Strategic Entrepreneurship and Innovation - Air Free Tyres

ASIA PACIFIC INSTITUTE OF INFORMATION TECHNOLOGY
IN COLLABORATION WITH
STAFFORDSHIRE UNIVERSITY UK
BA (Hons) in Business Administration
INDIVIDUAL ASSIGNMENT
Module Code & Title

BLB10084-3-STRATEGIC ENTREPRENEURSHIP - INNOVATION Prepared By ARCHCHANA VEKNESWARAN (CB003654)
Intake code GF11B1BA Date of Submission 6th June, 2012
Instructor Mr. I.G. Perera
Submitted in partial fulfillment for the degree of Bachelor of Arts (Hons) in Business Administration Word Count: 2746
Individual Assignment: Strategic Entrepreneurship and Innovation
EXECUTIVE SUMMARY
The report below is prepared for a business idea by Eco FIT Tyres (P) Ltd, a BOI venture, to launch green air free tyres which are a new industry changing innovation which avoids the issues of maintaining air pressure in vehicle tyres. With the possible investment help from TVF which encourages small medium entrepreneurs by offering US$ 300000 as startup capital the business plan is devised. The business focuses on 80% export to India and 20% or local Sri Lankan new tyre market. The factory of the company is expected to be located in the rented premises in Kalutara, one of the rubber and tyre manufacturing hubs of SL. Initially a brief introduction to the product and business is given. Environmental scanning and internal analysis are done based on PESTEL, value chain analysis, competitor analysis and finally a SWOT. Based on the environmental scanning strategic plan is developed. A marketing plan with segmentation, targeting and positioning aspects is exhibited with brief 4P analysis. Location strategies, production process, factory design and quality control are analyzed in depth in the chapter. Human resource requirements along with organisational structure are developed to explain the management of the company. Then a well elaborated financial analysis is included for the decision making purposes with sales forecasts. Business controls and risk analysis are also included. The report indicates that the venture would be very profitable and successful in its market presence and will be welcomed by the Sri Lankan and India customers.
ACKNOWLDEGEMENT
The author is heart fully thankful to her Strategic Entrepreneurship and Innovation lecturer Mr. I.G.Perera, whose encouragement, guidance, and support from the initial to the final level enabled to the author to develop an understanding about the subject. Also the author is thankful to Dr. Mahesha Samarathunga, for directing her in the correct path regarding citation and references. The author also wishes to thank the librarian. Lastly, the author offer her regards to all those who supported her during the completion of this individual assignment. The author is responsible for any errors that remain in this assignment.
TABLE OF CONTENTS
EXECUTIVE SUMMARY .................................................................................................................................. 2 ACKNOWLDEGEMENT ................................................................................................................................... 3 TABLE OF CONTENTS..................................................................................................................................... 4 LIST OF TABLES .............................................................................................................................................. 6 LIST OF FIGURES ............................................................................................................................................ 8 LIST OF ABBREVIATIONS ............................................................................................................................... 9 1. INTRODUCTION AND CURRENT BUSINESS SITUATION ....................................................................... 10 1.1 Introduction to the Company ............................................................................................................ 10 1.2 Introduction to the Product ............................................................................................................... 11 1.3 Current Manufacturing Front and Market Situation ......................................................................... 12 2. STRATEGIC ANALYSIS .......................................................................................................................... 18 2.1 PESTEL Analysis ............................................................................................................................. 19 2.2 Value Chain Analysis ....................................................................................................................... 23 2.2.1 Primary Activities Analysis ......................................................................................................... 23 2.2.2 Secondary Activities Analysis ..................................................................................................... 24 2.3 Porter Five Force / Industry Analysis ............................................................................................... 25 2.4 SWOT Analysis ................................................................................................................................ 28 3. 4. STRATEGIC PLAN ................................................................................................................................. 29 MARKETING PLAN ............................................................................................................................... 31 4.1 STP Strategy ..................................................................................................................................... 31 4.1.1 Segmentation.............................................................................................................................. 31 4.1.2 Targeting .................................................................................................................................... 32 4.1.3 Market Positioning ..................................................................................................................... 32 4.2 Marketing Mix for Eco FIT Tyres .................................................................................................... 33 4.2.1 Product ....................................................................................................................................... 33 4.2.2 Price ........................................................................................................................................... 33 4.2.3 Place ........................................................................................................................................... 34 4.2.4 Promotion ................................................................................................................................... 35

5. OPERATIONS AND PRODUCTION ........................................................................................................ 37 5.1 Physical Location .............................................................................................................................. 37 5.2 The Production Process of Air Free Tyres ........................................................................................ 39 5.3 Facilities, Equipments, Machinery and Material Suppliers ............................................................. 43 5.4 Quality Control Plan........................................................................................................................ 44 5.5 Research and Development ............................................................................................................. 45 6. MANAGEMENT AND ORGANISATON .................................................................................................. 46 6.1 Organizational Structure ................................................................................................................... 46 6.2 Recruitment and Selection ................................................................................................................ 46 6.3 Job Description ................................................................................................................................. 48 7. FORECASTS AND FINANCIAL DATA ..................................................................................................... 50 7.1 Initial Start up Costs.......................................................................................................................... 50 7.2 Financial Budgets.............................................................................................................................. 53 7.2.1 Sales Forecast Budgets............................................................................................................... 53 7.2.2 Production Forecast Budgets ..................................................................................................... 55 7.2.3 Materials Usage Budgets ........................................................................................................... 57 7.2.4 Material Purchase Budgets........................................................................................................ 60 7.2.5 Direct Labour Budget................................................................................................................. 63 7.2.6 Factory Overheads Budgets ....................................................................................................... 64 7.2.7 Administration Expenses Budget ............................................................................................... 65 7.2.8 Promotions Budget..................................................................................................................... 66 7.3 Pro - forma Financial Statements (Master Budgets) ......................................................................... 67 7.3.1 Pro - forma Manufacturing and Income Statement .................................................................... 68 7.3.2 Pro - forma Cash Flow Statement .............................................................................................. 72 7.3.3 Pro Forma Balance Sheet ........................................................................................................... 73 7.4 Ratio Analysis ....................................................................................................................................... 74 7.4.1 Profitability Analysis ................................................................................................................. 74 7.4.2 Liquidity Analysis ...................................................................................................................... 76 7.4.3 Efficiency Analysis .................................................................................................................... 76 7.4.4 Other Ratios ............................................................................................................................... 78 7.5 Investment Appraisal ............................................................................................................................ 78 7.5.1 Payback Period........................................................................................................................... 78 5

7.5.2 Discounted Payback Period ....................................................................................................... 79 7.5.3 Net Present Value Evaluation .................................................................................................... 79 7.5.4 Internal Rate of Return ............................................................................................................... 79 7.5.5 Accounting Rate of Return (ARR)............................................................................................. 80 7.6 Break Even Analysis ......................................................................................................................... 80 7.7 Exit Routes for Investors .................................................................................................................. 82 8. BUSINESS CONTROLS .............................................................................................................................. 83 9. RISK ANALYSIS ......................................................................................................................................... 85 CONCLUSION ........................................................................................................................................... 89 APPENDICES ................................................................................................................................................ 90 REFERENCES .............................................................................................................................................. 100
LIST OF TABLES
Table 1: Natural Rubber Consumption by BOI and Non BOI projects ........................................................ 13 Table 2: Facts on Sri Lankan rubber Manufactures .................................................................................... 13 Table 3: Facts on Sri Lankan tyre products manufacturing projects........................................................... 13 Table 4: Trend of purchasing new vehicles from 2003 2008 in Sri Lanka ................................................ 16 Table 5: Sri Lankan exports of tyres to India and world from 2005 - 2009................................................. 17 Table 6: PESTEL Analysis ............................................................................................................................. 22 Table 7: Competitor Analysis for EFT for Sri Lankan Market ...................................................................... 26 Table 8: Porter's five forces analysis for the exports in India Market ........................................................ 27 Table 9: SWOT Analysis for EFT................................................................................................................... 28 Table 10: Strategic Plan of EFT .................................................................................................................... 30 Table 11: Integrated Marketing Mix for EFT ............................................................................................... 36 Table 12: Factory Location in Kalutara and Rubber Supplier location........................................................ 37 Table 13: Material, Equipment and Service Providers of EFT ..................................................................... 43 Table 14: Staffing at EFT.............................................................................................................................. 48 Table 15: Job Description of the Workforce at EFT .................................................................................... 49 Table 16: Startup costs of EFT ..................................................................................................................... 50 Table 17: Startup costs................................................................................................................................ 51 Table 18: Subtotal of the Initial startup cost .............................................................................................. 52 Table 19: Total Financing Breakdown for the business .............................................................................. 52 Table 20: Sales Forecast for the year 2012/2013 ....................................................................................... 53 Table 21: Sales forecast 2012 - 2015 .......................................................................................................... 54 Table 22: Production forecast for 1012/2013............................................................................................. 55 Table 23: Production Budgets for Year 2013/1014 and 2014/2015 ........................................................... 56 6

Table 24: Materials Usage Budget for the year 2012/2013 ........................................................................ 57 Table 25: Material Usage Budget for the year 2013/2014 ......................................................................... 58 Table 26: Material Usage Budget for the year 2014 - 2015 ........................................................................ 59 Table 27: Materials Purchase Budget 2012/2013....................................................................................... 60 Table 28: Material Purchase budget for the year 2013/2014 .................................................................... 61 Table 29: Material Purchase Budget for the year 2014/2015 .................................................................... 62 Table 30: Direct Labour Budget for the three years ................................................................................... 63 Table 31: Monthly Breakdown for the first year ........................................................................................ 63 Table 32: Factory Overheads Budget for all the three years ...................................................................... 64 Table 33: Monthly breakdown of overheads budget for the year 2012/2013 ........................................... 64 Table 34: Administration Expenses for the three years.............................................................................. 65 Table 35: Promotions Forecast Budget for all the three years ................................................................... 66 Table 36: Pro - forma Income Statement from July 1st 2012 - October 31st 2012 .................................... 68 Table 37: Pro forma Income Statement from November 1st 2012 - February 28th 2013 ...................... 69 Table 38: Pro - forma Income Statement from March 1st 2012 - June 30th 2013 ..................................... 70 Table 39: Pro - forma Manufacturing Income Statement for 2013, 1014 and 2015 .................................. 71 Table 40: Pro forma Cash Flow Statement for 2013, 2014 and 2015 ......................................................... 72 Table 41: Pro forma Balance Sheet for three years .................................................................................... 73 Table 42: Gross Profit Margin ..................................................................................................................... 74 Table 43: Net Profit Margin ........................................................................................................................ 74 Table 44: Return on Capital Employed Ratio .............................................................................................. 74 Table 45: Return on Assets Ratio ................................................................................................................ 74 Table 46: Administration to Sales Ratio ...................................................................................................... 75 Table 47: Advertising cost to revenue ratio ................................................................................................ 75 Table 48: Current Ratio ............................................................................................................................... 76 Table 49: Quick Ratio .................................................................................................................................. 76 Table 50: Receivable Days Ratio ................................................................................................................. 76 Table 51: Payable Days ............................................................................................................................... 77 Table 52: Inventory turnover ratio and Inventory Days ............................................................................. 77 Table 53: Asset Turnover Ratio ................................................................................................................... 77 Table 54: Net Sales to Working Capital Ratio ............................................................................................. 78 Table 55: Payback Period ............................................................................................................................ 78 Table 56: Discounted Payback Period ......................................................................................................... 79 Table 57: NPV Evaluation ............................................................................................................................ 79 Table 58: Internal Rate of Return ............................................................................................................... 79 Table 59: Annual Rate of Return Calculation .............................................................................................. 80 Table 60: Break Even Point Calculation ...................................................................................................... 81 Table 61: Business Controls ........................................................................................................................ 84 Table 62: Risk Identification for EFT............................................................................................................ 85 Table 63: Risk Mitigation Strategies............................................................................................................ 88 Table 64: Process of registering a business in Sri Lanka ............................................................................. 91 Table 65: Process of registering a property ................................................................................................ 91 7

