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The analysis of MSD business plan
The paper is about MSD Construction Company own by an Omani citizen Mr Mujahid Al-Zadjali.it specialized in providing services including concrete fabrication, utilizing framework, concrete placement and excavation. It focuses on commercial as well as residential clients. It aims to become the leading contractor by providing high quality services with affordable prices.
This paper is about analyzing of the business plan for MSD. It will evaluate whether the plan is suitable for the firm to achieve their long-term goals.
This assignment will be organized as follows. First, it will highlight the owner-personal quality and the skills he possessed. Then, the organizational structure and management skills and duties will be evaluated. Later on, the company product-market will be discussed. It also will discuss about its market and pricing strategy. Next, it will focus on competitive environment and their strategies. Then, the financial performance of MSD will be analyzed. After the analysis of financial statements, the paper will analyze the SWOT of the company. In conclusion, there will be a brief summary about the case and recommendation for MSD to improve their business plan.
1.0 Personal Quality of the owner manager
Mr. Mujahid AL-Zadjali is capable to run his own construction business as he has 5 years experience in the field. In addition, he possesses a variety of skills that are required in running this type of the organization, such as marketing, time management and cost control skills. In addition, these will help assists him to solve the crises in future. The business plan had not mentioned whether he has IT skills which are important for all business.
Based on the business plan, the owner is willing to hold liable for all debts and obligation related to company. He also established long-term planning for the organization. These all indicate that he is self-motivated and emotionally strong to face all the business risks. Also, it means that the owner definitely desires to growth his business.
The objectives of the entrepreneur are to develop infrastructure for long-term planning and to achieve regular profit yearly. Furthermore, it aims to provide quality services at affordable cost to its customers. Another objective of the company is to provide health and safety work environment to its employees.
The owner of the firm has adopted leadership style based on responsible and mutual respects between the staff. This is one of the ideal characters for this construction company as there are many technical works have to be performed by specialized employee.
2.0 The Management Team
The business already had management team which consists of two administrative assistant and general manager. However, there are not sufficient numbers of management in the team. It should include human resource manager to accomplish the safety requirement on the job and high quality of services. The company should also appoint stock manager to manage in-coming and out-going materials for the constructions. In addition MSD did not appoint proper manger for preparation of the financial statements as it kept in position the administrative assistant with marketing and public relation background. It should hire manager that is specialized in accounting and finance.
According to the management team that mentioned in the business plan have adequate mix of outside experience. For example, Ms. Jaya is an administrative assistant has excellent organizational and managing office crisis skills with 25 years of experience in accounts payable and receivable. Except for Mr. Varma which has seven years experience in marketing and public relation but which is not adequate for accounting job.
The company set a goal to build an infrastructure for organizational structure but seems it does not applied yet proper organizational chart. It did not mention a detailed organizational structure and who should report to whom. It should clearly set up structure with staff position and duties.
The business plan has not mentioned if there is any delegation of authority between staff. They have to plan a proper delegation strategy and to inform staff about it in order to be aware of the responsibilities that are transferred to them.
There are no monitoring procedures to check the performance of the employees. The company had to have performance measurement to evaluate how the staffs perform in their duties.
The organization philosophy is based on job responsibility and mutual respect between staff. The staff should follow this organization culture to achieve the company's common goals and objectives.
MSD consider its employees as it provides health and safety work environment within the concrete industry. Moreover, it trains its employees adequately on the industry work. Although these are satisfying staff, there is probability of cost increasing of the company especially overhead expenses.
3.0 Product-Market Offering
The construction company had set target market by supplying its services to both commercial and individual customers. It provides road construction and dirt work for commercial customers. It also provides house slabs and driveways for residential houses. Moreover, it provides concrete fabrication services for both residential as well as commercial customers.
The business plan although highlight the services that provided to clients, it did not mention the types of services that are preferred by the clients. It should have a detailed investigation of customers needs to satisfy their requirements.
MSD adding-value in their products through provides certain benefits to its clients including solid foundation, long lasting and safety and high quality products with cost-effective prices. Therefore, the clients can enjoy living at their house and feel safety.
According to the statistics in business plan the demand of single-family units has been increased by 12% and 1.5% for multi-family units in 2001. This indicates that there is market space for MSD products and services. However, the statistics are out of date and the company should rely only on the recent data.
The firm has knowledge of the industry and competitors as it knows that the market is in growth position and the competitors' strength and weaknesses, such as Julfar and Bahwan Company. These all will assist firm in having resistance against any reaction by the competitors.
The products and services of the firm are well-constructed and durable with high quality but at reasonable price. Therefore, it leads to low maintenance requirements. In addition, it ensures that their products are saved and approved by Muscat Municipality and Ministry of Electronic and Water Resources before providing to customers. This indicates that the company has shown the value of their products for prospect customers.
