Business analysis of Merbatty

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CIMA Global Business Challenge 2014

MNA206 Management Accounting II

Semester2 2013-2014

Mid-term assignment

Content
  1. Background 1.1 Industrial background………………………………………………………….4 1.2 Merbatty’s background………………………………..................................4 – 5
  1. SWOT analysis 2.1 Strength 2.1.1 Large share of economic of scale…………………………........................5 2.1.2 Low interest rate during tough economic………………………………...5 2.1.3 Advantages of listing on the stock market……………………………......5 2.1.4 Improve public image by Charitable work…………………………….....5 2.1.5 Latest technology…………………………………………………...........5 2.2 Weakness 2.2.1 Less control of outsourcing interior designers…………………………....6 2.2.2 Disadvantages of a public limited company……………………….……..6 2.2.3 Narrow produce models and weak sales allocation……………………....6 2.3 Opportunities 2.3.2 Five years plan including new models production…………………..........6 2.3.3 Five years plan including new sales offices……………………................6 2.3.4 Opening of third boat building facility…………………………………...6 2.3.5 Introduction of new technology………………………………………….6 2.4 Threats 2.4.1 Competitors……………………………………………………………...7 2.4.2 Limitation of production capacity…………………………………..........7
  2. Ratio analysis 3.1 Liquidity ratios…………………………………………………………............7 3.2 Profitability ratios………………………………………………………......7 - 8 3.3 Efficiency ratios…………………………………………………………..........8 3.4 Investment ratios…………………………………………………………….....8
  1. Problem analysis 4.1 Accident at work…………………………………………………………..9 - 10 4.2 Racing boat…………………………………………………………….…10 - 11 4.3 Late delivery of a hull from Topcrest………………………………….....11 – 12

  1. Proposals analysis 5.1 New design supplier for third boat building facility………………….…..12 - 13 5.2 Sales staff employment issue…………………………………………………13
  2. Ethical issues 6.1 Racing boat issue……………………………………………………………..14 6.3 Later delivery from Topcrest issue……………………………………………14
  3. Reference…………………………………………………………………………14

  1. Background 1.1 Industrial European were being the leader of the leisure boat building industry until the recent 20 century, the USA and Australia has come in and share the market as one of the developed luxury boat building countries. Changes with the times, people live longer and enjoy more leisure time, the demand of luxury boats as a result increase greatly and correspondingly the quality of leisure boats. The target customers of luxury boats are major come from the upper class who are wealthy and successful. To them, they always don’t have much limitation on the spending to the boat and therefore they tend to have higher standards of requirement on the quality of the boat. That makes the luxury boat industry to be more customer-oriented. On the other hand, with the new post of environmental legislation (Recreational Craft Directive) in EU and USA increases the cost of the industry. 1.2 Merbatty Merbatty is a luxury boat building company which has a 33 years history located in the northern of EU. There are two boat factories locate at the USA and the EU. There are nearly 2200 employees working in the two factories. It goes public in 2012 and currently issued 120 million share at price of €2.8. Thus, the shareholding of the chairman drops to 30% and the JKL has become the second large shareholding with 28% shareholding. Merbatty are currently selling 15 types of boats with different sizes in various prices. Base on the fundamental cost, customers can have their own specific instruction for the interior design of the boat with additional payment. The building process varies from three to ten months depending on different model and size of the boat. Beyond EU and USA, Merbatty employs sales agents worldwide to generate sales from different parts of the world. In year 2012, Merbatty had a sales record of 280 boats which account 8% of the global market. The major sales are mainly come from Flybridge and Cruisers Model which are relatively lower price models. The EU made up the largest profit proportion with €219 and following by USA made a benefit of €148.
  2. SWOT Analysis 2.1 Strengths 2.1.1 Large share of economic of scale During 2012, Merbatty have a boats production record of 280 boats which occupy the global market share at 8%. Thus could put Merbatty in the competitive advantage. 2.1.2 Low interest rate during tough economic Due to the tough economy environment, Governments tends to implement quantitative easing monetary policy, which increase the supply of money, and lower the interest rate. Thus would be a benefit to the Merbatty as they enjoy a lower interest rate on the new loan of €200m. 2.1.3 Advantages of listing on the stock market Merbatty became a listed company in the 2012, it can then enjoy various sources of finance. 2.1.4 Improve public image by Charitable work As the chairman of Merbatty has been always involved in charitable work, thus help Merbatty to make improvement of image over the public. 2.1.5 Latest technology Merbatty is currently using the latest technology, including Computer Numerical Controlled (CNC) machining and robotic spray systems. Thus can help to reduce the costs of production. 2.2 Weaknesses 2.2.1 Less control of outsourcing interior designers Merbatty decides to outsource several elements of its interior design services. Thus would lead to loss of management control and product quality problems. 2.2.2 Disadvantages of a public limited company Every coin has two sides, as Merbatty is being a public limited company, has to share its profit with outside shareholders and increase its administration expenses. 2.2.3 Narrow produce models and weak sales allocation Merbatty is currently selling 15 types of boasts, which is quite a narrow choices provide to its customers. Thus may put Merbatty in the competitive disadvantage. 2.3 Opportunities 2.3.1 Five years plan including new models production Merbatty is planning to produce a much wider range of new boat models. Thus would help to solve the weakness of not having enough diversity of boat models as competitors which mentioned above. 2.3.2 Five years plan including new sales offices Merbatty will open sales offices in over 20 locations around the world and to terminate some sales agents’ contracts. Thus would wider the sales network of the company, 2.3.3 Opening of third boat building facility The third boat building facility located at the Surania would be a great competitive advantage to the Merbatty. Thus could provide a range of targeted services to the great demand from Middle East. 2.3.4 Introduction of new technology Merbatty has introduced the supplier rating systems and Key Performance Indicators (KPI’s) to maintain a closer relationship and to build a long standing relationship with its supplier. 2.4 Threats 2.4.1 Competitors

