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POSTGRADUATE INSTITURE OF MANAGEMENT University of Sri Jayewardenepura Master of Business Administration 2010 MTL502 International Financial Services

Assignment 02 (Marks allocated Maximum 30)

1. Type of Assignment 2.

- Individual

Scope of the assignment A report to be submitted on Crypton (Pvt) Ltd (details given below) covering following areas. a) b) c) d) e) Analysis of the current state of the organization Current status of each division in relation to the BCG matrix A forecast of long term cash requirement for Crypton (5 years) , excluding the new opportunity to supply to IBM Recommendation of financial strategies for each department and for Crypton A project appraisal for the new opportunity to supply to IBM.

3. Dead Line - 8th August 2010

4. Presentation Assignment must be presented in a printed report as per the guidelines issued by PIM. Minimum length of the report should be 10 pages (excluding annexure).

Ravi Edirisinghe Instructor

CRYPTON (Pvt) Ltd Background Crypton, located in Country C, was in incorporated 1990. It is a private limited company which manufactures, markets and distributes a large range of electronic components throughout Europe and the United States of America. Crypton employs approximately 700 people at its three factories in Eastern Europe and supply products to over 500,000 customers in 20 countries. Crypton holds stocks of about 100,000 different electronic components. Crypton is regarded within its industry as being a well-established business. The company is organised into three divisions, the Domestic Electronic Components division (DEC), the Industrial Electronic Components division (IEC) and the Specialist Components division (SC). Each of the three divisions has its own factory in Country C. Organisational structure Crypton is organised along traditional functional/unitary lines. The Board considers continuity to be a very important value. The present structure was established in 2002 and continued to date. Many of Cryptons competitors have carried out structural reorganisations since then. In 2008, Crypton commissioned a review of its organisational structure through a human resource consultancy. The consultants suggested alternative structures which they thought Crypton could employ to its advantage. However, Cryptons Board felt that continuity was more important and no change to the organisational structure took place. Product and service delivery Customers are increasingly seeking assistance from their component suppliers with the design of their products and the associated manufacturing and assembly processes. Cryptons Board views this as a growth area. The Board has recognised that Crypton needs to develop web-based services and tools which can be accessed by customers. The traditional method of listing the

companys range of components in a catalogue is becoming less effective because customers are increasingly seeking specially designed custom made components as the electronics industry becomes more sophisticated. Divisions of Crypton The company is organized into three divisions, the Domestic Electronic Components division (DEC), the Industrial Electronic Components division (IEC) and the Specialist Components division (SC).

The Domestic and Industrial Electronic Components divisions supply standard electronic components for domestic and industrial use. DEC division has been in existence from inception of the company. DEC has been generating almost 50% of the turnover of Crypton. The largest competitor for Crypton for this part of the business is KKK limited, which is a Swiss multinational. The turnover of KKK related to the domestic electronic components for 2009 was $ 1.6Bn. The marketing manager of DEC has been constantly updating the board about the slow growth rate in demand for such components.

Industrial Electronic Components (IEC) division was commenced in the year 2000. Crypton has been struggling to establish in the industry due to the stiff competition extended by the marketed leader COMRON. COMRON has been in existence for over 80 years and has never lost the No 1 position in this trade. The growth rate of the market has been phenomenal over the last 20 years.

Specialist Components (SC) division supplies components which are often unique and made to specific customer requirements. SC division was acquired from Be Limited in 2005. Be was the uncontested market leader for over 2 decades for this industry. The technical expertise of Be in the industry was one of the main reasons which convinced Crypton to acquire Be. After the acquisition there was a drop in sales for SC but Crypton managed to re-gain its no 1 position in 2006. The market growth in the industry has been exponential and forecasted to remain same for a foreseeable future.

Financial objectives of Crypton The Board has generally taken a cautious approach to providing strategic direction for the company. Most board members feel that this has been appropriate because the company was unprofitable during 2003-2006 and needed to be turned around. Also, most board members think a cautious approach has been justified given the constrained economic circumstances which have affected Cryptons markets since 2008. While shareholders have been disappointed with Cryptons performance over the last five years, they have remained loyal and supported the Board in its attempts to move the company into profit. The institutional shareholders however are now looking for increased growth and profitability. Capital market Crypton exists in a country which has a well developed capital market relating both to equity and loan stock funding. There are well established international institutions which are able to provide funds and corporate entities are free to issue their own loan stock in accordance with internationally recognised principles. Development approaches The Board has discussed different ways of expanding overseas in order to meet the overall strategic aim. It has, in the past, been reluctant to move from the current approach of exporting components. However the Director of Operations has now begun preparing a plan for the IEC division to open up a trading company in Asia. The DEC division is also establishing a subsidiary in Africa. Crypton has taken advice from a number of expert sources about market prospects in Asia. The research concluded Asian markets have excellent potential for growth and profitability, because of increasing industrialisation, for one of Cryptons divisions, IEC. The markets are fast-moving and highly adaptive. Some countries in Asia are highly entrepreneurial whilst in others there is much involvement of the State in business. In some countries there is a mixed economy. In general, Asia encourages free markets but this is also allied to a requirement in some countries for local involvement in any business enterprise. Most Asian countries make extensive use of

sophisticated information systems and information technology. A considerable amount of outsourcing from Western countries has taken place to Asias benefit. Although this had originally been in areas of manufacturing, outsourcing has now developed extensively and many service and administrative functions have also been outsourced to Asia. All of these influences have led to a variety of organisational structures in Asian business.