Bahwan and Julfar are well known brand with many years experience in construction services. They have an exemplary skill in customer relation management which enables them to retain their clients. Besides that, they have marketing skills and database resources that create obstacles to MSD to become market leader.
Construction Company is trying to stay close to customers by gathering all its services in head office (AL-Khuwair) and it provides 24 hours call centre as a facility for customers if they face or to complain about any problems.
In tight economy and high competition, MSD planned to design a unique strategy to keep the cost at reasonable level with high quality of products. It also verifies calls in accordance to their circumstances and then transfers these particular calls to proper department. It can be cost leadership firstly by attempt to gain more market share than its competitors. Then, the cost will be automatically reduced by distributing fixed cost in wide range of products.
4.0 Competitive Environment
Based on business plan there are no indicators of whether some of elements will affects the construction industry, such as economic stability and customer needs.
MSD firm had collected only some information regarding to its competitors. This include as follows:
* Operating method. The competitors using high quality services with reasonable price. These prices will gradually decrease up to the current market price without reducing in quality.
* Market strategies. In order to retain their clients, they hired customer relation management for this purpose.
On other hand, MSD did not find information related to competitors including size and profitability. It should get some statistical data about the competitors' profit, their market shares, number of employees, number of branched and so on.
The entrepreneur did not identify of the future marketing mix strategy of the competitors. It also did not investigate of whether the rivals have planned to develop new products for the future. The company's objective if the competitors develop new products or provide new services. It might be the latest one to possess these products or services and these possessions might already reach at their maturity level. MSD should at least try to gets some information about the competitors (through analysis current market strategy of the rivals to predict its future plan) in order to find proper reaction against its competitors to keep their objectives achievable.
The company did not have a unique resources that makes it difference from the competitors to attract clients. It should have something that allows them to be differentiating from other. For instance: providing free maintenance after sales.
5.0 Financial Performance
* Financial Statements figures
The analysts found certain errors in the MSD financial plan. In its projected income statement the amount of retained profit that desired by MSD is same as the break even. Therefore, the firm should make more profit to achieve its target. Moreover, the retained profit for the year 2007 was wrongly calculated. The amount after deducting provision for tax and legal reserve should be R.O 21,000 instead of R.O 42,600. This error affected the rate of some ratios like net profit and ROE.
In projected balance sheet of the firm two issues were found. First, the fixed assets were relatively low. The company's fixed assets balance should be higher due to heavy machinery and building that it possessed. If we assumed that most of its fixed assets is in form of leasing, it did not mention in the F.S. secondly, in 2008 the F.A was significantly low compare to previous years.
About the projected cash flow, there is one mistake has deducted. The advance pre-payment have to be ‘nil' instead of negative balance of R.O 5,000 as it is constant every year.
The business plan also includes the calculation of ratios. In calculation of interest cover, MSD did not mention the amount of interest or the amount of loan that will enable it to calculate the interest. There is a financial charge in income statement but it represents beside interest other items, such as transaction fees and cost of credit. Thus, it will mislead all the stakeholders who depend on the statements.
* Financial ratios analysis
However, the analysis of the ratios was based on the given statement except for 2007 where it calculated after the amendment of net profit.
a) Performance ratio:
Return on shareholders' funds.
The profit available to owner had been decreased in 2007 by 8.5% but it increased again in 2008 15%. This is because the profit after tax decreased in 2007 and then increased again in the following year. According to the plan the net profit is fluctuated every year. This indicates that company does not have adequate plan for uncertainty.
Return on capital employed
ROCE had been increased continuously every year. It is because the profit before interest and tax increased yearly. This mean the company situation is continually improving and willing to pay its debts. However, long term debt had not taken into account as it was not available in projected balance sheet. This lead to inaccurate identifies the percentage of profit available to pay its debts.
b) Profitability ratio:
The projected income statement shows that gross profit has been slightly decreased from 2006 to 2007. This is due to the increasing in cost of sales and the revenue did not increase at the same level while it remained almost same in 2008. MSD should investigate the reason of such decreases as it may affect he net profit in future
Net profit margin
Although the gross profit had been decreased, it can be noticed that the net profit is increasing every year. The reason for increasing is operating expenses has been increased at acceptable level which let retained profit to reflect the increasing in sales revenue. The total expenses were increased from 2006 to 2007 by 1.13% (27,000/24,000) whereby retained profit had increased by 1.58% (42,600/27,000) for same period.
c) Asset efficiency ratio:
The debtor collection period has decreased in 2007 by 34 days and it increased again in 2008 by 12 days. However, it is still considering high. (Further explanation in III)
Average payment period to MSD's suppliers is 79 days whereby average collection period is 158 days. Company might face problem in cash flow because it pays to supplier before receiving from customers. It should make sure that the money collected earlier than the payments although customers may not like it otherwise the firm will suffer to pay to its suppliers. If this situation is continued, the suppliers may not renew the contract or may ask the firm to pay on delivery.
d) Liquidity ratio:
The current ratio of the firm has been decreased in 2007 and 2008 compare to 2006 but it is still at acceptable level. This is probably because the current liabilities in 2006 are less than in 2007 and 2008. MSD attempted to ensure that its current ration did not fall below 4:1.
