Executive Summary Blue Water Boats (Blue Water) is faced with an uncertain future, in terms of strategic and operational

directions. With a declining core market segment of wooden boat and pressures from aluminum and fiberglass boats, it faces risks of decreasing revenue and profits in the future. Historically; it has operated on limited strategic shifts, and without explicit mission, vision and governance styles. The stakeholders believe it is time for a strategic shift, in order to sustain the business. They want to elevate the position of the company based on strengths of organizational culture, stellar reputatation and competitve edge within the niche market for wooden boats. However, there are various weaknesses in its technological innovations and management accounting policies. Also, foreign subsidies and strict trade policies has put Blue Water at a disadvantage to many foreign companies. Although the net profit increased over the past three years; to achieve further growth, it needs to focus on superior quality, expertise, products environmental friendliness, and marketing initiatives. Therefore; with the goal of future success, various alternatives were analyzed. Other than the strategic shift to aluminimum; all remaining options, as listed below, were deemed beneficial. Strategic Alternatives: 1. Maintain the status quo of building and repairing wooden boats 2. License manufacture of Sykes Class Sloop in fiberglass Operational Alternatives: 3. Construct a New Storage Shed 4. Increase Prices (Boats and Repair Charges) 5. Install New Information Technology (IT) System 6. Implementation of Balanced Score Card (BSC) The above shifts will help maintain Blue Waters market reputation and financial position. However, there are certain implementation issues which have to be mitigated. The licencing may result in substandard products and unfair practices by the manufacturer; those risks have to be controlled through a strict contract. New employees for the shed will require extensive training and insurance coverage for accidents. The BSC and IT system have to be continuously monitored in order to obtain optimal results. Successful implementation of alternatives will reduce Blue Waters future concerns. It will benefit from an increase in net income within the next year by over $25,000 or 84% of current profit levels.

Table of Contents
Introduction ................................................................................................................................................... 1 Situational Analysis ...................................................................................................................................... 1 Mission...................................................................................................................................................... 1 Vision ........................................................................................................................................................ 2 Strategic Direction .................................................................................................................................... 2 Governance ............................................................................................................................................... 2 Stakeholders Needs and Preferences......................................................................................................... 3 Constraints ................................................................................................................................................ 3 SWOT Analysis ........................................................................................................................................ 4 Competitive Landscape ............................................................................................................................. 6 Key Success Factors ................................................................................................................................. 7 Key Risks to be Eliminated or Mitigated .................................................................................................. 9 Identification of Issues and Alternatives ..................................................................................................... 10 Recommendations ....................................................................................................................................... 19 Sensitivity Analysis .................................................................................................................................... 21 Implementation Plan ................................................................................................................................... 22 Conclusion .................................................................................................................................................. 26 Appendix ..................................................................................................................................................... 27 Appendix A SWOT Analysis............................................................................................................... 27 Appendix B Ratio Analysis ................................................................................................................. 28 Appendix C Quantitative Analysis of Alternatives .............................................................................. 29 Appendix D Sensitivity Analysis ......................................................................................................... 32 Appendix E Action Plan & Timeline ................................................................................................... 35 Appendix F- Balanced Scorecard Sample .............................................................................................. 36 Appendix G Projected Financial Results ............................................................................................. 37 Bibliography ............................................................................................................................................... 38

Introduction Blue Water Boats (Blue Water) is currently facing an uncertain future. The company was founded in 1908, and since its inception has operated with minimal technological innovations and strategic shifts. Although it has carved itself a niche market in the wooden boat industry, with the ongoing decline in that particular market, and threat of substitutes such as fiberglass and aluminum boats, the companys future performance is at risk. There are also added pressures owing to lack of performance measures, standardized costing systems, marketing initiatives, low prices and a number of senior and experienced employees nearing retirement age. The key stakeholders want to ensure the ongoing success of Blue Water. David Hamilton, one of the newest shareholders, believes the company should not be losing money in either the short or long term, and thus hopes to make shifts in strategy and operations accordingly. The purpose of this report is to analyze the strategic and operational future of Blue Water. It provides a detailed situational analysis of the company; with discussions about the mission, vision, strategic direction, stakeholders preferences, companys strengths, weaknesses, opportunities, threats (SWOT), competitive landscape, advantages and key success factors. It also discusses the current financial position, through a ratio analysis. This is followed by the identification of issues, and alternatives available to Blue Water; along with qualitative and quantitative analysis of each. The report closes with recommendations, implementation plans, forecasted financial results and a brief conclusion. Situational Analysis Mission Blue Water is known for its quality classic boats. Founded 93 years ago, the company has been through many different economic changes and global events. The business has four distinct branches of business construction of wooden boats, boat repair, storage, and manufacturing of traditional boat fittings. The implicit long term strategy of Blue Water has been passed down through the generations. Blue Waters mission is to create boats that their customers will value in performance and appearance.

Page | 1

There is no explicit mission statement that the company provides internally or externally. The current long-term strategy is to use its existing expertise in wood to construct various kinds of boats such as classic boats that many owners enjoy. Albert and John Sykes, the heirs of the family business, have always kept this long-term mission at heart. Vision Currently, there is no explicit or implicit medium term strategy for Blue Water. Shareholders and management have always followed the business as it was handed down the generations. Similar to the mission statement, the visions of the business would also be different if Blue Water were to pursue another strategy that radically alters the course of the business. The unclear medium and long-term strategy of the company is disadvantageous and insufficient for the company as there is no clear goal. Although staying on their laurels and doing nothing could potentially work with niche markets; the lack of communications and commonality between different stakeholder preferences, will ultimately decrease stakeholders and Blue Waters goal congruence. Strategic Direction The ship building industry is changing drastically. The shareholders and management are currently proposing a new strategic direction. Before the proposals are discussed and explored, several different options are already available to be pursued. These options are available as strategic directions for Blue Water. Like any other company, a profit would be required on any strategy undertaken. Governance This business has been passed on through the generations since 1908. Recently, controlling interest of the company was sold to a non-family member, David Hamilton. However, all decisions are based on the number of shares. Therefore, decisions will require the owners consensus as the business is closely held by very few shareholders. Blue Water, also does not have a Board of Directors (BoD). However; as mentioned above the company is held by a small number of shareholders, who acknowledge that all decisions are to be based on extensive discussions and ultimate consensus.
Page | 2

Stakeholders Needs and Preferences This section describes the needs and preferences of key stakeholders of Blue Water Boats: David Hamilton, John Sykes, Albert Sykes, Louis Langille and Roselle Deveau. Figure 1: Stakeholders Needs and Preferences Stakeholder Needs/Preferences Does not want the business to be industrialized Does not want to lose money even in the short term Wants to grow the business Wants to implement a performance measurement system by using the balance scorecard Feels that environmental and health issues are important (especially with aluminum and fiberglass) Wants to increase prices on the Sykes Wants to use old-tech and low-tech Wants to increase exposure, and capitalize on niche markets Has concerns with producing small ships Wants an Information system to track cost of construction projects Wants to know about strategy Wants to target growing market in aluminum or fiberglass Wants to manufacturer the sloop using fiberglass Wants to increase labour charge out rates for the repair shop Wants a radical change Is open to other ideas as long as the supporting evidence is convincing Wants to construct small ships See an opportunity in fittings Agrees that price is too low for the boats wants to adjust prices, and know how to increase them without turning off customers Wants to market and grow in the fittings area owing to the unequal work guarantees for Blue Waters fittings Wants to train the workers more Wants to improve internal controls and organization of resources since there has been duplication of tool ordering Wants to take advantage of increase demand in cottages which will increase canoe demands Thinks it would be wise to produce the Rivera again Thinks there is a market for wooden boats Wants to increase marketing instead of waiting for customer to approach Wants to implement an Information Technology (IT) system

