INJECTION MOULDING

Injection moulded parts can be produced with; ribs, varying thickness and good surface finishes using all thermoplastic materials.  The orientation of molecules and reinforcement occurs during the process.  High pressure, nonuniform polymer shrinkage and orientation can lead to warpage and shrinkage over ribs and bosses.  Warpage is most apparent with crystalline materials and with large, flat parts.  Methods of controlling these effects are described below.

Plastic granules are softened during injection moulding and forced under pressure into a cold mould through small orifices or gates.  Pressure is maintained on the material after injection is complete so as to reduce shrinkage of the ribs and bosses as the material cools.  Pressure is higher at the gates because it will not transfer effectively through the compressible and rapidly cooling melt.  The additional packing pressure leads to a higher density of material near the gates and causes internal stresses.  These stresses tend to be partially relieved when the part is removed from the tool, resulting in warpage.

The plastic melt must flow from the gates, through the narrow gap between cooled mould surfaces, to the edge of the tool.  The gap becomes narrower as the material flows because some of the melt solidifies at the mould surface.  The pressure, flow rate and distance between the mould faces must be great enough, and the material viscosity low enough, to fill the mould before the solidifying material closes off the flow path. For each material and part thickness, there is a maximum practical flow length from a gate.

High pressures and narrow flow paths increase the orientation, which becomes greater as the gap freezes off.  Therefore, the orientation at the centre of the part wall is much higher than at the surface.  For the same reason, orientation is highest near the gates.  The gates should not be areas that are likely to suffer impact or other stresses, such as chemical attack.

The maximum practical thickness of the part is about four millimetres.  Above this thickness, cooling time becomes excessive.  The minimum normal thickness for injection moulding is about one millimetre.  Below this level, the party cools before the tool is filled and orientation is excessive.

The largest readily available injection moulding machines have a 3000 tonf clamping force, which restricts part size to about one cubic metre or less, for more difficult and filled materials. The flow length of the plastics from any one gate is limited to about 500mm with a 3mm wall thickness.    Therefore, multiple gates must be used for large parts. Gate design and position are very important for reducing part warpage and add to the complexity of the orientation effects.

The surface finish of injected moulded parts replicates the mould surface as it cools in contact with the surface, except over ribs and bosses.  Part design must be aimed at keeping ribs and bosses away form the back side of visible surfaces, reducing material in the rib root.  With filled or reinforced materials, the surface tends to be dull shows flow marks.

Cycle times vary from less than a minute to five minutes.  Injection moulding is the most useful thermoplastic processing method.  However, there are size limitations and a tendency towards warpage in flat parts.  Shrinkage over ribs can be designed around.

INJECTION COMPRESSION MOULDING

Injection compression moulding is sometimes known as coining.  The plastic melt is injected into the tool, which is held to a slightly greater opening than the ultimately desired part thickness.  As the amount of injected material approaches the desired part weight, the tool is closed to compress the material and to fill out the tool.

It is important for surface quality that the tool closure starts before injection stops and that the injection be completed before the tool is fully closed. This ensures that the material flow front does not stop.

Pressure requirements and orientation effects are less because material flows into the tool with the tool surfaces further apart than normal.  The rate of injection can be higher because the flow path is more open.

As the tool is closed down to the final part thickness, the melt is squeezed to the edges of the tool.  Orientation is less, because the final melt is not being forced through a narrow channel by high pressure from the gate.  Packing around the gate is eliminated as the injection is stopped before the tool is full.  Flash is reduced because their is no sudden pressure break, such as occurs in normal injection moulding when the tool fill is completed.

Long glass fibre, up to fifty per cent of fifty millimetre long, can be handled if properly formulated, because the lower injection pressures and larger gates allow the fibres to pass through more easily.  With lower built in stresses and less orientation, parts tend to exhibit much lower warpage when removed from the tool and less distortion and stress cracking in service.

Injection compression moulding is most useful for large area parts up to 1.5 square metres and for reinforced components requiring minimum warpage.  Sinkage over ribs is bad, or worse than with conventional injection moulding, because packing additional melt into ribs and bosses is not practical. However, the ability to add reinforcement could overcome the need to use ribs.

Although it is not widely used, injection compression moulding does offer the opportunity to overcome some of the size, orientation and reinforcement limitations of normal injection moulding. Injection compression moulding avoids the pressure peak obtained during normal injection. This allows larger parts to be made on the same tonnage machines as smaller parts. Internal stresses are lower because of a more even pressure distribution.

Flash is minimised, but a vertical flash tool is necessary.  This would normally have only one large, centrally located gate. Orientation is nearly eliminated. The need to use a vertical flash tool for this process limits its ability to be used for many parts, because of part shape.

HOLLOW INJECTION MOULDING

Hollow injection moulding is a relatively recent development.  High pressure gas is injected into the polymer melt flow at the nozzle of the machine or at the gates of a hot manifold system. The gas flows through the areas of lowest viscosity at the hotter centre of the melt.  Polymer injection is stopped before the part is full and this allows the gas to fill out the molten areas.  Final filling of the part is by gas pressure.

The molten areas must be designed to form a continuous path from the gate and along the ribs for the gas pressure to be effective to the extremities of the part.  Ribs must normally be widened at the root to allow for air passage.

Rib shrinkage is reduced, or eliminated, by this process.  Internal stresses and flashing are reduced, because the pressure peak is also eliminated, and this reduces warpage and finishing costs.  Pressure on the mould is also reduced.  Therefore, much lower machine clamping tonnage is necessary and the production of longer parts should be possible.

Surface finish is similar to that found in normal injection moulding, with the added advantage of reduced rib shrinkage. The process appears able to handle similar materials to normal injection moulding.  Limitations on reinforcement are similar to those of normal injection moulding.

Hollow injection moulding may require heavier wall sections than normal injection moulding and the process can be considered as being between normal injection moulding and foam injection moulding, with an improved surface.  Various alternative processes, using the melt stream injection of liquid or solid blowing agents, have been considered.

