WAC REPORT ON THE CASE HARRYS HI-FI CENTRE

Su bmitted To
Submitted On Submitted By : :

: Prof. Sanjay Kumar Gupta 20th July, 2012 Rohankumar Bhardwaj- 20121046 Samarth Mewada-20121048

To

: Harry

From : Steven Date : 20.07.2012

SUB: - Detail analysis report to choose the course of action for cost-effective future. Dear Harry, The close evaluation of the earlier & existing business situation, pertaining to Hi-Fi Centre, has been carried out. The report contains the analysis of the situation and evaluation of the options available for the future business models. The analysis leads to a decision to buy out the two partners and continue with the business solitarily. Thanks Regards Steven Management Consultant, Australia

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CONTENTS

EXECUTIVE SUMMARY ....................................................................................................... 1 SITUATION ANALYSIS ......................................................................................................... 2 PROBLEM STATEMENT: ...................................................................................................... 4 STATEMENT OF OPTIONS: .................................................................................................. 4 CRITERIA FOR EVALUATIONS:.......................................................................................... 4 EVALUATION OF OPTIONS: ................................................................................................ 5 RECOMMENDATION ............................................................................................................. 5 PLAN OF ACTION .................................................................................................................. 6 ANNEXURE 1 .......................................................................................................................... 7

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EXECUTIVE SUMMARY
Harrys hi-fi centre (high fidelity audio equipment centre), with the reasonable profit, entered into the partnership business to expand it. But the business failed to make profit. The factors affected the profit of the business are majorly salary for partners, rent and expense for the up gradation of the shop. Also, economic volatility and difference in business strategy between the partners affected the business. It was a necessity to change the business model. Various criteria are evaluated for the same in the report and suggestion is to buy out the partners and run the business single headedly as the skill to run the business is possessed by the proprietor.

Total Words :

109

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SITUATION ANALYSIS
Harrys HiFi centre, with high fidelity equipment, started singlehanded in 1972. Soon, the sales of the centre increased due to technical advice given to customers, good customer relationships and lower profit margins. Table 1 shows the actual sales data, calculated profit margin and expenditure for the year 1972-73 & 1973-1974. The growth rate shown during the year 1972-1973 & 1973-1974 were taken and depending upon the ratio, projected data for the year 1974-75 are calculated in Table 2. Table 1. Actual Sales Data of Harrys Hi-Fi for the year 1972-73 & 1973-74.

Amount ($) Sr.No. Description 1972-1973 1 2 3 4 5 6 Sales Gross Profit Average Profit Margin Net Profit Salary Expenditure, Tax, Salary for Assistants 214000 42000 19.63 12000 9000 21000 1973-1974 240000 48000 19.63 16000 10000 22000

Table 2. Sales Data of Harrys Hi-Fi for the Year 1974-75 Sr.No. 1 2 Projected 3rd Year- 1974 to 1975 Sales Gross Profit Average Profit Margin (From Table-1) 3 4 5 Net Profit - Assumed Salary Expenditure, Tax, Salary for Assistants Amount ($) 292000 57308 19.63 20000 11000 23000

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After making reasonable profit for three years, it was decided to expand the business with the initial investment of $60000. And for raising the capital fund, two partners were added to business. For the new partners, strategy was to target high end customer and to upgrade the shop. In partnership business, for the six months, there was an increase in gross sales of the business but a net loss for the company. Expenditure on the salary of the partners and rent leads to increase the difference between Gross profit and net profit as shown in figure 1.

Figure-1 Sales and Profit from 1972 to 1975 Many other factors like expenditure on up gradation, recession, inflation, and shop location were responsible for this loss. Moreover, new partners were aggressively targeting the higher income group with higher margin. This was resulted in losing the existing customer from the middle class and upper middle class. There were many opportunities with the upper middle class as market penetration of this class was only 3%. There was a fundamental difference in the operating and marketing strategy among the partners. As per Table 1 & Table 2, total expenditure after gross profit is $32000 for proprietor business whereas in Partnership business net loss of $10000 for gross sales of $30000 depicts that $40000 was the expenditure. This cost is mainly for the rent and salary of the partners. If profit margin is increased from 20% to 22%, it will have a negligible burden on customer. Hence, increasing the profit margin would have not invited the situation of losing customers.