Table 66: Process of trading across borders ............................................................................................... 91 Table 67: Import and Export procedures................................................................................................... 92 Table 68: Minimum Wage Rate in Sri Lanka ............................................................................................... 97
LIST OF FIGURES
Figure 1: Company Vision, Mission and Motto ........................................................................................... 10 Figure 2: Prototype of Air free Tyres .......................................................................................................... 12 Figure 3: Consumer Expenses Trend on Transport in Non food expenses segment .................................. 15 Figure 4: Number of Vehicles in Sri Lanka from 2004 - 2008 ..................................................................... 15 Figure 5: Ease of doing business in Sri Lanka .............................................................................................. 18 Figure 6: Value Chain Primary Activities of EFT .......................................................................................... 24 Figure 7: Porter's Five Forces ...................................................................................................................... 25 Figure 8: Composition of tyre demand in India - 2010 ............................................................................... 31 Figure 9: Target of EFT Tyres ....................................................................................................................... 32 Figure 10: Pricing for the tyres for the initial year ...................................................................................... 33 Figure 11: Pricing Strategies of Eco FIT Tyres throughout Product Life Cycle ............................................ 34 Figure 12: Distribution Path for Eco FIT Tyres ............................................................................................ 35 Figure 13: Push Strategy for Promotion ..................................................................................................... 35 Figure 14: Factory Plan................................................................................................................................ 38 Figure 15: Production Process of the Eco FIT Tyres .................................................................................... 39 Figure 16: Mixing Process Illustration ......................................................................................................... 39 Figure 17: Extruding Process Illustration .................................................................................................... 40 Figure 18: Beading Process Illustration ....................................................................................................... 40 Figure 19: Calendaring Process Illustration ................................................................................................ 41 Figure 20: Cutting Process Illustration ........................................................................................................ 41 Figure 21: Building Process Illustration....................................................................................................... 41 Figure 22: Curing Process Illustration ......................................................................................................... 42 Figure 23: Quality Inspection Illustration.................................................................................................... 45 Figure 24: Organisational Structure of EFT ................................................................................................. 46 Figure 25: Risk Assessment Map................................................................................................................. 86 Figure 26: Inflation in Sri Lanka from 1980 - 2010 ...................................................................................... 92 Figure 27: Unemployment Rate in SL from 1998 - 2010............................................................................. 93 Figure 28: Summary on legal proceedings .................................................................................................. 96 Figure 29: Highlights on contract enforcement in Sri Lanka ....................................................................... 97
LIST OF ABBREVIATIONS
BOI CBSL EFT ISO Mgr PESTEL R and D SL STP SWOT SLS Board of Investment Central Bank of Sri Lanka Eco Fit Tyres International Standard Organisation Manager Political, Economical, Social, Technological, Ecological, Legal Research and Development Sri Lanka Segmentation, Targeting, Positioning Strength, Weakness, Opportunity and Threat Sri Lanka Standard
1. INTRODUCTION AND CURRENT BUSINESS SITUATION 1.1 Introduction to the Company

The business proposal is for the establishment of the business venture in tyre manufacturing industry. The proposed idea will be for a BOI firm in the name of Eco FIT Tyres (P) Limited which would be initiated with 3 shareholders. The plant will be located in Kalutara which is one of the well known locations for the accessibility of the raw material (Rubber) with competent work force availability. The biomimicry green tyres which are the core products of the intended business venture will be manufactured in SL for local selling and also for export purposes. The project would initially require an investment of $300 000 / SLR 39,282,000 (as per 18/5/2012 exchange rate of Rs/$ 130.94 released by CBSL: CBSL, 2012). The main intention for the development of this business idea is to promote greener products which are very vital in todays global warming conditions. This is well reflected in the company logo with a caption statement Think Planet; Travel Green (Refer Fig 1). In an era where consumers are very demanding for innovative products which might make their life easy at a low cost and also in an environmental friendly way has created the business opportunity for this project.
Vision: To be the reputed company of best quality eco friendly air free Sri Lankan tyres in the local and global market Mission: At Eco Fit Tyre (P) Ltd, we expect to be the innovative quality conscious customer centric Sri Lankan organization which contributes towards the rural development and environment conservation
Figure 1: Company Vision, Mission and Motto
Source: Done By Author
10
1.2 Introduction to the Product

The product which is going to be launched by EFT is flat free tyres/ air free tyres which is completely different from conventional Charles Goodyears vulcanized wheel model. University of WisconsinMadisons Polymer Engineering Center in the USA has done a research on the possibility of adopting the biomimicry technology into the tyres structure which could provide the required pressure to the wheel to move the load from one location to another (technology4agri word press, 2012). The model adopted from nature was the honeycomb structure which has been applied for military vehicles for initial testing purposes (technology4agri word press, 2012) which showed an improved mobility freedom than conventional tyres (Hanlon, 2012). EFT is making modifications to this model to start the commercialized production for this concept tyre model. The air free tyres would come with own package of benefits to the customers. The air free tyres would promise a relatively better performance compared to traditional pneumatic tyres. This is mainly due to the honey comb or hub and spoke design of the wheel (Hanlon, 2012). The flexibility incorporated in the honeycomb structure of the wheel helps to absorb shock on the ride and to rebound back (Hanlon, 2012). Even though the technology is different the tyres provide the comfortable ride, ability to transport load and to envelope road hazards (Hanlon, 2012). The vertical stiffness and the lateral stiffness of the structure helps to optimize the performance level of each wheel which the conventional cannot achieve (Hanlon, 2012). The honey comb structure is made out of recyclable material which is environment friendly. Furthermore, the tyres do not require air to inflate them so the risk of punctures is eliminated by this model. So the users have no requirement to check the pressure in the air so it would become easy to maintain. This also provides another benefit for elimination for the need of another spare wheel which could increase the store capacity of the vehicle. The structure provides very low rotation resistance which leads to greater fuel economy and better handling. Having discussed the benefits the wheel would provide author moves on to explain the technical aspects of the product (Refer Fig 2). The support structure of the air free wheel is made out of synthetic resin/ thermoplastic resin which are totally recyclable. This makes EFT stick to its mission of conserving environment. The support structure is arranged in an interlacing fashion to
11
Individual Assignment: Strategic Entrepreneurship and Innovation provide effective flexibility in spokes without a horizontal force which helps to perform like pneumatic tyres. Initially, EFT tries to produce these for vehicles like cars, three wheelers, scooters, TVS and motor bikes and to move step by step to other heavy vehicles like vans, tractors and jeeps. EFT hopes to achieve mass market success through the launch of this industry changing innovation with a total competitive advantage over conventional tyre manufacturers.
Figure 2: Prototype of Air free Tyres
Source: Done by Author based on Hanlon (2005)
1.3 Current Manufacturing Front and Market Situation

SL is the 9th largest exporter of natural rubber generating more than 100,000 tons on an annual basis (Kandy investor, 2012). As per Kandy investor (2012), On the manufacturing front, Sri Lanka is the world's leading supplier of solid rubber tyres for vehicles. The big opportunity for any investor is to start manufacturing tyres and to export them where there is a high demand. About two thirds of global natural/ synthetic rubber production is utilized in automobile tyre manufacturing (Sri Lanka equity, 2012). So demand for the commodity is linked to the trends in automobiles industry, in addition to the price of crude oil (Sri Lanka equity, 2012). As per Sri Lanka equity (2012), for tyre manufacturing both synthetic and natural rubber is used where the usual mix is 60:40. Natural rubber component increases to match the ability to increase the ability to handle heat (Sri Lanka equity, 2012).
12
Individual Assignment: Strategic Entrepreneurship and Innovation Table 1 exhibits the tyre related natural rubber consumption by BOI and non BOI projects: Product Type Tyre Treading Pneumatic Tyres and Tubes Solid Tyres BOI Projects 1094 6575 15647 24% 80% 100% Non BOI Projects 3440 1600 76% 20% -
Table 1: Natural Rubber Consumption by BOI and Non BOI projects Source: BOI (2012 cited in Sri Lanka business, 2012)
Table 2 exhibits the no of projects, investments and type of ownership in the Sri Lankan rubber product manufacturing industry which makes SL a leading global player: Ownership No of Projects Foreign (100%) Local (100%) Joint Ventures Total 29 14 16 59 49 24 27 100 % Investment (Rs Million) 3580 675 2691 6946 51 10 39 100 % Employment (No of Employees) 5185 1841 10661 17687 29 11 60 100 %
Table 2: Facts on Sri Lankan rubber Manufactures Source: Sri Lanka business, 2012)
Table 3 shows the investment level per each tyre product: Product Type No of projects Tyre retreading Pneumatic tyres and tubes Solid tyres 3 3 4 5 5 7 % Investment (Rs Million) 558 4825 896 4 31 6 235 4077 667 1 25 4 % Employment %
Table 3: Facts on Sri Lankan tyre products manufacturing projects Source: Kandy Investor (2012)
As per Kandy investor (2012), SL has the following competitive advantages for rubber industry manufacturers: 124 years of name and competencies for high quality rubber exports, access to raw material (rubber) at competitive prices, access to highly qualified pool of technical and
13
Individual Assignment: Strategic Entrepreneurship and Innovation professional manpower at competitive salary/ wage rates, incentive from government for export oriented companies, suitable infrastructure for operations, access to supporting services such as R & D, testing and certification etc. When a SL manufacturers in tyre manufacturing industry enters into market with 80% export focus (Kandy investor, 2012): Qualifying Criteria for incentives: Investment worth of USD 150 000 or more Incentives: Tax rates: 0% for first 5 years, 10% for 6th 7th years and 15% thereafter, import duty exemption on capital goods and raw materials for export quantities, exemption from exchange control regulations. As per Kandy investor (2012), Any new company within the "thrust industry" category undertaking a minimum investment of Rs: 50 million, exporting not less than 80% of output and employing a minimum of 50 persons shall be eligible for a tax holiday of 10 years and to import project related items on duty free basis. These incentive schemes seem very profitable for EFT and would try to register under BOI to reap the benefits. Having briefed on the industry situation the market potential for air free tyres is discussed below. Even though strict rules are followed in oil, fuel and other motor related products, there are no stringent rules for tyres which lead to lack of customer protection (Gnanaraj, 2012). So the current tyre market in SL heavily flooded with cheap low quality tyres (Gnanaraj, 2012). New tyre market is growing at a phase of 7-8% annually and retreads market grows at a 1-3% rate annually (Gnanaraj, 2012). When economy booms people affords to buy new tyres and if the economy faces downfalls retread market could pitch up (Gnanaraj, 2012). As currently SL faces a good development in economic growth it is expected that the new tyre market would grow where retread market would remain constant (Gnanaraj, 2012). As per Gnanaraj (2012), A new tyre on average costs around Rs.9000-10000. A retread tyre costs around Rs.2500-3600. Fig 3 shows that SL shows an increasing trend in transportation expenditure in non food expenditure classifications.
14
Figure 3: Consumer Expenses Trend on Transport in Non food expenses segment
Source: Statistics.gov (2012)
Table 3 and 4 show that SL exhibits an increasing trend towards vehicle purchasing so there is good market for inventions in tyres.
Figure 4: Number of Vehicles in Sri Lanka from 2004 - 2008
Source: Department of Census and Statistics (2012)
15
Table 4: Trend of purchasing new vehicles from 2003 2008 in Sri Lanka
Source: Department of Census and Statistics (2012)
Having discussed the local market potential it is also essential to discuss the export potentials for air free tyres. As per rubber world (2012), world demand for tyres is forecasted to rise 4.7% per year through 2015 to 3.3 billion units. In value terms, the tyre market is projected to advance 6.5% annually over the same span to $ 220 billion. Asia Pacific region is considered as the largest market for tyres for motorbike, cycle and off road tyres (Rubber world, 2012). 60% of the tyre demand would be for the motor vehicles (Rubber world, 2012). As per De Mel et al (2011), Sri Lankas tyre and tube exports grew from USD 161.41 million in 2004 to USD 214.27 million in 2009. Sri Lankas exports of tyres and tubes to India also
16
Individual Assignment: Strategic Entrepreneurship and Innovation accelerated in recent years. Since 2006, when the tyre exports were $6.19 million the industry showed positive growth towards exports. India is the 6th largest tyre buyer of Sri Lanka. For the initial 3 years EFT expects to sell its air free tyres to India.
Table 5: Sri Lankan exports of tyres to India and world from 2005 - 2009
Source: De Mel et al (2011)
As per De Mel et al (2011), India recorded a share of 79 % of the market share in 2007 and 88 per cent in 2008. The value of Sri Lankas exports of New Pneumatic Tyres of Rubber to India increased from LKR 613.49 million in 2006 to LKR 1,021.56 million in 2008, a growth of 67 per cent. Due to global recession in 2008/2009 tyre export sector faced issues but since then it showed gradual increase (De Mel et al, 2011). The current market and industry situations shows positive signals towards the success of EFTs air less tyre launch.
17
2. STRATEGIC ANALYSIS
As a new business venture it is essential to understand the business environment prevailing in the country and possible competition in the future with the product offering. The following image gives a snapshot view on the ease of doing business in Sri Lanka when compared to other nations:
Figure 5: Ease of doing business in Sri Lanka
Source: Doing Business (2012)
The following sections discuss strategic analysis for EFTs business venture.
18
2.1 PESTEL Analysis