FOAM INJECTION MOULDING

Foam thermoplastic parts can be produced by adding a heat­activated blowing agent to the plastic granules or by injecting gas into the polymer melt in the injection moulding machine.  Foaming does not occur while the melt, containing the gas, is under high pressure in the injection machine barrel.  When the melt is injected into the mould, the trapped gas can expand to produce a foam.

To achieve foaming, the part thickness must be at least four millimetres and, for low densities, a minimum thickness of six millimetres is necessary to achieve a reasonable foam structure.

Cycle times are much longer than with other processes because of the greater part thickness.  This is sometimes balanced by feeding more than one tool from each injection unit.

Typical foam parts have a surface made up of collapsed cells, giving a swirl pattern similar to wood.  A major advantage of the process is that the foaming action completely fills large ribs and bosses, leaving a flat surface.  This is an excellent system for articles requiring a massive internal rib and boss system for stiffness, provided a high gloss finish is not required.

SANDWICH MOULDING

Sandwich moulding is used to produce parts with a skin of one material an a core of a different material. The skin material is normally unfilled and is chosen for its good surface characteristics, while the core material is usually foamed to eliminate sinkage or reinforced to increase stiffness.

The basic process relies on tow injection units connected, through a switchable valve, to the gate system of a tool in a single clamp unit.  The skin material is injected and this is immediately followed by injection of the core material. The core material pushes the skin material to the extremities of the mould, laying down a solidifying layer of skin on the cooled mouls surface as it passes.

With a reinforced core, the total thickness must be about one millimetre thicker than for normal injection moulding.  Size limitations are similar to those found in normal injection moulding, but multiple gating is difficult because the flow fronts always consist of skin material.

COMPRESSION MOULDING

Compression moulding is one of the few thermoplastic processing methods that allows the use of very long, or continuous, reinforcement.  Flow moulding and stamping are two forms of compression moulding.

Flow moulding involves heated plastic, moving in three dimensions, under the pressure exerted by the cold mould to fill the mould, carrying any reinforcements with it.  Ribs and bosses are filled with plastic and reinforcement, but little true control of reinforcement orientation can be achieved, even though oriented continuous fibre is used in the starting material.

Stamping is the deformation of a heated sheet of plastic under the pressure of a cold mould with minimal flow of material or change in reinforcement orientation.  Only single thickness parts are possible.

THERMOFORMING

Thermoforming is the forming of heated plastic sheet by the application of air pressure (pressure forming) or a vacuum between the heated sheet and the tool. The atmospheric pressure forces the sheet onto the tool, where it cools and retains the tool shape (vacuum forming).

It is impractical to form a reinforced sheet because of the low pressure involved and the tendency of the sheet to tear. Orientation and crystallisation effects can be used to strengthen or modify the physical properties of the plastic material, but such techniques are of interest only for low-cost food containers and similar items.

CONVENTIONAL BLOW MOULDING

Conventional blow moulding cannot handle reinforcement.  The only effect on the physical properties of the material caused by the processing is the tendency to orientate the molecules in the direction of the extrusion head. This can ultimately lead to failure of the product due too splitting in the direction of flow when subjected to impact or stress corrosion.

INJECTION BLOW MOULDING

For injection blow moulding, an injection moulded preform is used instead of an extruded parison.  The technique is particularly useful as a precursor for stretch blow moulding, in which blowing is carried out at lower temperatures with mechanical means or preform shapes to ensure that biaxial orientation takes place. Stiffness and strength are significantly increased by this process, as are other properties, such as resistance to the transfer of gases.  Most carbonated beverage containers make use of this biaxial effect.

ROTATION MOULDING

A plastic paste or powder is placed in a hollow metal mould, which is then heated and rotated so that the plastic melt coats the inside of the mould.  The mould is then cooled while still rotating. Parts produced in this way are difficult to reinforce because the fibres tend to separate from the plastics. Internal stresses are very low, but there is a risk of polymer degradation due to exposure to air. The process is used for decorative, nonstructural parts or as an alternative to blow moulding.

I originally wrote this article, “Venture opportunity screening” in November 2003.

An opportunity has been screened for the export of handcrafted goods from Singapore and the venture appears attractive. New technology and new business processes are used by the venture to provide small retailers of antiques clocks, gifts, handicrafts and home décor with handcrafted goods from Asia by 15 Kg air parcels, delivered in 7 days. The average value of each consignment is S$800 and credit card payment, with order, gives UK retailers 4 weeks to 7 weeks credit with the card company, whilst the venture is assured payment by VISA and Mastercard monthly. Direct mail and telemarketing are used to create and penetrate the market and bilingual staff are close to Asian suppliers and possess superior customer service skills.

A quick screening of the new venture identifies the potential market of small UK retailers and the gross margin is estimated to be 50%. The competitive advantages identified are identified as low fixed costs, control over costs, location and people advantages. The value created is 10% profit after tax and an IPO exit mechanism is foreseen after 3 years.

The opportunity concept takes advantage of the recent halving of prices for Transpacific freight and international call costs in the last couple of years and new techniques for receiving assured payment from international customers. The new venture strategy is to penetrate 10% of the market of UK retailers who sell antiques, clocks, gifts, handicrafts and home décor.

The market profile is of reachable customers who seek product variety. The competition is fragmented and market sizes are estimated as S$20M, S$80M and S$100M in the UK, US and Europe, respectively. The venture economics profile is of low capital requirements and favourable free cash flow characteristics. The time to break even is 15 months. The IPO exit mechanism is estimated to harvest S$2M for the founder in three years. The venture provides a good fit with the goals of the founder and a bilingual team will be created within the first 2 years of operation. Strategic differentiation from the competition is by superior customer service, use of technology, pricing and product quality. The market entry strategy is to create customer awareness that it is now possible to quickly receive quality Asian goods in small quantities at a competitive price from the newly formed company.