David Hamilton

John Sykes

Albert Sykes

Louis Langille Roselle Deveau Constraints

Foreign Subsidies: Governments in other countries support highly subsidized boat manufacturing companies. There are also allegations regarding unfair trade policies. Thus it makes it very

Page | 3

difficult for Canadian boat builders, and especially manufacturers in Blue Waters position to export their boats. They not only have difficulties in matching prices owing to lack of subsidies, but due to the bureaucracy and red tape in the export process; they cannot take initiatives to export their products. Lack of government financing: At present there are no specific policies in place by the Canadian government to help in financing boat builders. The government also makes minimal efforts to source boats from within the country. Thus once again Canadian boat builders are constrained by lack of financing opportunities and government demand for boats. This constraint hinders expansion plans of boat manufacturers and also results in lower demands for their boats. The Jones Act: This act, established in the U.S., makes it difficult for Canadian boat manufacturers to export ships to the U.S. At the same time, other countries use similar measures to reduce their import of foreign boats. Since Canada does not employ similar trade policies, the local boat manufacturers face competition from external sources, although they are unable to compete with those parties at their locales. Thus once again, Canadian boat builders are unfairly restricted in the international boat industry. SWOT Analysis The following section highlights key strengths, weaknesses, opportunities and threats for Blue Water. For a detailed analysis refer to Appendix A. Strengths Strength #1 - Reputation Blue Water is a company that has a strong reputation for making high quality and environmentally friendly products at reasonable prices. Blue Water has continuously garnered praise from magazines about the quality of its product. Its winter storage business unit has a history of having no major accidents while boats are in storage at Blue Water. Strength #2 - Organizational Culture Blue Water employees have a lot of experience. Some of the senior employees have up to 50 years of experience. The four departments also work well within themselves and with each other,
Page | 4

especially the boat storage business unit. On the corporate level, the four business units work as a fluid team, which has enhanced Blue Waters services. As well, the practices of few layoffs have increased employee morale and retention. Strength #3 - Competition Locally, it faces a lot of competition but it is only one of two traditional fittings manufacturers with a full line of fittings. It is the largest boat yard in all four business lines and has a history of repairing fiberglass, steel, aluminum and wood boats. Weaknesses Weakness #1 - Governance Currently, Blue Water does not have a Board of Directors that oversees the long-term strategy or the performance of management. As well, there is no job description for any jobs which creates a potential lack of accountability, which would normally be enforced through good governance. Weakness #2 - Technology Blue Water performs many tasks manually, such as payroll and maintaining financial statements, which creates operational inefficiencies and potential errors. As well, there is a lack of adequate hardware and software to computerize administrative tasks which is a competitive disadvantage. Weakness #3 - Management Accounting Management is interested in implementing a Balance Scorecard but has no internal experience, which will make the process potentially time consuming. As well, there is a lack of formal job costing for construction projects thus a reasonable level of profitability is not ensured1. Opportunities and Threats (OT) OT #1 Boat Market In the boating industry, over half the boats are made with aluminum due to the many benefits including the highest strength to weight ratio. There is a permanent decline in the wooden boat market but a strong niche market for wooden boat repair and construction has recently risen. As well, the Canadian boating industry has grown at a rate of 4% which exceeds the rate of growth in America, at 2%.
Page | 5

OT #2 - Governmental Support and Political Environment East Coast Boat Builders Association has lobbied the government to start a community college program to train workers in aluminum boat building which will help companies wanting to enter that market. However, foreign shipyards have been receiving price subsidies, government financing and procurement policies that put Canadian shipyards at a competitive disadvantage when competing at a global scale. Competitive Landscape Blue Water currently competes in a moderately to highly competitive environment because of the substitutes and the commodity product that is used to make the products. However, within its niche market, it has a high degree of power and protection due to the high level of skilled labour and high reputation required to be successful. A detailed analysis of the competitive landscape is provided in Figure 2, which analyzes Porters Five Forces in respect to the external environment of Blue Water. Figure 2: Porters Five Forces Low Degree of Rivalry There are few competitors that specialize in wood boats Locally, there are several competitors but are very small which limits their numbers of job taken Blue water is only one of two traditional fitters with a full line of fittings Significant Threat of Substitutes About half of all boats built in the U.S. in 1999 were built of aluminum alloys Demand for fiberglass has been increasing Demand for non-wood boats has increased dramatically since the 1950s Moderate Buyer Power There are few alternatives in terms of direct competitors but there are many substitute products High Supplier Power Skilled labour and experience is needed to compete in boating industry Three key workers are planning to retire in the near future Wood can be used for many different products High Barrier to Entry In order to enter the market, there is a requirement for high level of skilled labour Reputation is important and takes time to develop Ratio Analysis The net profit margin has increased steadily over the last three years from 2% to 4%. This is indicated in Appendix B.3. Two of the most profitable divisions, boat repair and fitting, have maintained
Page | 6

a consistent net margin of 26% and 11% respectively. These are referred to in Appendix B.1. and Appendix B.2. respectively. When analyzing the sales growth ratio, as shown in Appendix B.3., the sales level has fluctuated from (3%) to 7% over the last three years, while the net income growth ratio has fluctuated from 14% to 50%. Even when sales level has been relatively flat, the net income has increased and this can be attributed to the product mix. Boat repair and fitting, which are the two most profitable divisions, have made up a more significant portion of the sales mix than in previous years on average. Key Success Factors There are many key success factors that enable organizations in the ship building and repair industry to flourish and carry out efficient and effective operations. The following analysis looks at key success factors: Innovative Designs and Technology: Organizations should have innovative ship designs and technology which is one of the main reasons why many Canadian ship manufacturers have been so successful in the past. Customers will be attracted to different designs that suit their needs. Organizations will need IT systems to help control the costs of constructing these boats. High Quality and Performance: It is also critical that boats are manufactured with high quality and advanced materials that are durable and long-lasting. Organizations that have a reputation for building high quality ships will be more successful as consumers want superior performance boats. Experienced Ship Builders: Qualified and experienced employees in ship building and repair are also vital as these employees are better able to produce quality high boats that consumers want. Boat construction can be quite complex and there are many types of boats that have different compositions, meaning the experienced shipwrights are needed to lead construction teams based on expertise. Adaptability and Customization2: Customers often ask for special features on their boats so organizations need to be adaptable to meet their needs. By meeting consumers specific needs organizations can build a good reputation and demand for future orders.

