Table of Contents
U cars is automobile company which deals in hybrid cars. The objectives of the business are to achieve a 34% gross margin at the end of year one and a 31% return on assets, to maintain at least a minimum productivity index of 1.0 throughout our four years of operation, to attain a 1.8% market shares which builds up every year, to attain 5% growth in sales after first year of operation, to produce low price quality cars to meet customers’ satisfaction and to recruit the best employees and management team.
| Round | Total Sales (€m) | Total Unsold Stocks (€m) | Shareholder Funds (€m) | Closing Bank Balance (€m) | Outstanding Loans (€m) |
| Round 1 | 3630 | 0 | 937 | 304 | 0 |
| Round 2 | 5939 | 0 | 1,841 | 540 | 0 |
| Round 3 | 6028 | 0 | 1,892 | 596 | 0 |
| Round 4 | 6236 | 27 | 3,167 | 1830 | 0 |
The market research revealed high demand of medium and large cars. The medium cars were targeted majorly to the 25-40 age group while the large class were targeted to the 1-55 and 55 and above age groups. The medium and the large cars were the targeted market sectors in the first year. The market size for the medium cars consists of approximately 40% and 19.77% for the large cars. This represents 80,500 medium cars sales and 65,000 sales of large cars respectively. These cars were very affordable that the customers’ expectations were exceeded. Price slashing of the car prices was done as the company sacrificed part of its profit so as the number of sales may increase, create a position in the market. These cars additionally are powered by hybrid engines and eco-friendly. As Ucars’ strategy was to make use of cost leadership to gain a competitive advantage as the company struggles to gain a market share, this was combined with lean leadership to avoid waste in the supply chain. Strategically, the company ignored the use of many designs and features on its cars but, including the highly required modern designs and features that could not be done away with in the production in order to cut cost and make us lean. However, luxurious options were added to our U2 cars (Large) to give our customers a feel of luxury. This was done with the intention of creating awareness about our capability of producing luxurious cars in the near future.
U Car’s forecasted to sell all the produced cars in the first year to generate total sales revenue of 3629.75 by capturing 1.43% of the market share for U1 (medium cars) and 2.34% of market share for U2 (large cars). U Car’s improved the quality of its cars by investing £31.000.000 in robots, which were divided equally between the two prototypes. From the outset, U cars decided to buy 62 new Kawasaki robots for spot welding and painting. This automation gave the company a competitive advantage as the quality of cars produced were improved as well as protected its employees from fumes emerging from welding and painting, works which were all done done by robots under supervision of a human being.
All the cars produced during the first year were sold out, however the production was not high enough to cover the expenses as the company made a loss with a post-after tax profit with €-63.44M. However, the company invested heavily on promotions, Research & Development and training which have not contributed too much on profit.
| Round 1 | ||||
| Forecast | Results | |||
| Model | Medium (U1) | Large (U2) | Medium (U1) | Large (U2) |
| Workforce | 1876 | 1555 | 1876 | 1555 |
| Automation allocation | 50 | 50 | 31 | 31 |
| Effective workforce | 31 | 31 | ||
| Productivity | 42 | 41 | 42.91 | 41.80 |
| Produced cars | 90510 | 77028 | 80500 | 65000 |
| Unsold stock | 0 | 0 | 0 | 0 |
| Selling price € | 18000 | 30000 | 24500 | 25500 |
| Market Share (%) | 1.43% | 2.34% | ||
| Gross Margin | 34.78 | 39.32 | 46.95% | 16.91% |
| Fixed Overheads €m | 220.9 | 220.9 | 220.88 | 220.88 |
| Promotion €m | 85 | 85 | 85 | 85 |
| R&D €m | 190.5 | 190.5 | 190.45 | 190.45 |
| Training Cost €m | 5 | 5 | 5 | 5 |
| Automation Investment €m | 31 | 31 | 31 | 31 |
| Warranty Cost per car €m | 250.61 | 414.21 | 250.61 | 414.21 |
| Depreciation €m | 83.1 | 83.10 | ||
| Operating Profit €m | 559.7 | 559.69 | ||
| Post Tax Profit €m | 436.6 | 436.56 | ||
| Loan €m | 0 | 0 | 0 |
U Cars decided to produce a new model this stage, which will then be facelifted in the third year. U Cars increased the production of U1 by 57.14%, increased production of U2 cars by 30.7% and produced new model, U3 cars, a quantity of 53,800 cars. However, the selling prices of U1 and U2 cars remained the same as in the first year whereas the selling price of U3 cars was €15,500. U Cars bought automation and raised wages by 6.8% to improve the productivity. Additionally, U Cars negotiated with its employees on the introduction of new labour processes such as kaizen, work cells and total quality control. Additionally, the company invested in automation and created 1223 new jobs with the production of the new model. Options have been added considering the safety, quality and environment. In terms of R&D, U Cars added the accident prevention system to the 3 models for a safety purpose.