The reasons for making the company believe that the idea is an opportunity are concerned with the main components of customer need, premium pricing, underlying value creation proposition, market niche and product mix. Small UK retailers need a variety of high value products to differentiate themselves from the larger UK retailers and to compensate for their lower lever of sales activity. They are required to purchase goods in modest volumes from wholesalers and UK manufacturers to realize wholesale discounts and are prepared to pay a premium to reduce their investment in inventory. The new venture has an underlying value creation proposition of supplying UK retailers direct in more frequent, smaller volumes to reduce inventory and to take advantage of lower freight costs and international telemarketing call costs. The marker niche of UK retailers selling antiques, clocks, gifts, handicrafts and home décor is chosen to avoid dealing with the end-user consumer, whose average order value would be unlikely to exceed S$100, unacceptably increasing the administration costs. The product mix is carefully chosen to include only those items whose sales price to weight ratio is high, to ensure low air parcel distribution costs (as a percentage of the selling price). There are currently no substitutes for the marketing mix of premium priced products promoted by direct sales and telemarketing from Singapore.

The new venture seeks to improve upon the existing value chain by eliminating the warehouses of UK wholesalers. This is achieved by employing the ‘just in time' distribution technique that has been successfully used within manufacturing industries for the last 20 years to reduce inventory costs. The product strengths are the uniqueness of Asian designs, handcrafted features, unfamiliar materials, unusual colours, peculiar symbology and aesthetics. The product weaknesses are unproven demand, freight costs, fumigation certification for wooden items, humidity control requirements and the non-uniformity of designs. Existing competitors in the industry have been assessed. Direct mail costs are estimated to be S$1,000 per thousand contacts, telemarketing IDD call costs are S$10 per hour and the web-host charges 1½% per transaction and S$70 per month. The distribution costs have been estimated and are 22% of sales. Value chain physical, margin and information flows have been mapped and they reveal that the suppliers benefit from high percentage margins, which are moderate in absolute dollar terms.

It's estimated that the new venture will capture ¼, 1, 2 and 5% of the market in years 1, 2, 3 and 4 of the venture. The business goal is 10 % of the market, with sales of S$2M, in 5 years. The product cost represents 36% of the sales price, gross margin is 36% of the sales price, fixed costs are 16% of the sales price and profit before tax is 12% of the sales price. Resource needs to launch the company are modest. The cash flow conversion cycle has been forecasted and a preliminary cash flow analysis has been created. The break-even chart shows that the venture needs to ship three consignments every couple of days (or 28 consignments per month) to break even.

Capital will be raised for the business in two stages, at launch and after three years of operation by way of an IPO. The launch capital of S$100,000 is to be invested by the company owner. The market capitalization for the IPO, after 3 years, is estimated to be S$2M. This is based upon forecasted earnings (net profit after tax) of S$0.1M for 2007 and S$0.2M for 2008, giving a P/E ratio of between 10 and 20. The IPO opportunity will attract investors from Singapore government agencies, institutions and individuals. The company owner intends to harvest the venture by means of selling the company via the IPO. This is estimated to occur in three years time, in January 2007. The harvest prospects are good if the forecasted growth and required margins can be achieved. The company would be source of strategic value to exporters of other products based in Singapore, or to importers based in the UK. As there are no other firms currently delivering this product and service mix, a company contemplating entry may be a logical buyer. The business asset requirements are low and, if the owner decided to exit, it would cost less than S$20,000 in lost lease deposits and depreciated fixtures, fittings, equipment and other venture launch expenditures. This amount seems reasonable, with respect to the venture's potential and risk. Expenditure after launch can be adjusted to match the level of sales activity witnessed, so as not to run out of cash before securing enough profitable customers to sustain a positive cash flow.

The strategic analysis of the competitive landscape estimates that the four competitor categories are large UK importers with warehousing, specialist UK manufacturers, UK manufacturer's brokers and internet hobbyists with no marketing who have market shares of 50%, 25%, 20% and 5%, respectively. Marketing tactics for each competitor vary. Profiles of the competition in year 2003, for price/quality and market share/profitability have been created. The main manufacture of the handcrafted products, by definition, is not subject to technological change. However, the required quality assurance, fumigation and humidity control processes involve technology that will take six months to two years to develop, implement, install and maintain. The new venture has the competitive advantage of being in close proximity to the suppliers of the goods and an additional advantage can be gained by hiring staff who speak Mandarin and Indonesia Bahasa. The new venture is also able to work with its suppliers to assure quality and meet fumigation and humidity control requirements. The new venture can be price competitive if the advantages of low fixed costs, zero/low inventory costs, low supplier costs and higher customer value (through increasing their inventory turnover) more than compensate for the new venture’s higher distribution costs of delivery by air parcel. The new venture’s marketing positioning, relative to the competition, has been chosen. UK specialist manufacturers and manufacturer's brokers are vulnerable to competitors, like the new venture, being able to offer good quality substitute handcrafted product designs from Asia. Once penetrated, this section of the market will always remain vulnerable to the new venture’s competitors and they will lose market share if the quality of the new venture’s products can be maintained. Another vulnerability of the new venture’s competitors is in the creation of awareness in UK retailers that handcrafted Asian goods can be procured direct from the new venture.

The founder's vision is to change the way many goods are exported from Singapore, by offering superior customer service and good quality products, using staff skilled in CRM and by using new business processes. The company aims to inspire its staff through leading by example, on the job training and by continual employee attendance at CRM business management training seminars and courses. The founder has many years of international business management experience with a large MNC throughout America, Asia and Europe and many years of experience in project management and engineering in Europe with various companies. He is very knowledgeable about logistics, procurement and sales and possesses the skills required for the venture's success. Additional bilingual personnel are required in Mandarin, Bahasa and English. These new staff members will be attracted to the venture after the first six months of launching the company. The founder has previously managed procurement and export of industrial products from America, Asia and Europe.

