Jot case study - Report


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Jot case study - Report

  1. 1. TEAM NAMEEKUSHEUNIVESITYBANGLADESH UNIVERSITY OF PROFESSIONALSTITLEREPORT TO THE BOARDMEMBERSTable of ContentsContents1.0 EXECUTIVE SUMMARY 32.0 INDUSTRY BACKGROUND 43.0 STRATEGIC ANALYSIS 43.1 Company Analysis 43.1.1SWOT Analysis (Appendix A) 43.1.2 Ansoff’s Growth Vector Matrix (Appendix B) 53.1.3 Porters Generic Strategies (Appendix C) 63.2 Industry Analysis 63.2.1 PEST Analysis (Appendix D) 64.0 FINANCIAL ANALYSIS (Appendix E) 64.1 Profitability ratios 64.2 Liquidity Ratio 64.3 Activity Ratio 74.4 Debt Ratio 7
  2. 2. 5.0 WHAT-SO ANALYSIS 86.0 SCENARIO ANALYSIS AND RECOMMENDATION 126.1 Near-Shoring Proposal in Voldania (Appendix F) 126.2 Launching New Range of Toys for 9-11 Age Group 126.3 Late Delivery of Christmas Product 136.4 Faulty New Flying Spaceship Toy 147.0 MAJOR ISSUE ANALYSIS AND RECOMMENDATION 157.1 Market Expansion 157.2 Reduce Debt 157.3 CSR Activities and Product Safety 168.0 APPENDICES 171.0 EXECUTIVE SUMMARYThis report tries to prioritize the current issues of the management of Jot whilediscussing and advising upon them. Through strategic and financial analysis, thereport analyzes the ins and outs of this firm and through a detailed what-so analysisthoroughly discusses the issues of the firm.For the near shoring proposal the team suggests to shift production to China basedupon net present value of cost involved while launching new products in the 9-11age group. The report provides multiple solutions for the late delivery and faultytoy cases and chose to prefer major customers over small retailers and to repair thefaulty products.The report further suggests on issues including market expansion, debt reductionand CSR activities.2.0 INDUSTRY BACKGROUNDToy market is a highly seasonal market with most sales occurring in pre-Christmas
  3. 3. periods (October-December). 86% of the world’s toys are manufactured in Chinaand most of the rest in other Asian countries. China has proved itself as a low costquality manufacturer in toy sector. But it does not design and create new products.3.0 STRATEGIC ANALYSIS3.1 Company Analysis3.1.1SWOT Analysis (Appendix A)Having strength in electronics and connections with a range of manufactures, Jot iscontinuously innovating new products every year. With an annual R&D budget of €1.2 million out of the total revenue of € 9.8 million in 2011, it is clear that Jot givesmajor importance to its product development. The company should continue on thisstrategy to ensure higher value proposition to the consumers but needs to have aquality assurance team that monitors the production process as well as thedevelopment stage to ensure no technical failures occur with the products.With rented warehousing, outsourced manufacturing and transportation it is clearthat uncertainty and management hassle is quite high. The entire process will haveto be monitored with utmost transparency to ensure that the management hascomplete control over it.There are some major untapped market segments that need to be catered in order tomaintain the growth level of Jot. These markets have high growth and can easily betapped into with new and advanced range of products that Jot innovates.3.1.2 Ansoff’s Growth Vector Matrix (Appendix B)Existing Product-Existing MarketJot’s major markets include USA and EU markets along with other non-EUmarkets in Europe. Of the total revenue, USA market fetched 23.11%. EU 39.73%and Non-EU European countries 29.04%. These markets will offer littleexpansion in the short-term in terms of increased revenue with the current worldwide recessions that have hit most of the developed countries hard.Existing Product-New Markets
  4. 4. While the USA and European markets are facing recession with austerity in majorEU markets, it’s time to look for alternate markets. Developing markets like Russia,China and India are the markets that can provide the much needed revenue growthfor Jot. Compared to other markets, the emerging Asia fetched only 8.45%. Theseare the markets that are untapped to a great extent and needs major attention.New Product-Existing MarketWhen it comes to entering new markets with new products, a major shift in strategyis necessary. Jot is a company producing toys for children. The current markettrend shows that children are more tech savvy and want more and more productsthat offer technologically advanced and user friendly toys.New Product-New MarketJot is