Business Case Study – Cctv

If you were Jack Gin, what would you do: acquire Derwent Systems, based in Newcastle, UK, to extend its reach into Europe, or focus on the IPO?

When assessing if Jack Gin should acquire Derwent Systems or focus on IPO it is would be best suggested to undertake a review of the attractiveness and competitive position of the proposed acquisition. One method of doing this is through the use of the Boston Consulting Group (BCG) Matrix. This matrix assesses the competitive position of the business in its current form, and the aspects of the proposed businesses, against their respective market attractiveness. (Robbins, et al. 2009) The BCG considered businesses in terms of a Cash Cow, Star, Problem Child or Dog.

The case study tells us that Extreme CCTV is a growing company with specialized products that produce positive cash flow for the business, which makes it a Cash Cow. Derwent, although they had difficulties with cash flow at the current time, have a specific product base and have a recognized brand name, which sits this business in the Problem Child area of the Matrix. In order to develop a business which could become a star, Derwent would be able to provide the brand and provide recognition, and Extreme is able to provide the business the necessary cash flow to achieve a possible Star business.

Therefore I believe that Jack Gin should invest into Derwent Systems as it will allow the acquisition of a recognized product with the ability to sustain positive cash flows assisting in long term sustainability of the business.  Briefly outline the risks associated with your recommendation and how the company could manage these risks. There are risks associated both with acquisition and passing the opportunity;

• Not Acquiring Derwent
• Will lose access to a high quality high performing product
• May risk market saturation Ability to provide competitive pricing structure for current product range should competitors produce the same products Acquisition Risks
• Cash flow – does Extreme have enough cash flow to support Derwent requirements in the short term •Change management issues in merging businesses and associated staff cultural issues
• If competitors are already engaging in the market Extreme is trying to break into – do they have a market dominance
• Geographical issues – managing businesses on two sides of the globe

Globalisation and workforce diversity issues . List the benefits, and why you believe they outweigh the risks Increased market share

• Ability to offer the market more products
• Acquiring the good will of Derwent customers
• The additional Intellectual property from Derwent research and development
• Additional staff and their knowledge and experiences
• Ability to proposed more competitive pricing structures as inputs may be cheaper as business will have greater turn over and thus may be able to purchase components in bulk
• Economies of scale – not only for tangible inputs but labour inputs
• Increased borrowing power with the merger of two businesses – increased assets. 4. Analyse Extreme CCTV’s competitive landscape using

Porter’s Five Forces

Porter’s Five Forces consist of the following;

• Supplier Power . This component could be considered as high as with a larger volume of component turnover Derwent could access better trading terms and stronger relationships with suppliers. This would result in more reliable and competitive supply of components and with good relationship management, such as ensuring on time invoice payment, Derwent may be able to become a ‘preferred’ creditor.
• Consumer Power. Quality would be at the forefront of the consumer’s requirements and thus this component would be considered very high. Without reliable quality products Derwent would allow competitors access to their market, reducing their cash flows and product sales.
• Substitutes. There are very few substitutes to CCTV. Any alternative products do not provide the same level of quality or access to the same features provided by Extreme (and Derwent) products, thus this factor is considered low.
• New Entrants . The possibility of new entrants into the market is low due to the fact that a number of businesses are already participating in the market, and any new entrants would need a large capital, for research and development and product development.

Rivalry oIt is possible that Pelco may merge with other competitors, such as Silent Witness, and their new competitive power would be unknown at this time. Therefore this would be considered a medium risk as neither the new market nor the strategic direction of any competitors is known.

Production Costs. Production costs would differ between operating locations, i. e. Derwent and Extreme factories, as input costs may differ due to the differing localities, i.  Northern America and UK. oEconomies of scale could be achieved in bulk purchase of inputs; however the logistical issues associated with movement of stock between geographic locations may actually increase costs should this strategy be employed. This would have to be carefully considered. Marketing Costs. As the market in North America currently does not appreciate the Derwent product it would be critical to demonstrate through marketing the benefits that there products, and Extreme’s on trying to enter the market, would have for them. Encouraging distributors and consumers to try the product would be critical in being able to ‘break’ into the market.

Distribution costs needed to be considered would be movement of input components, where are the distributors and their clients, and would there be a ‘head office’ hierarchy set up or would the two arms of the Extreme business, i. e. Derwent and Extreme, be seen as equals in the company structure and thus have equal responsibilities and distribution strategies would be determined by each location instead of a ‘one size fits all’ approach. Pricing structure would need to be competitive with other competitors where product services and capacity is similar, where there are distinct difference between what the competitor can offer and what the new Extreme business could provide the market then the ability to charge inflated prices, limited to the value perceived by the consumer, would be would become available. These potential increase profit margins on specific products could be used either as investment into research and development or to minimise the cost of borrowing.

It would be dependent on any marketing strategy that would be linked with the pricing structure. Costs. Bulk buying where possible would represent the best way to minimize costs for this business and achieve any economies of scale. Distribution Channels. It would be seen that existing distribution channels to be used to promote and sell the products. As the attractiveness of the product became greater then new distribution channels would open. oAn alternative distribution would be to use the companies own resources.

The staff would have the background knowledge on the development of the products and the strategic missions and values of the business and would be able to communicate these as part of their marketing strategy. Barriers to Entry. Entry into this market at this time is favorable as there are not many competitors and Extreme already holds product differentiation with its current product range. The ability to merge research and development from the two businesses would provide a great opportunity to emerging markets globally. Legal/Contractual/Intellectual Property. There are definite intellectual property issues with this merger and then management of research and development results through this business and the proposed merger. Legal contracts and possible supply and logistic contracts would need to be facilitated to provide opportunity for efficiencies. Contacts and Networks .Contracts and networks already in place for both businesses would be used in the first instance, and then with increase attractiveness of produce new networks and contacts would be developed. It is also evident within the case study that participation at trade shows would provide key opportunities to expand current networks.

The Extreme structure would remain in its current form. With the proposed retirement of Duffy, Gin would need to find an appropriate management team to continue operations of the Derwent arm of the business. FATAL FLAW/RISK Existence of a Fatal Flaw . There are possible fatal flaws in this proposal; Cost of borrowing required capital to acquire Derwent. Ability to establish a suitable management team to continue Derwent operations. The need to establish two geographical locations for operations the logistical issues that this may create. Staff culture issues and how Derwent staff would be received and integrate with Extreme employees.  There is a risk in this proposal in that the cost of capital required to start up the business may be prohibitive to entering the market, although the use of a merger with a business that has established distribution channels and market would reduce this risk overall.

Bibliography

1. Morse, Eric A, and Ronald K Mitchell. Cases in entrepreneurship: the venture creation process. Thousand Oaks: SAGE Publications, 2005.
2. Robbins, S, R Bergman, I Stagg, and M Coulter. Management. 5th . Pearson Australia, 2009.