Significant assumptions are made in the screening of the new venture. It’s assumed that the sales projections are realistic and that customers will purchase the goods without first being able to touch and see them, apart from the photographs and specifications in the new venture’s catalogue. The ability to recruit local staff with good customer service skills and understanding of UK dialects, names and customs is assumed. It’s also assumed that the implementation of supplier quality assurance will be successful and that customers accept the new venture’s terms of payment. The downside consequences of invalidity to these assumptions are lost growth opportunities if sales projections prove to be unrealistic and the company could be forced to cease trading if it is found not to be possible to recruit local staff with good customer service skills and UK knowledge. If product quality cannot be controlled then customer returns and lost trade could cost several tens of thousands of dollars in refunds to the credit card companies, who demand 100% customer refund guarantees. The maximum cost of liquidation, to the founder, is less than S$80,000 and is tolerable. Bankruptcy is not tolerable by the founder for participation in this venture.

The risk of the venture is rated as medium as it is managed by financial bootstrapping and with the use of milestones. Before the IPO in three years time, the business is initially funded by the founder. The founder's investment is moderate and break even is estimated to occur in the 15^th month of trading. Bootstrapping is used between break even and the IPO listing to minimize the company's exposure to financial risk. Borrowing could be used to promote growth, but this would increase the risk. Milestones are placed along the venture's path to the IPO, as checkpoints, before further resource commitments are made. The first milestone is placed after the first six months of operations. This marks the transition of the company into leased premises with a shop front and a commitment to engage two staff before the end of the first year. The precondition for passing this milestone is that the direct mail and telemarketing campaign have generated more than one hundred positive responses or enquiries and that the receipt of the first few purchase orders is imminent. Similar milestones are placed every six months to match additional resource commitments with previous, current and future sales activities. A schedule for week-by-week action steps, during the first six months, has been created.

The value proposition can be enhanced by communicating to retailers the true cost, to them, of their currently low inventory turnovers and how the new venture company could assist them to increase their inventory turnovers, thereby reducing the amount of their capital tied up in stock. The new venture could improve their value proposition by appointing agents or distributors in the UK to penetrate the 90% of the target market that they don't envisage infiltrating by direct mail and telemarketing alone. The sequence of customer database generation, direct mailing and telemarketing batch sizes could be changed to improve the fit by focusing on a pilot study. The sequence could be changed so that 500 targeted customers are contacted four months ahead of the plan to statistically infer the likely response from 5000. Staff could be added earlier than planned to divide the tasks of CRM database creation, direct mail and telemarketing between staff and the founder. The fit could also be improved by eliminating the need for premises with a shop front for local sales. Local sales are expected to be low, so more economic business premises could be used in an out of town industrial area. The free cash flow characteristics are at their optimum with advanced payment commitment and retarded payment for logistics and resources. However, the value chain could be extended to manufacture the products ourselves. The major risk, after venture launch costs, is that the initial marketing investment of S$10,000 does not create customer awareness, enquiries and orders at the magnitude planned by the new venture. The risk/reward balance could be adjusted by increasing or decreasing the marketing investment.

I originally wrote this article, “Small enterprises” in October 2003

CASE STUDY : BURT’S BEES

An opportunity is defined as consisting of an idea and other components. The following enterprise case study allows comparison with other companies in the industry and shows little investment, small market share, low wages and low productivity for Burt’s Bees. It is explained that the company's success is due to it's uniqueness, Roxanne's qualities, her family, marketing and resource management. The company should keep to it's plan of producing in North Carolina to allow the value of the company to continue to grow, prior to harvesting. According to Timmons and Spinelli (2003:106):

“Roxanne Quimby sat in the president's office of Burt's Bees newly relocated manufacturing facility in Raleigh, North Carolina. She was surrounded by unpacked boxes and silence from the unmoving machines with no one there to operate them. Quimby looked around and asked herself, "Why did I do this?" She felt lonely and missed Maine, Burt's Bees' previous home. Quimby had founded and built Burt's Bees, a manufacturer of beeswax-based personal care products and handmade crafts, in central Maine and wasn’t convinced she shouldn't move it back there. She explained:

“When we got to North Carolina, we were totally alone. I realized how much of the business existed in the minds of the Maine employees. There, everyone had their mark on the process. That was all lost when we left Maine in 1994. I just kept thinking 'Why did I move Burt's Bees?' I thought I would pick the company up and move it and everything would be the same. Nothing was the same except that I was still working 20-hour days.”

Quimby had profound doubts about this move to North Carolina and was seriously considering moving back to Maine. She needed to make a decision quickly because Burt's Bees was in the process of hiring new employees and purchasing a great deal of manufacturing equipment. If she pulled out now, losses could be minimized and she could hire back each of the 44 employees she had left back in Maine, since none of them had found new jobs yet. On the other hand, it would be hard to ignore all the reasons she had decided to leave Maine in the first place. If she moved Burt's Bees back, she would face the same problems that inspired this move. In Maine, Burt's Bees would probably never grow over $3 million in sales, and Quimby felt it had potential for much more.”

The difference between an idea and an opportunity

An opportunity consists of a market, timing, resources, networks and an idea. An idea is a component, or part, of an opportunity. An idea is of academic interest only when, judged in isolation and is inert, until combined with the other factors to create an opportunity.

Idea creation is the entrepreneur’s first step to realizing a favourable opportunity. An idea needn't be owned by the entrepreneur and could be regarded as a tool. It could be licensed from another company or establishment. An idea must interact with other components to create an opportunity, but many ideas need to assessed till the right one is chosen to become part of an opportunity. It might be a great innovation or may simply be a more effective way of doing something. Insight or exploration may generate an idea or it may be accidentally stumbled upon.