introducing around 5/6 products every year with an annual R&D budget of €1.2 million. With the budget for each product development, it can easily focus theAsian markets where the buying power is generally lower than that of EU and USAbut with a much larger population. Cheaper products concentrating the Asianmarkets should allow them to have a more diversified business that are less proneto major worldwide downturns like the recent subprime crisis that has brought mostof the developed world to their knees.3.1.3 Porters Generic Strategies (Appendix C)Three generic strategies include: cost leadership, differentiation, and focus. Jot iscurrently using a combination of Porters differentiation in terms of product qualityand cutting edge technology and focus strategy for age group.3.2 Industry AnalysisJust as the internal environment of the business, external factors that affect thebusiness both in short and long term requires to be analyzed and the managementneeds to have a thorough knowledge of it.3.2.1 PEST Analysis (Appendix D)The political, economic, social and technological factors shown here affect thebusiness in every possible way. With a market distributed all over the world, Jotwill have a hard time accustoming itself with all these factors and functions
  5. 5. smoothly. Presently, the technological factors need to be given more importancesince with the advent of mobile aps and technologically advanced productsavailable to the more tech savvy customers.4.0 FINANCIAL ANALYSIS (Appendix E)4.1 Profitability ratiosThe Gross Profit margin of Jot is quite good but due to the higher distribution andadministration costs, including development costs of the toys; the operating profitis quite low. The net profit margin has risen a bit compared to the former year butstill it is very low due to the high finance expenses of the debt capital.ROA shows that management has failed to effectively generate adequate amount ofprofit while ROE is higher than ROA due to higher debt capital.4.2 Liquidity RatioThe Quick Ratio is quite high due to the higher amount of trade receivables and isalso lower than that of 2010. The receivable are high as toy market is highlyseasonal and around 30%-55% of the sales occurs in the fourth quarter of the yeari.e. October to December and over 68% of Jot’s sales are dependent on 7 largeretailers and they often don’t pay until at least 60 days after the invoice date.Though the Current and Quick ratios are pretty good but Jot may face problem inmeeting its short term obligations as the cash ratio is too much low and already thecompany has taken an overdraft of €960,000 @12% per year.4.3 Activity RatioThe inventory turnover of Jot has risen than that of 2010 resulting a lowerinventory turnover period which means the average number of days the items ofinventory are held for has reduced. The asset turnover ratio has also risen,meaning that the management of Jot was able to manage the assets more effectivelyand efficiently than that of 2010 in generating the sales.4.4 Debt RatioThe debt ratio and the gearing ratio in comparison to that of 2010 has fallen but stillis very high meaning that significant portion of the firm’s total asset has beenfinanced through debt i.e. by the creditors and so greater the firm’s degree ofindebtedness and higher the degree of financial leverage.
  6. 6. As the interest cover ratio is higher than 1 Jot can meet up its interest expensesfrom the loans and overdrafts.5.0 WHAT-SO ANALYSISSegment | The What | Implications |Jots inception and history | Husband and wife team company | Jot started as afamily company || | || Substantial revenue growth | The company surely gained a success height within avery short time |Jot’s product range and service age group | Their product range is for two agegroups; 3 to 5 years and 5 to 8 years | These two age group receive most toys inquantity and most amount of money is also spend || Absent of 9 to 11 age group toys | High margin as well as risk missed. || Own designed toys and licensed toys | Diversified product line || Electronic features of toys | Competitive advantage and successful branding andpositioning || 5 new products each year as well as other new aspects of current products | Jot iskeeping up with the trend of market. || Unique range of toys without any modification for years | Successful branding inthe minds of customers || | || 50%-100% mark up prices by retailers | Barrier creating a risk for Jot |Production of Toys | In-house team of designers | More uniqueness in designing || New technology electronic chip | Attractive to retain and capture new customers || Researching the market trends | Continual development || More than 12% of the total revenue are invested for design and development | Thetiming of research and development is good as it helps to launch the newprototypes |
