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Acme Lights

Acmes CEO had felt for some time that, although from the corporate financial viewpoint the

company was in good health, the product portfolio was not performing as it might so he

asked his senior team for brief reports.

Marketing manager:We have been producing our basic security light (BSL) for many years

and it has always been up there with the market leaders because of our quality reputation.The integrated light system (ILS) was launched into the growing garden leisure market

three years ago and is already one of the main players. We have been producing the

external security sensor (ESS) for as long as the BSL but in the past five years it has lostmarket share because competitors have kept on bringing out new models. I think we needto invest more in developing and marketing all our products.

Finance director:We are spending huge amounts on development and marketing the ILSbut this is not reflected in the returns. Our big money maker is the BSL and we should sell

the ILS and ESS and focus on what we are clearly good at.

Production manager:I agree with that. The BSL is a stable product look at inventory

management. I find it difficult to stop people leaving the ILS because so much overtime has

to be worked; attrition is also high on the ESS because we have put people on short timeand morale is very low.

CEO:You are all missing the point. The underlying problem is that the ESS does not fit ourportfolio and it is causing problems with the overall company supply chain while the ILS is

clearly an unnecessary drain on company finances. I must say I am not convinced with the

new models being brought out by our competitors; it is a mystery to me why they think it iscost effective.

Strategist:This discussion is quite hopeless without applying strategic models tounderstand properly our competitive position and how effectively the products are actuallybeing managed.

Acme Plc

Operating Account at end year: Cost, revenue and gross profit ($000)

SALES REVENUE 304 250

COST OF GOODS SOLD 236 366

GROSS PROFIT 67 884

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Operating Account at end year: Overheads and Operating Surplus ($000)

Factory cost 2 000

Corporate HQ 9 000

Corporate Marketing 1 000

Hiring & redundancy cost 2 940

TOTAL OVERHEAD 14 940

OPERATING SURPLUS 52 944

Cash Flow for year ($000)

OUTLAY INCOME

Material purchase 54 242

Loan interest 10 500 Interest on assets 300

Wage cost 118 500

Equipment cost 53 950

Product marketing 10 459

Product development 5 250

Total overhead 14 940 Sales revenue 304 250

Total outlay 267 841 Total income 304 550

NET CASH FLOW 36 709

Balance Sheet at end year ($000)

FIXED ASSETS

Factory 150 000

Equipment 150 000

Corporate HQ 50 000

TOTAL FIXED ASSETS 350 000

CURRENT ASSETS

Raw materials 13 560

Finished goods 27 598

Cash 10 000

TOTAL CURRENT ASSETS 51 158

TOTAL ASSETS 401 158

OWNERS EQUITY 251 158

DEBT (long term)

Loan 150 000

TOTAL DEBT 150 000

TOTAL LIABILITIES 401 158

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Report on Products for Year

BSL ESS ILS BSL ESS ILS

Market share 20 5 15

Composition of supply

Output 600 000 117 000 8 750

Inventory (year beginning) 30 000 12 000 2 000

ORDERS 600 000 125 000 7 500 TOTAL SUPPLY 630 000 129 000 10 750

Distribution of supply

Sales to orders 600 000 125 000 7 500

Working time (%) 100 90 120 Inventory (year end) 30 000 4 000 3 250

Labour attrition rate (%) 2 6 6

Price ($/unit) 380 250 6 000

Competing price ($/unit) 380 250 6 000

Account at end year

Wage cost ($000) 75 000 13 500 30 000

Equipment cost ($000) 40 000 5 200 8 750

Material used ($000) 50 000 2 925 817

Product Marketing ($000) 5 490 469 4 500

Product Development ($000) 5 250 SALES REVENUE ($000) 228 000 31 250 45 000

TOTAL COST ($000) 170 490 22 094 49 317 COST OF GOODS SOLD ($000) 170 490 23 604 42 271

Unit cost ($/unit) 284 189 5 636 GROSS PROFIT ($000) 57 510 7 646 2 729

Required:

1. Demonstrate what the strategist meant by applying strategic models.2. Set out your view of the future of the company under the present management.