now that we selected our final strategies, it is time to evaluate them in comparison to each other
in order to come up with the single best near-future strategy for the Baldwin Ultimate Division.
Strategy Evaluation: Qualitative Evaluation – QSPM Matrix
As mentioned, we will next evaluate our three selected strategies in comparison each other. For
that purpose, we will use the Quantitative Strategic Evaluation Matrix (QSPM), which
essentially is a model to evaluate the alternative strategies qualitatively based on the existing
external and internal factors, yielding a quantitative score that can be used to interpret the value
of that alternative relative to the others.
As one can witness on the next page, the QSPM has a familiar layout as it essentially is a merger
of our previously used EFE Matrix and IFE Matrix; it lists the same external and internal factors
we came up with earlier and their respective weights we had assigned, again amounting to 1.00
in the external and internal categories. This time around, however, we will not rate the Ultimate
Division’s performance in relation to these factors but instead rate the alternative strategies on
their attractiveness relative to the factor at hand. Our alternative strategies are: NBD EE1 = our
currently exercised strategy of competing in the digital-imaging sensor industry with one
product; SO1 = we enter a Joint Venture with a Japanese partner to produce digital cameras for
sale worldwide, which use our sensors; WO2 = we acquire Andrews, taking over their assets,
their products, and hopefully, their customers. The rating ranges from 1, which means that this
strategy is not attractive relative to how it may capitalize or improve upon the particular factor,
to 4, which means that this strategy is very attractive in view of the factor. Should the strategy be
completely unrelated to a certain factor, no rating is assigned. So for example, let us look at
(Discussion continued on page 25)
24
Quantitative Strategic Evaluation Matrix
Strategic Alternatives*
NBD EE1 SO1 WO2
Critical Success Factors Weight AS TAS AS TAS AS TAS
Opportunities
1. Lower material costs .15 1 .15 2 .30 3 .45 2. Expansion of product line .15 1 .15 2 .30 4 .60 3. Expansion into new global markets .10 - - 4 .40 - - 4. Diversification of product line .10 - - 4 .40 2 .20 5. Grow company .05 1 .05 4 .20 3 .15
6. Take advantage of continuous growth and increase market share
.05 3 .15 2 .10 4 .20
Threats
1. Entry of new competitors or products .10 1 .10 4 .40 3 .30 2. Increase of labor / material costs .10 1 .10 2 .20 3 .30 3. Sudden end of growth stage .05 1 .05 4 .20 2 .10 4. Competitors form alliance or merger .05 1 .05 3 .15 4 .20 5. Newly-emerging technologies / substitutes .05 1 .05 4 .20 2 .10 6. Economic changes – drastic demand shifts .05 1 .05 4 .20 1 .05
1.00 Strengths 1. Superior marketing effectiveness .15 4 .60 3 .45 4 .60 2. Product closely tailored to customers’ demands .15 4 .60 3 .45 3 .45 3. Highest segment product quality / reliability .05 4 .20 3 .15 4 .20 4. Excellent financial position .05 4 .20 4 .20 4 .20 5. Highest individual product market share .05 4 .20 2 .10 4 .20 6. Continuously relatively accurate forecasts .05 4 .20 4 .20 4 .20
Weaknesses
1. Decreasing contribution margin .10 1 .10 4 .40 3 .30 2. Costly low automation .10 1 .10 3 .30 2 .20 3. High dependency on increasingly costly labor .10 1 .10 3 .30 2 .20 4. Aging product .10 1 .10 4 .40 3 .30 5. Niche strategy in only one industry .05 1 .05 4 .20 2 .10 6. Very narrow product line .05 1 .05 4 .20 3 .15
Sum Total Attractiveness Score 1.00 3.40 6.40 5.75
Note: Some factors may have been shortened or reworded due to lack of space. * NBD EE1 = current strategy; SO1 = Joint Venture with Japanese partner to produce digital cameras (domestic & foreign sale); WO2 = Acquire Andrews
25
item 4 of the Opportunities section, “Diversification of the product line.” The SO1 strategy
received an Attractiveness Score (AS) of 4, as it is obviously a highly-attractive strategy in terms
of that it diversifies the Ultimate Division’s product line by adding a completely new product
(digital cameras) which competes in a different industry. WO2 merely received an AS of 2 since
it is only somewhat attractive in a sense that it does in fact expand the product line with a slightly
different sensor, but this sensor still competes in the same segment. NBD EE1 received no score
at all, as the current strategy does not consider any type of diversification, as we would continue
revising the same old product every year.
