The purpose of this report is to address the key strategic issues facing Coast4Life with the expected downturn ahead. Included is a financial analysis, identification of major issues, analysis of alternatives and a recommendation.
Financial Analysis for the Year Ended 2012 (Appendix 1)
* Current ratio of 1.6 indicates that the company can meet its short term obligations. There is a 46% improvement versus last year’s current ratio of 1.1. Quick ratio of 1.8 shows a 50% improvement. * Total debt- to-equity of 1.5 shows a 12% improvement over prior year’s ratio of 1.7 indicating that the firm is relying less on debt. Times interest earned ratio of 6.4 improved by 30%. * Profitability ratios indicate overall earnings growth. Net margin of 15.2% grew by 18% compared to 12.9% in 2011 while Return-on-Equity (ROE) of 27.4% grew by 16%. Return on Investments (ROI) of 11.2% shows a significant 28% growth from 8.7% and posted a 14% favourable variance compared to target. * Revenue and net income grew by 13.4% and 33.3%, respectively.
Major Strategic Issues
With the expected estimated 30%-35% decline in the overall booking, the expected impact is a decline in income by $7M (Appendix 2). The proposed alternatives to generate additional revenues and or/ cost savings are evaluated using a required after tax rate of return of 16%.
Alternative 1 – Change Customer Mix
Objectives: Maximize Repeat Customers from 20% to 40%
Maximize Age Group 40-60 years old from 30% to 38%
* Incremental Income of $721K in 2013; $2.1M for the 3 years ahead combined (Appendix 3)
* Opportunity to expand extra-services
* Maximizes capacity/resources
* Marketing constraints to target customer mix
* May require additional costs to achieve target
This option addresses the incremental income requirement. It maximizes profitability and provides opportunities to expand business ( in line with the company’s mission).
Alternative 2 – Implement a web-based booking system
* Incremental savings of $24K in 2013; $226K for the 3-yrs ahead combined (Appendix 4)
* Opportunity for additional costs reduction (i.e. advertising, promotion)
* Provides information about passengers
* Opportunity to target more customers
* Meets demand for Internet-booking
* Accounting module improves financial reporting
* Loss of customer service
* Technology must be up to date and well maintained
* Security (i.e. financial data, customers)
This option meets the cost savings requirement. It also addresses the immediate need of the company for market/customer information and addresses constraints in alternative 1 (customer mix). This is in line with the company’s mission to provide unique services.
Alternative 3 – Hire Crew and Hospitality Workers from Underdeveloped Countries Pros:
* Incremental cost savings of $883K; $2.1M for the 3 years ahead combined (Appendix 5)
* Cheaper wages
* May damage reputation (poor service quality)
* May dampen employees’ morale
This alternative meets the requirement for cost savings. To ensure quality service, the company must invest in training. The company should also keep key employees (pros: assists in training, promotion could keep morale high). Long-term cost savings is attractive.
Alternative 4 – Divest the Fraser dry dock
* Incremental Income of $3.1M in 2013; $2.5M for the 3-years ahead combined (Appendix 6)
* Focus on core business
* Incremental costs of $438K per year (maintenance and lost income from the dry dock operations (Appendix 6)
* Decline in company-wide morale
* Damage to reputation and local ties
* Quality of third-party maintenance
This alternative meets the incremental income required. This allows the company to focus on its core business. However, long-term, the negative impact on income, reputation and ties with the community are not desirable.
It is recommended to change customer mix and implement a web-based booking system. Both alternatives achieve the income requirement (total $745K in 2013; $2.4M for the 3 years ahead). Both alternative have low risk and provide more opportunities to maximize the use of its resources and capacity and expand business. Hiring crew and staff from underdeveloped countries is recommended if the high risk is mitigated i.e. by retaining key employees. Divesting the drydock is not recommended due to the incremental expenses associated in future years.
The recommended alternatives meet the requirement to generate revenue and/or cost savings to counter the expected downturn in 2013.