Opportunity construction is the next step in the entrepreneurial process where the idea is positioned in the real world. The idea is combined with marketing and economic factors to form the opportunity and to determine the likelihood that a gap between market needs and wants can be filled. A real need in the market must be satisfied or created and the timing should be right. An opportunity should add value for the buyer and both profit and growth potentials should be high for the entrepreneur.

It could be argued that opportunities, the real world viability of ideas, are more important than the ideas themselves.

What can be learned from the case study?

Five facts can be learned from the case study, in comparing Burt's Bees with other companies in the same industry. Investment, market share, sales per employee, value added and wages are all very different between Burt's Bees and the industry average.

Investment by Burt's Bees is significantly lower than the industry average of $13,898 per production worker. This is evident in the company's description of un-automated processes.

Market share for Burt's Bees is only 0.015% of the total toilet preparation industry. This should not attract the major market player's attention to compete.

Sales per employee for Burt's Bees’ 44 workers is only 21% of the industry average.

Value added per Burt's Bees' production workers is significantly less than the industry average of $377,541 per production worker due to no investment in automation and an unproductive, unskilled workforce - as described in the case study.

Wages for Burt's Bees' production workers are less than half the $10.93 per hour average for the industry.

Other information could be derived from the case study, but not with certainty. Assets cannot be compared because it's not known if Burt's Bees leases or has bought, for example, vehicles for the sales representatives. Additionally, the ratio of production to non-production workers can't be compared as the number of sales representatives for Burt’s Bees is not stated in the case study. It's anticipated that there are proportionately less non-production workers at Burt's Bees than the average for the industry.

Why has the company succeed so far?

The company success is due to the company's uniqueness, Roxanne's qualities, her family, marketing and resource management.

The facts given within the case study show that Burt's Bees is very different from other companies within the industry. The company's financial strategy creates a competitive advantage against similar sized companies.

Roxanne brings many desirable qualities to the company, acquired through her unforgiving background and because of her character. Roxanne worked hard throughout her childhood in small independent ventures to raise money for college and afterwards, prior to forming Burt's Bees. According to Roxanne, "I liked buying and selling things well, adding value. Loved [the] freedom of starting a business, of not knowing how it would turn out.”

The interaction between the family, Roxanne and Burt, and Burt's Bees is favourable to the company. The family's need for liquidity is low and profits have been retained within the company. There is no conflict between the family and the business, and Burt's readiness in agreeing with Roxanne to relocate from Maine to North Carolina demonstrates an ability to adapt to the changing requirements of the business and shows that the couple share the same perspectives. Roxanne says about Burt that, "he's my main sounding board and [he] gives me a lot of moral and psychological support ... there's never been a conflict between us."

Burt's Bees' marketing of the product contributes to the success of the company. Being first in the market and positioning the new product in an un-served market niche helps. Roxanne knows her customers and that there are consumers living in urban areas who have "an unconscious desire for more simplicity and our products speak to that need." The product line was expanded to include other hand made crafts and beeswax products like lip balm to appeal to the same market niche.

Resources are carefully controlled by the company. A bootstrapping approach is used to finance the company from retained profits. This means that the company has no debts and actually refuses to sell products to retailers who don't pay their bills within thirty days. The resources of the North Carolina Commerce Department were used to identify new premises on favourable terms. During the growth of Burt's Bees, the minimal amount of resources is used at each stage. New employees are hired only when sales increase. Household kitchen appliances are used to manufacture the product and, without a telephone, messages were received from a local health food store. Roxanne's willingness to sleep in the back of a truck at trade shows, the rental of the derelict school house as a factory and low production worker wages are further examples of the efficient use of resources. According to Roxanne, "Since the beginning of Burt's Bees, the company had never once dipped into the red, had always turned in a profit and it's profits had always increased.”

What should Roxanne and Burt do now?

Roxanne and Burt have three options. They can sell the business, return to Maine or remain in North Carolina. They should remain in North Carolina, as explained below.

Sell the business
Roxanne does not want to be at Burt's Bees forever and has other ambitions to fulfil, like living in India. Burt's Bees will be sold by Roxanne and Burt at some time in its business cycle. Now would not be the best time because the company continues to grow rapidly and it's foreseeable that revenues could be more than ten times their current levels if the business is allowed to grow. The company has no tangible assets and the only asset is intangible 'goodwill'. The company could be currently sold to a willing buyer for, say, a few million dollars. However, with the company's continued growth, it could be sold for several tens of millions of dollars within a few years. It is not advisable to harvest the business at this moment in time.

Return to Maine
The production workers at Maine have a good attitude. Yet, they are unskilled and this, combined with no automation, creates the low productivity in comparison to the industry average. Roxanne spent most of her time alongside the production workers to give supervision and to supplement the workforce. This left no time for Roxanne to focus on broad management issues. New management could not be attracted to the Maine environment. The production facility could hardly meet current demand and sales were determined by the limited production capacity. The Maine facility incurs high transportation and payroll taxes. It is not wise to retum to Maine, where company growth would be difficult and Roxanne would be frustrated.

Remain in North Carolina
Burt's Bees remaining in North Carolina is the only alternative that allows the company to grow, realize its full potential and become ready for harvesting for a price which is fair to Roxanne and Burt. Transportation costs and payroll taxes are lower in North Carolina than in Maine. The location is more attractive to hire a management team to support Roxanne. This would release her to consider broad management issues, rather than involve herself in direct supervision of the production workers. Operations in North Carolina require a change in production methods from manual to automated manufacture. This is necessary to control labour costs and to ensure that future revenue is not limited by the means of production, as it was in Maine. A large percentage of the country's population lives within a twelve hour drive from the North Carolina plant and this places Burt's Bees closer to the majority of its customer base. Additionally, there is a greater supply of labour in North Carolina that is skilled. Although more expensive on a wages per hour basis, it is expected that productivity gains, by using skilled workers, will more than offset the higher hourly wages.

