Case Study – Extreme CCTV (all details discussed in this case study have been taken from the Extreme CCTV case study as presented in Cases of entrepreneurship: the venture creation process (Morse & Mitchell, 2005)) Student Name: Katrina BinottoStudent Number: S3172726 Course: BUSM 2367 – Business Enterprise One 1. If you were Jack Gin, what would you do: acquire Derwent Systems, based in Newcastle, UK, to extend its reach into Europe, or focus on the IPO?
When assessing if Jack Gin should acquire Derwent Systems or focus on IPO it is would be best suggested to undertake a review of the attractiveness and competitive position of the proposed acquisition. One method of doing this is through the use of the Boston Consulting Group (BCG) Matrix. This matrix assesses the competitive position of the business in its current form, and the aspects of the proposed businesses, against their respective market attractiveness. (Robbins, et al. 2009) The BCG considered businesses in terms of a Cash Cow, Star, Problem Child or Dog.
The case study tells us that Extreme CCTV is a growing company with specialized products that produce positive cash flow for the business, which makes it a Cash Cow. Derwent, although they had difficulties with cash flow at the current time, have a specific product base and have a recognized brand name, which sits this business in the Problem Child area of the Matrix. In order to develop a business which could become a star, Derwent would be able to provide the brand and provide recognition, and Extreme is able to provide the business the necessary cash flow to achieve a possible Star business.
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Therefore I believe that Jack Gin should invest into Derwent Systems as it will allow the acquisition of a recognized product with the ability to sustain positive cash flows assisting in long term sustainability of the business. 2. Briefly outline the risks associated with your recommendation and how the company could manage these risks. There are risks associated both with acquisition and passing the opportunity; Not Acquiring Derwent •Will lose access to a high quality high performing product •May risk market saturation Ability to provide competitive pricing structure for current product range should competitors produce the same products Acquisition Risks •Cash flow – does Extreme have enough cash flow to support Derwent requirements in the short term •Change management issues in merging businesses and associated staff cultural issues •If competitors are already engaging in the market Extreme is trying to break into – do they have a market dominance •Geographical issues – managing businesses on two sides of the globe •Globalisation and workforce diversity issues 3. List the benefits, and why you believe they outweigh the risks Increased market share •Ability to offer the market more products •Acquiring the good will of Derwent customers •The additional Intellectual property from Derwent research and development •Additional staff and their knowledge and experiences •Ability to proposed more competitive pricing structures as inputs may be cheaper as business will have greater turn over and thus may be able to purchase components in bulk •Economies of scale – not only for tangible inputs but labour inputs •Increased borrowing power with the merger of two businesses – increased assets. 4. Analyse Extreme CCTV’s competitive landscape using
Porter’s Five Forces Porter’s Five Forces consist of the following; •Supplier Power oThis component could be considered as high as with a larger volume of component turnover Derwent could access better trading terms and stronger relationships with suppliers. This would result in more reliable and competitive supply of components and with good relationship management, such as ensuring on time invoice payment, Derwent may be able to become a ‘preferred’ creditor. •Consumer Power oQuality would be at the forefront of the consumer’s requirements and thus this component would be considered very high.