Page | 7

Eco-efficiency3: There are many negative environmental impacts that can arise as a result of boat building and repair. The Canadian boat building industry is required to comply with a number of environmental regulations and restrictions. These include taking steps to minimize the impact of waste that results from boat building processes such as building of mould, gel coating, fiberglass and resin coating, painting, foam blowing, and gluing4. These processes contain toxins that are harmful to the environment. Organizations that use renewable resources and recycled materials will garner a good reputation and public image, which will in turn help increase their sales. Marketing5: Marketing is also a key process which helps organizations attract new customers. There are many marketing options for ship building organizations. These include boating and cruising magazines, boat shows, online marketing, and the use of trade association memberships. By promoting the business and gaining good publicity, organizations can build their brand and increase recognition. Competitive Advantage Blue Water carries out many processes and has resources that give it a competitive advantage over other organizations in the industry. The following analysis looks at some of Blue Waters competitive advantages. Quality Wooden Boats: Blue Water has a reputation for having superior quality wooden boats as illustrated by the Wooden Boat magazine article. The article emphasized the quality of the original workmanship, and the fact that some of Blue Waters wooden boats, built during the height of fiberglass boat building, have outlived many of those supposedly indestructible boats. Environmentalism: Blue Water has been commended for its production of environmentally friendly boats, and for not using outbound motors which are under public scrutiny for their noise and fume pollution. Its environmental stewardship ensures that it wins over consumers concerned for the wellbeing of the oceans and ensures that the company has a positive image as it will not be the target of environmental lobbyists. Skilled and Experienced Workers: Some of Blue Water Boats employees have been working in the ship building industry for five decades. These employees are highly qualified and build ships that are
Page | 8

known for their superior workmanship. Blue Water employees work as fluid teams to leverage all of their experiences to construct complex ships. Blue Water Classics: Blue Waters classical ship designs have garnered much attention and interest. Publicity in a boating magazine said Blue Water has high performance canoes that are built using traditional methods and materials which are indistinguishable from those built in the golden age of canoeing. Good Reputation: Blue Water reputation stems from its high level of customer satisfaction. The company has a great deal of experience in working with clients to ensure satisfaction. Generally when customers receive their boats they enjoy them greatly. Majority of the boats Blue Water built in the last 20 years are still with original purchasers; only one boat in that period was sold in the first five years of ownership. High Performance Boats: Many of Blue Waters boats receive positive attention for their good performance. For example, the Sykes Class Sloop is very well received by customers, even helping make a local club a success. People liked its classic good looks, strong sailing ability, and safe handling characteristics. The boat had good racing characteristics but was safe enough to allow children to use. Winter Storage: Blue Water generates significant revenue from offering winter boat storage. This market that developed due to the expansion of recreational boating has helped improve Blue Waters bottom line. This line of business is so popular that Blue Water has a waiting list of customers trying to obtain storage space. Key Risks to be Eliminated or Mitigated The most critical issue facing Blue Water is the reality that the market they operate in is declining, some say the wooden boats are a dying business. With the introduction of new materials in the market that produce cheaper and more durable boats, the demand for wooden boats are dwindling. However, there is still a market for leisure wooden boats, demanded by a very particular type of customer that Blue Water can serve. But there are still concerns about sufficient demand for Blue Waters products.

Page | 9

Another major issue that threatens its success is the poor control and understanding of the costs of boat manufacturing. There is no cost management system in place and thus no tracking mechanism to determine how much a job actually costs the firm. This leads to inappropriate pricing, and potential for losses and poor margins. Blue Water is not receiving the proper market price for the quality of products it sells. Beyond the bottom line; there is also the issue of image, if the boats are being sold too far below the actual market value, there may be a false impression by customers about their quality. They may doubt quality on the basis that a quality product could never be sold at such a low price. Additionally; in the near future, three of Blue Waters key employees will be reaching retirement age. They may leave the workforce, causing the company to face a shortage in skilled and valuable labour. It will be very difficult to replace the calibre of skills these employees possess as they have been in the business for most of their lives and know their craft well. Without their skills in the mix, Blue Waters product quality will suffer. Identification of Issues and Alternatives The uncertain future facing Blue Water has driven the need to analyze the strategic and operational alternatives available to the company. The following are the major alternatives that are to be addressed. They are listed in their order of importance and relevance to the companys future. Strategic Alternatives: 1. Switch to Manufacturing Aluminum Boats and Place Government Bid 2. Maintain status quo of Manufacturing Wooden Boats 3. License Manufacturing of Sykes Class Sloop using fiberglass Operational Alternatives 1. 2. 3. 4. Construct a New Storage Shed Increase Prices (Boats and Repair Charges) Install New Information Technology (IT) System Implementation of Balanced Score Card

Page | 10

Strategic Alternatives Alternative 1: Switch to Manufacturing Aluminum Boats and Place Government Bid This alternative will lead to a complete overhaul of the current strategy of Blue Water in regards to the manufacture of wooden boats. The manufacturing will be completely shifted to aluminum boats. This will be supplemented by either a corresponding change in the repairs department and fittings construction, or a relocation of those departments. Pros Cons Qualitative Aluminum is the largest growing segment of the A complete change in strategy and operation of boating industry at present. Thus Blue Water will boat yard will be required, with new equipment, be able to take advantage of this growing market new people and yard layout. This shift will require and expand sales a lot of resources, both financial and human resources. The company will also have to establish a new image as an aluminum boat builder At present, aluminum is a larger market than Until recently, aluminum boats had an image of wooden boats. Thus Blue Water can focus on a being ugly and of low grade finish. This is not much larger market than it caters to currently consistent with Blue Waters current image as a superior boat manufacturer, and will hurt the companys image Due to their capability for great speed, aluminum As current employees do not possess the necessary boats have an added advantage of being known as skills for manufacturing aluminum boats, they will good performers. Blue Water can cultivate growth have to be laid off. This is not consistent with the by marketing on this feature image of Blue Water, which prides itself on almost nil turnovers and redundancies Since the boats are easy to repair, the repair Technology in this industry makes prices department will not have to learn additional skills competitive even with low production quantity. or be engaged in technically complex tasks Thus Blue Water will not only have to take drastic marketing measures, it will also have to price boats accordingly As the boats can be quickly customized to meet The repair and storage department are customer requirement, the amount of time required supplemented by the wooden boat construction for shipwrights to deal with boat designs and department. With a move to aluminum, Blue Water communications with customers will be reduced. will lose customers for both those departments and This will help increase Blue Waters efficiency and as a result face a decrease in revenue productivity The provincial community college to train workers Due to the material and process of manufacturing will reduce the need to internally train employees. aluminum boats, there are environmental concerns It will also assist the company in getting skilled with employees working at such yards. Blue Water labour may face resistance from employees and environmental groups which will damage its reputation in the market

Page | 11

Due to the lobbying of the East Coast Boat Builders Association, the provincial government has agreed to give contracts to builders on the east coast. Because of the geographic location of Blue Water, this will be highly beneficial As this strategy will require implementation of Computer Aided Design and Manufacturing (CAD/CAM) systems, they will help in producing high quality boats, with the means of new technology. This will enable Blue Water to be more efficient, obtain more jobs and also bid on numerous contracts This shift will enable the company to place a bid for fifteen patrol boats to the Department of Fisheries and Oceans. The company can also bid on similar contracts in the future

Most aluminum boat yards have unionized employees. With a move to a unionized labour force, the wage rates will increase on average by $4 (from $17 to $21). This will increase expenses and also make the company vulnerable to employee strikes and discord Although, one of the primary reasons for this shift is to place the government bid for the fifteen patrol boats; there is no guarantee that the contract will be received. This places a risk for Blue Water, as there may be a difficulty in obtaining return or important customers after the shift

Similar to the disadvantage listed above, if the government contract is received; there is still no guarantee that going forward Blue Water will receive similar contracts in the future. Thus it will once again face the risk of an uncertain customer base Although there is a threat of unionization, the Operating aluminum yards require laying-off unionized labour can be organized into production employees when there are no job contracts. This lines to produce efficiently and thereby further process is not congruent with the current policy at increasing the output levels Blue Water, as mentioned above. This will also require Blue Water to have extensive resources in place in order to handle the redundancies and thus increase expenses for the company as well as harm its image These types of boats do not require highly skilled Besides local competitors, manufacturing labour, unlike wooden boats. Thus with the help of aluminum boats will require Blue Water to the community training college, Blue Water will compete with foreign competitors. This poses a risk not face any risks in terms of employee skills as foreign manufacturers are hard to compete with, owing to their subsided prices, and unfavourable trade policies; such as The Jones Act In order to bid for the government contract, Blue Water has to have the aluminum boat yard set up by the end of this year. This gives the company very little time for the complete overhaul and new marketing initiatives. The company may not be able to make the shift in time and will thus lose the bid Quantitative The 2 year government contract, if won, will result This type of manufacturing will require expensive in $53,550 of profit per year. This amount is investment in CAD and CAM equipments approximately $24,000 more than the current Net Income of $29,383.Refer to Appendix -C.1 for detailed calculations of this shift