External environment factors are discussed below:
Impact to
Impact to company (0 to 10)
Total Impact
Factors Political Environment Political Stability
Industry ( 0 to 10)
Remarks
64
By routing the terrorism the country experiences political stability which has created a nation into an economic hub for investors. Business climate is less risky.
Governance Economical Plans
42
Public services are considered to be over staffed and inefficient. Bribery and corruption makes a process delayed. Mahinda Chinthana covers all the development incentives for plantation sectors and export oriented industries which cover rubber and tyres industries.
56
Tax Policies
63
Recently government decided to increase the import taxes on vehicles which slapped the demand for vehicles especially for motorbikes (tax increased from 61% - 100%) and three wheelers.
Authorities
42
Legal authorities such as board of investment, rubber development department, rubber research institute etc are of great benefit for infant level SMEs and for firms with export focus.
Business Startup Process
30
Very time consuming and bureaucratic in nature.
19
Individual Assignment: Strategic Entrepreneurship and Innovation Economical Environment Inflation
48
Inflation in SL is 7.7% which is relatively high and might create increase in raw material costs, machinery costs and highly be represented in the exchange rates which might affect the global competitiveness for the tyre exports of EFT.
Unemployment Treaties/Agreements
56
Unemployment in SL is 4.2% and there is a relatively rural unemployment which creates opportunity of easy access to labour.
10
80
India (Main export focus of EFT and SL) are members of Indo Sri
Lanka free trade agreement, SAARC, SAFTA, South Asian Economic Union etc. These treaties help to achieve tariff benefits which are the integral part of these agreements. Fuel and electricity price hikes 9 8 72 Ceylon Petroleum corporation has increased fuel prices and electricity prices are also shot up by 15% surcharge on industries which impacts manufacturing firm operations and demand for vehicle purchase. Social Environment Cultural Traits Literacy Rates 3 2 6 Sri Lanka is home for multiple cultures and ethnicities. It is essential to consider equality among communities. 7 8 56 More than 90% literacy level. State universities provide the necessary engineering. Country of origin attitudes 6 6 36 High preference to foreign brands. training and technical knowledge on chemical
20
Individual Assignment: Strategic Entrepreneurship and Innovation Price Perception Advertisements attitudes 5 7 35 High price represents high quality and vise versa. Value for money is more important. 6 9 54 Reminders are required to make the customers switch the brands to erode brand loyalty. Technological Environment R&D Road Infrastructures 7 8 56 SL has formulated institutes like Industrial technology institute to help innovation and learning. 8 8 64 The Road Sector Assistance Project was designed to lower transportation costs and travel times by improving the condition of national highways Communication Patent Protection 5 6 5 9 25 54 The communication sector is showing improvements year on year Patent protection and authority is available in SL but the lack of awareness in customers leads to counterfeited products. Ecological Environment Climate Conditions Pollution 9 9 81 Sri Lanka is one of the countries which has the climatic conditions which is very suitable for the growth of rubber plants 6 10 60 High pollution in SL. Certain green products have started to come up to the market after the global warming warnings. There is a high customer acceptance. Legal Environment Legal proceedings 5 5 25 Legal proceedings takes a lot of time for hearing in courts and the process is very bureaucratic.
21
Individual Assignment: Strategic Entrepreneurship and Innovation Minimum wage 6 6 36 There is a legal minimum wage requirement that has to be compiled by the industries.
Table 6: PESTEL Analysis
Source: Compiled by Author
Indicators:
In the above chart, - Opportunity - Threat
0 No Impact at all 1 50 Very Low Impact (Threat/ Opportunity) 50 100 Very High Impact (Threat/Opportunity)
[Refer Appendix 1 for Detailed Analysis]
Critical opportunities (50 100) which helps the EFTs successful operations are: Political stability, economic plans of the current government, BOI as a beneficial authority, rural unemployment which helps to access labour force for the operations, treaties with main export country India and SL which provides tariff benefits, good level of literacy rates and technical knowledge, R & D capabilities provides by government agencies, supportive infrastructure which supports the logistics, positive climate which helps the growth of rubber industry which provides main raw material, and citizens encouragement for greener products. Critical threats (50 100) which challenges the EFTs operations: Tax increases in the vehicle imports, fuel and electricity price hikes which increases the operating cost and high promotional expenses due to the requirement of advertisement to persuade the customer towards the quality and the benefits of the product and also to make them switch from their current tyre brand to an alternative product. Patent protection is not that efficient in SL.
22
2.2 Value Chain Analysis

2.2.1 Primary Activities Analysis
1. Inbound Logistics: The material will be purchased from suppliers whom comply with ISO standards to maintain the quality of the output. The machineries required for the production process will be imported from China and will be assembled here in the factory. Company focuses on maintain few supplier contacts and to have a long term partnership with them to ensure continuity of business for the supplier and EFT. The factory will have small stores for stocking of raw materials and will be ordered as and when required but on a certain promised quantity to avoid any fluctuations in the order. Bulk purchases would be done to reach discount benefits. Store keepers with simple inventory management software will be utilized to count and keep track of the stocks. Transportation facilities will be outsourced to Toll Global logistics Ltd to acquire the competencies in logistics services. 2. Operations: The factory setting will be in compliance with ergonomic methods where smooth material flow in to the production facility is ensured. Raw material will be mixed in Burbon mixers and will be sent to the extruders, beading, calendars, cutting, curing, and gluing section appropriately (Discussed later in Chapter 5). After the production process the quality will be checked and sent to finished goods store for temporary storage. In the stores packaging will be carried out. 3. Outbound Logistics: From the stores the finished products will be transferred to the distribution services outsourced to Toll global logistics. The distributors of this product will be distributed to the Start lube, Xpress Lube and Delo service centers island wide. On request tyres will be distributed to other services centers. Orders to the export market in India will be processed via online sources. Market forecasts will be done based on number of orders processed on a monthly basis. 4. Marketing and Sales: Simultaneously marketing promotions will be carried out on a large scale to create awareness in mostly online, written and electronic mediums. (Refer marketing plan in chapter 4).
23
Individual Assignment: Strategic Entrepreneurship and Innovation 5. After Sales Services: Product installation and services will be provided by the channels which are the service centers. Customer hotline will be on during the working hours to clarify issues and requirements of the product at the reception of the administration block of the factory.
Figure 6: Value Chain Primary Activities of EFT
Source: Done by Author
2.2.2 Secondary Activities Analysis
1. Procurement: The materials would be purchased from suppliers of high quality supplies. High quality office equipment and machineries will be purchased. 2. Technology Development: Chinese state of the art tyre manufacturing high tech machineries will be imported and used in the production. Computers will be installed with soft ware with inventory control, TPS, MIS programs and also quality measuring intelligence systems which helps to record the transactions, prepare reports, quotations and make sound decisions as and when required.
24
Individual Assignment: Strategic Entrepreneurship and Innovation 3. Human Resource Management: Top management will be represented by experienced directors in the field of engineering and management. Middle management will be represented by young energetic workforce who occupied skills and leadership to take the initiatives taken at the board level a reality. Operational level workers will be guided by supervisors. (Refer chapter 6) 4. Firm Infrastructure: The factory is conveniently located in Kalutara with electricity, communication, transportation infrastructures which helps the continuous operations of the company. It is evident that both primary activities and secondary activities add value to the EFTs operation but if when the business starts its operations if any activity mentioned above became a very difficult/ non value adding activity that would be outsourced to a reputed party.
2.3 Porter Five Force / Industry Analysis

Michael Porters industry analysis is given below but certain factors are irrelevant as the product is comparatively new and EFT is a first mover into that market in that respect. Competitor analysis is conducted by considering the trends and players in the tyre industry.
Figure 7: Porter's Five Forces
Source: Google Images (2012)
25
Individual Assignment: Strategic Entrepreneurship and Innovation Factor Industry Rivalry Impact Remarks
No Impact Currently there is no industry rival in the Sri Lankan or Indian tyre market which offers air free/ flat free tyres. EFT would be the only manufacturer if the tyre is introduced to the tyre markets. This would provide first mover advantage till the technology is copied or reproduced by another tyre company.
Threat substitutes
of
Moderate
The only issue with the conventional tyres was the flat issue and the environment pollution by the waste tyres. But these market gaps will be filled with EFT green recyclable flat free tyres. Rather it could take time for a substitute to emerge to compete against this tyres model. There are conventional pneumatic tyre producers who are dominating the current market so the company has to persuade the customers to make them switch to this technology.
Threat
of
Moderate
As new investments are encouraged by BOI or generally in SL due to prosperity plans and political stability new companies might enter the market in future with similar tyre concepts or even enhanced versions. But high investment cost and market acceptance might be barriers to new entrance of competition.
new entrance
Supplier Bargaining Power
High
EFT is a relatively small and new company and suppliers could exert bargaining power over the company in negotiations. This might lead to increase prices which might create issues when pricing the tyre and might face problems in competitive edge.
Customer Bargaining Power
High
Initially bargaining power would have a high impact because EFT as a new business venture has to convince the early adopters of the tyres in every possible way with superior customer service, Till EFT gains substantial markets in 4-7 years time every single customer contact is of great importance for positive word of mouth publicity and future sales.
Table 7: Competitor Analysis for EFT for Sri Lankan Market
26
Table 8: Porter's five forces analysis for the exports in India Market
Source: Fadaweb (2012)
Supplier and customer bargaining power are critical threat at the current situation whereas other factors are of less significant now as the technology adopted is industry changing innovation.
27
2.4 SWOT Analysis Strengths

First mover to the flat free tyre segment Main focus product is high quality (ISO certified) tyres with flat free benefits and green ideas as they are recyclable Highly competent workforce Location is close to suppliers and Colombo Usage of high tech Chinese state of the art manufacturing equipments
Weaknesses
Small scale operations Less predictability of the market acceptance High cost on promotions on customer persuasion activities No previous history about the company High initial investment and startup costs Increasing living cost lead to increasing wage rates for employees Limited distribution channels
BOI benefits of exemption of import tax & tax holidays etc.
Opportunities
Political stability and economic plans of the current government Unemployment which helps to access labour force for the operations Treaties India and SL which provides tariff benefits High literacy rates and technical knowledge R & D capabilities provides by government agencies Supportive infrastructure which supports the logistics
Threats
Tax increases in the vehicle imports, fuel and electricity price hikes which increases the operating cost High inflation rate of 7.7 % Patent protection is less efficient in SL Business start up procedures are very bureaucratic and time consuming High supplier bargaining power High consumer bargaining power
Positive climate which helps the growth of rubber industry which provides main raw material
Citizens positive attitude towards greener and innovative products