Merbatty only focus on the building of boats powered by engines and doesn’t include other types of leisure boats, as a result it would limit its competitiveness towards other boats builders and put its competitors in a competitive advantages. 2.4.2 Limitation of production capacity Facing the increasing demand of luxury boats, the capacity of Merbatty’s two facilities would reach the saturation point.

  1. Ratio analysis 3.1 Liquidity Ratios

2012

2011

Current ratio

3.15

0.79

3.1.1 Current ratio The current ratio of 2012 increase rapidly from 2011 which from 0.79 to 3.15. The situation reflect that the liquidity level of the company has a significant increase, which means the company has hold more cash than that of receivables. Other the other hand, 3.15 is considered to be a too high current ratio that shows the Merbatty may not efficiently using its current assets in generation of profit. 3.2 Profitability Ratios

2012

2011

Profit margin

8%

7%

ROCE

0.09

0.21

3.2.1 Profit margin The profit margin of Merbatty had a very slight increase of 1% from year 2011 to year 2012, which explains that the sales condition and expenses incurred is remain constant for the past year. 3.2.3 ROCE Similar to the too high current ratio, a decreasing ROCE of Merbatty once again indicates the inefficiently use of its capital investments.

3.3 Efficiency Ratio

2012

2011

Asset turnover

0.52

0.80

3.3.1 Asset turnover A lower asset turnover ratio than previous year could be a strong evidence that Merbatty is currently using its assets in an inefficient way. 3.4 Investment Ratio

2012

2011

Gearing

0.25

0.40

EPS

0.22

0.66

3.4.1 Gearing ratio A decreasing gearing ratio would be a positive change to the company, which means that the debts of Merbatty had decreased from last year. The gearing ratio of Merbatty is 0.25(<1) which can be considered as healthy. 3.4.2 EPS Merbatty is currently experiencing a decrease of EPS while it having an increasing profit. The dropped EPS is caused by the new issue of shares of Merbatty, as there is no big changes on its profit generated in both years while its share issued had increased from 2011(30m) to 2012(90M).