Page | 12

Conclusion: As seen from the analysis above, moving into the aluminum market will enable Blue Water to compete in a larger market segment and thus expand sales. It will also be easy to hire employees owing to the presence of the local community college. This will also allow Blue Water to bid for the contract of fifteen government patrol boats and earn approximately $24,000 more in revenue (Appendix C.1). However; there are considerable sources of risks as well. Blue Water will have to initiate a complete over haul of its production process and create a completely new image in the market. It will no longer be able to rely on the reputation it has established in the market, or the superior skills of the experienced employees. It may end up damaging its reputation, face employee resistance through an unionized labour force and also reduce its repairs and fitting business. Alternative 2: Maintain status quo of Manufacturing Wooden Boats This alternative will maintain the current strategy regarding boat manufacturing, with Blue Waters continued focus on wooden boat manufacturing, repairs and fittings. Pros Cons Qualitative Recently emerged strong niche market this will There is a general understanding that the wooden help Blue Water to target the niche market and boat market is not as strong as its peak years. If increase sales Blue Water decides to continue operations in this market, they will not be able to target a universally growing market Employees are well familiar and skilled with There is high local competition for canoes. With building wooden boats thus employees will not seven local competitors, Blue Water faces risks of require any further training, which will save losing their competitive edge training resources Blue Water recently received free publicity for As the province no longer has an apprenticeship their wooden boats, especially the canoes. It can program, Blue Water will have to train employees use these publicity to further expand its market and out of province or by others in the company. This sales may result in employees being less skilled, or increase training expenses for Blue Water There has been an increase in cottage buyers. This The senior shipwright is set to turn 65 in the next market segment is also causing an increase in the three years, and may wish to retire. Since he has demand for environmentally friendly boats. Due to extensive experience in wooden boat lack of outboard motor in Blue Waters wooden manufacturing, Blue Water will lose a valuable boats they are considered environmentally friendly. source of expertise Thus the company can easily target this market segment and expand sales

Page | 13

The wooden boat construction supplements the The province views wooden boats as a dying other three departments. Ongoing operations in this business. Thus the company may not be able to market will ensure that those departments also have receive extensive support (through training sufficient demand and sales programs and financing) from the local government Quantitative This option requires the least investment in extra If appropriate measures are not taken to increase materials and labour as existing resources can be sales and marketing efforts by Blue Water, the utilized companys sales will not grow. The business will remain stagnant in terms of growth and income will remain at the current levels

Conclusion: Maintaining status quo and continuing to manufacture wooden boats will help Blue Water maintain its position in the niche market it has carved out for itself. The company can continue to rely on its highly skilled labour force and continue to foster its reputation and image. It can also target growing market segments which prefer environmentally friendly boats and maintain the repair and traditional fittings business. However, there are risks owing to the overall decline in the wooden boat industry, and the lack of training facilities; which will cause difficulties for Blue Water to obtain experienced labour going forward. Alternative 3: License Manufacturing of Sykes Class Sloop Under this strategic change, Blue Water will license the production of its Sykes Class Sloop to a Boston boat manufacturer. Blue Water will provide the manufacturer with the moulds for building the sloops and in exchange receive 10% from the sale price of each boat. The manufacturer plans to build the boats using fiberglass. Pros Cons Qualitative There has been an increased demand from local As the intellectual property (IP) on the sloop has market for sloops. Thus Blue Water will be able to expired, and no one currently holds the IP; Blue expand its sales based on this market expansion Water faces the threat of new entrants to this market segment The licensed manufacturer is said to have close ties The sloop moulds are easy to replicate, as only a with the Boston sailing community. With proper simple measurement of the boats will enable marketing, the sloops can be targeted towards this building a new mould. Thus both with and without community and this will also result in an increase an IP, the company will face risks of competition in sales of the sloops and substitutes

Page | 14

This will open up the opportunity for Blue Water to export the sloops as well; thereby further expanding its market reach and earnings potential

Currently, Blue Water is the only yard with the mould for the sloop. Thus it would be a great opportunity for the company to expand based on this advantage Since fiberglass boats have wooden parts which will require repairs, Blue Waters repair business will be supplemented through this strategic shift. The repair departments earnings may actually increase Quantitative If the expected 25 units are sold then profit will There is no guarantee of the number of boats that increase by $11,250 per year. See Appendix -C.2 will be sold. The amount sold may be less than the for calculations of sloop revenues. 25 units expected. Conclusion: Through this shift, Blue Water can take advantage of the growing demand for sloops in the market. Since they are the only yard with the moulds, they can also take advantage of their position. This

This strategy requires providing the mould details to the manufacturer. There is a risk that the manufacturer will use the moulds for their own benefit and not share adequate profits with Blue Water Since Blue Water has a reputation for superior quality, if the manufacturer fails to produce similar quality sloops; the reputation of Blue Water may be damaged

will also help augment their repairs business as the repairs process for wooden and these boats are similar. However, Blue Water will always face the threat of new entrants to the market as the IP for these boats have long expired. The manufacturer may not be able to produce the boats according to the superior standards of Blue Water, thereby damaging their established reputation. Operational Alternatives Alternative 1: Construct a New Storage Shed This alternative will result in the construction of a new storage shed. This is based on the assumption that the current labour and materials are sufficient to build the new shed. Pros Cons Qualitative There is a waiting list for usage of the storage shed. Since this alternative is primarily based on the Thus expanding the shed will allow Blue Water to assumption that Blue Water will have extra labour provide services to not only the customers on the and materials to build the shed; the employees may waiting lists, but also to additional ones have to forgo their normal tasks in order to finish the constructions. At the same time, if the employees have no spare time the construction may have to be postponed

Page | 15

Blue Water already has a reputation for an accident-free storage process. The company can further market their storage department based on this positive image

With the building of the new shed, Blue Water will require more employees to manage the sheds. Currently there are only three employees, but with the additional shed there will definitely be a need for more employees. Also, since the employees at the storage yard have to be highly skilled, the new employees may not be have the same degree of expertise Quantitative The shed will yield a profit of $3,125 per year and The shed will be costly to make as it requires an increase Net Income by $2,350 per year after investment of $15,500, which is a significant accounting for depreciation on a straight line basis amount for Blue Water over 20 years. For a detailed calculation of the increase in profit refer to Appendix -C.3 The payback time for the investment in the shed would be approximately 5 years; as shown in Appendix C.3. This payback period is a long period of time, and thus Blue Water will not immediately see positive returns on this investment

Conclusion: Since there is always a waiting list for customers demanding the shed, Blue Water will be able to satisfy those demands and also obtain additional storage business. The company can market their services further on the basis of their accident free image. However, there will be a need for hiring more employees, who may not be as skilled as the current ones. Thus, there may be an increase in accidents which can cause damages to the companys reputation. Also, the payback period on the construction is almost 5 years (as per Appendix C.3), which is substantial. Alternative 2: Increase Prices (Boats and Repair Charges) Through this change, both the repairs and boat prices of Blue Water will be increased. Pros Cons Qualitative Blue Water boats are of superior quality and the Customers may not be willing to pay additional for repairs performed are also highly technical. Thus the boats, and thus demand may decrease the company will be able to fully earn its potential income Blue Water will also be competitively priced as the Since the wooden boats are already in a declining other boat manufacturers, and thus compete with market, this may further negatively impact sales for those on an equal platform Blue Water