In this round, the company paid taxes and since no existing loan was in place, no loan was being serviced. U Cars forecasted to sell all cars in stock for that year and have no cars, in stock at the end of the second year. By producing more cars, U Cars started making profit. The sales income reached £59 39.25. Additionally, the firm aim to invest continuously in research and development to help develop and improve on the quality of our cars and reduce customers warranty claim by 25% yearly. The warranty cost per cars decreased from the first year because U Cars allocated well the workforce with the automation and it had an impact on the quality of the cars produced.
The results show that the post-after tax profit was €908.68M and in operating profits was €1151.39M. This can be attributed to the depreciation along with the increase of the fixed overheads and the promotion costs. Results show that warranty costs per car decreased because of the rise of the salary and the training cost and this had a significant impact on the quality. Overall, decisions were efficient because at the end of the year, U Cars started making profit.
U Cars decided not to launch a new model but rather to facelift all the three models produced in the first and second year. The strategy was to serve the diverse markets in the industry thus increasing the customer base for the company and in return increase sales.
U Cars forecasted to produce 127000 UI model cars, 85500 U2 model cars, and 53800 U3 model cars with 2.19%, 3.05% and 1.03% of market share respectively. Moreover, no stocks left were expected. The warranty cost for U1, U2 and U3 cars were €177.53, €295.08, €240.39 respectively. The firm was expected 2 strike days and results reached more than our expectations with only 1 strike day.
Results show that U Cars met the forecast for the net cash position and market share. The operating profit with the profit after tax was slightly different than the forecast and this due to the increase of the depreciation along with the automation investments. Furthermore, U Cars set-up the production too high as a result the productivity was reached with overtime to produce and facelift all the three models of cars produced during the first and second years. Overall, U Cars was concerned about the quality management in regards of the warranty claims.
U Cars launched a model car (U4) which was a more luxurious option for users who needed this improvement. Additionally, since U Cars had initially produced low cost cars, it had to meet the needs of customers who were able to meet the additional costs and get good eco-friendly luxurious large cars. U Cars reduced the number of workforce for U1 cars while increased the workforce for U2 and U3 cars as their market shares increased and created more value for the company. Additionally, with the production of U4 model cars, the company created 1000 more jobs for the production of U4 cars. Furthermore, U Cars invested £60M in automation and changed the allocation of automation that goes for each car. U Cars increased slightly the production of all models.
U Cars forecasted to sell all produced cars with a gross margin of 42% for U1, 5.43% for U2, 15.62% for U3 and 11.99% for U4. Thee warranty costs was forecasted to reduce to 300 and expected the strike days at 1.
Results show that U1, U3 and U4 model cars were all sold out with higher gross margin than the one expected. However, U2 model cars were not sold exhaustively as 1131 cars remained in stock at the end of the fourth year. Additionally, the warranty cost did not meet our expectations due to the increase of salary, training cost and production costs. The net cash position and the sales revenue are the same as forecasted whereas the operating profit and the profit-tax profit were higher. Overall, decisions taken were profitable for U Cars.
