BAC 4674

Case 4

Freezing out Profits

BAC4674
INTEGRATED
STUDY
Trimester 2, 2013/2014

CASE

CASE: Freezing Out Profits

Submission date: 16/01/2014
Facilitator: Dr. Zauwiyah Ahmad
Prepared by:
Name

Student ID

Contribution
%

Ng Heng Chiew

1092701511

25

Tee Yee Chi

1092701430

25

Toh Xinyi

1092701353

25

Wong Wei Kai

1092701363

25

TOTAL

Signature

100%

To be completed by the lecturer

Marks awarded for the following

Case Analysis

Decision

Evaluation

Action Plan

Poor (1)

Satisfactory (2)

Good (3)

Excellent (4)

Stakeholders
not
identified
and
problem not clearly
defined

Some
of
the
stakeholders
identified
and
problem not clearly
defined

All
stakeholders
identified but problem
not clearly defined

All stakeholders
identified
with
clear
problem
definition

Decision not clearly

articulated
and
reasoning is faulty

Decision not clearly

articulated
and
reasoning is unclear

Decision is clearly
articulated
but
reasoning can be
improved

Decision is clearly
articulated
and
well-reasoned

Alternatives
explored

poorly

Some
alternatives
explored and some
impacts considered

Alternatives
fully
explored but impacts
not fully considered

Decision
justified

poorly

Decision
made
justified
but
implementation plan
can be improved

Decision
made
justified
but
implementation plan
reasonable

Score

Alternatives fully
explored
and
impacts
fully
considered
Decision
made
fully justified and
implementation
plan
comprehensive

BAC 4674

Format and
presentation

Case 4

Report
is
less
organised,
with
obvious grammatical
and structural errors

Report is organised,
with
minor
grammatical
and
structural errors

Freezing out Profits

Report
is
well
organised, with proper
formatting and use of
language

Clear
evidence
that report is
prepared carefully
and thoughtfully

Total marks

Declaration by group leader

(This section is to be filled in the students own handwriting.)

I hereby declare that all group members names are correctly included in the above section. I hold a
copy of this assignment which I can produce if the original is lost or damaged. I certify that no part of
this assignment has been copied from any other students work or from any other source except where
due acknowledgement is made in the assignment.

Group leaders signature

: _____________________________

Group leaders name

: _____________________________

Group leaders student ID

: _____________________________

Date

: _____________________________

BAC 4674

Case 4

Freezing out Profits

Contents
Question 1............................................................................................................. 4
Question 2........................................................................................................... 16

BAC 4674

Case 4

Freezing out Profits

Question 1 - Identify potential actions or decision making tools that can

be utilized to solve the issues identified in the case.
There are two main issues that we have identified in the case, that is: Secconz is
requesting for a price reduction and CCs plant in China is under investigation for
dumping activities.
There are some decision making tools that can be utilized to give a general idea
of how a company should approach or tackle any issues or threats. An example
of this is the SWOT analysis.
SWOT Analysis
SWOT analysis is a structured planning used in evaluating the companys
strength, weaknesses, opportunities and threats in making strategic plans and
decisions. It involves specifying the companys objective and identifies internal
and external factors that are favourable and unfavourable in achieving that
objective. What may represent strengths with respect to one objective may be
weaknesses for another objective. The factors may include all of the 4Ps (price,
product, promotion, and place).
Once SWOT analysis has been performed, the objectives or goals of the company
should be set. Identification of companys strength, weaknesses, opportunities
and threats is important because they can inform later steps in planning to
achieve the objective.
One way of utilizing SWOT is matching and converting. Matching is used to
find competitive

advantage by

matching

the

strengths

to

opportunities.