Page | 16

This increase is consistent with the stakeholder belief (both Albert and John Sykes) that Blue Water is priced below competitors and thus should increase prices Quantitative Blue Water will increase Net Income by a large amount, as shown in the sensitivity analysis in Appendix- D.2 and D.3. The sensitivity analysis will be further discussed upon in a later section

Conclusion: Thus increasing the prices will help Blue Water earn its full potential income and compete better with other higher priced manufacturers. Blue Water will significantly increase its net income, but there will be a risk of low demand for services and boats owing to the increased prices. Alternative 3: Install New Information Technology (IT) System This will deal with the purchase and implementation of a new computer system for Blue Water. This system will be used for cost tracking and producing financial reports. At the same time, the system will be used for marketing purposes as well. Pros Cons Qualitative The new system will help Blue Water in marketing Roselle will have to be trained to use the software. the business and also assist in the design and A complex system may be hard to operate and thus planning of new boat constructions she may require extensive training, which may mean increased spending on the system and corresponding training expenses The system will also assist in evaluating the The system operators will also have to learn to productivity of the workforce. Understanding back-up the system and also be able to handle any employee performance will help make Blue Water issues that may result from a system failure more efficient in terms of service and manufacturing As the system will allow comparison of past and Since Blue Water currently has no expertise with present financial and operational results, IT systems, they may not be able to purchase a management will be better able to understand the system which will reap optimum benefits for them. companys performance and undertake financial This will result in negative returns from their planning decisions accordingly investment on the system Similar to the above benefit, the system will also track costs. This will help Blue Water in determining the different costs associated with the various constructions and make pricing decisions effectively to yield optimum profits

Page | 17

As the systems will enable more frequent financial reports, this will also assist management in terms of decision making With the added information available, the different departments can be benchmarked. This may also help in setting up budgeting decisions and variance analysis for Blue Water Similarly, the system will allow for ways to compare estimated and actual costs. This may further benefit Blue Water in establishing bids for contracts Quantitative There will be a cost associated with the system implementation and purchase. There may also be additional expenses related to the training of system operators

Conclusion: With the implementation of the IT system, Blue Water will be able to better monitor costs, benchmark production process and employee efficiency and create financial reports. They can also use the system to track production costs of individual boats and thus establish more efficient bids for contracts and tenders. However, it may be expensive to implement the system and there will be additional costs in training the employees to use it. Also, there is always a risk that the system will not be effectively utilized which will reduce the return on the invested system. Alternative 4: Implementation of Balanced Score Card Under this alternative, the company will implement the Balanced Score Card (BSC), through which they will gain an overall understanding of the quantitative and qualitative performance of the company. Pros Cons Qualitative The BSC will create a qualitative measure of Currently no one in the company has a background performance. This will supplement the financial in using BSCs. Thus there may be a need to use performance measures, and Blue Water will have a external resources to train and obtain better understanding of the qualitative factors of understandings. Otherwise, the cards may not be their business and raise efficiency accordingly implemented effectively and thus the benefits of the BSC will be lost

Page | 18

Since the information from the BSC will help Implementing the BSC will require a certain time determine qualitative performance, Blue Water will contribution by the employees of Blue Water. be better able to link customer satisfaction and There will be a need to understand the companys profit and thus make changes to customer service strategy better6 in order to design the card. These offerings and product mixes in order to better may result in numerous set back and postponement satisfy demand and increase profits of the implementation Quantitative There will be a need for financial resources for implementing the BSC. It may be necessary to hire external consultants to obtain regular updates7 of the card which may be expensive

Conclusion: As indicated, the BSC will help establish better benchmarks for the business and it will help link the quantitative and qualitative measures of Blue Water. Thus the company can better understand customers and costs, and price and market products accordingly. However, since there is limited exposure to BSC within the company, there will be a need to continuously hire external consultants for updating it. This may prove expensive and time consuming for Blue Water. Recommendations It is recommended that Blue Water take the following initiatives: Strategic Alternatives: 1. Maintain the status quo of manufacturing wooden boats 2. License manufacture of Sykes Class Sloop Operational Alternatives: 1. 2. 3. 4. Construct a New Storage Shed Increase Prices (Boats and Repair Charges) Install New Information Technology (IT) System Implementation of Balanced Score Card It is recommended that Blue Water continue its wooden shipbuilding and repair operations as opposed to switching to using aluminum. As indicated by the comparison in Appendix C.4.II, the difference in firm value from switching to aluminum and maintaining status quo, licensing sloop manufacturing and building the new shed is a minor $8,700. Therefore, although aluminum boats have many advantages such as increased firm value along with product benefits such as great speed,
Page | 19

performance, and its fast growing market; Blue Water should continue in the market segment in which it is most experienced and reputed. Blue Waters core competencies all relate to the wooden boat business. The company has almost a hundred years history in wooden boat construction and repair. During this time it has developed core competencies that have allowed it to garner a reputation for building traditional high performance, and high quality vessels. Although aluminum boats are becoming the latest trend, a niche market demanding wooden boats is emerging. Blue Water can take advantage of this market to increase profitability. Also switching to manufacturing aluminum boats is quite a risky venture which would require a complete overhaul of the current business operations. Not only would Blue Waters employees, many of whom are experts in wooden boats, require new training, but also large amounts of investments will be required. For example, switching to aluminum will require the use of the entire present property, meaning that Blue Water will need to invest a lot of money to transform the property and move other divisions elsewhere. Another uncertainty in this option is related to the government contract to build fifteen patrol ships. If granted, this contract will bring in around $107,100 in profit over two years (as shown in Appendix -C.1); however, there is no guarantee that Blue Water will be awarded this contract. Since Blue Water Boats has no prior experience or reputation in building aluminum boats, there is a likelihood of not receiving the contract. The lack of expertise and reputation may also be another reason as to why customers may not purchase aluminum boats from Blue Water. Instead, customers may opt to purchase from a more experienced and reputed aluminum boat builder. Blue Water should also license the construction of its Sykes Sloop to the Boston boat manufacturer, who will manufacture the boats out of fiberglass. This option is profitable for Blue Water as it results in $11,250 of profit per year (as shown in Appendix -C.2). This option also requires minimal investment as the only expenses are for materials and labour. Also it allows Blue Water to focus on the core competency of building wooden boats, while still being able to take advantage of the opportunities in the fiberglass market by outsourcing fiberglass production to another company.