Table 9: SWOT Analysis for EFT
Source: Done by author
28
3. STRATEGIC PLAN
The following are the business strategic plan that would be referred in every business function. Corporate Vision To be the reputed company of best quality eco friendly air free Sri Lankan tyres in the local and global market Corporate Mission At Eco Fit Tyre (P) Ltd, we expect to be the innovative quality conscious customer centric Sri Lankan organization which contributes towards the rural development and environment conservation. Business Motto /Slogan Corporate Level Objectives Think Planet Travel Green To provide high quality biomimicry tyres to the customers by adhering to the local and international manufacturing standards. Business Level Objectives To be the pioneer of innovations by diversifying to provide eco friendly value added solutions. To promote corporate social responsibility in environmental conservation. To provide employment opportunities in rural areas To be profitable and sustainable despite competition. To be the highly preferred brand as the best solutions provider in the tyre industry in the South Asian market To identify and seize market opportunities to reach the first mover advantage To have a highly skilled competent work force To increase foreign exchange earnings via export quality tyres. To maintain and sustain collaborations with the business partners. Functional Level Objectives To increase the awareness on the product concept through radical and continuous promotional activities To adopt to the more recent and reliable sources of cost
29
Individual Assignment: Strategic Entrepreneurship and Innovation accounting to remain profitable and to show a true and fairness via financial statements To practice quality related practices heavily to retain the local and international standards To provide a suitable and harmless working environment to the employees at EFT and to continuously improve the competence through training and development To uphold the legal and ethical governances throughout the operations Operational Objectives To adhere to the set plan for the productivity to meet the customer demands on time To ensure there are no abnormalities in the production floor to ensure health and safety commitments
Table 10: Strategic Plan of EFT
The above stated strategies will be looked into by the EFT employees as a whole to ensure continuous and profitable business throughout the operations. The company expects to have unique competitive position in the market due to the newness of the product and benefit it offers to its customers. The sources of this competitive advantage are the unique concept of the product, experiences directors board, benefits offered by the board of investment, quality of raw material and machineries, competent workforce with forward thinking etc.
30
4. MARKETING PLAN
4.1 STP Strategy
4.1.1 Segmentation The segmentation for Eco FIT tyres are the owners of motorbikes, scooters, three wheelers and motor cars. The geographical segmentation initially to island wide distribution in Sri Lanka and to export to India which is the friendly nation to Sri Lanka with economic agreements which makes the export a better option. After sustainable operations for consecutive 5 years company would focus on rest of the South Asian markets such as Maldives, Nepal, and Pakistan etc. In India there are 72.7 million motor vehicles which represent 14.2% of the motorized vehicles ownership percentage households (World Bank, 2012). In Sri Lanka there are 2.5 million motor vehicles which represent 4.1% of the households (World Bank, 2012). There are 381448 cars, 406531 three wheelers and 155950 motor bikes on the road of Sri Lanka (Department of census and statistics, 2012). On the other hand India is nation which is the largest country in the region with more than 2 Million car purchases on an annual rate (automobile India, 2012). There are 6 million two wheelers currently purchased annually in India (automobile India, 2012).
Figure 8: Composition of tyre demand in India - 2010
Source: Ingre (2010 cited in Fadaweb, 2012)
The above figure shows the tyre demand by different vehicle types. Motorbikes seems to be dominating in the demand conditions.
31
Individual Assignment: Strategic Entrepreneurship and Innovation 4.1.2 Targeting New tyre market is growing at a phase of 7-8% annually and retreads market grows at a 1-3% rate annually in Sri Lanka (Gnanaraj, 2012). As currently SL faces a good development in economic growth it is expected that the new tyre market would grow where retread market would remain constant (Gnanaraj, 2012). As per Gnanaraj (2012), A new tyre on average costs around Rs.9000-10000. A retread tyre costs around Rs.2500-3600. The car segment in India grows on a 12% base and motorbike grows in a 29% rate annually (Ingres, 2012 cited in fadaweb, 2012). So these situation show that the geographical targets India and Sri Lanka- of Eco FIT tyres seems a good viable segment.
Figure 9: Target of EFT Tyres
80% of the production will be exported to India and 20% of the production will be targeted to SL towards motor cars, motorbikes and three wheelers new tyre market segment. 4.1.3 Market Positioning With the products motto Think Planet; Travel green the market perception is achieved by giving an indication that the product is an environment friendly product. Through promotional activities it is expected to be differentiated in the customer perception of best quality tyres which is air free and easy to maintain offered at a an affordable pricing. EFT expects to reach the extent of high quality tyres with innovative features at an affordable price.
32
4.2 Marketing Mix for Eco FIT Tyres

4.2.1 Product The tyres will be produced for three wheelers, motorbikes and cars as the companys target is the owners of these three types of vehicles. The lifetime for a tyre would be more than 6 years and it complies with quality standards. (Refer section 1.2) 4.2.2 Price Eco FIT tyres have no direct competitors in the market because tyre technology currently available in the market is the conventional vulcanized pneumatic tyre varieties. So there is all possibility to introduce the product to the market at relatively high price. But the income level of a motorbike owner and the three wheel owner will be different from car owners. So, the purchasing power of the buyers is different from one to another. So there is differentiation in the profit margin that goes into each tyres pricing even though the production cost is similar to all three varieties. The details below show the costing for the product range for the initial year.
Figure 10: Pricing for the tyres for the initial year
Source: Authors Work
In the above figure the pricing was done based on ABC costing method. In the second and third year the price for motorbike will be 7600 and 7650. Price for the cars will be 8200 and 8300 and for three wheel tyres 7200 and 7200 for second and third years respectively. As the product is unique this premium pricing will be practiced to increase the profitability through first mover advantage. Refer the figure below for pricing strategies over PLC of Eco FIT tyres.
33
Figure 11: Pricing Strategies of Eco FIT Tyres throughout Product Life Cycle Source: Authors Work
4.2.3 Place Eco FIT tyres will be adopting a one channel distribution option where through service centers the tyres will be distributed to its potential customers. The manufacture has no direct contact with the customers but hotline services will be there for any support which will be directed to the reception at the factory. The strategy adopted for the distribution for the introductory stage is selective distribution because the tyres will be available only in selected vehicle service stations of Caltex Chevron in Sri Lanka and Bajaj Motors, India. The distribution will be made available in their locations mostly covering the district wise distribution. From the growth stage intensive distribution will be adopted to make sure every demand is met and customers could reach the product without any issue. This strategy will be carried on to the maturity stage as well and the distribution will be scaled down to selective distribution. Transportation will be outsourced to Toll Global Logistics. The figure below will give a snapshot view of the distribution channel of the air free tyre from factory to customers.
34
Tyre Factory Service Outlets Sri Lanka
Customers
Service Outlets India

Figure 12: Distribution Path for Eco FIT Tyres
Source: Authors work
4.2.4 Promotion The promotion will be carried out by the company in order to create sufficient awareness on the product and the benefit it offers to the customers and the vehicles performance by using the tyre. The strategy that the company would adopt is push strategy to persuade the distributors to stock up the goods and to sell when customer demands for it.
Figure 13: Push Strategy for Promotion
Source: Google Images (2012)
35
Individual Assignment: Strategic Entrepreneurship and Innovation Advertising is the main promotion mix which is going to be adopted by EFT. Following table give an indication to the modes of advertising:
News Paper Advertisements 1. Lankadeepa 2.Veerakesari 3. Daily Mirror Television Advertisements 1. Sirasa TV 2. Shakthi TV 3. TNL Radio Advertising 1. Hiru FM 2. Shakthi FM 3. Yes FM Online Advertising 1. Facebook 2. Company Website Exhibition Stalls
Table 11: Integrated Marketing Mix for EFT
Source: Authors work
Pioneering advertising on a regular basis will be conducted to keep reminding the potential customers about the existence of the product in its introduction stage. In the growth and maturity stage other sources of promotions such as sales promotions, retailer promotions etc would be adopted to penetrate into the tyre industry at a faster phase.
36
5. OPERATIONS AND PRODUCTION

5.1 Physical Location
The factory will be located in rented premise in Kalutara, one of the hubs known for rubber production and tyre manufacturing in Sri Lanka. As the natural rubber is going to be supplied from Kotagala plantations, Padukka this location would be much closer to the suppliers. Kalutara consists of 276 200 households out of which 71 060 are Samurdhi beneficiaries which indicates people who are in a low income border (Ministry of economic development, 2012). So if EFT employs work force from those families and train them. This could improve their living standards and this is also in line with one of the strategic objectives of EFT. 35 roads in Kalutara have been carpeted and 1455 projects to concrete the rural roads (Ministry of economic development, 2012) along with 21 water, 20 electrification projects (Ministry of economic development, 2012) add value to the business infrastructure of the factory location. Figure below shows the route from supplier to factory. The destination could be reached within 50 minutes.
Table 12: Factory Location in Kalutara and Rubber Supplier location
Source: Google Maps (2012)
37
Individual Assignment: Strategic Entrepreneurship and Innovation The factory is a 4 year old former factory building located in 246 perches (66973.5 square meters) land rented for operations. The factory has high monist roof with well ventilated building (buy and sell, 2012). Canteen room is available to accommodate 50 employees at once. Sick room is available in a 2000 square feet area. The factory also comprises of male and female rest rooms. The landscaping is also done regularly to maintain the scenic beauty and also to promote green concept of the company.
Figure 14: Factory Plan Source: Done by Author
The figure above shows the factory design which is compatible with industry standards.
38
5.2 The Production Process of Air Free Tyres

The production flow and details of the production process are as discussed below:
Figure 15: Production Process of the Eco FIT Tyres
Source: Done By Author
1. Mixing: With the bonbury mixer chemical components and natural/ synthetic rubber has to be mixed well to create a homogeneous substance. The rotor tool within the machine helps to blend and mix the elements really well. Chemical components consist of carbon black, age resistors, zinc oxide, stearic acid, sulphur and oil etc (binod pandey, 2012).
Figure 16: Mixing Process Illustration
Source: You Tube (2012)
39
Individual Assignment: Strategic Entrepreneurship and Innovation 2. Extruding: Extruding involves additional mixing of the substance with the shearing action and it is pushed through a die where the substance is vulcanized and cooled down to terminate the vulcanization (binod pandey, 2012). This helps in adding threads, inner wall and side wall preparation.
Figure 17: Extruding Process Illustration
3. Beading: As per Binod pandey (2012), The bead wire is coated with a rubber compound and bent around the circumference of a wheel to give the bead a circular shape. Finally, lengths of woven nylon are wrapped around the bead bundle to make it ready for use in the tire building operation.
Figure 18: Beading Process Illustration
40
Individual Assignment: Strategic Entrepreneurship and Innovation 4. Calendaring: This is the process of coating the steel cord on both sides with specified thickness of rubber by using the calendar (You tube, 2012).
Figure 19: Calendaring Process Illustration
5. Cutting: This is the process of cutting the calendared fabric and steel cord sheet according to the specific width and angle by using of cutter (You tube, 2012).
Figure 20: Cutting Process Illustration
6. Building: This is the process of assembling all the components so far produced into the drum by using the building machine to create the green tyres. The carcass drum would not be used to inflate the tyre as air free tyres do not need air pressure (You Tube, 2012).
Figure 21: Building Process Illustration
41
Individual Assignment: Strategic Entrepreneurship and Innovation 7. Curing: This is the process of curing the process tyres under heavy temperature for 20 minutes to create grip on the edges of the tyres (You Tube, 2012).
Figure 22: Curing Process Illustration
8. Resin Mixing, Cutting and Binding Process : In the mean time of the process the thermoplastic resin mixture would be made with collective ingredients of chemicals required to create flexibility and as well as durability. The mix would be sent as a sheet to the cutting machine where the structure in the interlacing single line way would be cut. Two similar structures would be glued together in an opposing fashion and then would be fixed in the middle of the tyres with the specific glue. 9. Inspection: The uniformity test and weight check would be done to ensure quality of the tyres. Soon after the inspection process the tyres would be distributed to the tyres distributors and for export containers. This is the whole production process of the air free tyre manufacturing.
42
5.3 Facilities, Equipments, Machinery and Material Suppliers

The following chart exhibits the business requirements and the suppliers of those items: Material/Machines/Service Providers Natural/Synthetic Rubber Carbon Black Silica Sulphur Plasticizers Steel and Steel Wires Bead Wires Thermoplastic Resin Powder Logistics, warehousing and export services Machinery Suppliers: 1. 2 Banbury Mixer (87 Liters) 2. Extruder 3. Beading Machinery 4. Calendaring Machinery 5. Tyre Cutter 6. Builder Machines (2 units) 7. Curing Machine 8. Resin Mixer 9. Resin Structure cutter 10. Gluing Machinery 11. Inspection Machinery Office Utility Equipment and Vehicles: 1. Air conditioners (4) 2. Computers (6) 3. Furniture 4. Office Equipments 5. Van Utility/ Service Suppliers: 1. Electricity 2. Internet Services 3. Water 4. Insurance 5. Banking Services Suppliers/Business Partners Kotagala Plantations, Padukka General Trading Company (P) Ltd, Colombo - 08 Massive Lanka (P) Ltd, Panadura Nekab (P) Ltd, Kalubowila. Matrex International (P) Ltd, Kalutara Accenture International (P) Ltd, Colombo 13 Toll Global Logistics, Colombo 1.
Dailan Huahan Rubber and Plastic Machinery Co.Ltd, China
Singer Mega, Kalutara PC House Ltd, Colombo Damro Furniture, Moratuwa Micro Cars (P) Ltd, Colombo. Ceylon Electricity Board Sri Lanka Telecom PLC Water Board Sri Lanka Insurance, Kalutara Hatton National Bank
Table 13: Material, Equipment and Service Providers of EFT
43
5.4 Quality Control Plan