Converting is to apply conversion strategies to convert weaknesses or threats

into strengths or opportunities. An example of conversion strategy is to find new
markets. If the threats or weaknesses cannot be converted, a company should
try to minimize or avoid them.
Through SWOT analysis, CC is able to recognise weaknesses and threats that
exist and to counter them with a robust and creative set of strengths and
opportunities.
SWOT analysis will prompt CC to move in a balanced way throughout the
companys business. It emphasize on:

building on your strengths

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Case 4

minimizing your weaknesses

seizing opportunities

counteracting threats

Freezing out Profits

For the first issue (Secconz is requesting for a price reduction), there are several
decision making tools that can be utilized.
1. Cost-Volume Profit Analysis (CVP Analysis)
CVP analysis is a method of cost accounting that is concerned with the effect
of sales volume and products costs have on the profit of a business. It
illustrates how the operating profit changes in accordance with the changes in
variable costs, fixed costs, selling price per unit and total units produced and
sold. CVP analysis often assumes that the sales price, fixed cost and variable
cost per unit are constant.
The basic formula used in CVP analysis is: px = vx + FC + Profit
Where: p is price per unit;
x are total number of units produced and sold
v is variable cost per unit;
FC is total fixed costs.
Since the case only provides the product costing of the Fuzzy Frost Alpha (FFA)
component, we will only do the CVP analysis on FFA. It is assumed that the
sales price is constant at $100 (CCs current selling price to customers other
than Secconz). The fixed cost is assumed to be $600,000 ($8 x 75,000). The
variable cost per unit would be $50.
First, we find out the breakeven point for CC given its current operating costs.
This is the point where CC is able to recover only all of its costs, thereby not
suffering any losses but not making any profits as well.
Breakeven point (volume) = FC / (p v)
= $600,000 / ($100 58)
= 14, 286
Breakeven point (dollar) = 14, 286 x $100
= $1,428,600
This means that CC only has to sell 14,286 units of FFA or $1,428,600 in order
to recover the fixed costs related to the production of FFA. Since CC is
currently selling a total of 75,000 units of FFA, this shows that CC does not
have to worry about not recovering their costs.

BAC 4674

Case 4

Freezing out Profits

p-v is also equal to the contribution margin per unit. It is the amount by
which sales per unit exceeds variable costs per unit. FFA has a contribution
margin of $42, or 42% ($42/$100). This means that with every unit sales of
FFA, $42 is available to cover the fixed costs.
This relationship between the cost, volume and profit of the FFA component is
illustrated in the graph below:

The breakeven point is where the revenue line crosses the total cost line.
14,286 units have to be produced and sold in order to avoid sustaining any
losses. After that point, any additional sales per unit of FFA will have a profit of
$42.
The result of the CVP analysis indicates that, if CC loses Secconz as a major
customer, CC is forgoing at least $10,500 ($42 x 25,000). However, even
without Secconz, CC will still be able to cover their fixed costs and generate
high profits from their sales to European customers.

2. Ratio Analysis

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Case 4

Freezing out Profits

Ratio analysis is a tool used to conduct a quantitative analysis of information

in a companys financial statements. It can evaluate relationships among
financial statement items for example: net profit margin shows the percentage
of a companys sales revenue that is left after accounting for operating costs.
External users as well as internal users of the financial statements often rely
on ratio analysis to better understand the companys actual performance.
Therefore, Mr Dali would be able to evaluate the issue better with this
information. For example, Mr Dali could use the ratio analysis to determine the
viability of choosing not to renew CCs contract with Secconz instead,
expanding their market to other regions.
Ratio analysis focuses on 3 key aspects of a business: liquidity, profitability
and solvency. Liquidity ratios measure the ability of a company to repay its
short-term debts and meet unexpected cash needs. Examples of liquidity
ratios are: current ratio, receivables turnover and inventory turnover. A
company that has low liquidity ratios could indicate that the company is facing
bankruptcy and having cash flow problems. Banks and other financial
institutions usually take a companys liquidity into account when considering
whether to approve or renew loans.
Profitability ratios measure a companys operating efficiency, including its
ability to generate income and therefore, cash flow. Examples of profitability
ratios are: profit margin, asset turnover, price-earnings ratio and payout ratio.
A company with high profitability can attain equity financing more easily, for
example through issuance of new shares. This is because investors are looking
to invest in companies that promise rapid growth.
Solvency ratios are used to measure long-term risk and are of interest to longterm creditors and stockholders. Examples of solvency ratios are such as:
debt-to-total assets ratio and times interest earned ratio.
Together with the financial statements, ratio analysis helps paint a clearer
picture of the companys actual state of affairs. If CC is financially sound,
liquid, profitable and has no long-term solvency concerns, then CCs options
are wider. This is because CC could consider Secconzs demand rationally
without being afraid for the companys survivability.
3. The Porter's Five Forces
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Case 4