Without reliable quality products Derwent would allow competitors access to their market, reducing their cash flows and product sales. •Substitutes oThere are very few substitutes to CCTV. Any alternative products do not provide the same level of quality or access to the same features provided by Extreme (and Derwent) products, thus this factor is considered low. •New Entrants oThe possibility of new entrants into the market is low due to the fact that a number of businesses are already participating in the market, and any new entrants would need a large capital, for research and development and product development. Rivalry oIt is possible that Pelco may merge with other competitors, such as Silent Witness, and their new competitive power would be unknown at this time. Therefore this would be considered a medium risk as neither the new market nor the strategic direction of any competitors is known. 5. Analyse the opportunity using the First Screening Guide INDUSTRY ANALYSIS •What is the industry that addresses this market? oCCTV equipment •Number of competitors ?Pelco ?Silent Witness •Relative size of competitors oNo one competitors having a majority share in the market, which was highly fragmented. Pelco – in Extreme CCTV’s market space, from Southern California oSilent Witness – Canadian public company, worldwide networks with good growths since 1995. MARKET ANALYSIS •Is there a need? oIndustry had decided that CCTV use is a vital part of their overall security strategy and have experienced significant benefits oThese benefits in specialized markets, such as government agencies and correctional facilities are not being taken up by the more generalized business and consumer market. •Customers? oThere is clear demand for this product in government agencies, correctional facilities, and casinos proven by sales to date. More generalized usage of CCTV over time due to perceived and perhaps real reduction of crime that has been experienced where CCTV is in use. •What value do you add? oThe value added service be provided would be; ?Integrated Day Night Cameras – superb performance ?Product Differentiation – a perceived distinct edge by major distributors •Product Life oThe product life expected from this service would be durable, as once the set up was established and trust built with customer they would be very unlikely to ‘try’ a competitor’s product.
The security provided and reputation created by Extreme would see more at stake for the consumer and unless motivated by other means, such as additional services or major discounting, they would be reluctant to try another service. •What is the current market structure? oThe major competitors in this industry are: ?Pelco, and ?Silent Witness. oFollowing are features of services already provided; ?Pelco – provides similar products to Extreme, but at this time does not have the market reputation nor or they able provide a holistic product range as they are not able to provide an integrated camera. Silent Witness – have a product range that is able to operation in varied operating conditions, but also do not currently provide a product that allows the quality of night vision recording. •What is the proposed market size? oThe industry currently serves the following markets: ?Families, ?Singles, and ?Couples of any age group. •What is the market’s growth potential? oThe potential market available for this service is substantial, although it may be difficult to accurately predict. ?Gin feels that although the market is expanding he is unsure how far it will grow and what may drive this growth. Key drivers for the growth would be the increasing acceptance of CCTV usage and the merge of technologies to strengthen the security features of the products. •What would be the proposed cost structure? oExtreme’s proposed product offering would be to provide Derwent products under the Derwent branding, but integrate the results of their research and development which had lead to the development of the even illuminator (UF500) with Extreme’s day/night camera. This would provide a unique product to the market. Pricing for this unique product could be set above the ‘standard’ products and the pricing structure may allow scope to support ongoing research and development investments with a set portion of the profit against these products dedicated to this purpose. Advertising this to the customer may encourage their increased investment in the products Extreme would provide in general. THE NUMBERS •Profits after tax? oCurrently Derwent profits after tax have been reducing, from $292,570 in 1998 to $159,111 in 2000. oExtreme has been experiencing good financial growth since its first year of trading in 1997. It could be considered that after Derwent acquisition that profits after tax would still be positive and in fact do have a chance of growth if the market response to the integrated product is strong. •Time to break even? oIt Gin purchased Derwent for $2. 6 million is would take approximately 4 years for Extreme to break even against this purchase. This is assuming that their annual profits are approximately $692,000 remains constant and that all other factors such as pay scale and in direct costs remain constant. •Time to positive cash? Positive cash flow would take some time longer than the estimated 4 years for break even. oWith the development of the desired product and ensuring its marketing and strategic placement would manage it would be possible to achieve positive cash flow very soon after breaking even. •ROI Potential? oThe return on investment potential is able to be seen in this business idea, but the level of ROI achievable is not able to be determined at this time as market demand is unreliable at this time. •Capital Requirements? oExtreme would require capital investment, through financing, to acquire Derwent. The