EFTs quality control initiates from the raw material purchased from the suppliers. EFT looks for the raw material suppliers who comply with quality standards in their output. EFT goes into specific purchase agreements with all the material suppliers to look for detailed specifications and certifications on the chemical components in the raw materials. To ensure the quality as specified by the suppliers, lab assistants at EFT would perform random tests on the main inputs of the production line before signing the contract. EFT would engage in business with few trusted suppliers only to ensure the quality aspects. In the components mixing process throughout the whole process certain samples will be taken and tested for the quality assurance on tensile strength and density (Bridgestone, 2012). The workers at the components mixer front would be responsible for the quantity of materials added and mixed. EFTs simple computer solution has the record keeping systems of tyres by its code number. For example on the tyre 175/80 AF 14 88H is stated. 175 means the width, 80 represents the aspect ratio, AF denotes air free type, 14 says the wheel rim diameter, 88 denotes load matrix and H represents the speed rating (Bridgestone, 2012). Record keeping in the computer would help to track down the batch and the components included. When a batch of tyres comes out of the 2/3 tyres would be randomly selected to conduct destructive testing. Air pockets between the tread constructions, mileage testing by fixing into a testing drum etc would be conducted from the sample. This will help to determine the durability and mileage that a tyre could be used along with various performance aspects. The tyres would go into radiation booth X tray inspection and dynamic balancing testing would also be done for quality compliance. This acts as feed forward control because the lab assistants would check back into the production process to trace the flaw to avoid damages in future in the tyres. Furthermore, feedback from customers, distributers and suppliers would be recorded clearly for future improvements in the product and the processes of manufacturing. EFT would initiate the certification process to be granted acceptance for ISO 9002 product quality certification, ISO 9001 quality management certification and ISO 14001 environmental management system certification within the initial 6 month of operations.
44
Figure 23: Quality Inspection Illustration
5.5 Research and Development

EFT would not have a separate research and development department at the organisational structure because setting up R and D department is very expensive for a company in its initial stages of the operations. But the company directors who are engineers and lab assistants will continuously visit and update the knowledge on current trends in the rubber and relevant chemicals from BOI and Industrial Technology Institute of Sri Lanka. Soon after the customers acceptance of the initial launch of air free tyres, R and D department will be added to the organisational structure. The main objective for the R and D department when established is to identify the market gaps and do research on filling those gaps and also to find improvements on current product offerings. R and D department will work along with marketing department to know the customer needs and feedback on current products. Required lab facilities with necessary equipments will be made available within the factory premises.
45
6. MANAGEMENT AND ORGANISATON

6.1 Organizational Structure
Directors (3) and TVF Venture Capital Representative
Operations Manager
Finance Manager
Marketing Manager
Quality Assurance Manager
Human Resource Manager
Supply Chain Manager
Supervisors
Accountant
Lab Scientists
Receptionist
Store Keepers
Operational Workers
Accounts Interns
Marketing Inters
Toll Global Logistics Representative
Security Agency
Figure 24: Organisational Structure of EFT
Janitors
Driver
6.2 Recruitment and Selection

The following table exhibits the staffing requirements and selection methods:
Position Operations Manager Qualifications Expected Minimum 10 years experience in the manufacturing field preferably in tyre manufacturing. Should have a B. E or M.
Recruitment
Selection Strategy
Strategy
Advertising/ Head
Interview with Board
Sc in engineering degree. Should have expertise in hunting Tamil/Sinhala language and should show leadership traits. Finance Manager Minimum 10 years experience in the manufacturing field. Should have a CIMA/ACCA/ CFA qualification. Should have expertise in Tamil/Sinhala language and should show 46 Advertising Interview with Board

leadership traits. Marketing Manager Minimum 10 years experience. Should have a BBA or Head Interview with board
MBA or CIMA in marketing. Should have expertise in hunting Tamil/Sinhala language and should show leadership traits.
Quality Assurance Manager Human Resources Manager Supply chain manager
Minimum 10 years experience. Should have a B.E or M. Sc Advertising in Chemical engineering. Should have expertise in Tamil/Sinhala language and should show leadership traits. Minimum 10 years experience. Should have a BBA or MBA or profession HR in HRM. Should have expertise in Tamil/Sinhala language and should show leadership traits. Minimum 10 years experience. Should have a BBA or M. Advertising Sc in supply chain management. Should have expertise in Tamil/Sinhala language and should show leadership traits. Advertising
Interview with board
Supervisors
Minimum 5 years experience in the field of manufacturing Advertising especially tyres would be an added advantage. GCE A/L passes in 3 subjects is required. Should poses technical knowledge in machinery maintenance.
Interview with Manager HR
Accountant
Minimum 5 years experience in the field of manufacturing Advertising field. Should be a partial or fully qualified
Interview with HR Manager
financial/management accountant. Good command in English is expected. Lab Scientists Minimum 3-5 years experience in the field of chemical Advertising engineering preferably in industrial engineering. Should pose B.Sc in engineering. Should be enthusiastic and wishes to innovate and learning. Receptionist Should have 3 passes in GCE A/Ls. Should have language efficiency in all three languages. Should be pleasant and should show leadership traits. Store Keepers Minimum 3-5 years experience in the field of store keeping Advertising and inventory management. Partial qualification in CIMA is an added advantage. Should have good command in English. Operational Should poses 3 passes in GCE A/Ls. Experience in Advertising Advertising
Interview with Manager HR
Interview with HR Manager Interview with Supply chain manager Interview
47

Workers manufacturing field is an added advantage. Should be able to learn fast and act according to a set procedure. with operations manager Interns Should be an undergraduate in B.SC or BBA in marketing / finance. Experience will be certified after 6 month. No salary. Security Guards Janitors Driver Should have experience. Should have driving license with no black marks on driving experience. Should be punctual. Contract Advertising Interview with HR Manager Supply chain
Representative
University recruitment
College Interview
Should have 5 years experience.
Contract
Should have 3-5 years experience with a track record of good performance.
Table 14: Staffing at EFT
Contract
Interview
6.3 Job Description

Position Responsibilities
Directors
To represent EFT in the industry and society. They have utmost power to pass any decisions. They would involve in R & D for the initial period till R & D department is established. They would devise policies of the company.
Operations Manager
To make operations plan on a daily basis and to ensure that the requirements are met.
Finance Manager
To record all the transaction and make costing decisions. Should prepare financial statement with due diligence for the exhibition of true and fairness of the records. Would prepare budgets on a monthly way and transfer plans to other managers. Would be managing funds of the company.
Marketing Manager
To identify the market trends and customer expectation and to transfer that knowledge to the board for future developments in products. Would be responsible for the development of promotional budgets and activities.
48

Quality Assurance Manager
To address quality aspects of the operations and to deal with the abnormalities of the production process. Would work towards organizations intentions to reach quality standards.
HR Manager
To ensure that the HR demand and supply are met and no excess labour is employed. Would plan on training initiatives for the knowledge development of the employees.
Supply chain manager
To address the material and supplies requirements of the company and to work along with the suppliers and distribution channels. Manager has to ensure the export products have reached the Indian destination on time or not.
Supervisors
Monitoring the activities at the production floor and to ensure the smooth flow of production. Would also be responsible initially for the technical problem resolving in the machines.
Accountant
Recording the day to day transactions of the company and the management of cash payments and receipts.
Lab Scientists
Responsible to observe the components supplied by the suppliers and would also ensure the correct mix of raw material in the mixer. Would involve in testing of the finished goods to ensure quality. Would be involved in R & D initiatives taken by the board.
Receptionist Store Keepers
To address the visitors and to record phone calls in the hotline. To ensure safety of the raw materials and to maintain a good record on stocks and obsolete stocks.
Operational Workers
To work on the production floor and to track any abnormalities and to report that to the supervisors for resolving.
Interns
Would support the marketing and finance function by assisting with activities, idea generation and record keeping.
Supply chain Representative
Would act as a bridge between the company and the logistics company.
Table 15: Job Description of the Workforce at EFT
49
7. FORECASTS AND FINANCIAL DATA

7.1 Initial Start up Costs
Table 16: Startup costs of EFT
50
Table 17: Startup costs
The tables exhibit a breakdown of the initial capital requirement. As the credit period for customers is 2 months initial investment should cover initial two month expenses as well along with the capital asset requirements. Exchange rate considered is 1$ = LKR 130.
51
Individual Assignment: Strategic Entrepreneurship and Innovation Total start up of Eco FIT Tyres (P) Ltd is shown below:
Table 18: Subtotal of the Initial startup cost
In order to financing for the business is as follows:
Table 19: Total Financing Breakdown for the business
The minimum investment announced by TVF venture capitalist is not enough to start up the total business operations. So shareholders invested 12% of the total requirement of capital. This amount will be invested from individual bank accounts of the shareholders. The following chapter will give indications of the forecasted budgets for the upcoming 3 consecutive years of operations.
52
7.2 Financial Budgets

7.2.1 Sales Forecast Budgets
Table 20: Sales Forecast for the year 2012/2013
53
2012/2013 Sales Forecast LKR Moto bike Tyres Price per unit Total Sales Value Three Wheeler Tyres Price per unit Total Sales Value Moto car Tyres Price per unit Total Sales Value 2670 7500 20025000 3375 7000 23625000 5200 8000 41600000 US$ 2670 58 154038 3375 54 181731 5200 62 320000
2013/2014 LKR 3471 7600 US$ 3471 58.46
2014/2015 LKR 4860 7650 US$ 4860 59
26379600 202920 37179000 285992 4388 7200 4388 55 6143 7200 6143 55
31593600 243028 44229600 340228 6760 8200 6760 63 9400 8300 9400 64
55432000 426400 78020000 600154
Table 21: Sales forecast 2012 - 2015
Pricing for the product are done based on ABC costing plus profit markup. As the product is still in the introduction stage at the end of 3 years, the premium pricing could be adopted and the prices are been gradually increased. Due to the exceptional benefits provided there is a high potential that the pricing will be accepted by the potential customers. The profit mark up included is different from type to type due to the assumption that the purchasing power of the customer would differ significantly. Refer figure 10 for the way of price determination.
54
Individual Assignment: Strategic Entrepreneurship and Innovation 7.2.2 Production Forecast Budgets
Table 22: Production forecast for 1012/2013
55
Table 23: Production Budgets for Year 2013/1014 and 2014/2015
56
Individual Assignment: Strategic Entrepreneurship and Innovation 7.2.3 Materials Usage Budgets
Table 24: Materials Usage Budget for the year 2012/2013 Source: Done by Author
57
Table 25: Material Usage Budget for the year 2013/2014
58
Table 26: Material Usage Budget for the year 2014 - 2015
59
Individual Assignment: Strategic Entrepreneurship and Innovation 7.2.4 Material Purchase Budgets
Table 27: Materials Purchase Budget 2012/2013
60
Table 28: Material Purchase budget for the year 2013/2014
61
Table 29: Material Purchase Budget for the year 2014/2015
62
Individual Assignment: Strategic Entrepreneurship and Innovation 7.2.5 Direct Labour Budget
Table 30: Direct Labour Budget for the three years
Table 31: Monthly Breakdown for the first year
63
Individual Assignment: Strategic Entrepreneurship and Innovation 7.2.6 Factory Overheads Budgets
Table 32: Factory Overheads Budget for all the three years
Table 33: Monthly breakdown of overheads budget for the year 2012/2013
64
Individual Assignment: Strategic Entrepreneurship and Innovation 7.2.7 Administration Expenses Budget
Table 34: Administration Expenses for the three years
65
Individual Assignment: Strategic Entrepreneurship and Innovation 7.2.8 Promotions Budget
Table 35: Promotions Forecast Budget for all the three years
66
7.3 Pro - forma Financial Statements (Master Budgets)

Following are the assumptions or policies in the following financial statements: 80% of sales will be exported to India and 20% will be sold locally. Selling price of the export and import will be the same. Cost of raw material consumed by the 3 types of tyres is considered to be the same on an average. Finished goods are valued at cost. There will be no work in progress at the end of the financial year. There will be no import duty and corporate tax liability on the operation as the business venture is a thrust industry. Company would enjoy 10 years tax holiday as 80% of the output is exported. The exchange rate will not fluctuate for the next 3 years and the US$1 will be equal to LKR 130. Business is exempted from exchange rate regulation as it is under BOI. Finished goods will be sold at the beginning of each month and debtors will be awarded with 2 month (60 days) credit period. Raw materials will be purchased at the beginning of each month will be paid in 3 month (90 days). Fixed assests are depreciated on a straight line method. (Refer Appendix 3). Refer Appendix 2 for workings.
67
Individual Assignment: Strategic Entrepreneurship and Innovation 7.3.1 Pro - forma Manufacturing and Income Statement
Table 36: Pro - forma Income Statement from July 1st 2012 - October 31st 2012
68
Table 37: Pro forma Income Statement from November 1st 2012 - February 28th 2013
69
Table 38: Pro - forma Income Statement from March 1st 2012 - June 30th 2013
70
Table 39: Pro - forma Manufacturing Income Statement for 2013, 1014 and 2015
71
Individual Assignment: Strategic Entrepreneurship and Innovation 7.3.2 Pro - forma Cash Flow Statement
Table 40: Pro forma Cash Flow Statement for 2013, 2014 and 2015
72
7.3.3 Pro Forma Balance Sheet
Table 41: Pro forma Balance Sheet for three years
73
7.4 Ratio Analysis