Freezing out Profits

The Porters Five Forces analysis is a framework for an industry analysis and
business strategy development. It is a simple, yet powerful tool for
understanding where power lies in business situation. This is useful as it helps
an organization to understand both the strength of the current competition
position and the strength of a position that the company is considering to
move into. With the clear understanding of where the power lies, the company
can take advantage of a situation of strength, improve situation of weakness
and avoid making the wrong move. This is essential in making decision or
panning. Conventionally, the tool is used to identify whether new products,
services or businesses have the potential to be profitable. This analysis will
help the company to analyse the intensity of the competition, the profitability
and the attractiveness of an industry. By utilizing The Five Forces Model, CC is
able to analyse the opportunities and overall competitive advantage.

One of the forces that determine the competitive power in a business situation
is threat of new entrant. Profitable markets that yield high returns and low
entry barriers will attract new firms. This will inevitably decrease the
profitability for all firms in the industry. If it costs little capital or required little
time to enter the market, if there are few economies of scale in place, or if
there are little protection for a companys key technologies, then new
competitors can quickly enter the market and weaken an organisation

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Case 4

Freezing out Profits

position. If a company has strong and durable barriers to entry, then the
company can preserve a favourable position and take fair advantage of it.
The next forces that will a business are threat of substitute products. Close
substitute products that exist in a market will increases the likelihood of
customers switching to alternatives in response to price increases. This will
cause the consumers switching cost to decrease.
Bargaining power of buyers shows how easy it is for buyers to drive prices
down. This is driven by the: number of buyers in the market; importance of
each individual buyer to the organisation; and cost to the buyer of switching
from one supplier to another.
Bargaining power of suppliers displays how much pressure suppliers can place
on a business. If one supplier has a large enough impact to affect a company's
margins and volumes, then it holds substantial power. Here are a few reasons
that suppliers might have power:
No substitutes
Few suppliers of a particular product
High switching cost
Suppliers goods are critical to buyers success
For most industries, the intensity of competitive rivalry is the major
determinant of the competitiveness of the industry. This describes the
intensity of competition between existing firms in an industry. Highly
competitive industries generally earn low returns because the cost of
competition is high.
Relating to Freezing out Profit case, CC should recognise that as a supplier of
refrigerator components to Secconz, CC has the competitive advantage as
CCs FFA components is essential to Secconzs success. CC also provides
higher

quality

than

its

nearest

competitor

and

just-in-time

delivery

requirement to Secconz which makes it the only FFA component supplier in

Singapore. Moreover, there have not been any products that are able to
substitute CCs FFA component since it is a new technology provided by CC.
The intensity of rivalry is high and therefore, CC should continue to develop
more efficient and effective as well as innovative products due to the threat of
substitute products and similar products.

4. Quantitative Strategic Planning Matrix (QSPM)

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Case 4

Freezing out Profits

QSPM is a high level strategic management approach for evaluating possible

strategies. It is design to determine the relative attractiveness of feasible
alternative actions. When company executives think about what to do, they
usually have a prioritized list of strategies. Basically, QSPM approach attempts
to select the best strategy using from input from other management
technique.
Steps in developing QSPM:
i.
List the key external opportunities or threats and internal strengths
ii.
iii.
iv.
v.
vi.

and weaknesses in the left column

Assign weights to each factor
Identify alternative strategies
Determine attractiveness score
Compute total attractiveness scores
Compute sum of total attractiveness score

An example of how this table can be used to solve issues faced by

management is illustrated below.