As in previous matrices, we then simply multiply the weight of the factor by its respective AS
rating to obtain the Total Attractiveness Score (TAS). These are then summed for each strategy
to obtain the Sum Total Attractiveness Score (STAS). This score then determines which of the
strategies should be picked based on a qualitative evaluation. Keep in mind that this score does
not have the usual 4.00 maximum, but instead 8.00 as we combined the internal and external
factors into one matrix. The lowest possible score would be a 0, which would only be possible in
the highly-unlikely case that a strategy had no relevance whatsoever to any of the listed factors.
In our case, we can see that our current strategy NBD EE1 scored lowest with a cumulative score
of 3.40, WO2 has the second-highest score of 5.75, and SO1 received the leading score of 6.40.
Again, these scores are relative, so no mathematical inferences can be made to determine by
what percentages certain strategies are superior to others. Nevertheless, our overall conclusion
would be that our SO1 strategy, our foreign Joint Venture, is the most attractive of the three in
view of the established external and internal factors.
26
Strategy Evaluation: Quantitative Evaluation – Financial Statements
After completing our qualitative analysis and comparison between our three strategies, it is now
time to perform a quantitative evaluation. For that purpose, our chief financial officer has
prepared financial statements and a NPV analysis for all three of our scenarios, assuming an
eight-year lifespan for each investment.
We will begin with the financial statements and go over the NPV analysis in the next segment.
First up is our NBD EE1 strategy, our current strategy for which we simply continue producing
one product in the high-end sensor industry, which we adapt to our customers’ preferences on a
yearly basis. Our base year is 2018, whose column reflects the financial data that can be found in
the Capstone Courier. The percent column displays the percentage these numbers make up in
relation to total sales. (Discussion continued on page 27)
NBD EE1 – Current strategy:
2018% of
Sales 2019 2020 2021 2022 2023 2024 2025 2026
Sales $ 57,793 100% $ 67,155 $78,035 $ 90,676 $ 105,366 $ 122,435 $ 142,270 $ 165,317 $ 192,099
Variable Costs:
Labor $ 23,871 41% $ 27,738 $32,232 $ 37,453 $ 43,521 $ 50,571 $ 58,763 $ 68,283 $ 79,345
Material $ 21,077 36% $ 24,491 $28,459 $ 33,069 $ 38,427 $ 44,652 $ 51,885 $ 60,291 $ 70,058
Inventory Carry $ 317 1% $ 368 $ 428 $ 497 $ 578 $ 672 $ 780 $ 907 $ 1,054
Total Variable $ 45,265 78% $ 52,598 $61,119 $ 71,020 $ 82,525 $ 95,894 $ 111,429 $ 129,481 $ 150,457
Contribution Margin
$ 12,528 22% $ 14,558 $16,916 $ 19,656 $ 22,841 $ 26,541 $ 30,840 $ 35,836 $ 41,642
Period Costs:
Depreciation $ 1,040 2% $ 1,208 $ 1,404 $ 1,632 $ 1,896 $ 2,203 $ 2,560 $ 2,975 $ 3,457
SGA ( R&D, Promo, Sales, Admin)
$ 6,220 11% $ 7,228 $ 8,399 $ 9,759 $ 11,340 $ 13,177 $ 15,312 $ 17,792 $ 20,675
Total Period $ 7,260 13% $ 8,436 $ 9,803 $ 11,391 $ 13,236 $ 15,380 $ 17,872 $ 20,767 $ 24,132
Net Margin $ 5,268 9% $ 6,121 $ 7,113 $ 8,265 $ 9,604 $ 11,160 $ 12,968 $ 15,069 $ 17,510
Income StatementBaldwin Inc. High End Segment
Note: All numbers are in thousands. Constant market share is assumed.
27
All other calculations, from the year 2019 to 2026, are based on 2018’s percentage weights and
sales and an assumed 16.2% growth rate per year. So for example, 2019’s sales of about $67.155
million are a 16.2% increase from 2018’s $57.793 million – just as 2026’s net margin of $17.510
million is a 16.2% increase of 2025’s $15.069 million.