  7. 7. | | || The fresh design team | Jot takes no risk while producing the prototypes for toyfair and IPR. || | || Jot’s in-house Quality Assurance team located both in Europe and in Asia |Efficient operations and testing || A single personnel is responsible for Jot’s outsourced manufacturers |Responsibility on a single personnel increases risk |Outsourced manufacturers | Outsourced manufacturing companies do not workexclusively for Jot | Unethical issues may come up || Repeat business and good level of commitment with manufacturers | Shieldsagainst other competitors || | || Competitive pricing by manufacturers | Low margin for Jot || Leased warehouse of Jot’s | Indicate low resources || Near-shoring consideration | May decrease cost |Sales | Europe and USA are the biggest market | Dependency on these regions || Jot’s dependency on sales to large retailers | Higher buyer’s bargaining power |Licensed toys | Licensing fee is between 5% to 10% | Licensing fee is on themoderate level for Jot. |Inventory control | First-in first-out | The FIFO concept works positively for Jot || Write-down reserve was €0.124 million | Too high and needs to concentrate oninventory control |The Jot Brand | Jot brand name is synonymous with quality electronic toys |Positive brand image || Positive press reports by marketing team | The marketing team has been workinghard |IT Systems | Replication of data between different IT systems | IT system of Jot isnot up to mark || Outsourced logistics company | Increases risk and dependency |Target Markets for Growth | Targeting new markets- Russia and Asia | Implies the
  8. 8. increasing capacity and capability || Direct shipment | This indicates to a good management team of Jot’s. |Corporate Social Responsibilities and Product Safety | CSR plan to be developed innext year | May affect the function of the company in case market extension andpenetration || No mention of Jot’s “CE” marking | Regulatory Issues. |6.0 SCENARIO ANALYSIS AND RECOMMENDATIONThe team has gone through the scenario and found some major issues that needimmediate attention. We have taken the liberty to analyze them and arrange themaccording to their priorities as we saw fit.6.1 Near-Shoring Proposal in Voldania (Appendix F)The management is pondering over the thought to shift its production gradually toVoldania from China due to increasing cost.6.1.1 Strategic Viewpoint: China produces 86% of the world’s toys but theirproduction cost is rising and coupled up with unreliable supply concern. However,working in Voldania requires ability to make some cunning maneuvers includingpersonal donation to influential parties. This might breach the code of ethics. Eventhough Jot has built up a good relation with its suppliers through repeat businessand can avail special favors, all decision will have to be based upon the financialdata.6.1.2 Financial Viewpoint: The NPV (Net Present Value) the 5 year investment ifbased in Voldania totals, €2,717,025.876 while that of China €2,948,991.70 asshown in Appendix ()6.1.3 Operational Viewpoint: Jots market is mostly based in Europe and USA. Ashift in production to Voldania will improve responsiveness of delivery to theirwarehouse or directly to customers while making the logistics to gain favorableefficiency.6.1.4 Recommendation: Based upon our estimate, the business needs to shift its
  9. 9. production to Voldania to for better business performance.6.2 Launching New Range of Toys for 9-11 Age GroupJot does not cater to the 9-11 age group at the moment and Alana Lotz, ProductDevelopment Director of Jot is thinking about introducing a range of productsincluding a smartphone application that has both gaming and educational aspect.6.2.1 Suitability: Even though Jot is quite strong technologically, but mobileapplication is an arena where Jot is inexperienced and lacks expertise. Though itcan be lucrative, there is also higher level of risks involved since major change inhuman resources will have to be brought about in a very short time and entering anew market will make them face stronger competitors.6.2.2 Acceptability: There has been a tremendous growth in use of smartphone