NEW ASIAN VENTURE BRIEF

A new venture is proposed for the sale of Asian artefacts through conventional high street retailing and export to Australia, North America and Europe. Typical products include hand carved furniture and ornaments from Indonesia and pottery from China. A market is already established and the new venture has a competitive advantage by using targeted marketing and a low rental outlet. There are competitive, technical and financial risks involved and strategies are required to be developed to reduce the impact of these risks. Supplier relationships need to be developed and a shop layout is required. A business plan needs to be created with monthly and quarterly budgets.

Market assessment

There is a market of Caucasian customers who purchase Asian artefacts whilst on vacation, or residing, in the South East Asia region. The Singapore market is currently served by very small souvenir shops or medium sized retailers located in prime, but expensive, shopping locations. Passing trade accounts for most of the business. A majority of the medium sized businesses have ceased trading and have closed in the previous two years. This is a result of lower revenues caused by less travellers to the region recently and the migration of expatriates to their home countries during the recession. Continually high shop rental prices accelerated closure of the medium sized businesses. The new venture will be located outside of expensive shopping areas and will compensate for lower passing trade by attracting customers to the outlet through specialized marketing at tourist hotels events and expatriate residential areas. The economic and highly available Singapore transport system is an attribute. Additionally, export of goods via the Internet, using international courier, will complement over-the-counter shop sales. The local market will expand over the next three years of the economic cycle from it's current trough.

Risk determination

The competitive risks of the new venture are that medium sized retailers will return to the market in prime shopping locations and now use Internet technology for export of their goods.

The technical risks involve the compromise between high shop rental and passing trade, import/export procedures, inventory range/value, web site structure/maintenance and payment mechanisms.

The financial risks are commitments to fixed rental payments for a period, inventory investment, supplier reliability, customer receivables and assured revenues.

Production planning

Agreements need to be signed with up to six suppliers in ASEAN countries. The contracts are to cover logistics, product ranges, import/export procedures, scheduling, payment, cancellations, defaults, quality, agreement enforcement and contract termination.

The new venture shop layout and telecommunication methodology need to be defined to support both the local and international aspects of the business. A register of non-current assets needs to be created to help cost estimation.

Advice and guidance need to be sought from acquaintances in non-competing, but similar, existing businesses.

Cost estimation

A business plan needs be created to provide a good estimate of initial costs, expenses and projected revenues for the new enterprise. The anticipated fixed costs are shop rental, fixtures, fittings, utilities, minimum inventory, minimum staff, telecommunications, computer hardware and software. Variable costs are expected to be turned-over inventory, shipping, marketing and additional staff. Monthly budgets need to be created for the first twelve months, followed by quarterly budgets for the next two years.

Feasibility evaluation

Finally, the above mentioned risks to the success of the new venture are required to be analyzed to determine how they could be managed and controlled. Strategies to reduce the impact of competitive, technical and financial risks to the business need to be formulated. An opportunity screening task is required to be done for the proposed business before the decision is made whether or not to proceed with the venture.

References

Timmons, J.A. Spinelli, S. 2003, New Venture Creation, Mc Graw Hill 2003

I originally wrote this article, “Strategic management” in April 2004.

SUMMARY

A business strategy is to be implemented for Élan Boats using an implementation framework. My prior work identified the strengths, weaknesses, opportunities and threats facing Élan. These analyses were previously summarized to enable strategic options to be considered for the implementation of the chosen business strategy.

Three strategies were previously identified for Élan using the BCG growth-share matrix, KSF, Porter's five forces, driving force analysis, SWOT analysis, value chain and industry evolution approaches and the firm is identified as falling into one of three strategic groups. The three strategic options of divestiture, the original strategy and a growth strategy are evaluated and a growth strategy is formulated to have 6 sustainable competitive advantages in addition to the strategic asset of the American Skier model. The long-term and short-term objectives of the firm are identified and converted into functional strategies for implementation. Detailed tasks are constructed to implement the strategy and six performance measures are assigned measurements for evaluating the success of Élan's implementation of the growth strategy. Incentives for the successful future growth of Élan are presented and potential barriers to implementation are identified.

Summarizing the conclusions and recommendations for Élan, using the growth strategy:

(1) Change company funding from debt-finance to equity-finance and remove liquidity concerns, plus provide working capital for growth.

(2) Increase annual revenue growth forecast from 20% to 60% to aim for market leadership within a decade.

(3) Implement customer relationship management and focus growth strategy at 2^nd and 3^rd largest customer base in the U.S., i.e. California and Florida.

(4) Match (or even better) constant innovation record of market leaders with release of innovative product designs in 2003, 2006 and 2009.

(5) Increase manufacturing cost efficiency through value engineering, alternative material sources and changes to direct labour compensation package to increase gross margin from 29.6 to 40%.

(6) Reduce overheads (office and management payroll, sales consulting, advertising, marketing, professional fees) to increase net profit from 1 - 5% to 10%) and exploit market leaders' high overhead weakness in mature market.

STRATEGY FORMULATION

Important drivers were previously identified for use in formulating a strategy for Élan Boats. The firm is within one of three strategic groups within the industry and three business strategies are considered for Élan.

Divestiture strategy
This strategy would involve the owners in selling the business to a competitor or new entrant and is supported by the BCG growth-share matrix approach, KSF approach and Porter's five forces approach. The BCG model places the firm in the low-growth and low share quadrant of the matrix. It identifies Élan as a cash trap, because it will be perpetually absorbing cash, and a candidate for divestiture. The KSF approach shows that Élan lacks most of the key success factors for the industry and which are possessed by the market leaders, i.e. economies of scale, constant innovation record, large dealership network and customer loyalty. Porter's five forces model illustrates the industry as having a low profitability potential for Élan. Buyers have high bargaining power with a choice of 14 boat builders. The best engine maker is locked into the market leaders, whose three firms dominate two-thirds of the oligopoly market.