  1. Problem analysis 4.1 Accidenct at work 4.1.1 Impact of the problem Recently Paulo, a Scotsman of Merbatty, had felt down while he is working on a hull and had broken his leg because he arrived for work high on drug. This reflects that there is not enough security check for high-risk workers of Merbatty. Also on the other hand shows that the working guideline is not perform strictly. When employees are injured during job, it may cause sadness and fear in workers around the working environment. Employees may be hesitant to continue with the task surrounding the accidence place. Thus would damage the morale of employee. Thereafter, Merbatty has to handle the aftercare works with extreme cautious because the public, including the union, are following very closely on the issue. Once the public consider the company makes improper actions, it will bring serious damages to the image and reputation of the company. In November 2009, 6 workers were unfortunately fall down from a faulty elevator and caused death during the construction process of the International Commerce Centre in Hong Kong. The deceased’s families urged the developer, Sun Hung Kai Properties, to explain the accident. The developer not merely provided no explanation but also tried to cover the tenants in nearby. Such improper handling drawn the anger of the public, the union so raised demonstrations to criticize the unscrupulous of the Sun Hung Kai Properties. 4.1.2 Solutions 1. Merely to release a compensation to Paulo and to cover the accident to the public. 2. To provide a good aftercare (compensation and medical service) to Paulo and to apologize to the public about the improper implement of safety guideline and promise to improve. 4.1.3 Recommendation Solution 2 are recommended as it benefits the company in both short term and long term. In short term, providing a good aftercare to the victim could maintain employees’ morale and make the paused task continue. In long term, it is a good way to apologize before any public opinion come out. Because this could avoid the company image being damaged by hypes. 4.1.4 Problem By solution 1, if it is running well with the covering work on the accident, there would not be a strict feedback from the public, thus help to cut costs and shorten the steps it may need to take comparing to solution 2. The company on the other hand has to bear the risk that if the covering work is fail, there would be an irreversible damage to the company. 4.2 Racing Boat 4.2.1 Impact of the problem

Jesper is the market director of Merbatty. He has an idea to promote Merbatty’s top boat P-3000 through racing boat. Although the racing boat cost a lot to Merbatty, Jesper has make a calculation and analysis on the P-3000 costing. He believes that the sales of P-3000 after the promotion through racing boat can cover the cost spent on racing boat. However, the chairman of Merbatty Alberto feels dismayed about the event of racing boat. Alberto thought spending on racing boat to promote the boat of Merbatty is wasting of money while without any guarantee of success.

4.2.2 Solving the problem

  1. Alberto and Jesper can have a meeting to discuss about the issue about the racing boat event. Other shareholder can give advices on the issue and find out the best way.
  2. Other than promotion through racing boat, there are still a lot of events that can promote Merbatty. May be they can make some advertisement or attend some boat exhibition to grab notice.

4.2.3 Recommendation Solution 1 is the best options, other shareholders have the rights to vote for the proposal and advices in the meeting. Only two men ideas are not enough, may be the proposal works and attract lot of customers.

4.2.4 Problem

Solution 2 may put the company into a high risk of loss because of not guaranteed of profit. 4.3 Late delivery of a hull from Topcrest 4.3.1 Impact of the problem As there are not a lot of suppliers choices that Merbatty can choose and the contract was too lucrative to turn down, the best idea is to rely on Topcrest. A late hull deliver would give a bad reputation to the business. However, Topcrest offered a reasonable compensation to Merbatty, which can solve the merbatty’s short term financial problems. For example, a number of small parts such as chemical coating or adhesive agents such as capacitive suppliers often have to face Apple's demanding requirements and pushing for lower prices. Apple will ask the manufacturers "if they have the ability to do this? Or we will find another supplier," It can usually force suppliers into submission. Facing such a large single business, the majority of suppliers will be pushed to the limit of the production line, and Apple can therefore reduce costs. This is in fact the majority of large companies control the means of cost. Moreover, for instance iphone 6 needed sapphire glass for the phone. There is not a lot of companies sell sapphire glass in the world and reaching the standards of Apple is more difficult. This shows Apple has no better deals from other companies, just like Merbatty has no better options than Topcrest. 4.3.2 Solving the problem

  1. Merbatty could choose another hull supplier.
  2. Merbatty can accept the offer by Topcrest. In the meantime, Merbatty can find other more reliable suppliers.
  3. If Topcrest and Merbatty have a contract and Topcrest failed to complete the offer which includes good quality and guarantee no late delivery, Merbatty can sue for breach of contract and possible get more compensation. The compensation they get can invest on other reliable suppliers.