Page | 20

Blue Water should also build a new storage shed for boats. The storage line of business is very profitable for the company and it requires few resources and labour as ship owners manage most of the storage preparation of their own boats. It is also a popular line of business as there is a waitlist of people trying to store their boats in the shed. By building another shed, Blue Water can accommodate more boat owners and increase profits by $3,125 per year (as shown in Appendix C.3). Along with these recommendations, it is also suggested that Blue Water Boats increase the price of its boats, install a new IT system, and implement a balanced scorecard. By raising the prices of its boats, Blue Water will be more aligned with competitive prices and will bring in more revenues. Implementing a new IT system will help the company better plan new boat constructions, report financial data, and monitor employee performance. Lastly, implementing a balance scorecard will enable Blue Water to establish improved benchmarks and link the quantitative and qualitative measures of the business, which will in turn allow the company to better understand its customer base and its costs. Sensitivity Analysis Currently the repairs division uses a charge out rate of $25, which is well below the local average of $42. A sensitivity analysis of the repair labour charge out rate shows that by raising the charge out rate by as little as $3, there can be significant increases in net income. If the charge out rate is increased to the local average of $42, Blue Water will generate an additional $106,756 in income. This analysis is shown in details in Appendix D.2. A sensitivity analysis was also performed on the prices of Blue Waters canoes and Sykes Class Sloop. Both of these vessels are priced much lower than the competition. The Blue Water canoes sell for $1,150 whereas the competition sells them for around $2,175; and the Sykes Class Sloop is priced at $4,500, whereas other similar boats are priced around $14,500. A sensitivity analysis of the canoes show that if the canoe price is increased by $525 to $1,675, which is still relatively cheaper in comparison to competition, then net income will increase by $1,575 (as shown in Appendix D.3).The same is applicable for the Sykes sloop; if price were increased to $10,500 which is still significantly below competitors prices, net income will increase by $6,000 (as shown in Appendix D.3). However, the concern with
Page | 21

raising prices even by a nominal amount is that there is no guarantee that customers will pay the new increased prices and may look for alternative products that are cheaper. Lastly, a sensitivity analysis was performed on the number of boats that could be sold after the licensing of Blue Waters Sloops to the Boston manufacturer. Retaining a 10% fee or approximately $450 per boat, a change in the number of boats sold would affect profits. For example, if 26 boats were sold instead of the expected 25, an additional $450 of profit will be seen. See Appendix D.4 for the range in profits depending on the number of boats sold. As the future is uncertain, performing this analysis provides us with the potential ranges of profits Blue Water may face. This is especially important as there is a current economic downturn. The recession of the early 2000s may have an impact on the sales of boats. As we are all aware the economic conditions are poor right now due to recent events such as the collapse of the high tech stocks and high interest rates. Although the Canadian economy was not impacted as hard as its neighbours the U.S., the recent economic downturn has led to a decline in employment and in the disposable income in households8. This is likely to have a negative effect on boat sales and may mean that the 25 expected units of sales may not be realized. Implementation Plan As discussed above, the best alternative is to maintain status quo wooden boats production and licensing the Sykes sloop to the Boston manufacturer to be produced in fiberglass. Additionally all the operational alternatives need to be implemented for continued success. An action plan with timeline are shown in Appendix E. Manufacturing with Wood One of the major implementation barriers for maintaining the current position in the manufacturing of wood boats is the permanent decline in the market. However, this barrier actually creates an opportunity for Blue Water. The company has created a niche market within the boating industry and since the market is unattractive to potential entrants, it makes it more profitable for Blue Water.
Page | 22

The second major implementation issue is the loss of three employees who are retiring in the near future. In order to address this issue it is recommended that a training program be implemented. The training program should have the senior employees interview the employees so that they feel comfortable working with each other. This will also enable and encourage the senior employees to share their knowledge. In addition to shadowing senior employees, comprehensive training manuals will be created to retain the knowledge within the corporation. In addition to staying in the wood manufacturing business, it is recommended that prices increase to reflect the true value of the boats. Currently, Blue Waters canoe is selling for only $1,150 which is almost half the price of other traditional manufacturers. In order to determine what the best price is, further market research should be done, to obtain both primary and secondary data. The secondary data can be obtained from competitors websites and magazines. The primary data can be collected through discussions with customers and organizations. Through this analysis, the price should be equal to the value that customers are willing to pay for the different services. One of the major weaknesses of Blue Water is that no marketing is performed. This lack of marketing may result in potential customers going to direct competitors or using substitute products. To increase marketing efforts, it is recommended that a marketing firm be used in the short term to develop an understanding of how to effectively market the products and services that the company offers. Licensing Production of Sykes Sloop Some of the major risks with outsourcing are the quality of the products and the potential impact that partnerships may have on reputation. If the Boston manufacturer produces poor quality products, this will reduce Blue Waters reputation of producing high quality products. To manage this risk, a contract should be put in place where if quality standards are not met then large penalties will come into effect. In addition, random quality audits will ensure that the manufacturer is meeting standards and clear inspection standards will be discussed and agreed upon. Another major risk is that the intellectual rights to the Sykes Sloop has expired and there is a chance that the Boston manufacturing may steal the mould design and eliminate Blue Water from the
Page | 23

process and retain more of the profits. To address this, as part of the contract, a non-competition clause should be in place to prevent such actions. Construct a New Storage Shed With a new storage shed, Blue Water will need to hire more employees to service the new shed. When hiring more employees, depending on the labour market, there may be scarce number of high quality employees. If low quality employees are hired and damage is caused to the stored ships, the storage department will lose its reputation of an accident and incident free storage centre. This risk is mitigated by the fact that there are many layoffs at other boat yards and the availability of workers is high. In addition, Blue Water should investigate into purchasing an insurance policy against any damages that the employees may cause. Implement new IT system Currently, Blue Water does not have the adequate software and hardware. This will prevent Blue Water from implementing the appropriate IT system. It is recommended that an off the shelf IT package that can support the accounting function, track inventory, manage production costs and employee data be purchased. In addition, a server should be purchased to run and process the IT system. Strategy9 and the Balanced Scorecard In order to implement a strong and effective balanced scorecard, Blue Water needs to start with a clear understanding of what the business strategy is. Strategy is formulated around what the firm does/wants to do and the environment it competes in. Strategy is basically how a firm intends to compete and win in the market. A large aspect of strategic direction is based on what the core competencies are and how the firm can best capitalize on those competencies to turn a profit. According to Kaplan et all, there are four steps to developing strategy10; addressing four questions. First, what is your business and why? You have to set the mission, vision and core values of the firm. The mission simply sums up why you are in business. The vision is more precise and outlines mid to long term goals of the company; the vision is market oriented aspirational. The Values are the foundations for the company, the guidance for what is important and what the company mentality is.
Page | 24

Second, where are we going? Setting specific strategic goals are crucial. Once the vision is set, you can then identify the gap between the firms performance and the target. Then specific goals are put in place to close that gap. These are the overarching targets that drive the firm strategy. Third, what are the key issues that need to be considered in the strategy? These are determined by doing thorough analysis of the internal and external environment of the business. Using different models, the firms key competencies, weaknesses, threats and external forces are identified and related issues are taken into consideration at the next stage. Finally, how can the business compete given all the above? Identifying where to compete (target market), how to differentiate offerings. This is where the overarching goals are broken down to short term targets that need to be met in order to move the firm closer to its long term vision. The balanced scorecard is a tool that helps decompose the overarching goals into metrics that measure performance and help drive desired activities to help the firm meet its targets. The metrics fall into 4 categories, the shareholder perspective (financial metrics), the customer perspective, the employee perspective (internal metrics), and learning and growth of the business. For Blue Water to have a smooth transition to using a balanced scorecard, it is recommended that the scorecard first be implemented as a tool to improve quality of production and firm performance. Once the employees are comfortable with the process and buy into the idea of using the metrics and aiming for the targets, performance evaluation at the individual level should be implemented. This way they will respond more favourably to being evaluated and being rewarded based on performance. Please refer to Appendix F to see a sample balanced scorecard with recommended metrics that Blue Water can use. As indicated by the arrows, each quadrant has a cause and effect relationship with the next, for example: increased customer satisfaction would drive return business which would lead to growing profits. Improving demands and financial performance would then lead to a need for more skilled labour to meet these demands and require further training. More training and development of the employees would lead to improved efficiency/ lower units costs in production.