Current strategy
The current strategy is not supported by SWOT analysis, value chain or industry evolution approaches. The SWOT analysis shows that Élan has the critical weaknesses of projected low profitability/liquidity/market share and major threats of customer loyalty to the market leaders and a mature inboard runabout boat market. The value chain analysis reveals that the primary activities of operations, outbound logistics and marketing in Élan's current strategy are not those of a potential market leader. The industry evolution approach places the inboard runabout boat industry at the mature stage of its life cycle and Élan's high variable costs and large product range are not supported by this approach.

Growth strategy
A growth strategy removes the conflicts between the objectives within the firm's current strategy. The modified objectives support Élan's current mission statement. The current strategy does not support Ben Favret' s goal to be the "true market leader in profitability, quality, manufacturing cost efficiency and eventually sales", as quoted by Nairn and Strickland (2003:179). Élan's current business plan, using 20% revenue growth, would place the firm only mid-position in the 14 inboard runabout boat manufacturer's market share league table in a decade's time. A growth strategy places Élan as a market leader in a decade. The fixed and variable costs within the business plan for the firm's current strategy also do not support Ben Favret's vision. A growth strategy, incorporating changes to the current strategy's profitability and cost efficiencies, closes the gaps and re-aligns the firm’s objectives to support the mission statement or vision.

CORPORATE STRATEGY, SCA

There are three strategic groups in the inboard runabout boat industry, i.e. market leaders, U.S. National Championships qualified towboat manufacturers, and the remaining nine firms. Élan and Infinity form the strategic group of being U.S. National Championships qualified towboat manufacturers but not being a market leader. Under the firm's current strategy, its only competitive advantage that is substantial, sustainable and supported is that it is a qualified towboat manufacturer for the U.S. National Championships. The growth strategy removes many of the firm's weaknesses, reduces competitor strengths and exploits competitor weaknesses. The growth strategy increases the number of sustainable competitive advantages to support Élan's vision, which may be expressed as,

To supply inboard runabout boats directly to water sports enthusiasts primarily in the Gulf Coast region, bypassing boat retailers. Élan will eventually be the market leader, through business efficiencies and superior customer support.

The growth strategy supplements,

SCA 1 U.S. National Championships qualified boat manufacturer (current strategy)

with,

SCA 2 Market leadership position
SCA 3 High product quality, performance and superior customer service
SCA 4 Constant innovation
SCA 5 Financial stability of the company
SCA 6 High manufacturing cost efficiency
SCA 7 Low overheads

LONG-TERM OBJECTIVES

Of the six new SCAs associated with the growth strategy, three are long-term and three are short-term.

SCA 2 Market leadership position
Market leadership provides many benefits such as; price setting (as opposed to price taking), economies of scale, greater customer awareness and preferential supplier terms. Ben Favret's vision is to be market leader … eventually. Élan's current business plan shows a 20% annual revenue growth rate, inferring a market leadership position (with sales equal to MasterCraft and Malibu) about 25 years in the future. Although achievable, this growth exposes Élan to the penalties of being a minor player in the industry for a quarter-century. The growth strategy reduces this exposure to a decade by using a 60% annual revenue growth model. By this method, Élan have sales comparable to MasterCraft and Malibu in 2011. This assumes that the mature market size remains as that detailed in exhibit 10 of Nairn and Strickland (2003:171).

SCA 3 High product quality, performance and superior customer service
"Price and quality are the most important factors in brand selection", according to Nairn and Strickland (2003:160) and Ben Favret states that inboard runabout boat customers are currently dissatisfied with overpriced boats that under perform from competitors who do a poor job of servicing customers. “American Performance Marine had been building its American Skier models “to the highest possible standards" since 1975, earning a reputation for high quality, exceptional product performance, and cutting edge innovation", notes Nairn and Strickland (2003:178). A reputation for high product quality is a component of the growth strategy but Ben Favret changed the company name to Élan in 2000 and can no longer rely upon the past good quality reputation of American Performance Marine. Reputations take years to obtain, but only weeks to destroy. This long-term objective involves Élan implementing a company quality assurance programme from marketing, sales, procurement, testing, delivery and customer service. Of particular importance are every point in the chain where there is a customer contact e.g. boat show marketing, factory tour, demonstration, warranty work, customer complaint. The customer must be delighted with the service they receive from Élan for the firm to earn a reputation for high product and service quality.

SCA 4 Constant innovation
To become a market leader, Élan needs to match (and even better) the innovative reputations of the current market leaders, who use innovation to differentiate their products, in response to customer needs, e.g. swim platform (1972), triple fins (1984), EFl engines (1990) and specialty wakeboard boat (1997). The long-term objective is for Élan to introduce substantial product innovations every 3 years.

SHORT-TERM OBJECTIVES

SCA 5 Financial stability of the company
The growth strategy relies upon Élan being financially secure in the immediate future. The current business plan causes immediate liquidity concerns from the start up of the company because the inventory on hand cannot be converted into cash quickly. The current strategy would have allowed the company's liquid assets to be insufficient to cover the current liabilities, which are predominantly an operating loan and trade creditors. The growth strategy needs Élan to change from being a debt-financed business to being equity financed. This could be through employee/owner stock ownership or stock ownership by an outside institution. The market capitalization needs to be enough to provide sufficient working capital to fund the 60% annual revenue expansion of the growth strategy.

SCA 6 High manufacturing cost efficiency
A high efficiency in the cost of manufacturing is a key objective in the growth strategy and is an integral part of Ben Favret's vision to be the "true market leader in profitability, quality, manufacturing cost efficiency...", as stated earlier. The manufacturing efficiency in the current strategy would lead to gross margins of 29.6%, as shown in Nairn and Strickland's (2003:181) income statement for the firm. The growth strategy requires Élan to align with Ben's vision of high manufacturing cost efficiency by increasing the gross margin to 40%. A value engineering analysis will prioritize where material costs can be reduced and labour efficiency increased with greatest impact on manufacturing efficiency.