7.4.1 Profitability Analysis 1. Gross Profit Margin
Gross Profit Margin Gross Profit Sales 2013 23108783 85250000 27% 2014 36753583 113405200 32% 2015 60135958 159428600 38%
Table 42: Gross Profit Margin
2. Net Profit Margin

Net Profit Margin Net Profit Sales 2013 8747883 85250000 10% 2014 21642083 113405200 19% 2015 45774458 159428600 29%
Table 43: Net Profit Margin
3. Return on capital employed (ROCE)

ROCE Net Profit Capital Employed 2013 8747883 53529883 16% 2014 21642083 65298966 33% 2015 45774458 106073424 43%
Table 44: Return on Capital Employed Ratio
4. Return on assets (ROA)

ROA Net Profit Non Current Assets 2013 8747883 24575539 36% 2014 21642083 21514128 101% 2015 45774458 18452717 248%
Table 45: Return on Assets Ratio
74

5.
Administration cost to revenue ratio

Admin Cost to Sales Ratio Administration Cost Sales 2013 7205500 85250000 8% 2014 7136500 113405200 6% 2015 7136500 159428600 4%
Table 46: Administration to Sales Ratio
6. Advertising cost to revenue ratio

Advertising Cost to Sales Ratio Promotions Cost Sales 2013 4674000 85250000 5% 2014 5715000 113405200 5% 2015 4925000 159428600 3%
Table 47: Advertising cost to revenue ratio
The profitability conditions of EFT seem favorable. All of the four ratios calculated above shows a positive and continuous increase in the next 3 years. The gross profit margin shows a slower increase in second and third year compared to net profit margin because the administration cost and promotions cost shows a steady decrease in second and their year. Net profit margin increases by 9% and 10% in year 2014 and 2015 where as gross profit margin shows only a 5% and 6% increase respectively. ROCE ratio shows a tremendous 17% improvement in 2014 and shows a 10% in 2015. This may be due to increase in the shareholders fund accumulated which lead to increase in the denominator figure of the equation. ROAs improvements indicate that within two years the business reaches a performance level more than the noncurrent assets value. So the above analysis shows that the business shows a good profitability condition immediately in its second year but the growth slows down a bit in the 3rd year.
75
Individual Assignment: Strategic Entrepreneurship and Innovation 7.4.2 Liquidity Analysis 1. Current Ratio
Current Ratio Current Assets Current Liabilities 2013 26602983 6554306 4.06 2014 43534033 9598529 4.54 2015 83862657 14907951 5.63
Table 48: Current Ratio
2. Quick Ratio / Acid Test

Quick Ratio Quick Assets Current Liabilities 2013 24709865 6554306 3.77 2014 41086827 9598529 4.28 2015 80393261 14907951 5.39
Table 49: Quick Ratio
The above ratio indicates that EFTs liquidity position is in a favorable position to meet the maturing obligations of the business. Current ratio says that EFT has current assets which are 4, 5 and 6 times higher than liabilities. Quick ratio also indicates that other than the raw materials EFT still has the capability to payback the creditors. So the liquidity position seems good at EFT as liquidity is essential for a new business to invest and grow in its operations. 7.4.3 Efficiency Analysis 1. Receivables Days
Receivable Days Average Receivables Sales Days 2013 3512500 85250000 15 2014 12106000 113405200 39 2015 37867925 159428600 87
Table 50: Receivable Days Ratio
76
Individual Assignment: Strategic Entrepreneurship and Innovation 2. Payable Days
Payable Days Average Payables Purchases Days
2013 3277153 45510341 26

Table 51: Payable Days
2014 11353571 58298621 71
2015 17052505 81073648 77
3. Inventory Turnover Ratio and Inventory days

Inventory Turnover COGS Average Inventory Times Inventory Days 2013 62141217 1289093 48 8
2014 76651617 3629180 21 17
2015 99292642 4934478 20 18
Table 52: Inventory turnover ratio and Inventory Days
4. Asset Turnover Ratio

Asset Turnover Sales Non Current Assets 2013 85250000 24575539 3 2014 113405200 21514128 5 2015 159428600 18452717 9
Table 53: Asset Turnover Ratio
When comparing the receivable and payable days, cash is collected within few days than payable days which gives a hint that payables are acting as one of the short term financing source. But in the 3rd year receivables take a long a time than payable days. It is assumed that the EFT could have liquidity to manage the payments. It could be said that inventory is converted in a faster phase than usual. As there was no opening inventory ratio in 2013 the inventory times show a high turnover times than other two years. Inventory stays in the stores only for very short term in all three years which is a positive indication. Noncurrent assets are generating cash at an increasing phase from 2013 2015 which is shown by an increasing asset turnover ratio. So the efficiency would be good for EFT for the next 3 years since its inception.
77
Individual Assignment: Strategic Entrepreneurship and Innovation 7.4.4 Other Ratios Net Sales to Working Capital Ratio
Net Sales to Working Capital Sales Working Capital
2013 85250000 20048677 4
2014 113405200 33935504 3
2015 159428600 68954706 2
Table 54: Net Sales to Working Capital Ratio
LKR generated through each units of working capital is dropping over time mainly due to the fact that working capital is increasing at a faster rate than sales. EFT is low geared company because 100% of the total investment is made by the share holders and venture capital firm. Risk of being a highly geared company is avoided. There is no long term or short term debt taken from the 3rd party so debt ratios are not calculated.
7.5 Investment Appraisal

7.5.1 Payback Period
Net Profit for the year Add: Depreciation Cash Flow Y1 8747883 3211411 11959294 Y0 -44782000 0 -44782000 Y2 21642083 3211411 24853494 Y1 11959294 -32822706 Y3 45774458 3211411 48985869 Y2 24853494 -7969212 Y3 48985869 41016657
Initial Investment Cash flows Accumulated cash flows
Table 55: Payback Period
Payback period for the company is 2 Years and 2 months. Investors can recover their initial investment within less than 3 year period so it could be said that the project is viable and less risky as the project paybacks very quickly.
78
7.5.2 Discounted Payback Period

Initial Investment Cash flows Discount factor 14% Discounted Cash flow Accumulated cash flows Y0 -44782000 0 1 -44782000 -44782000 Y1 Y2 Y3 48985869 0.675 33065461.58 17884099.3
11959294 24853494 0.877 0.769 10488300.84 19112336.89 -34293699.2 -15181362.3
Table 56: Discounted Payback Period
Discounted payback period for the project is 2 years and 6 months. The cash flows are discounted at the lending rate by banks to include the decreasing time value of money. Still the project is less risky as the initial investment could be recovered in a less than 3 years period. 7.5.3 Net Present Value Evaluation
Initial Investment Cash flows Discount factor 14% Discounted Cash flow Y0 -44782000 0 1 -44782000 Y1 11959294 0.877 10488301 Y2 24853494 0.769 19112337 Y3 48985869 0.675 33065462
Table 57: NPV Evaluation
Net present value of the project is LKR 17884099 which is a positive figure gives an indication that the project is viable and would increase the shareholder funds. 7.5.4 Internal Rate of Return
Initial Investment Cash flows Discount factor 14% Discounted Cash flow Initial Investment Cash flows Discount factor 40% Discounted Cash flow Y0 -44782000 0 1 -44782000 Y0 -44782000 0 1 -44782000 Y1 11959294 0.877 10488301 Y1 11959294 0.714 8542353 Y2 24853494 0.769 19112337 Y2 24853494 0.510 12680354 Y3 48985869 0.675 33065462 Y3 48985869 0.364 17851993
Table 58: Internal Rate of Return
79

14% + (40%-14%) (17884099+5707300)
*17884099
= 34%
NPV for 14% and 40% discount factors were taken to calculate IRR for the business venture. It showed that the IRR is greater than cost of capital of 14% which means the project is viable. When the cost of capital switches to 34% where the NPV become a zero, project would be viable and would improve the shareholder wealth. 7.5.5 Accounting Rate of Return (ARR)
Accounting Profit Total Profit of three years Average Accounting profit Average Investment ARR Y1 8747883 76164424 76164424/3 44782000/2 25388141 22391000
Y2 21642083 25388141 22391000 = 113%
Y3 45774458
Table 59: Annual Rate of Return Calculation
ARR shows a very good 113% of return to the project. Project is viable to the investors based on profit aspects. All the above investment appraisal techniques show that investment is viable.
7.6 Break Even Analysis

As EFT offers its products to 3 different segments it is only viable to do a Multi Product BEP analysis. Variable cost per unit includes only the direct material and direct labour cost per unit. This cost is similar to each unit produced. Fixed cost includes indirect labour costs, insurance, electricity, and promotional expenses (assuming that it wont change with number of units sold). The total fixed cost change is due to inflationary expectation that lead to increase in certain salary increments. Selling price is as stated in the sales budget. The break even analysis can be seen below.
80
Table 60: Break Even Point Calculation
EFTs sales mix is 24% motorbike tyres, 30% three wheel tyres and 46% motor car tyres (Refer table 21). Multiple BEP allows calculating weighted average breakeven point for the year and then fixed cost will be divided by the value. As per table 60 it is clearly evident that predicted sales forecasts have exceeded the BEP units required that is indicated in the flourishing profit figures shown in financial statements. EFT could operate with margin of safety as per the analysis given above.
81
7.7 Exit Routes for Investors

The main exit route available for TVF to exit from the business venture is Eco FIT opting for an initial public offering (IPO) and start trading in the Colombo Stock Exchange Diri Savi Board. This exit will happen within 5-8 years time since the inception of the business venture. This is mainly preferred by the management as the directors will hold major share of the capital and it allows having institutional shareholders with the business to direct towards the future which seems promising. The preparation for an initial public offering will allow TVF to provoke the pre emptive bid which allows following a dual track approach (Vanhaerents and Stroud (2012). Unless the performance goes on very well on the 8th year a merger with the well reputed tyre manufacturing company who wishes to jointly produce the Eco FIT tyres will be approached. This would help the company to jointly grow with combined resources of the two companies and gain increased profits.
82
8. BUSINESS CONTROLS
Area of Control Debtors and Sales Creditors and Purchases Human Resources Inventory Proper credit worthiness checks before delivering goods Establishment of credit limits and monitoring of the limits Maintenance of clear debtors record and debtors control account Authorization on bad debts and credit notes by the finance manager Cash receipts should be matched with invoice Debtor age analysis will be conducted and reviewed by the board Investigation of disputes Purchase order forms and goods returned note will be pre numbered and will be kept in safety custody Purchase order will be checked for arithmetical accuracy and would be checked with purchase order and goods received note Goods received will be inspected for quantity and quality Analysis on purchases with budgets for variance detection Proper screening of new recruits and segregation of duties Personal records updates and changes will be notified to the HR manager and finance manager Reconciling staffing number with the labour budget Authorization on payments, leave and half day work Time records will be monitored based on supervised clock card recording system Piece work records will be monitored and recorded by the supervisor at the production unit. Abnormal behaviours like working late, unexplained sudden wealth will be investigated Banking of unclaimed wages Physical stock taking and investigation on any shortage or excess Proper records on goods received and sent
83
Control Mechanisms
Individual Assignment: Strategic Entrepreneurship and Innovation Fixed Assets Information Technology Marketing Adequate provision for any obsolete inventory Finance or board level approval on any stock write offs Separate raw material and finished goods stores for physical control Valuation of stocks in accordance with accounting principles Unused materials properly recorded and sent back to stores Adequate insurance cover for stocks Physical verification of fixed assets and maintenance of register Authorization on any acquisition or disposal of fixed assets Assets compared to capital expenses budgets Adequate insurance cover Assets accounted based on accounting standards. Authentication passwords given to have access to the computers for a user. Should not be disclosed to others. Authorized people only could have access to certain applications used at the operations Integrity checks to ensure no abnormal inputs are processed Forensic controls to see the data processed are mathematically and scientifically correct Finance Budgets are prepared on monthly basis Variance analysis to find flaws in the operations Proper authorization for any banking or receipt on cash and cheques. Finance audit by an external audit firm Feedbacks from dealers and customers about the tyres sold and satisfaction level Test marketing before commercial launch of the product to avoid major negative impacts Gathering business intelligence to detect any penetration of competitors against the brand to avoid eroding sales beforehand
Table 61: Business Controls
84
9. RISK ANALYSIS
The following are the risks identified that could impact the performance of EFT (P) Ltd. The impact and likelihood are given on the basis of following probability of risk occurrence. 0-30% Low Risk (L)
Risk Area Operations Risks
31%-60% Medium Risk (M)