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The merits and demerits of the proprietor business and partnership business on various criteria is summarised in table 3.

Table 3. Comparison of proprietary and partnership business

Particulars Profit
Control Decision Power Cost Startup

Proprietor Business
No sharing, high profit Full Control over business Single headed, No conflict

Partnership Business with Friends

Shared among partners Shared or no control over business Increases conflict, Shared decision Low capital cost as it is shared

for High capital cost

PROBLEM STATEMENT:
To develop a profitable business model which also serves the values that was carried.

STATEMENT OF OPTIONS:
Analysis of the situation of partnership and proprietary business leas to following viable solutions for the problem. 1) To buy out the two partners by paying $10000 to each and continue with the current business model. 2) To start a new business of loud speaker manufacturing by utilising the business that can be bought out for $20000.

CRITERIA FOR EVALUATIONS:

1) Profitability Profit that will be gained by business model. 2) Possible Risk The Risk associated with business model will be evaluated. 3) Future Scenario The Future scenario for the business model will be evaluated. 4) Sustainability Whether the business model will sustain in the volatile market? 4 WAC REPORT ON HARRYS HI-FI CENTRE

EVALUATION OF OPTIONS:

1) To buy out the two partners by paying $10000 to each

In the proprietor business, yearly profit will be $9450 (Refer Annexure 1). This Profit will not be shared. Business with the focus on customer relationship, low profit margin and high sales will result in to the higher profit. This business is having a large customer base of Middle class and Upper working class, hence overall risk is low for this model. Also, technical expertise will strengthen the consumers share in market. The business is targeting the Middle class and Upper working class. In future, market penetration of this class can be increased from 3% to 6%. Also, the seasonal goods will result in to the better future sales. The business has already sustained in the market in early days for about three years. Though sustainability depends on the market trends & economy, good customer base will result in to the reasonable growth of business even in the weak economy.

2) To start the new business of manufacturing loud speakers

To start the business, high capital cost will be required. If we consider the business model as per annexure 1, it is clear that time required to recover the capital cost is at least 2 years. So, company will start making profit after recovering the capital cost which is not in the case of option 1. There is no prior experience in this field; hence it may not run as expected. Also the good customer base for this business does not exist. So, the risk factor is high in this case and speculations on future growth cant be made due to lack of experience. Sustainability depends on the quality, price and after sale service of products. The technical expertise to produce high quality product will be an added advantage.

RECOMMENDATION
Looking at the profit margin and risk involved, a business model to buy out the other two partners and continue with the existing business is the best option. Also large customer base will benefit the same. Hence we recommend to buy out other two partners from existing business. Further, John D. Rockefeller's famous words say "A friendship founded on business is a good deal better than a business founded on friendship."
(Source: www.businessknowhow.com/startup/partnership.htm)

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PLAN OF ACTION 1) 2) 3) 4)
Reunite the customers that were lost in partnership business. Sell out the assets which were used to upgrade the model in order to repay the debts. Market the new business model in order to bring to the customers notice about the change. Once the sale rises hire an assistant and also train him/her in technical manner in order to help customers in a better way. 5) Raise the profit margin quarterly on the basis of the market condition and sale of a particular product in order to sustain in future even in weak economy. 6) Develop the concept of contract based service (not limited to customers who buy products from centre) with various attractive offers. This will result in a good customer base and also raise the revenue of the centre.

Total Word Count

1003

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ANNEXURE 1
Yearly profit if two partners were bought out and continues with the same business Remains in Business Monthly Profit Tax - 25 % assumed Net profit per month Profit For One Year Source: Business model developed by Cyril Future Business Model of Loud Speaker Manufacturing considering the same sales and profit as of existing business Amount ($) 1050 262.5 787.5 9450

Capital Cost (Assumed)

$20000 Amount ($)

Monthly Sales 1 2 3 4 5 6 Sales Gross Profit Average Profit Margin Net Profit before Tax Investment allowance- 40% of profit Total Taxable Profit Profit after tax 7 Net Profit 20000 4500 22.5 1050 420 630 472.5 892.5

No. of Months Required to recover cost 22.40896359 of initial investment

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