To set up its strategy, U Cars used the strategy clock from Faulkner and Bowman (Figure 2). Indeed, U Cars followed the hybrid strategy which combines low-cost and differentiation strategy (Faulkner & Bowman, 1995). U Cars aimed to simultaneously attain higher benefits and lower prices compared to its competitors. The hybrid strategies are useful to enter rapidly in the markets and to gain market share.
Figure 2: Strategic clock (Faulkner & Bowman, 1995)
Barney (1991) through its model “The Resource-based View” argues that the competitive advantage comes from the distinctiveness of the firm’s resources and competencies. In other hand, Porter (2004) suggests that the competitive advantage can be considered in any of the primary and support activities in the value chain.
Finance is a key element in an organization. According to Khan and Jain (2008), “Financial management provides a conceptual and analytical framework for finance decision making”. It is essential for an organization to manage effectively its working capital management to survive. Indeed, the working capital management is about handling the current assets and current liabilities with the objective of diminishing the risk of bankruptcy (Liquidity) and increasing return on investment assets (Profitability). It involves finding a balance between profitability and liquidity. An effective working capital management leads to the survival and the growth of an organization (Kargar and Blumenthal, 1994). Similarly, an efficient working capital management leads to profitability (Padachi, 2006). U Cars had a capital of £500 M. However, a no loan was required to start the business. U Cars maintained a good cash flow position. U Cars had enough current assets to pay off the current liabilities within a short period. This is an effective financial sign for U Cars. Indeed, it reveals that the firm was able to cover its current liabilities with a mix of cash and liquid assets over the 4 years. Similarly, in terms of profitability, U Cars achieved its objective by increasing yearly by 10 % the net profit after tax and by increasing the return on investment by 5% by end of year 3. In other terms, U Cars succeed in achieving the goal of maximizing the shareholder value. In regards of efficiency, U Cars was using the Just-In-Time inventories management to eliminate the need to hold inventories. That’s why U Cars had no inventories from year 1 to year 4 (Atrill, & McLaney, 2013). However, “if a business lowers its inventories, then it must reorder frequently, which increases ordering costs” (Brigham, & Ehrhardt, 2014). Indeed, U Cars started every year without any stock left which had a negative impact on the assets of U Cars.
Overall, U Cars maintained a good cash position and profitability. The financial decision had a significant impact on the external stakeholders such as creditors as it shows that U Cars is financially reliable and it had also an impact on internal stakeholders such as the shareholders as the company maximized their shareholder value.
Kotler and Keller (2009) states “marketing is a significant dimension of any business in today’s highly competitive environment and financial success is often depending on marketing ability”. Drucker (1954) argues “Because it is the purpose to create a customer, any business enterprise has two and only two basic functions: marketing and innovation”. When giving brand name to its car models, U Cars considered that a brand should be memorable, meaningful, likeability, transferrable, adaptable and protectable (Pelsmacker, Geuens, & Bergh, 2013).
U Cars name has obtained a stable market share by the end of the four years, with different car models that sui different specific need of its clientele. U1 model reflects the easiness to drive around in the cities, U2 reflects the innovation, U3 reflects the energy and U4 reflects the success. U Cars unique selling proposition is “maximizing lifestyle while minimizing footprint”. Indeed, U Cars corporate social responsibility is concerned about environment by providing eco-friendly cars. In terms of positioning, U Cars produces eco-friendly cars with high quality at low prices thereby providing a good value for money to their customers. It is the keystone of the hybrid strategy that U Cars follows. U Cars considered the hierarchy of effects models for setting its objectives. According to this model, consumers follow different stages in responding to marketing communication such as the cognitive, conative and affective stage. Moreover, Vaughn (1980) developed the FCB grid where he explains that buying a car is a high involvement thus it is considered as cognitive element.