Risk Identification
61%-100% High Risk (H)

Impact
Probability
Ownership Sup. Chain Mgr Operation Mgr Lab scientists Store keepers/
Risk Number
Delays in the receipt of raw material Machine breakdown IT system failure Fraud/Theft
M H M L
M H M H
1 2 3 4
Security guards/ Finance Mgr Market Risks Slow acceptance/ rejection of product Insolvency of the buyer Entrance of competitors to the market Human Risk Labour Strikes Inefficiency in production floor Accidents during the work Miscommunication of orders Economic Risk Exchange rate risk Import getting banned in India Interest rate risk Financial Risk Reputation Risk Environme nt Risk Quality Risk Batch of poor product customers
Table 62: Risk Identification for EFT
M M M L M L H H H H M L M
H H H H H M L M H L H M H
Marketing Mgr Finance Mgr Marketing Mgr HR Manager Operation Mgr Supervisor Supervisor Finance Mgr Directors Finance Mgr Finance Mgr Finance Mgr Quality Mgr Operation Mgr
5 6 7 8 9 10 11 12 13 14 15 16 17
Increase in raw materials price Over/under trading or capitalization Environment operations Floods and heavy weather conditions Pollution of factory
18
reaching
Quality Mgr Lab Scientists

19
85
Risk 11 Risk 14 L i k e l i h o o d H
Risk 12
Risk 2 Risk 8 Risk 13
Risk 1 Risk 13
M
Risk 5 Risk 6 Risk 7 Risk 9
Risk 15 Risk 17
Risk 10 Risk 16
L
Risk 4 Risk 19
M Impact
Figure 25: Risk Assessment Map
Risk mitigation strategies are explained below in the table. Risk 1 Control Strategy Risk avoidance Action Supply chain manager could have a buffer stock which might help when there are time delays in raw material delivery. If the condition continues could switch to another supplier. 2 Risk avoidance Proper maintenance of the machinery to avoid time delays in manufacturing and continuous checks could be done by the supervisors. 3 Risk avoidance Proper maintenance of backups would help when the system is down. 4 Risk transfer The stocks and assets can be insured against the loss.
86
Individual Assignment: Strategic Entrepreneurship and Innovation Accounts would be audited each year to detect accounting fraud. 5 Risk control 6 Risk Limitation acceptance/ Through proper market research this risk could be avoided. Proper gathering of business intelligence would be helpful. Credit worthiness of the buyer could be checked before sending goods for sales. 7 Risk Acceptance Should gather business intelligence of the competitor and enhance the product offering to the market. 8 Risk Avoidance HR manager and board members could have meeting to identify the issues of labors and provide them to avoid further conflicts if the demands are reasonable. 9 Risk Limitation Training to improve efficiency and proper screening process when selecting for the job. 10 Risk Transfer Taking a insurance policy in order to address employee health and safety issues 11 Risk Avoidance Identifying the background of the person and the language that could reach the employees. Giving time for any clarification would avoid issues. 12 Risk Transfer Taking a hedging agreement with the banking partner of EFT. 13 Risk Acceptance Directors board should decide on other export possibilities to other countries. 14 Risk Avoidance Taking a hedging agreement to avoid interest rate changes to protect against the cost of capital changes when company takes a loan. 15 Risk Avoidance Involve in long term relationship and have bulk purchasing to achieve discounts despite price changes. 16 Risk Avoidance Finance manager could look out for investment
opportunities with excess cash to earn income 17 Risk Limitation Factory audit could be done to measure the CO2 emission
87
Individual Assignment: Strategic Entrepreneurship and Innovation levels on a continuous basis. Waste management should be monitored continuously. 18 Risk Acceptance Precaution could be taken for the safety of goods during floods. 19 Risk Avoidance Destructive and non destructive quality checks before tyres leave the factory to distribution.
Table 63: Risk Mitigation Strategies
88
CONCLUSION
The above report was prepared for a business idea by Eco FIT Tyres (P) Ltd, a BOI venture, to launch green air free tyres which is a new industry changing innovation which avoidance the issues of maintaining air pressure in vehicle tyres. With the possible investment help from TVF which encourages small medium entrepreneurs by offering US$ 300000 as startup capital the project plan was devised. The Sri Lankan and Indian tyre market showed greater opportunities were the successful sustainability in the market for new tyres. With the consideration to opportunities and threats stems from the environment a strategic business plan was developed. Any launch of new product requires a proper marketing plan. In that way a very brief marketing plan also developed with segmentation and targeting analysis. The factory was planned to be located in Kalutara, one of the hubs for tyre production. The factory and location conditions were briefly explained location maps. Production process of the manufacturing process was also developed with engineering design explanations. The organisational structure of the company with the selection process and staffing requirements analysis was developed in the report. Very elaborate financial forecasts were carried out and included to make decision on the investment of the project. Investment appraisal and ratios exhibits that the project will be viable and profits to enhance shareholder wealth. Business controls and possible risk mitigation strategies were also included at the end. Author assumes that the product will be happily welcomed by the customers because of the performance level of the tyres compared to conventional pneumatic tyres.
89
APPENDICES
1. PESTEL ANALYSIS 1. Political Environment Sri Lanka, conventionally referred to as Democratic Socialist Republic of Sri Lanka, has republic government structure (CIA, 2012). The island was under a heavy ethnic conflict for the period of 26 years which came to an end in 2009 (CIA, 2012). Since then by routing the terrorism the country experiences political stability which has created a nation into an economic hub for investors all over the world as the business climate is less risky. As per daily ft (2012), After successfully defeating terrorism, Sri Lankas economy has grown steadily with political situation stabilized due to president Rajapakses leadership said the Korean President Lee Myung- bak. But still when opposition parties come into ruling the stability could have an impact. Good governance is one of the integral parts of any successful nation but despite being exhibited as the nation is treating every individual as equal in front of law this is not the case in reality (Daily ft, 2012). There are corruptions which is very evident in day to day lives of the citizens and the business people (Daily ft, 2012). Public services are considered to be over staffed and inefficient. Bribery and corruption makes a process delayed. His Excellency President Mahinda Rajapakse proposed various schemes to promote economic development into the country through his policy named Mahinda Chinthana. This 10 year government plan covers all the development incentives for plantation sectors and export oriented industries which cover rubber and tyres industries (Daily News, 2012). The infrastructure development in highway constructions would benefit the companies in logistics. The government tax policies are very dynamic and unpredictable. Recently government decided to increase the import taxes on vehicles which slapped the demand for vehicles especially for motorbikes (tax increased from 61% - 100%) and three wheelers (Colombopage, 2012). This is a threat to the tyre industry where the demand would get affected. Legal authorities such as board of investment, rubber development department, rubber research institute etc are of great benefit for infant level SMEs and for firms with export focus. Greater incentives (tax holidays, leasing) and legal/business advice is provided by these institutes.
90
Individual Assignment: Strategic Entrepreneurship and Innovation Following are some of the legal requirements and how business establishment procedure could be conducted in Sri Lanka.
Table 64: Process of registering a business in Sri Lanka
Source: Doing business (2012)
Table 65: Process of registering a property
Table 66: Process of trading across borders
91
Table 67: Import and Export procedures
2. Economic Environment Sri Lankas inflation rate on consumer prices is 7.7% (2011 estimates, Indexmundi, 2012). This is a threat to the company as this level of inflation is highly when comparing other global economies. This might create increase in raw material costs, machinery costs and highly be represented in the exchange rates which might affect the global competitiveness for the tyre exports of EFT. But, overall trend as shown in the figure below shows a down ward trend.
Figure 26: Inflation in Sri Lanka from 1980 - 2010
Source: Indexmundi (2012) Unemployment rate in Sri Lanka is measured to be 4.2 % (2011 estimates, CIA, 2012). It is ranked as 41 in unemployment rate among global comparison. Regional unemployment is also an issue is SL where this creates an opportunity for industries as labour could be easily accessed. The figure below shows the overall unemployment rate in SL.
92
Figure 27: Unemployment Rate in SL from 1998 - 2010
Source: Indexmundi (2012) There is positive and friendly commercial relationship between India and Sri Lanka which indicate that trade agreements between these nations creates a positive business climate for export intentions of the company. These nations are members of Indo Sri Lanka free trade agreement, SAARC, SAFTA, South Asian Economic Union etc. These treaties help to achieve tariff benefits which are the integral part of these agreements (Eximguru, 2012). The fuel prices steadily show an increase in the past years. Fuel suppliers kept on increasing the fuel pricing in accordance with the global oil prices. As per Colombo page (2012), the stateowned Ceylon Petroleum Corporation effective from midnight Saturday (11) has raised the price of a liter of diesel by Rs. 31 to Rs. 115, price of a liter of Octane 90 petrol by Rs. 12 to Rs. 149 and a liter of Octane 95 by Rs. 12 to Rs. 167. A liter of kerosene, which was Rs 71 before the increase, will now stand at Rs. 106, an increase of Rs. 35. This might create negative impact on the vehicle purchase rate and also the operational expenses of the companies because of the energy requirements. Industry sector electricity prices has been recently increased by 15% as surcharge which has increased the power cost which are essential to the operations (lanka business online, 2012). 3. Social Environment Sri Lanka is home for multiple cultures and ethnicities. As per CIA (2012) out of the total population, Sinhalese 73.8%, Sri Lankan Moors 7.2%, Indian Tamil 4.6%, Sri Lankan Tamil 3.9%, Unspecified 10%. Following is the religions composition of the nation: 69.1% Buddhist,
93
Individual Assignment: Strategic Entrepreneurship and Innovation Muslims 7.6%, Hindu 7.1%, Christian 6.2% and unspecified 10% (CIA, 2012). 74% of the population speaks Sinhala and 18% speaks Tamil (CIA, 2012). English and Sinhala are mostly used as official languages. SL has high power distance, very collectivist in nature, with masculine traits which has a long term orientation in thinking and planning (Geert Hofstede, 2012). Attitude towards learning and innovation is highly encouraged in Sri Lanka. More than 90% of the population who are above the age of 15 has the required literacy level in Sri Lanka (Indexmundi, 2012). Currently many state universities and private institutions provide the necessary training and technical knowledge on chemical engineering and various other related educational syllabuses which create the opportunity to attract experienced work force into the industry. Country of origin plays a vital role in the consumption pattern of Sri Lankans. Sri Lankans mostly opt for brands of overseas but now under Buy Sri Lankan attitude SL started encouraging Asian and Sri Lankan goods which created more positive business waves in the industry (Chandirakumara and Budhwar, 2005). Sri Lankan consumers are incredibly brand loyal and it is pretty hard to switch them from one brand to another (Chandirakumara and Budhwar, 2005). Price sensitive mindset is very prominent characteristic of Sri Lankans (Chandirakumara and Budhwar, 2005). Cheapest product is mostly not that encouraged with increased demand but the value for money is the only element that matters in Sri Lanka (Chandirakumara and Budhwar, 2005). Sri Lankans are very short memories and has to be continuously being reminded of the product (Chandirakumara and Budhwar, 2005). Rural citizens mostly listen to radio where as urban citizens prefer TV advertisements (Chandirakumara and Budhwar, 2005). As the country is a middle income classified most of the income tends to get spend on consumption (Chandirakumara and Budhwar, 2005).
94
Individual Assignment: Strategic Entrepreneurship and Innovation 4. Technological Environment As per Ceylon today (2012), The importance of scientific and technological advancement is rooted in the mission statement of the countrys Ministry of Technology and Research which seeks to formulate and implement policies pertaining to the popularization and advancement of science and technology, including scientific research and development and transfer of technologies, to ensure improved quality and productivity so as to upgrade economic activities, which are essential for the economic and social development of Sri Lanka. In that respect SL has formulated institutes like Industrial technology institute to help innovation and learning.
Roads play a vital part in the infrastructure of SL. Outside Colombo area more than 50% of the roads are in very poor conditions to operate in the roads (World bank, 2012). To resolve this issue The Road Sector Assistance Project was designed to lower transportation costs and travel times by improving the condition of national highways, which are the backbone of Sri Lankas economy (World bank, 2012). This would help industries to do their logistics without any problems. This would further avoid any time delays.
Communication network is also an essential and integral part of any business and this sector has contributes a lot in the communication requirements of businesses. As per CIA (2012) following are some indicators of the improvements in this respect: Telephone line in use: 3.579 million Mobile phones in use: 17.359 million Internet hosts in use: 8652 Internet Users: 1.777 million
Patent protection and authority is available in SL but the lack of awareness in customers leads to counterfeited products. Patent protection is anyways punishable offence in Sri Lanka.
95
Individual Assignment: Strategic Entrepreneurship and Innovation 5. Ecological Environment Sri Lanka is one of the countries which has the following climatic conditions which is very suitable for the growth of rubber plants. As per rubber board (2012) they are: Rainfall of 2000 to 3000 mm evenly distributed without any marked dry season and with 125 to 150 rainy days per annum Maximum temperature of about 29oC to 34oC and minimum of about 20oC or more with a monthly mean of 25 to 28oC High atmospheric humidity of the order of 80% Bright sunshine amounting to about 2000 h per annum at the rate of 6 h per day through all the months Absence of strong winds
Environment pollution is a huge issue in Sri Lanka which has been heavily criticized. Certain green products and green production plants have started to come up to the market after the global warming warnings. There is a high customer acceptance towards alternative green energy sources for their day to day operations. 6. Legal Environment The legal proceedings on contract enforcements and resolving conflicts are been given below in the following charts:
Figure 28: Summary on legal proceedings
96
Figure 29: Highlights on contract enforcement in Sri Lanka
The minimum work salary is given below.
Table 68: Minimum Wage Rate in Sri Lanka
Source: Salary (2012)
97
Individual Assignment: Strategic Entrepreneurship and Innovation 2. Workings 1. Payments for Suppliers
98
Individual Assignment: Strategic Entrepreneurship and Innovation 2. Cash Receipts from Debtors
Source: Done by Author 3. Fixed Assets
99
REFERENCES
Automobile India (2012). Two Wheeler Statistics. [Online]. Available http://www.automobileindia.com/two-wheelers/statistics/ [Accessed on 20th May, 2012] Binodpanday . (2012). Thapathali Tyre Industry. [Online]. www.binodpandey.wordpress.com [Accessed on 24th May, 2012] Available from:
from:
Bridgestone corporate website. (2012). Off the road Tyres [Online]. Available from: http://www.bridgestone.com/products/speciality_tires/off_the_road/about/production.html [Accessed on 24th May, 2012] Buy and Sell. (2012). Real estate commercial building for sale. [Online]. Available from: http://www.buyandsell.lk/kalutara/horana/real-estate-commercial-building-sale-factory-for-salein-horana-82822.html [20th May, 2012] Central Bank of Sri Lanka. (2012) Exchange rates. [Online]. http://www.cbsl.gov.lk/htm/english/_cei/er/e_1.asp [18th May, 2012] Available from:
Ceylon today, (2012). Research and Development in Sri Lanka [Online]. Available from: http://www.ceylontoday.lk/61-5584-news-detail-research-and-development-in-sri-lanka.html [Accessed on 23rd May, 2012] Chandrakumara, A. & Sparrow, P. (2004). Work orientation as an element of national culture and its impact on HRM policy-practice design choices. International journal of manpower. 25 (6) p.565-568. Chandrakumara, A. and Budhwar, P.S. (2005). Doing business in Sri Lanka. Thunderbird International Business Review, Vol. 47(1) January February. P 95 120 CIA, (2012), Sri Lanka. [Online]. Available from: https://www.cia.gov/library/publications/theworld-factbook/geos/ce.html [20th May, 2012] Colombopage. (2012). Sri Lanka raises taxes on Motor vehicles, cigarettes and Liquor [Online]. Available from: http://www.colombopage.com/archive_12/Mar31_1333179265CH.php [Accessed on 23rd May, 2012] Daily news. (2012) Ten year development plan for plantation sector. [Online]. Available from: http://www.dailynews.lk/2012/02/21/news35.asp [19th May, 2012] Daily News. (2012). [Online]. Available from: http://www.dailynews.lk/2012/02/21/news35.asp [Accessed on 20th May, 2012]
100
Individual Assignment: Strategic Entrepreneurship and Innovation De Mel, D., Jayaratne, S. and Premaratna, D., (2011). Improving Import Export Procedures and processes in Sri Lanka. [Online]. Available from: th http://www.unescap.org/tid/artnet/pub/wp9111.pdf [Accessed on 20 May, 2012] Doing business. (2012). Explore economies Sri Lanka [Online]. Available from: http://www.doingbusiness.org/data/exploreeconomies/sri-lanka#protecting-investors [Accessed on 24th May, 2012] Eximguru. (2012). India- Sri Lanka free trade agreement [Online]. Available from: http://www.eximguru.com/exim/trade-agreement/india-sri-lanka-free-trade-agreement.aspx [Accessed on 24th May, 2012] Fadaweb (2012). Indian Tyre Industry. [Online]. Available http://www.fadaweb.com/indiantyresindustry.htm [Accessed on 21st May, 2012] from:
Financial Times (2012). Korean president commends Lankas economic growth. [Online]. Available from: http://www.ft.lk/2012/04/28/korean-president-commends-lankas-economicgrowth-political-stability/ [Accessed on 28th May, 2012] Geert Hofstede. (2012). Cultural Analysis of India. [Online]. Available at: http://geerthofstede.com/india.html [Accessed on 1st May, 2012] Gnanaraj, S. (2012). Tough Competition in Tyre Market. [Online]. Available from: http://sundaytimes.lk/021229/ft/tough.html [Accessed on 25th May, 2012] Google Images (2012). [Online]. Available from: https://www.google.lk/imghp?hl=en&tab=wi [Accessed on 23rd May, 2012] Google maps corporate website. (2012). Map of Western province. [Online]. Available from: https://maps.google.lk/maps?hl=en [Accessed on 28th May, 2012] Hanlon, M. (2005). Tweel Technology. [Online]. th http://www.gizmag.com/go/3603/ [Accessed on 25 May, 2012] Available from:
Indexmundi. (2012). Sri Lanka Inflation Rate [Online]. Available from: http://www.indexmundi.com/sri_lanka/inflation_rate_(consumer_prices).html [Accessed on 24th May, 2012] Kandy Investor. (2012). [Online]. Available from: http://www.kandyinvestor.org/index.php?option=com_content&view=article&id=64&Itemid=66 [Accessed on 20th May, 2012] Lanka business online. (2012). [Online] Available from: th http://www.lankabusinessonline.com/fullstory.php?nid=521653539 [Accessed on 20 May, 2012]
101
Individual Assignment: Strategic Entrepreneurship and Innovation Ministry of Economic Development, (2012). Kalutara District [Online]. Available from: http://med.gov.lk/english/?page_id=1502 [Accessed on 23rd May, 2012] Rubber board, (2012). Manage cultivation [Online]. Available from: nd http://www.rubberboard.org.in/ManageCultivation.asp?Id=31 [Accessed on 22 May, 2012] Rubber world (2012). Market report [Online] Available from: rd http://www.rubberworld.com/RWmarket_report.asp?id=750 [Accessed on 23 May, 2012] Salary. (2012). Minimum wage in Sri Lanka [Online]. Available http://www.salary.lk/home/salary/minimum-wage [Accessed on 18th May, 2012] from:
Sensus and statistics department of Sri Lanka, (2009/2012), Household Income and Expenditure Survey, Sri Lanka, Ministry of Finance and Planning of Sri Lanka. Sri Lanka business. (2012). Rubber [Online]. Available http://www.srilankabusiness.com/rubber/artical1.htm [Accessed on 19th May, 2012] from:
Sri Lanka Equity. (2012). Sri Lanka plantation companies [Online]. Available from: http://www.srilankaequity.com/2010/05/sri-lanka-plantation-companies-to.html [Accessed on 25th May, 2012] Statistics.gov (2012). Final Bulletin [Online]. Available from: http://www.statistics.gov.lk/Newsletters/HIES200910FinalBuletin.pdf [Accessed on 24th May, 2012] Technology for agri (2012). New Technology. [Online]. Available from: th https://technology4agri.wordpress.com/category/new-technology/page/2/ [Accessed on 18 May, 2012] Vanhaerents, K. and Shroud, H. (2012). Corporate finance: Venture Capital Exit Routes. [Online]. Available from: http://www.slideshare.net/Freddy56/corporate-finance-venture-capitalexit-routes [Accessed on 26th May, 2012] World Bank (2012). South Asia. [Online]. Available from: http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/EXTSARRE GTOPTRANSPORT/0,,contentMDK:20694454~pagePK:34004173~piPK:34003707~theSitePK :579598,00.html [Accessed on 18th May, 2012] You Tube (2012). Hankook Tyre Manufacturing Process. [Online]. Available from: http://www.youtube.com/watch?v=oSC0d8F20B0 [Accessed on 27th May, 2012]
102