allaround the world. Children now-a-days have access to such gadgets and the marginfor such a product is much higher.6.2.3 Feasibility: The age group of 9-11 offers the highest margin and will alsoretain customers who have been using Jot’s products all their life wherebyincreasing the chance of repeat buying. The projects estimated cost of €30,000 iseasily affordable considering the fact that average design and development cost peryear is €1.2 million with each project receiving anything between €0.1 to €0.25million.6.2.4 Recommendation: The market is untapped and this is high time for Jot toenter the market so long as it is financially viable since this segment has a promiseto grow as fast as ever and will help Jot continue the tremendous level of growth ithas been experiencing. Everything still depends upon the cost benefit analysis.6.3 Late Delivery of Christmas ProductSupply was hampered by one of the manufactures who is thought to be givingpreference to its larger buyers leading to a situation where Jot may fall back indelivery of Christmas products. The supplier will be able to supply 75% of theorder in time. So, there are two options for Jot to follow:1. Send all 75% of the products to its major customers. who number around 7 andcontrol 68% or Jots product sales. This will ensure that the major customers do not
  10. 10. get annoyed and disrupt the existing business relationship that could otherwisehamper the future relationship with them.2. Proportionately distribute the products to all the customers so that theindependent toy shops at least get a portion of what was ordered on time. Byensuring this, Jot will show that they are giving equal importance to the smallretailers.6.3.1 Recommendation: The business should take the first suggestion wherebysupplying the entire amount to its major customers and ignore the independent onesuntil the next delivery. Otherwise, the relation with big retailers will deteriorate andthat is something Jot cannot afford right now. In regard to the compensation, alldepends upon the long term strategy of Jot. If they opt to shift production fromChina to Voldania, then they can charge compensation to the suppliers for theirerror that will cost Jot substantial amount both monetarily and in terms of goodwillwith its customers. If they do not shift their production, they had better not go forany fine and instead formulate a process whereby no such thing can occur. Forinstance, they can order increased amount to a much smaller group of reliablesuppliers to whom Jot can be a preferred customer due to the volume of orderswhereby enjoying a much better service in return.6.4 Faulty New Flying Spaceship ToyA major fault in the toy has been found that has seen complaints of overheating andin some cases smoke was seen by customers. Joy has three options:1. To spend additional €10 per unit on improved insulation for the alreadyproduced units at hand that includes any additional distribution costs. Jot alreadyhas 3200 inventory and so if they sell these to the retailers they can make a profit of€19200 {3200*€(40-24-10)}.2. To sell the product at the discount market where toys of inferior quality are soldat 50% less than the conventional market price. As such the loss occurring wouldbe €12800 {3200*€(40*.05-24)} but might have a negative effect on the brandimage.3. To dispose of the product at hand and completely write off the product. Here
  11. 11. they will account the loss of €76,800 (€24*3200).6.4.1 Recommendation: Here, Jot option 2 and 3 will lead to loss and consideringthe fixed cost obligation like interest and debts payments. Option 2 cannot bechosen since this will affect the brand image. Option 3 on the other hand will savethe company from further damage to reputation but it will also show theirincompetency to produce a functioning product. Considering all options, option 1would be the best choice.7.0 MAJOR ISSUE ANALYSIS AND RECOMMENDATIONApart from those mentioned in the scenario, the team has identified some issuesthat need to be resolved immediately after taking care of the scenario cases. Thefollowing issues are arranged as per their perceived priority.7.1 Market ExpansionIn order to continue the 18% revenue growth, Jot will have to expand its marketand enter the Asian and Russian market. These markets have demand for Jot’sproducts and their ever increasing number of middle class will fuel the growth to amuch higher level. Their expansion strategy might include:1. Joint Venture with local