Key factors

Weigh

Merge

Expand internationally

Attractivene

Total

Attractivene

Total

ss score

attractiven

ss score

attractiven

STRENGTHS

ess score
Unique/Quali

ess score

0.20

0.80

0.20

of 0.05

0.10

0.20

0.10

0.40

0.40

JIT

0.20

0.80

0.80

Poor

0.15

0.45

0.45

0.30

0.9

1.20

ty product
Location
business
Workers

WEAKNESSES

skills

marketing
High
manufacturi
ng cost

Sum weights

1.00
10

WEAKNESSES

OPPORTUNITIES

BAC 4674

Case 4

Freezing out Profits

Globalization

0.12

0.36

0.48

Penetration

0.12

0.48

0.48

Vertical

0.20

0.80

0.80

Deregulation

0.05

0.15

Increasing

0.15

0.15

0.60

0.20

0.8

0.01

0.02

0.15

0.60

6.64

>

5.78

integration

competitors
In-house
manufacture
Exchange
rates
Substitute
products

Sum weights

1.00

Sum total attractive scores

We recommend that CC should merge with Secconz rather than expand

internationally after considering the total attractiveness score of the internal
and external factors of CC.
QSPM can also be applied to solve the issue of the investigations in China, that
is, should CC bribe China trade officials, and if not, what is the best approach
for CC.
Key factors

Bribe

Contact US Do nothing

STRENGTHS

ITC

Unique/Quali

0.2

ty product

Location
business

of 0.0

AS

TAS

AS

TAS

AS

TAS

0.10

0.10

5
11

BAC 4674

Case 4

Workers

0.1

skills

JIT

0.2

Freezing out Profits

0.80

0.80

0.40

0.60

0.60

0.60

0.48

0.48

0.48

0.48

0.48

0.48

0.40

0.60

0.60

0.10

0.10

0.10

0.45

0.45

0.45

3.41

<

3.51

>

3.21

WEAKNESSES

0
Poor

0.1

marketing

High

0.3

manufacturin

g cost
Sum weights

1.0

OPPORTUNITIES

Globalization

0.1
2

Penetration

0.1
2

Vertical

0.2

integration

Deregulation

0.0

WEAKNESSES

5
Increasing

0.1

competitors

In-house

0.2

manufacture

Exchange

0.0

rates

Substitute

0.1

products

Sum weights

1.0
0

Sum total attractive scores

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Case 4

Freezing out Profits

Therefore, it is recommended that CC should not bribe the authorities; instead

CC should directly contact US ITC to inform the issue facing by CC. Based on
the table below, by contacting US ITC yields a greater attractiveness rather
than bribing or do nothing or being reactive rather than proactive.

For the second issue (CCs plant in China is under investigation for dumping),
there are also decision making tools that can be utilized.
1.

Decision tree

A decision tree is a decision support tool that uses a tree-like graph or model
of decisions and their possible consequences. Decision tree includes
probability or chance of event outcomes, resource costs, and event outcomes.
A decision tree is often used to help identify a strategy most likely to reach a
goal. However, a decision tree should be paralleled by a probability model,
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Freezing out Profits

which gives the probability of each event outcome, as well as the costs or
returns of the outcomes.
Therefore, if Mr Dali wishes to use this tool, he will have to seek professional
advice on: the probability of being found guilty by the United States
International Trade Commission (US ITC); the probability of paying a fine or
being closed down if found guilty; the amount of fine or anti-dumping tax that
has to be paid; the probability that the a bribe will really solve the problem.
An example of the decision tree for this issue is given below:

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Case 4

Freezing out Profits

Question 2- Assume that Secconz has decided not to renew the

contract: prepare a report of the alternatives for Cold Cuts and make
your recommendations.
Find new customers
As stated in the case, Secconz decided not to renew the contract with Cold
Cuts(CC), the company will suffer a huge lost from losing of a major customer
which is an annual sales of 25, 000 units of FFA component. Hence, CC should
find new customers whether it is from locally or abroad to sustain the
shareholders return and survival of the firm. This can be done by using the
SWOT Analysis which is explained in the Question 1. First of all, there is a need
for CC to identify the strength of the companys product such as its competitive
advantages to be able to compete with other competitors and similar products.
One of its competitive advantages of its product, FFA component is service of
just-in-time delivery system and high quality. However, it is also pertinent for CC
to take note and consider the weaknesses of the product to make improvement
and amendment in order to sustain in the market and gain new market share. In
spite of that, CC should also consider whether there is any opportunities for CC
to penetrate into new market easily. For example, if the buying country does not
have any import quota implemented, it is easier for CC to introduce its product
into the country and supplies it to as many customers as possible. Further, CC
should also consider the threats before entering into the new market by
identifying the risk to the company and products such as political risk. This can
be done by using the PEST Analysis which determines the elements of political,
economic, social and technological.
In order to maintain the companys operation and its profitability, CC should also
use the 4Ps strategy which is a marketing mix strategy. It includes the
components of price, product, promotion and place. During an introduction of a
product to new market, it is a must for CC to understand the features of the
product and determine its pricing strategy, distribution method of product to
buyers and ways to promote the product in order to expand its customer base.
Besides that, take note also that the Porters Five Forces is vital for CC to use
when finding new customers in order to determine the bargaining power of its
suppliers as well as its buyers. This is to ensure that the supply of the FFA
component and other air-conditioner technology is in tandem with the demand
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Freezing out Profits