For our SO1 strategy’s income statements, our Joint Venture with a Japanese partner, the
underlying calculations remain the same. The column for year 2018 – our year zero – remains
unchanged as well as the derived percent-of-sales weights. What changes is our expected sales
number for year 2019, which signifies the first year of our strategy implementation, as well as a
few extra rows and new assumptions for the margins. For the 2019 sales, we simply assumed that
our sales would double compared to our no-changes strategy, since we now also would be selling
digital cameras with a partner in Japan. Hence, we doubled our year-zero sales of $57.793
million and grew them by 16.2%, which we assume to also be the growth rate in the digital-
camera industry, to obtain a sales total of $134.311 million. This number is compounded each
year by the same rate throughout our eight-year period, as are all other numbers in the table.
However, since we now would have entered a Joint Venture, we can’t simply assume to receive
all the profits. These need to be shared among partners. Therefore, the initial total net margin
represents the profits for Baldwin before a certain percentage is given away. We assume that half
of this amount, for example $12.243 million in 2019, was earned in the U.S. market through
regular sensor sales. This sum amounts to $6.121 million, which Baldwin then gets to keep for
itself. The other half is earned internationally with the cooperation of our Japanese partners.
Since they provide most of the assets to produce the digital cameras and are responsible for the
market implementation and localization, our contracts provide them with 60% of the profits,
while we receive 40% respectively. Multiplying the $6.121 million by 40% yields $2.449
million, which is the amount Baldwin can then add to its bottom line as actual income from
foreign operations.
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SO1 – Joint Venture:
2018% of
Sales 2019 2020 2021 2022 2023 2024 2025 2026
Sales 57,793$ 100% 134,311$ 156,069$ 181,353$ 210,732$ 244,870$ 284,539$ 330,634$ 384,197$
Variable Costs:
Labor 23,871$ 41% 55,476$ 64,463$ 74,906$ 87,041$ 101,142$ 117,527$ 136,566$ 158,690$
Material 21,077$ 36% 48,983$ 56,918$ 66,139$ 76,853$ 89,304$ 103,771$ 120,582$ 140,116$
Inventory Carry 317$ 1% 737$ 856$ 995$ 1,156$ 1,343$ 1,561$ 1,814$ 2,107$
Total Variable 45,265$ 78% 105,196$ 122,238$ 142,040$ 165,051$ 191,789$ 222,859$ 258,962$ 300,913$
Contribution Margin 12,528$ 22% 29,115$ 33,832$ 39,312$ 45,681$ 53,081$ 61,681$ 71,673$ 83,284$
Period Costs:
Depreciation 1,040$ 2% 2,417$ 2,809$ 3,263$ 3,792$ 4,407$ 5,120$ 5,950$ 6,914$
SGA (R&D, Promo, Sales, Admin)
6,220$ 11% 14,455$ 16,797$ 19,518$ 22,680$ 26,354$ 30,624$ 35,585$ 41,349$
Total Period 7,260$ 13% 16,872$ 19,606$ 22,782$ 26,472$ 30,761$ 35,744$ 41,535$ 48,263$
Total Net Margin (Japan and Domestic)
5,268$ 9% 12,243$ 14,226$ 16,531$ 19,209$ 22,321$ 25,937$ 30,138$ 35,021$
Actual Net Margin (Domestic)
6,121$ 7,113$ 8,265$ 9,604$ 11,160$ 12,968$ 15,069$ 17,510$
Actual Net Margin (Japan)
2,449$ 2,845$ 3,306$ 3,842$ 4,464$ 5,187$ 6,028$ 7,004$
Actual Total Net Margin (All Operations)
8,570$ 9,958$ 11,572$ 13,446$ 15,624$ 18,156$ 21,097$ 24,514$
Income Statement
Baldwin Inc. High End Segment (Foreign and Domestic Market)
Note: All numbers are in thousands. Constant market share is assumed.
And lastly, once more the same rules as in the previous income statements also apply for the
WO2 strategy, the Andrew acquisition. The format is identical to NBD EE1’s income statements.
Our 2018 column remains untouched and so do our percent-of-sales weights. Again, the only
difference lies once more in the assumed sales number for year 2019, which then grows at a
16.2% rate. The main question here is: how did we come up with $102.5 million for the first
year? Basically, we took the $57.793 million in sales and grew them by 16.2% to $67.155
million. This is what we expect to make just from our initial Baldwin assets in our segment.