Page | 25

Forecasted Financial Results For a detailed financial forecast refer to Appendix G. Based on the 2001 results, some of the expenses such as salaries were indexed as growing at a rate of 2%, while other expenses increased by an approximated amount. For example, advertising and marketing expenses are expected to increase $10,000 as the effort to promote the company and its products and services. As well, the projects of building the shed, licensing manufacture of sloops and improving the pricing of boats and repair charge out rates were also considered. Implementation of these projects will increase the future net income. Based on the expectations of savings and new earnings, the increases in 2002 net income before taxes would be 84% or almost $25,000 higher. The expected $54,000 of net income will continue into the future as better costing systems, using a balance scorecard, and increased promotion will help increase the margins. Conclusion Therefore in conclusion and as indicated by the extensive analysis provided above, in order to maintain its current market position and reputation Blue Water should not make a drastic change in its strategic direction. It should continue to maintain its wooden boat manufacturing business, while licensing out the manufacture of its sloops to the Boston Manufacturer. This will help the business to maintain and foster its reputation in the industry and also enable it to further tap into the niche market of wooden boats. It should also construct a new storage shed, in order to satisfy the increasing demand for storage. At the same time Blue Water should implement an IT system, BSC and increase prices. The IT system and BSC will help the company to benchmark performance more effectively and understand employee performance in depth, thus Blue Water will be able to make effective pricing and production decisions. As for the prices, with the advantage of Blue Waters reputation and superior quality, the increased prices will better enable the company to compete with other manufacturers and also increase its net income.

Page | 26

Appendix Appendix A SWOT Analysis Strengths Weakness Opportunity Blue Water boat repair has a history of repairing fiberglass, steel, aluminum and wood boats Blue Waters senior shipwright has 50 years of experience and the junior shipwright has 20 years of experience Blue Water has never had an incident involving damage during their winter storage service Storage service is always full with a waiting list and number of boats in storage has been increasing since 1997 Blue Water is one of the only two traditional fittings manufacturers with a full line of fittings Fitting employees have been working in the shop since the 1950s Few layoffs compared to other boat yards which increases employee morale Blue Water four departments work as a fluid team The boat storage department has a strong cohesive unit Free publicity from a series of various newspaper and magazine articles written Blue Water canoes are cheaper than other traditional manufacturer ($1,150 vs. $2,175) Blue Water boats are environmentally friendly and fit the traditional look of cottage properties Blue Water has the largest boat yard in all four business lines locally Blue Water employees do not currently perform any part of the process of getting a boat ready for winter storage Blue Water has no board of directors No job descriptions for any jobs Middle of the pack compensation for employees Payroll is handled using cheques instead of direct deposit Office technology is very basic Financial tables are done by hand and entered in to word processing package which leaves it prone to error Lack of adequate hardware and software to computerize administration No formal marketing efforts Limited production and long wait times (up to six weeks) for either a canoe or a Whitehall Three key employees are eligible for retirement Difficulty determining profitability of construction projects No one in the company has background in the balance scorecard Over half of the boats are made of aluminum Yacht owners require annual maintenance and customers have deep pockets Outboard motors have increased public criticism for noise and fume pollution Canadian manufacturers are recognized as world leaders The Canadian industry has been growing at 4% vs. 2.5% in America Canadian currency has been on the decline and made exporting more attractive to the
Page | 27

 Threats

US East Coast Boatbuilders Association has lobbied the government to start a community college program to train workers in aluminum boat building Strong niche market has recently arisen for wooden boat repair and construction Wooden boat market has been on the decline since the introduction of fiberglass boats in the early 1950s Wooden boat market is in permanent decline Existing Canadian policy is ineffective in countering widespread foreign subsidies and unfair trade practices Foreign shipyards have price subsidies not matched in Canada Canadian yards do not get government financing and procurement policies that foreign yards do The Jones Act in the United States and similar legislation in other countries make it difficult to export ships

Appendix B Ratio Analysis B.1 Boat Repairs Margins 2001 184423 104663 21979 9000 135642 48781 26% 2000 143100 79500 19080 9000 107580 35520 25% 1999 162427 93483 17762 9000 120245 42182 26% 1998 143124 80633 17739 9000 107372 35752 25% 1997 154556 88317 17665 9000 114982 39574 26%

Income Expenses: Labour Materials Depreciation Total Expenses Net Income Net Margin (Net Income/Income)

B.2 Traditional Fittings Margins 2001 135494 89400 29722 1200 120322 15172 12% 11% 2000 132563 87870 28725 1200 117795 14768 15% 11% 1999 125301 82945 27249 1200 111394 13907 16% 11% 1998 119681 79776 25542 1200 106518 13163 19% 11% 1997 114175 75421 24970 1200 101591 12584 20% 11%

Income Expenses: Labour Materials Depreciation Total Expenses Net Income % from Tall Ships Net Margin (Net Income/Income)

Page | 28

B.3 Blue Water Ratios Formula Net Profit Margin Net Income/Sales 2001 2000 Profitability Ratio 4% =29383/777543 3% =24558/802710 1999 2% =16340/747744 1998 2% =14276/73 4893

Sales Net Income

(Current Sales-PY Sales)/PY Sales (Current NI -PY NI)/PY NI

Growth Ratio -3% =(7775437% =(802710802710)/802710 747744)/747744 20% =(2938350% =(2455824558)/24558 16340)/16340

2% =(747744734893)/734893 14% =(1634014276)/14276

Appendix C Quantitative Analysis of Alternatives C.1 Switch to Aluminum and Obtain Government Bid Initial Investments Flux cutting equipment Other Gear Profit per Boat

$125,000 $47,000 $7,140 Profit after all expenses 15 Boats for government bid contract $107,100 $53,550 Total Profit / 2 years

Total Profit (Profit per boat * 15 boats) Profit per year

Current Net Income $29,383 indefinite business (Wood construction, fitting, repair, storage)

Page | 29

C.2 Licencing of Sloops Materials and Labour for Mould Cost Current Price per Sloop 10% license fee per sloop Expected units sold Profit per year (license fee * expected sales units) C.3 Construction of New Shed Shed Costs Costing system Balance Scorecard $15,500 If labour time and spare materials are procured Number of boats 10-20 meters 5-10 meters 20 boats 15 boats Additional fee for shed use $100 $75 2,000 4,500 450 25 11,250

Profit per year Amortization of shed Net Income Payback period - it will take 5 years to recover this cost (with no discounting)

$2,000 (number of boats * additional fee) $1,125 (number of boats * additional fee) $3,125 $775 (shed cost/ 20 years) $2,350 4.96

Payback period: Undiscounted method to determine how long it will take for the project to pay for its initial investments Payback period = initial investment/net income per year C.4 Comparison of Firm Value C.4.I Assumptions The firm value can be determined by discounting the operating cash flows into infinity. Using the prime rate at the end of 2001of 4%11 plus 2%, this government loan rate was used to determine the value of the firm. Therefore it was estimated that Blue Water would borrow at a rate of 6%. As well, at the time of estimation, the economy was in a recession and therefore the prices were accordingly depressed. In

Page | 30

addition; the initial investments were subtracted from the firm value, as the initial outflow of cash is necessary for these projects to be implemented. Firm Value = Operation cash flows per year / discount rate initial investments C.4.II Calculation of Firm Value Firm Value Prime Rate Government Loan Rate 4% 2% 6%