by customers. It is also to determine any threats of new entrants to avoid price

competition and monopoly of well-known suppliers. Thus, for all of the analysis
mentioned above, CC should take action to find new customers to make full use
of its factory capacity as it has lost one of its biggest customers, Secconz.
Move plant to China
As Secconz has decided not to renew the contract with Cold Cuts (CC), the
company will lose at least $10, 500 from the information gained in the CVP
Analysis as mentioned above but will still be able to produce high profits from
other customers from the FFA components. However, CC will not earn as much as
from Secconz which is less of $40 per unit with the facing of tense competition
with the European state-of-the-art technologies. CC is also facing competition
from suppliers of similar products and customers who decided to manufacture
air-conditioner technology in-house due to high costs, harming the company
financial condition and profits. This is determined from the Porters Five Forces
based on the mentioned above such as the threat of new entrants which is
competitors from China and European market, threat of substitute products as
air-conditioner technology is prone to easy copying, bargaining power of buyers
and bargaining power of suppliers. As a result, CC should move its plant to China
for a lower cost of production such as labour cost and its increasing efficiency in
China.
Before moving its plant to China, CC should consider every factors and
consequences identified by the Quantitative Strategic Planning Matrix for the
possible strategies and the SWOT Analysis for the strengths, weaknesses,
opportunities and threats of this option. For example, CC must first consider the
issue facing by the plant in China on the investigation by the US ITC before
moving the company operation to China as the operation there might be closed
down if the company is found guilty for anti-dumping activities. The outcomes of
the issue are illustrated above by using the decision tree analysis.
Do nothing
As mentioned above, the CVP Analysis has provided CC that even if the company
lost one of its major customers, Secconz, the company will still earn high profits
from their sales to the European customers which is 50, 000 units of FFA
component annually. Based on the breakeven point determined in Question 1, CC
only needs to sell 14, 286 units of FFA component in order to recover its fixed
16

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Freezing out Profits

costs and thus, 50, 000 units of sales to European customers are enough not
only to recover its fixed costs but also to produce high income. Therefore,
without having a contingency plan or strategies for product development is
sufficient for CC to continue surviving even with the loss of it major customer.

Report
To: Board of Directors of Cold Cuts Company
From: Mr. Dali
Date: 15th January 2014
Subject: Loss of major customer, Secconz
Introduction
The two-year contract with Secconz is coming towards the end and Secconz has
decided not to renew the contract due to the low price competition from China.
Discussion
Losing Secconz as a customer will cause us loss of one-third of our sales of the
Fuzzy Frost Alpha component. By using a variety of decision making tools, there
are several options available for us to be taken to overcome these issue which
are:
1. We can look for other customers whether in Singapore or in the worldwide
as we provide the far better quality than our nearest competitor and justin-time delivery requirements. Our FFA component is also the newest
technology and our company is also the only Singaporean supplier for the
part. Hence, finding a new customer in Singapore would not be a huge
problem to our company as we have a good reputation of good quality
product.
2. Moving our whole plant operation to China is also another option to our
company as we are facing competition from suppliers of similar products
and customers who decided to manufacture air-conditioner technology in17

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Freezing out Profits

house due to hefty costs. Thus, moving our operation will reduce our cost
of production like labour cost as there is a factory of our own in China.
3. We can also look for the option of not to do anything as sales to the
European customer is sufficient to cover our fixed costs and it would still
provide us with high profit.

Recommendation
Based on the data provided, it is recommended and advisable that we choose
the option of looking for new customer. This is to increase our profits other
than the profits gained from the European customers and thus, attracting new
investors to our company.

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