Since we now would have acquired Andrews, however, we need to make an educated guess
about how much in sales their product Anvil would contribute to our sales total. As we know,
29
Boost had a 19% and Anvil a 10% market share in 2018 (please refer to the Capstone Courier for
details), which we assume to stay constant over the eight-year period. So then, all one has to do
is to divide the $67.155 million by the 19% market share and multiply it by the 10% to get
Anvil’s contribution of $35.345 million. Note that this is assuming an identical price for both
products. When added together, we obtain the already compounded sales number of $102.5
million. This number is then, as usual, compounded by 16.2% over the remainder of the years.
WO2 – Andrews Acquisition:
2018% of
Sales 2019 2020 2021 2022 2023 2024 2025 2026
Sales $ 57,793 100% $102,500 $119,105 $138,400 $160,820 $186,873 $217,147 $252,325 $293,201
Variable Costs:
Labor $ 23,871 41% $ 42,337 $ 49,195 $ 57,165 $ 66,426 $ 77,187 $ 89,691 $104,221 $121,105
Material $ 21,077 36% $ 37,381 $ 43,437 $ 50,474 $ 58,651 $ 68,152 $ 79,193 $ 92,022 $106,930
Inventory Carry $ 317 1% $ 562 $ 653 $ 759 $ 882 $ 1,025 $ 1,191 $ 1,384 $ 1,608
Total Variable $ 45,265 78% $ 80,280 $ 93,286 $108,398 $125,959 $146,364 $170,075 $197,627 $229,643
Contribution Margin
$ 12,528 22% $ 22,219 $ 25,819 $ 30,001 $ 34,862 $ 40,509 $ 47,072 $ 54,697 $ 63,558
Period Costs:
Depreciation $ 1,040 2% $ 1,845 $ 2,143 $ 2,491 $ 2,894 $ 3,363 $ 3,908 $ 4,541 $ 5,276
SGA (R&D, Promo, Sales, Admin)
$ 6,220 11% $ 11,032 $ 12,819 $ 14,895 $ 17,308 $ 20,112 $ 23,371 $ 27,157 $ 31,556
Total Period $ 7,260 13% $ 12,876 $ 14,962 $ 17,386 $ 20,202 $ 23,475 $ 27,278 $ 31,697 $ 36,832
Net Margin $ 5,268 9% $ 9,343 $ 10,857 $ 12,616 $ 14,659 $ 17,034 $ 19,794 $ 23,000 $ 26,726
Income Statement
Baldwin Inc. High End Segment
Note: All numbers are in thousands. Constant market share is assumed.
30
Strategy Evaluation: Quantitative Evaluation – NPV Analysis
Now that we determined the future cash flows for each strategy for the next eight years, it is time
to perform a NPV analysis to see which project has the highest overall value relative to its
investment.
Before we begin, a few variables need to be briefly explained. To calculate our WACC discount
rate, we used the formula WACC = ((Equity x ROE) + (Debt x ROD x (1 – Tax Rate))) + Added
Risk Rate, where Equity = 0.554, Return on Equity (ROE) = 0.45, Debt = 0.446, Return on Debt
(ROD) = 0.116, and the Tax Rate = 0.35. Also note that Equity + Debt = 1. These numbers can
be found in the Capstone Courier and are a result of our financial structure that is laid out to
maintain a leverage ratio of 1.8. The Added Risk Rate in the formula represents the extra
percentage that is added to the WACC rate to demonstrate the elevated risk of certain strategies
over others. So for example, while the Added Risk Rate for our current strategy is 0, it is 5%
(0.05) for our Andrews-acquisition strategy and 8% for our foreign Joint Venture. These yield
final WACC ratios of 28.29%, 33.29%, and 36.29% respectively.
Finally, we also need an initial investment, or cash flow zero, for our three scenarios. For our
current strategy, we estimated it to be $9 million, as this amount approximately covers the cost of
R&D, marketing initiatives, and capacity expansions to keep Boost competitive in the high-end
sensor market. For the Joint Venture, we estimated an initial investment of about $4.5 million,
which is intended to cover the cost of hiring an international team, identifying an appropriate
partner, and providing initial assets related to our sensor technology.
And lastly, for our Andrews acquisition, we estimated an initial investment of $11,782,740. This
number was estimated by considering the overall market value of the entire Andrews firm and
roughly calculating to what extent its high-end division contributed to that value. At the end of
2018, Andrews market cap stands at $91 million. Its overall unit sales were 6,835,000 to which
Anvil, its high-end sector product, contributed 885,000 units or about 12.95%. When that
percentage is taken from the overall company value, we obtain our $11,782,740.