Strategic Entrepreneurship and Innovation - Air Free Tyres

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Strategic Entrepreneurship and Innovation - Air Free Tyres

Uploaded by

Copyright:

Available Formats

ASIA PACIFIC INSTITUTE OF INFORMATION TECHNOLOGY

BA (Hons) in Business Administration

Module Code & Title

Intake code GF11B1BA Date of Submission 6th June, 2012

Instructor Mr. I.G. Perera

Individual Assignment: Strategic Entrepreneurship and Innovation

Individual Assignment: Strategic Entrepreneurship and Innovation

Individual Assignment: Strategic Entrepreneurship and Innovation

Individual Assignment: Strategic Entrepreneurship and Innovation

Individual Assignment: Strategic Entrepreneurship and Innovation

Individual Assignment: Strategic Entrepreneurship and Innovation

Individual Assignment: Strategic Entrepreneurship and Innovation

Individual Assignment: Strategic Entrepreneurship and Innovation

Individual Assignment: Strategic Entrepreneurship and Innovation

1. INTRODUCTION AND CURRENT BUSINESS SITUATION 1.1 Introduction to the Company

Source: Done By Author

Individual Assignment: Strategic Entrepreneurship and Innovation

1.2 Introduction to the Product

Figure 2: Prototype of Air free Tyres

Source: Done by Author based on Hanlon (2005)

1.3 Current Manufacturing Front and Market Situation

Individual Assignment: Strategic Entrepreneurship and Innovation

Figure 3: Consumer Expenses Trend on Transport in Non food expenses segment

Source: Statistics.gov (2012)

Figure 4: Number of Vehicles in Sri Lanka from 2004 - 2008

Source: Department of Census and Statistics (2012)

Individual Assignment: Strategic Entrepreneurship and Innovation

Source: Department of Census and Statistics (2012)

Source: De Mel et al (2011)

Individual Assignment: Strategic Entrepreneurship and Innovation

Figure 5: Ease of doing business in Sri Lanka

Source: Doing Business (2012)

Individual Assignment: Strategic Entrepreneurship and Innovation

2.1 PESTEL Analysis

Impact to company (0 to 10)

Factors Political Environment Political Stability

Governance Economical Plans

Business Startup Process

Very time consuming and bureaucratic in nature.

Individual Assignment: Strategic Entrepreneurship and Innovation Economical Environment Inflation

Source: Compiled by Author

In the above chart, - Opportunity - Threat

[Refer Appendix 1 for Detailed Analysis]

Individual Assignment: Strategic Entrepreneurship and Innovation

2.2 Value Chain Analysis

Figure 6: Value Chain Primary Activities of EFT

Source: Done by Author

2.2.2 Secondary Activities Analysis

2.3 Porter Five Force / Industry Analysis

Figure 7: Porter's Five Forces

Source: Google Images (2012)

Supplier Bargaining Power

Customer Bargaining Power

Source: Done by Author

Individual Assignment: Strategic Entrepreneurship and Innovation

Source: Fadaweb (2012)

Individual Assignment: Strategic Entrepreneurship and Innovation

2.4 SWOT Analysis Strengths

BOI benefits of exemption of import tax & tax holidays etc.

Citizens positive attitude towards greener and innovative products

Source: Done by author

Individual Assignment: Strategic Entrepreneurship and Innovation

Source: Done by Author