Again, the current liabilities in 2006 are more than in next two years. It was noticed that the inventory was less in 2006 than the inventory in following years. MSD should ensure their inventory level should not increase further otherwise it might face difficulties in cash flow.
e) Gearing ratio
The interest coverage of less than three times is considering low. It can be seen that the interest cover is increasing every year from 21 times in 2006 to 29 times in 2008 which is good news to company. The reason behind this increasing is the profit before interest and tax is greater in 2007 and 2008 than in 2006 regardless of increasing in total expenses.
* Sensitivity analysis
The following table will help to calculate the sensitivity to profit.
Less: Material cost
Less: Labor cost
Less: Fixed cost
I) Calculation of sensitivity
Since the plan had not given clear figures for calculating sensitivity of the project, we had assumed the following:
* Cost of sales had been taken as a material cost.
* Staff salaries as a labor cost.
* Other expenses had used as fixed cost.
Profit to sales
Profit to material
Profit to labor
Profit to fixed cost
It had found that sales were the lowest percentage among the others. Therefore, it was more sensitivity to profit. It means that the sales will affect the profit more than other element if it decrease or increase.
II) Calculation of BEP
Profit to BEP (in value) = sales*(F.C/contribution)
The company had to sell an average of R.O54000, R.O61000 and R.O67000 in 2006, 2007 and 2008 respectively in order to cover all of its expenses.
III) Margin of safety
The company can allow its sales to decrease by 35%, 27% and 22% in 2006, 2007 and 2008 respectively without incurring any losses.
6.0 SWOT analysis of MSD construction
MSD provides quality construction services by providing an honest, fair working relationship with residential and commercial clients, subcontractors and sales people. Since the biggest concern within the concrete work industry is the health and safety of its employees as well as the customers. Also, it developed a comprehensive infrastructure designed, long term planning with a safety policy and secure company. They did good analysis about the strength and weaknesses of their competitors. The company management has different facilities which enhance them to perform better such as, experience and qualification in different areas in the market started from the owner. The ability of company to provide superior quality services at highly competitive and guaranteed price.
There is no clear organizational structure of the company. They don't have a famous brand name yet. Also, they focus only in few department and duties. Moreover they did wrong calculation in different areas like in concrete work and in single-family housing construction. In order to overcome these weaknesses, MSD should create additional departments, such as IT and human resource department. Furthermore, it should hire financial analyst to analyze market accurately.
The owner and his management team are highly experienced and qualified in construction work. The growth in population, demand increase in construction and increase in government projects will help them to survive. Also, competitors have high overhead expenses, bad contractual terms with its key suppliers that often delay particular project and because of that they are losing some of their strategic partnership with significant firms.
MSD faced strong competitors with strong capital and shares, which they already in the market and they have high construction services and distribution quality at very competitive price. The competitors have exemplary skills in customer relationship management and leading marketing skills with efficient database management. In pricing strategy the competitors seems to be the expert in the field by offered reasonable price with high quality for a year and then slowly moves it down to compete with current price in the market. Government regulation to apply omanization which could lead to high cost and the labors May not have a good experience. MSD can merge with other construction company to get extra capital for competing with competitors. It can build its own IT department to process the data efficiency. It should have proper procedures for recruitment so it can minimize after employment cost.
Conclusion and Recommendation
This paper had analyzed the appropriateness of MSD business plan. There were some issues against the plan that is necessarily to succeed the business. Some of importance investigation had not carried on, such as competitors' strategy. On other hand, there were some incomplete statements and improper collection of market statistic. Moreover, the firm F.S had included errors that would affect its financial goals. In addition, the company did not have PEST and Porters' five forces analysis of the industry.
These missing statements will lead to business failure. If it is plan to propose their business plan to the any of financial instruments to seeking loan there is potential of rejecting this proposal.
MSD should review some of its plan, such as market statistic and attempt to get more accurate data.
Beside the correction of data, it should also collect significant data like competitive market shares, profit and the size. In addition, it should collect information about competitors' Porter's five forces.
It had found that some of the management holds inappropriate position in accordance to their qualification and experience. The firm should review this and try to appoint right person for the right job.
It should also hire some additional managers in management team, such as human resource manger and stock manger to implement the company's strategies.