Using the DRIP model (Pelsmacker, Geuens, & Bergh, 2013), U Cars focused on the differentiation of its models and on developing its brand awareness. U Cars targeted people under 25 for medium cars (U1), people from 25 to 40 for medium and large cars (U1, U2, U3), people from 41 to 55 for large and luxurious cars (U3, U4) and finally people over 55 for large cars (U4) considering the market demand but also the market size.
U Cars based its strategy on the marketing mix which involves 4p’s: product, price, place and promotion (Kotler and Keller, 2009). During the introduction stage, U Cars aimed to create brand awareness among early adopters. Thus, U Cars invested high amount in promotion such as TV, digital media, promotional offers and dealers incentives. In terms of pricing, U Cars used the product life cycle as a reference. U Cars used the penetration strategy to quickly enter in the market by getting high market share (Ansoff, 1965). Moreover, U Cars used the psychological pricing with odd pricing to attract irrational buyers by encouraging impulse buys (Kotler, & Armstrong, 2013).
U Cars became well-known during the growth stage; the objective was to create interest among innovators. U Cars invested a lot in R&D and in promotion to differentiate from its competitors thus the selling prices increased slightly. Indeed, U Cars followed the product development strategy by adding customized options and the warranty services to meet customers’ needs. During the maturity stage, U Cars aimed to maintain brand loyalty. Thus, U Cars launched a new car to diversify its brand models. Finally, U Cars reduced its advertising during the decline stage to sustain its loyal customers. It is recommended at this stage to cut down the selling prices (Proctor, 2014). However, U Cars decided to launch a new U4 large cars for people over 55 to meet their needs as it was more luxurious, as the company had created awareness about its capability of producing luxurious cars in the near future.
Operation management is the activity of managing the resources that create and deliver services and products”. Patnaik (2015) states “operations management involves system design and operating decisions related to product and service design, capacity planning, process selection, location selection, work management, inventory and supply management, production planning, quality assurance, scheduling, and project management”.
According to Shim and Siegel (1999) operations strategy is concerned by putting in place rules and plans using the firm resources effectively and efficiently to contribute to the company’s long term competitive strategy. U Cars corporate strategy relied on its core competences to develop its long term competitive strategy. Hamel and Prahalad (1990) argues that core competencies are developed through continuous improvement. Barney (1991) suggests that core competencies should be Valuable, Rare, Inimitable, Non-substitutable. U Cars core competencies were based on high skilled professionals in management, high technology along with production which make them distinctive from their competitors. The quality characteristic of U Cars is the core competence thanks to its heavy expenditures on R&D that contributes to the product development. U Cars strategy was to invest a lot in automation to get higher productivity because it generates lower costs and helps to become more competitive (Stevenson and Van Ness, 2001). Indeed, productivity is fundamental for companies that have low cost strategy, because the “higher the productivity, the lower the cost of the output” (Stevenson and Van Ness, 2001). U Cars competitive advantage was based on innovative eco-friendly cars using the lean management. With continuous improvement in their production using the lean management, it has the ‘just in time’ production which gives high efficiency in production (Heizer and Render (2011).
Over the 4 rounds, U Cars relied on the total quality management by following the “doing it right first time” procedure. U Cars focused on the doing right first time approach by preventing defects and meeting the requirements (Crosby, 1996). Moreover, U Cars emphasized on the continuous improvement through a Plan-Do-Check-Act cycle to constantly improve the system of production (Deeming,1986). U Cars operations seek to influence the speed, the flexibility, the differentiation, the reliability, and the costs of its products and services. During year 3, the productivity went down while the warranty claims increased. Therefore, it had a negative impact on the quality. U Cars could have taken corrective actions by spending on appraisal costs (field testing) and prevention costs (quality planning), so it will have reduced the internal (failure analysis) and external costs (warranty costs, complaints) to zero defects (Figure 6).