Switch to Aluminum with successful bids every 2 years indefinitely Initial Investments Flux cutting equipment 125,000 Other Gear 47,000 Total Investment 172,000 53,550 Cash from Operations per year (This cash is equivalent of profit per year calculated in Appendix C.1) Firm Value 720,500 Firm Value is the Cash flow discounted into infinity less initial investments Stay with Wood, license sloops and construct new shed Initial Investments Materials and Labour for Mould Cost Shed Costs Total Investment

2,000 15,500 17,500

Cash from Operations per year From current net income - if no action is taken 29,383 Licencing of Sloops (As per Appendix C.2) 11,250 Additional Revenue from Storage Shed (As per Appendix C.3) 3,125 43,758 Total Cash from Operations Firm Value 711,800 Firm Value is the Cash flow discounted into infinity less initial investments Difference in Firm Value 8,700

Page | 31

Appendix D Sensitivity Analysis D.1 Formulas Used

Sensitivity of Boat Prices = Number of boats expected to be sold * (New Boat Price Old Boat Price) Sensitivity of Repair Charge Out Rate = Number of hours expected to be billed * (New Charge out Rate Old Charge Out Rate)
D.2 - Repair Charge out Sensitivity Analysis Labour Cost for Repair Division (As per segmented income statement provided) Ship wright per hour Painter per hour Charge out rate per hour Average charge out rate (Average rate of 2 ship wrights and 1 painter) Number of hours per year (Labour Cost for Division / Average Charge out rate) Hours per week (Number of hours per year/ 52 weeks) Charge out rate 60 58 56 54 52 50 48 46 44 42 40 38 36 34 32 30 28 Additional Income to Blue Water 219,792 207,233 194,673 182,114 169,554 156,995 144,435 131,875 119,316 106,756 94,197 81,637 69,078 56,518 43,958 31,399 18,839 104,663 19.00 12.00 25.00 17 6,280 121

Page | 32

D.3 Boat Prices Sensitivity Analysis Number of boats sold in 2001 Canoes Price 2,175 2,075 1,975 1,875 1,775 1,675 1,575 1,475 1,375 1,275 1,175 Additional Income to Blue Water 3,075 2,775 2,475 2,175 1,875 1,575 1,275 975 675 375 75 Number of boats sold in 2001 Sykes Class Sloop Price 14,500 13,500 12,500 11,500 10,500 9,500 8,500 7,500 6,500 5,500 4,500 Additional Income to Blue Water 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Current Price 1 4,500 Current Price 3 1,150

Page | 33

D.4 Fiberglass Sensitivity Analysis Current Price per Sloops 10% license fee per Sloop Expected units sold 4,500 450 25

Number of Boats Sold 30 29 28 27 26 25 24 23 22 21 20 19 18 17 16 15

Expected Profit per year 13,500 13,050 12,600 12,150 11,700 11,250 10,800 10,350 9,900 9,450 9,000 8,550 8,100 7,650 7,200 6,750

Additional Income/Loss (when expectations set at 25) 2,250 1,800 1,350 900 450 (450) (900) (1,350) (1,800) (2,250) (2,700) (3,150) (3,600) (4,050) (4,500)

Page | 34

Appendix E Action Plan & Timeline Action Plan Action License Sloop Manufacture Market Research Marketing Campaign Construct New Shed Install IT System Balanced Scorecard Responsibility Cost Start Date Strategic Implementations John Sykes $ 2,000 March 1, 2002 Operational Implementations David Hamilton $ 2,000 March 1, 2002 Roselle Deveau $ 8,000 April 1, 2002 John Sykes $15,500+ June 1, 2002 Roselle Deveau $ 2,000 March 15, 2002 David Hamilton $ 1,000 October 1, 2002 Finish Date Ongoing Ongoing Ongoing August 31, 2002 Ongoing Implementation complete by fiscal year 2003

Timeline 2002 Q1 Initiate licencing of sloop manufacturing with Boston manufacturer Undertake market research Install IT system 2002 Q2 Devise and initiate marketing campaign Start construction of new storage shed 2002 Q4 Design and implement Balance Score Card

Page | 35

Appendix F- Balanced Scorecard Sample

Financial Perspective Return on Investment Net Income Profit Per Unit Sales Growth

Learning and Growth Apprenticeship program % of employees trained Hours of training

Customer Perspective Customer Satisfaction # of complaints or concerns # of returns or fixes needed to correct orders # of jobs New customer jobs Returning customer jobs Wait time for custom jobs Positive Recognition in the media

Internal Perspective Employee Satisfaction Employee Turnover Unit costs for jobs

Page | 36

Appendix G Projected Financial Results Gross Income Increase in Repair Charge out rate Increase in Boat Prices Income from New Shed Income from Fiberglass Licensing Adjusted Gross Income Cost of Goods and Services Sold: David Hamilton Salary John Sykes Salary Roselle Deveau Salary Employee Salaries Materials Advertising and Promotion Travel Hamilton and Sykes Travel Boat Repair Crew Equipment Purchases Repairs to Equipment Depreciation Heat and Power Telephone Interest Expense Postage 2001 Projected 2002 Comments 777,543 777,543 31,399 Charge out at $30 2,375 Canoes at 1,275 and Sykes at 6,500 3,125 Additional Income 11,250 Additional Income $777,543 $825,692

40,000 43,000 35,500 414,960 142,741 325 3,575 5,675 24,003 7,300 18,100 8,250 2,060 2,475 196 748,160 $29,383

40,800 43,860 36,210 423,259 142,741 10,325 3,575 5,675 26,003 7,300 18,875 8,250 2,060 2,475 196 771,604 $54,088 84%

Indexed at 2% Indexed at 2% Indexed at 2% Indexed at 2% Same Promotion to help with Price Increase Same Same 2001 + Mould Same 2001 + Shed Amortization Same Same Same Same (No loan if aluminum contract not taken)

Net Income % Increase in income = (2002 NI - 2001 NI)/2001 NI

Page | 37

Bibliography Amadeo, K. (2011). Why Our Economy Is in a Recession Now. Retrieved March 29, 2011 from http://useconomy.about.com/od/grossdomesticproduct/a/cause_recession.htm Anthony, R. & Govindarajan, V. (12th ed.) (2007). Management Control Systems. McGraw-Hill /Irwin Bank of Canada. (2011). Rates and Statistics: Canadian interest rates and monetary policy variables: 10year lookup. Retrieved March 21, 2011 from http://www.bank-banque-canada.ca/en/rates /interest-look.html Dalhousie University. (2008). Eco-Efficiency Centre. Retrieved March 20, 2011 from http://ecoefficiency.management.dal.ca/Files/Business_Fact_Sheets/BoatBuilding_fs.pdf Horgren, C., Foster, G., Datar, S., Teall, H., &Gowing, M. (4th ed.) (2006). Costing Accounting: A Managerial Emphasis. Pearson Education Canada. Kaplan, R., Norton, D., Barrows, E., (2008). Developing the Strategy: Vision, Value Gaps, and Analysis. Harvard Business School Publishing Province of Nova Scotia. (2011). Boatbuilding and Repairs. Retrieved March 20, 2011, from http://www.gov.ns.ca/econ/nsx/site/businfo/PrintProfile.asp?type=bus&infoid=9&id=83

Page | 38

1 2

Horgren, Foster, Datar, Teall, & Gowing, (2006) Province of Nova Scotia (2011) 3 Dalhousie University (2008) 4 Dalhousie University (2008) 5 Province of Nova Scotia (2011) 6 Anthony, & Govindarajan, (2007) 7 Ibid 8 Amadeo (2011) 9 Kaplan, Norton, &Barrows, (2008) 10 Ibid 11 Bank of Canada (2011)

Page | 39