asset base of Derwent, quoted in 2000 as being $2,353,113 in their financial statements, would provide a significant base for sourcing this finance. When considered as a whole business, i. e. Derwent and Extreme, there would be adequate assets to secure finance to complete the acquisition. The consideration needed by Gin would be the businesses ability to service this size of loan as part of normal operations. •Exit Mechanism? oPossible exist strategy would be to sell off the Derwent part of the company should Gin be unable to operate this part of the business. oShould t require a more significant exit from the market then Extreme could sell components and intellectual property to competitors. •Value? oStrategic value of the business would be high when established. It would have a solid loyal client base, established branding and market reputation. It would be able to achieve market differentiation needed to provide some assurance of long term sustainability in the market. CAN YOU AFFORD TO PLAY? •Production Costs? oProduction costs would differ between operating locations, i. e. Derwent and Extreme factories, as input costs may differ due to the differing localities, i. . Northern America and UK. oEconomies of scale could be achieved in bulk purchase of inputs; however the logistical issues associated with movement of stock between geographic locations may actually increase costs should this strategy be employed. This would have to be carefully considered. •Marketing Costs? oAs the market in North America currently does not appreciate the Derwent product it would be critical to demonstrate through marketing the benefits that there products, and Extreme’s on trying to enter the market, would have for them. Encouraging distributors and consumers to try the product would be critical in being able to ‘break’ into the market. •Distribution Costs? oDistribution costs needed to be considered would be movement of input components, where are the distributors and their clients, and would there be a ‘head office’ hierarchy set up or would the two arms of the Extreme business, i. e. Derwent and Extreme, be seen as equals in the company structure and thus have equal responsibilities and distribution strategies would be determined by each location instead of a ‘one size fits all’ approach. Prices? •Pricing structure would need to be competitive with other competitors where product services and capacity is similar, where there are distinct difference between what the competitor can offer and what the new Extreme business could provide the market then the ability to charge inflated prices, limited to the value perceived by the consumer, would be would become available. These potential increase profit margins on specific products could be used either as investment into research and development or to minimise the cost of borrowing.
It would be dependent on any marketing strategy that would be linked with the pricing structure. •Costs? oBulk buying where possible would represent the best way to minimize costs for this business and achieve any economies of scale. •Distribution Channels? oIt would be seen that existing distribution channels to be used to promote and sell the products. As the attractiveness of the product became greater then new distribution channels would open. oAn alternative distribution would be to use the companies own resources.
The staff would have the background knowledge on the development of the products and the strategic missions and values of the business and would be able to communicate these as part of their marketing strategy. •Barriers to Entry? oEntry into this market at this time is favorable as there are not many competitors and Extreme already holds product differentiation with its current product range. oThe ability to merge research and development from the two businesses would provide a great opportunity to emerging markets globally. •Legal/Contractual/Intellectual Property. There are definite intellectual property issues with this merger and then management of research and development results through this business and the proposed merger. oLegal contracts and possible supply and logistic contracts would need to be facilitated to provide opportunity for efficiencies. •Contacts and Networks? oContracts and networks already in place for both businesses would be used in the first instance, and then with increase attractiveness of produce new networks and contacts would be developed. It is also evident within the case study that participation at trade shows would provide key opportunities to expand current networks.
THE MANAGEMENT TEAM •The Extreme structure would remain in its current form. With the proposed retirement of Duffy, Gin would need to find an appropriate management team to continue operations of the Derwent arm of the business. FATAL FLAW/RISK •Existence of a Fatal Flaw oThere are possible fatal flaws in this proposal; ?Cost of borrowing required capital to acquire Derwent. ?Ability to establish a suitable management team to continue Derwent operations. ?The need to establish two geographical locations for operations the logistical issues that this may create. Staff culture issues and how Derwent staff would be received and integrate with Extreme employees. •Risk? oThere is a risk in this proposal in that the cost of capital required to start up the business may be prohibitive to entering the market, although the use of a merger with a business that has established distribution channels and market would reduce this risk overall. BIBLIOGRAPHY •Morse, Eric A, and Ronald K Mitchell. Cases in entrepreneurship: the venture creation process. Thousand Oaks: SAGE Publications, 2005. •Robbins, S, R Bergman, I Stagg, and M Coulter. Management. 5th . Pearson Australia, 2009.
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