Figure 6: Cost of quality Curve (Wood, 2013)
Finally, U Cars didn’t manage well to have an efficient continuous review system through its inventory level. Heizer and Render (2011) mentioned that “you can never achieve a low-cost strategy without good inventory management”. Slack, Brandon-Jones, & Johnston (2013) mentioned that a less amount of inventory can have a negative impact on customers demand and on financial revenues. Overall, the operations management had an impact in terms of product quality on internal stakeholders such as owners but also on the external stakeholders such as customers.
According to Beardwell and Thompson (2014) “HRM is concerned with recruitment, selection, learning and development, reward, communication, teamwork and performance management”. U Cars hired 3431 workforce and invested €31 million in automation in year 1. From year 1 to year 2, the company increased the number of automation to improve the productivity. Additionally, a new model of the car was produced in this year to add to the two initial models (U1 and U2) that had been produced in year 1. The workforce was increased to 6223 to meet the demand of the market however the automations were the same as in year 2. Consequently, the productivity increased from 41.8 to 42.5. In year 3, U Cars facelifted all the models produced in the first and second year in the third year. Thus, U Cars diverse markets in the industry, thereby increasing our customer base and sales annually. In year 4, the productivity increased to 36.61. However, U Cars set the goal to achieve 120 productivity per cars/worker however this hasn’t been achieved because U Cars had not allocate enough employee and automation for the forecasted number of cars to be produced. In regards of the warranty costs, it increased from year 1 to year 4 from 47.10 to 67.53. This was contrary to the firm’s aim to invest continuously in research and development to help develop and improve on the quality of our cars and reduce customers warranty claim by 25% yearly.
After we introduced a new model in year 2, the warranty cost increased to 60.47 because U Cars didn’t allocate enough training. This had an impact on the quality. In year 4, when we launched another new model, we increased the salary to 580 in year 4 and the training cost to £9M, thus the warranty costs decreased. In regards of the strike days, one of U Cars objective was to get 1 strike day by end of year 3, this has been achieved however one incorrect decision in year 4 increased the strike days to 2. In terms of wages, employees were paid in the first year £485 which was the average given by the competitors. Then, the wages were raised yearly, £500 in year 2, £520 in year 3 and £580 in year 4. By increasing the wages and the training, U Cars aimed to get a better productivity, better quality and employee motivation. Similarly, Pfeffer (1998) suggests that high wages and extensive training are linked with the company performance. Furthermore, Guest (1997, cited in Armstrong and Baron, 2002) suggests that “HR practices influence HR outcomes, which in turn leads to lower absence and labour turnover and increased productivity and quality and these in turn should lead to an increase in sales and profitability. In other words, effective performance is attained through the people within the organisation (Figure 7).
Figure 7: Link between HRM and performance (Guest et al, Effective People Management, CIPD, 2000)
U Cars was concerned about the importance of continuous learning for sustaining competitive advantage. That’s why the company used the performance management to monitor their employees’ results (Beardwell and Thompson, 2014). To keep them motivated, U Cars was giving them incentives and rewards. Indeed, people are motivated if they know that they will receive an award if they achieve the target (Vroom, 1964).
Overall, the decisions had an impact on internal stakeholders such as the employees in terms wages and training but also on external stakeholders such as the owners in terms of strike d
Over the 4 years, U Cars succeed in achieving its objectives apart from some wrong decisions. The company contributed to the maximization of shareholder value by holding a good return on investment along with effective net operating profit across the 4 years. Moreover, the company managed to reduce the strike days to 1 by end of year 3 by thanks to the yearly increase of the wages. However, U Cars reached its goal of 5% of market share by end of year 4 thanks to its diversification of its range of products. Moreover, U Cars was also closed to the target in terms of productivity because U Cars did not allocate enough employee and automation. Finally, U Cars missed its target in terms of reducing the warranty claims by 25 % by end of year 3 because the company didn’t effectively manage on the allocation of automation and production lines.
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