retailers whereby opening outlets and also supplyingother retailers there. This will not cause conflict in interest with their existing majorbuyers in Europe and America.2. Opening personal outlets- This will require substantial amount of fund and Jotis already riddled with debt and will not be suitable for Jot to open a new outlet onhis own as the risk is higher and can negatively affect the performance of the corefunction.7.1.1 Recommendation: Option 1 should be chosen since it brings about increasedmargin by replacing a major player in the supply chain that requires minimalamount of investment.7.2 Reduce DebtWith a gearing ratio of 63.19%, Jot is riddled with debt capital. It makes raisingfurther capital expensive and so there is a strong need to reduce the amount of debt.To fuel its growth, Jot can choose from:
  12. 12. 1. To convert into a Public Limited Company and raise capital from through IPO.2. They can raise additional capital since they have not crossed the authorizedcapital7.2.1 Recommendation: Option 2 will be the best.7.3 CSR Activities and Product SafetyWell publicized CSR activities should be formulated and can include partnershipwith organizations like UNICEF-Save the Children that creates a global impact. Itsproducts or packages can help spread the messages for UNICEF.8.0 APPENDICESAppendix A: SWOT AnalysisStrength (S) | Weakness (W) |* Positive branding in customers mind, quality electronic toys * Substantialsales revenue growth rate * Own in-house designers team accompanied bynecessary replacement when required * Updated electronic featured products *High level of understanding and commitment between the company andmanufacturers * Separate marketing and sales team * Direct interface withoutsourced manufacturers by means of standardized CAD/IT system | * Productsfor limited age group * Dependency on manufacturers and retailers * Nothaving own warehouse but leased ones * No manufacturing and logisticsfacilities of the company * Funding constraint as a private limited company *High level of accounts receivables and payables * Less effective IT system as itfails to provide all of the data required * Sales are significant only during Q3 andQ4 * Lack of comprehensive CSR plans |Opportunity (O) | Threat (T) |* Introduction of products for other age groups which are yet to be addressed *Market expansion and penetration strategy for Asian and Russian markets *Near-shoring to have some Europe based outsourced manufacturers * Using themanufacturers existing product lines to introduce new products * Focusing on
  13. 13. improvement of relationship with manufacturers in order to encounter futurecritical period * Launching special programs with new products during eventslike Olympic, World Cup, Euro Football to boost up sales * For capital raisingmay go for initial public offering after conversion into a private limited company| * Near-shoring, marketplace competition and competitive pricing bycompetitors * Little influence over large retailers * Dependence on fewmanufacturers increases buyers power and may result in low profit margin forcompany * Exchange rate risk, market risk and risks associated with raw materialssuppliers * Changes in economic & political conditions of countries concerned *Potential changes in global and national policies * Possibility of arising unethicaldemands from manufacturers and retailers |Appendix B: Ansoff’s Growth Vector MatrixIncreasing Risk| Existing Products | New Products |Existing Markets | Market Penetration (Lowest Risk) * Europe and USA Markets| Product Development (Medium Risk) * Developing New Products for 8+ AgeGroup |New Markets | Market Development (Medium Risk) * Developing Russian andAsian Markets | Diversification (Highest Risk) * Brand and Line Extension |Appendix C: Porter’s Generic Strategy AnalysisDifferentiation Strategy | * Jot brand name is the synonym of quality electronictoys. So the quality toys of Jot differentiate it from its competitors quite easily. *Jot’s product portfolio mainly includes electronic features. This is seen as one ofthe strengths which differentiate Jot’s products from others. * The company has apolicy of launching around 5 totally new products each year. These new innovativeproducts have appeal to the targeted age groups and that is proved in the past. *