Extracts from last years results and the forecast for the next financial year are as follows Accruals Last year 2009 $m 3,77 5 550 475 250 1,27 5 5,05 0 3,75 0 850 450 0 450 5,05 0 4,50 0 1,75 0 1,05 0 Forecast Next Year $m 4,325 950 575 100 1,625 5,950 4,050 850 625 425 1,050 5,950

Non-current assets Current assets Accounts receivable Inventory Cash and marketable securities Total current assets Total assets Total equity Non-current liabilities Secured bond repayable Current liabilities Accounts payable Bank overdraft Total current liabilities Total equity and liabilities

Revenue Cost of Sales Profit before tax

5,750 2,300 1,208

Notes to Financials Revenue to grow at 10% per annum for the next 5 years Cost of Sales to remain at the same ratio. Bank OD is at an interest of 8% pa Depreciation is approx 400,000,000 pa Capital equipment purchases will remain same as forecasted for next year for the next 5 years. Taxation is 20% of Net profit after Interest (Assume - No capital allowances) Dividend payout to remain at 50% of profit for the year

Strategic opportunity The Board of Crypton is considering the possibility acquiring another company, DP Limited, in the electronic components industry. Crypton has begun preliminary discussion with DPs Chairman with a view to making an offer for DP. Cryptons Board is attracted by DPs strong reputation for customer service but is aware, through press comment, that DP has received a slight increase in complaints regarding its service to customers over the last year. DP had a very high success rate in meeting special government contracts and has very close contacts with authorities. DP has an EPS of 2.10 and a PE of 16. Latest financial statements indicate that DP has 20m ordinary shares in total.

Strategic development Crypton applies a traditional rational model in carrying out its strategic planning process. This encompasses an annual exercise to review the previous plan, creation of a revenue and capital budget for the next five years and instruction to managers within Crypton to maintain their expenditure within the budget limits approved by the Board.

Debates have taken place within the Board regarding the strategic direction in which Crypton should move. Most board members are generally satisfied that Crypton has been turned around over the last five years and were pleased that the company increased its profit in 2009 even though the global economy slowed down. Crypton benefited from a number of long-term contractual arrangements with customers throughout 2009 which were agreed in previous years. However, many of these are not being renewed due to the current economic climate. The Board stated in its annual report, published in March 2010, that the overall strategic aim of the company is to: Achieve growth and increase shareholder returns by continuing to produce and distribute high quality electronic components and develop our international presence through expansion into new overseas markets. Cryptons Chief Executive said in the annual report that the strategic aim is clear and straightforward. He said Crypton will strive to maintain its share of the electronic development, operational, maintenance and repair markets in which it is engaged. This is despite the global economic difficulties which Crypton, along with its competitors, has faced since 2008. Crypton will continue to apply the highest ethical standards in its business activities. In order to facilitate the achievement of the strategic aim, Cryptons Board has established the following strategic goals: 1. Enhance the provision of products and services which are demanded by customers; 2. Invest in engineering and web-based support for customers; 3. Maintain the search for environmentally friendly products; 4. Pursue options for expansion into new overseas markets. The Board has also stated that Crypton is a responsible corporate organisation and recognises the social and environmental effects of its operational activities. Concern over the rate of growth

Cryptons recently appointed Director of Operations and one of its Non-Executive Directors have privately expressed their concern to the Chief Executive at what they perceive to be the very slow growth of the company. While they accept that shareholder expectations should not be raised too high, they feel that the Board is not providing sufficient impetus to move the company forward. They fear that the actual results for 2010 may be below planned. They think that Crypton should be much more ambitious and fear that the institutional shareholders in particular, will not remain patient if Crypton does not create stronger earnings growth than has previously been achieved.

Opportunity to supply to IBM.

Crypton is working on a proposal , through SC division to manufacture special electronic components to one of the largest computer manufactures in the world, IBM.

Crypton has not manufactured this component before but their engineers are confident that they could supply the goods to the specification. The contact is for 5 years and the initial investment in machinery is $85 million. The machinery would last for 5 years but will have to be scrapped immediately after the project.

The forecasted demand ( in units 000) are as follows

Year Demand

1 120

2 140

3 205

4 250

5 300

In addition to above below information are also available

Selling Price - $800 per unit. However, after the 1st year the price will be revised upwards by 3% per annum ( on compounded basis)

Material requirement to manufacture one unit is estimated as 15Kgs per unit. The agreed purchase price with the supplier is $30 per Kg. Supplier agreed not to increase the price during the period of the contract, however if the purchase quantity is more than 3Million Kgs per annum then a 5% rebate will be given to T industries on the agreed purchase price.

Labor Cost $ 120 per unit. This cost will be maintained throughout the contract. Overheads for the project $20 Million per annum

End of Case -

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