31
NBD EE1 – Current strategy: SO1 – Joint Venture:
Equity (E/V) 55.40%Debt (D/V) 44.60%ROD 11.60%
ROE 45.00%
WACC 28.29%
WACC Calculation
Equity (E/V) 55.40%Debt (D/V) 44.60%ROD 11.60%ROE 45.00%WACC 36.29%
WACC Calculation
Years Cash FlowsCF0 (2018) -9,000 $ Co1 (2019) 6,121$ Co2 (2020) 7,113$ Co3 (2021) 8,265$ Co4 (2022) 9,604$ Co5 (2023) 11,160$ Co6 (2024) 12,968$
Co7 (2025) 15,069$ Co8 (2026) 17,510$ NPV 18,693$
WACC 28.29%
Assumptions
NPV Analysis
Years Cash FlowsCF0 (2018) -4,500 $ Co1 (2019) 8,570$ Co2 (2020) 9,958$ Co3 (2021) 11,572$ Co4 (2022) 13,446$ Co5 (2023) 15,624$ Co6 (2024) 18,156$ Co7 (2025) 21,097$ Co8 (2026) 24,514$ NPV 26,245$
WACC 36.29%
NPV Analysis
Assumptions
WO2 – Andrews Acquisition:
Equity (E/V) 55.40%Debt (D/V) 44.60%ROD 11.60%ROE 45.00%WACC 33.29%
WACC Calculation
Years Cash FlowsCF0 (2018) -11,782.74 $ Co1 (2019) 9,343$ Co2 (2020) 10,857$ Co3 (2021) 12,616$ Co4 (2022) 14,659$
Co5 (2023) 17,034$ Co6 (2024) 19,794$ Co7 (2025) 23,000$ Co8 (2026) 26,726$ NPV 24,645$
WACC 33.29%
NPV Analysis
Assumptions
Note: All numbers are in thousands.
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Strategy Evaluation: Strategy Selection – Optimal Strategy
At this point, we have evaluated our three alternative strategies qualitatively as well as
quantitatively. It is now time to pick an overall winner that will be implemented. For that
purpose, we will make a direct comparison between all three strategies in respect to their QSPM
scores and NPV.
Strategy Selection
Strategy
NBD EE1 Current Strategy
SO1 Foreign Joint Venture
WO2 Andrews Acquisition
Analysis
QSPM Score
3.40 6.40 5.75
NPV $18.693 million $26.245 million $24.645 million
It appears that both the QSPM as well as the NPV analysis favor our SO1 strategy, the Joint
Venture with a Japanese firm. Hence, this is the strategy we will be implementing.
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Strategy Implementation: Action Plan
Now that we selected an appropriate strategy, it is time for its implementation so that our
Ultimate Division can benefit from it. An action plan of implementation is provided below.
Strategy SO1: Joint Venture in Japan
Action Step Begin Date 2010
End Date 2010
Responsible Department(s)
Responsible Position(s)
Resources
Complement Required
Assets/Expenses Required
Expenses in
Thousands
Hire / Train International Team
May 10
May 31
Human Resources
Director of Human
Resources
6employees, each
10hrs/wk for 2 wks = 120hrs
Salaries, PC, Internet, Training
Materials
$1,000
Hire / Train 2 Japanese Natives
$300
Research / Identify Potential Partners
May 31
June 28
International Director of
International Relations
2 employees, each
20hrs/wk for 4 wks = 160hrs
Salaries, Phone, PC, Internet
$200
Legal Search May 31
June 28
Legal Director of
International Law
1 employee, 20hrs/wk for
4 wks = 80hrs
Salary, PC, Internet, Legal
Literature $100
Contact Potential Partners
June 28
July 9 International Director of
International Relations
2 employees, 40hrs for 1 wk = 80hrs
Salaries, Phone, PC, Webcam
$100
Trip to Japan July 12
July 17
International / Legal
Director of International
Relations and Director
of International
Law
5 employees, each
40hrs/wk for 1 wk = 200hrs
Plane Tickets, Accommodations
$50
Negotiations July 13
July 15 Salaries, Formal
Dinners, Salary Additions
$275 Finalize Contracts
July 15
July16
Provide Technological Assets
July 23
August 6
Operations Director of
Foreign Operations
3 employees, 40hrs for 2
wks = 240hrs
Salaries, Trucks, Sea Shipping,
Machines $2,475
Total Initial Investment
$ 4,500