  14. 14. It also enhances certain aspects of some of its existing products each year to refreshtheir appearance and features. This also helps Jot to maintain unique featuredproducts in the event of copying by competitors. |Focus Strategy | * Jot is currently focusing on the pre-school age group of 3 to 5year olds and the next age group of 5 to 8 year olds. One of the reasons behindfocusing on this age group could be that the most money is spent on toys for the 6to 8 year age group according to research. * In terms of products, Jot’s main focusis on electronic featured ones which substantial growth rate. * At present, Jot’sfocus point for sales is the European and U.S.A markets as they are key revenuedrivers. * Considering manufacturing, Jot’s focal point is China at present withconsiderably cheap labor. * Jot mainly focuses on 7 large customers (includingretailers and stores) which are its key revenue drivers. * The peak of Jot’s salesoccur pre-Christmas sales period. So this is the focus period to extract as much as itcan from the market. |Appendix D: PEST AnalysisAppendix E: Financial RatiosProfitability Ratio| 2011 | 2010 |Gross profit margin | 3147/9866= 31.9% | 2756/8371= 32.92% |Operating Profit Margin | 551/9866= 5.58% | 453/8371= 5.41% |Net Profit Margin | 246/9866=2.49% | 185/8371=2.21% |Return on Assets (ROA) = profit for the period/total assets | 246/5378=4.57% |185/4393=4.21% |Return on Equity (ROE) = Earnings available for common stockholders/ CommonStock Equity | 246/932=26.40% | 185/686=26.97% |
  15. 15. Liquidity Ratio| 2011 | 2010 |Current ratio | 4628/2846=1.63 | 3672/2107=1.74 |Quick or Acid test Ratio | (4065+21)/2846=1.44 | (3173+29)/2107=1.52 |Cash Ratio | 21/2846=.0074 | 29/2107=.0138 |Activity Ratio| 2011 | 2010 |Inventory Turnover =cost of goods sold/ Inventory | 6719/542=12.40 |5615/470=11.90 |Inventory Turnover period | 365/12.40=29.44 days | 365/11.90= 30.67 days |Asset Turnover Ratio = Sales/Capital Employed | 9866/(932+1600)= 3.90 times |8371/(686+1600)= 3.66 times |Debt Ratio| 2011 | 2010 |Debt ratio =total debt/ total Assets | (1600+2846)/5378=82.67% |(1600+2107)/4393=84.38% |Interest Cover Ratio/ times interest earned ratio =(operating income)/interest charge| 551/213=2.59 times | 453/201=2.25 times |Gearing Ratio =total long term debt/ Capital employed (shareholders equity+ longterm debt) | 1600/(932+1600)=63.19% | 1600/(686+1600)=70% |Appendix F: NPV CalculationVoldana| year 0 | year 1 | year 2 | year 3 | year 4 | year 5 || | | | | | |Donation | € 25,000.000 | | | | | |Production unit | | 60,000.000 | 100,000.000 | 140,000.000 | 180,000.000 |
  16. 16. 220,000.000 |Labor hours(.45 hours per unit) | | 27,000.000 | 45,000.000 | 63,000.000 |81,000.000 | 99,000.000 |Labor cost per hour | | € 5.000 | € 5.100 | € 5.202 | € 5.306 | € 5.412 |Total labor cost | | € 135,000.000 | € 229,500.000 | € 327,726.000 | € 429,786.000 |€ 535,788.000 |Machine Cost per unit | | € 1.960 | € 1.960 | € 1.960 | € 1.960 | € 1.960 |Total Machine Cost | | € 117,600.000 | € 196,000.000 | € 274,400.000 | €352,800.000 | € 431,200.000 |Distribution Cost per unit | | € 1.200 | € 1.272 | € 1.348 | € 1.429 | € 1.515 |Total Distribution Cost | | € 72,000.000 | € 127,200.000 | € 188,720.000 | €257,220.000 | € 333,300.000 |Value For The Year | € 25,000.000 | € 324,600.000 | € 552,700.000 | € 790,846.000| € 1,039,806.000 | € 1,300,288.000 |Discount Factor | 1.000 | 1.120 | 1.254 | 1.405 | 1.574 | 1.762 || | | | | | |PV | € 25,000.000 | € 289,821.429 | € 440,749.601 | € 562,879.715 | € 660,613.723 |€ 737,961.407 || | | | | | |NPV | € 2,717,025.876 | | | | | |China| year 1 | year 2 | year 3 | year 4 | year 5 || | | | | |Production unit | 60,000.000 | 100,000.000 | 140,000.000 | 180,000.000 |220,000.000 |Labor hours(.6 hours per unit) | 36,000.000 | 60,000.000 | 84,000.000 | 108,000.000| 132,000.000 |Labor cost per hour | € 1.750 | € 1.960 | € 2.195 | € 2.459 | € 2.754 |Total labor cost | € 63,000.000 | € 117,600.000 | € 184,380.000 | € 265,572.000 | €363,528.000 |
  17. 17. Machine Cost per unit | € 1.400 | € 1.400 | € 1.400 | € 1.400 | € 1.400 |Total Machine Cost | € 84,000.000 | € 140,000.000 | € 196,000.000 | € 252,000.000| € 308,000.000 |Distribution Cost per unit | € 3.000 | € 3.180 | € 3.371 | € 3.573 | € 3.787 |Total Distribution Cost | € 180,000.000 | € 318,000.000 | € 471,940.000 | €643,140.000 | € 833,140.000 |Value For The Year | € 327,000.000 | € 575,600.000 | € 852,320.000 | €1,160,712.000 | € 1,504,668.000 |Discount Factor | 1.120 | 1.254 | 1.405 | 1.574 | 1.762 || | | | | |PV | € 291,964.286 | € 459,011.164 | € 606,633.452 | € 737,428.208 | € 853,954.597|| | | | | |NPV | € 2,948,991.707 | | | | |