4.3.3 Recommendation Short term

Finding other suppliers in such short time would be difficult, therefore Merbatty should accept the offer by Topcrest. They have good quality of hulls and also would give compensate for the delay. If Merbatty decides to find other suppliers, they cannot guarantee that the hulls would arrive on time and they would have a higher loss.

Long term

Merbatty should find more different suppliers and negotiate to have the best deal for the future. They can rely on more suppliers and avoid late delivery.

4.3.4 Problem

Solution 2 should be the best option to solve the problem. First, it can solve the problem immediately that hull has not enough to use in Merbatty. Second, Merbatty can still find better suppliers to avoid the problem in the future in the meantime.

  1. Proposals analysis 5.1 New design supplier for third boat building facility 5.1.1 Background of proposal The third boat building facility located in Surania was approved by Merbatty Board on March 2012. Lukas Dian has provided the background information of two potential design companies that willing to work for the new Surania Facility, the Merbatty has to make the choice. 5.1.2 Discussions 1. Cooper Design

Cooper Designs is a Western European multinational boat interior design business company. It has a new office which is located in Dubaria, 200 miles away from the Suranian boat building facility. It is a successful designing company providing high quality services and its designs are winning the best modern design awards. Moreover the Cooper make full use of computer assisted design techniques (CAD) and provides an extranet service allowing customers to remotely view the current design for their boat at any time.

2. Arabian Interiors

Arabian Interiors is a four year-old company but it has won recognition at the 2013 Dubaria international boat show for the best Arabian designed boat interior. The company’s employees are local people who are well educated and full trained in the use of the latest CAD systems. 5.1.3 Recommendations For suggestion to Merbatty, it is a good way for it to choose the Arabian Interiors. Although it has been founded for four years, it already got an award from the 2013 Dubaria international boat show. The risk of using this designer is lower because the employees are well-training to the latest CAD system. 5.2 Sales staff employment issue 5.2.1 Background of the proposal The Merbatty sales director, Mr. Stefan Gil and HR director Marie Lopp had discussed about employ sales staff as oppose to agents. 5.2.2 Discussions 1. Opinion of Mr. Gil

Sales agents are more motivated to sell the products. And most of the boat selling businesses have been used this for year and Merbatty should try to keep the situation if there is no profitable issues.

2. Opinion of Miss Lopp

The growth of Merbatty boats’ price nowadays are more affordable by the customers. Most of the target market of agents are not the same as Merbatty’s target while the sales staff of Merbatty can pointing to the company’s main market. 5.2.3 Recommendation It is a good suggestion to keep the situation now as agents have their own customer relations that Merbatty do not have at this moment, it may reduce its competitiveness and decrease the sales of products if Merbatty lost its sales agents.

  1. Ethical issues 6.1 Racing boat issue In the case, Jesper involves his self-interest to assert himself on the business and is not objectivity enough. Without any confirmed analysis and evidence, Jesper assert that there will be a extra sales of the P-3000. Thus would put the shareholders on a high risk to loss. 6.2 Later delivery from Topcrest issue In the case, the late delivery from Topcrest would affect the reputation of Merbatty because thus may cause a late delivery of Merbatty to its clients. The careless of Topcrest shows that it only base on its own interest and neglect the honesty between Topcrest and Merbatty.
  2. Reference Ng, Maggie. Death of 6 at ICC an accident, coroner rules. (11st Dec, 2010) http://www.scmp.com/article/733022/death-6-icc-accident-coroner-rules (visited 23rd March 2014)

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