SCA 7 Low overheads
Ben Favret assesses the market leader as having very high overheads due to it's large production facility. Élan's growth strategy exploits this competitor's disadvantage, in a mature market, especially when sales momentarily decline - effectively increasing the fixed cost component in the market leader's total boat cost. However, Élan's current fixed costs are a weakness and give rise to a meagre 1% to 5% net profit. The growth strategy requires this to be 10% through reductions in; office and management payroll, sales consulting, advertising, marketing, professional fees and miscellaneous expenses.

FUNCTIONAL STRATEGIES

The six additional SCAs, discussed above, fall into the three functional areas of Customer, Finance, and Internal.

Customer
Acquiring and retaining customers, to build strong relationships with, is difficult in the inboard runabout boat industry for a new entrant like Élan. Porter's five forces model identifies the customer as having loyalty to the market leaders and a high bargaining power because of the 14 competing firms in a mature market. The rivalry amongst existing firms is intense because the market leaders aggressively compete to attract customers to maintain their economies of scale. Élan's vision, through the growth strategy, is to supply inboard runabout boats directly to water sports enthusiasts primarily in the Gulf Coast region, bypassing boat retailers and providing superior customer support. This customer functional strategy may, at first glance, appear incorrect as it does not incorporate the distribution and marketing key success factors of the market leaders and raises the issues of regional marketing, direct sales and customer support. Nairn and Strickland (2003:155) identify California and Florida as having the 2^nd and 3^rd largest concentration of registered boats in the U.S., inferring that a marketing campaign in this region alone has the highest potential to realize the greatest return on marketing expenditure. Nairn and Strickland (2003:160) also identify that less than 5% of boat sales are initiated by dealerships, whereas almost 60% of sales are from boat shows. Finally, a regionally based marketing initiative ensures close proximity of customers, who increase the potential for superior customer service in this regional market segment

Finance
The success of Élan hinges on the firm achieving a market leadership position within a definite time period of (say) a decade. A substantial amount of working capital is required to finance this growth because increased expenditures are incurred ahead of increased revenues. The firm's assets are tied up in illiquid WIP and inventory (until a sale is realized), yet Élan's current strategy would rely upon debt financing, which gives rise to very liquid liabilities. For this reason, the finance functional strategy (to support growth) requires Ben Favret and any other investors to relinquish a share of their ownership in return for equity financing to give liquidity to the firm. Alternatively, Ben Favret could match his enthusiasm for Élan's success with a greater investment, thus avoiding dilution of his equity in the company.

Internal
The internal functional strategy can be subdivided into strategies for the sub-functions of administration, customer service, engineering and production.

Administrative expenses, according to the current business plan, erode the net income to 1 or 5%. This provides no significant buffer to prevent Élan from operating at a loss and gives no retained earnings for re-investment. Management payroll, sales consulting, advertising, marketing, professional fees and miscellaneous expenses are potential items for savings to be realized and to enable a net income of 10% to be achieved.

Customer service is an area where Ben Favret says that Élan's competitors are failing. A customer relationship management (CRM) programme would enhance the firm's opportunity to provide superior service by creating customer profiles and ensuring that every customer experience with Élan is a good one.

Value engineering and activity based cost analysis of the American Skier model will identify those materials and design features that can be changed to improve manufacturing efficiency. Additionally, product innovation is an ongoing process that should result in substantially new and innovative design features being brought to market every three years.

Production at Élan gives rise to a gross margin of 29.6%. This margin doesn't give a sufficient contribution to fixed costs and production techniques, labour efficiency, compensation levels need to be changed to raise the gross margin to 40%.

TASKS / ACTIVITIES

The most important part of the growth strategy is it's implementation. Whist the strategy may be expertly formulated, it may fail if not correctly implemented. Having formulated the growth strategy, set long-term and short-term objectives and grouped them into manageable functional strategies, the strategy is actually executed at the task/activity level.

PERFORMANCE MEASURES

Measurement of how well the firm manages to implement the growth strategy can drive the behaviour of Élan's team. Six key performance indicators are derived to measure the success of Élan in sustaining their competitive advantages.

Balanced scorecard position of key performance indicators
Market leadership position - 60% annual sales growth
High product quality - 1% warranty work as a percentage of sales
Constant innovation - 3 years between new product release
Financial stability - liquidity ratio of 1.0
Manufacturing efficiency - 40% gross profit margin
Low overheads - 10% net profit margin

The above scorecard is shown with the KPls in a balanced position. However, many relationships exist between the 6 SCAs and Élan need to be careful that improvements in one performance are not at the expense of another performance. Lower overheads can be obtained by decreased advertising, which may jeopardize the market leadership goal. Superlative quality may be achieved by increased direct labour hours, which would reduce manufacturing efficiency. There are many relationships between the 6 sustainable competitive advantages.

REWARDS / INCENTIVES

A common choice faced by all new businesses is whether to grow the company or not to grow the company. The basic problem with Élan's original strategy is a conflict between the owner's enthusiasm/vision for growth and the bare facts contained in the business plan, SWOT analysis, competitive forces analysis, etc. The business plan shows insufficient working capital for real growth and substantial operating expenses. The only way for a new business to be allowed to substantially grow is for the owners to accept growth in the market value of the business at the expense of immediate personal payroll withdrawals and for the company to be financed through equity shares. The employees of Élan may be offered alternative compensation packages, with lower payroll amounts compensated by stock options. "One characteristic that distinguished Malibu from it's competitors was its employee stock ownership programme", states Nairn and Strickland (2003:176).

POTENTIAL BARRIERS TO IMPLEMENTATION

There are two major potential barriers to implementation of the growth strategy and these are concerned with financing the business and manufacturing efficiency.

Financing the business
As previously discussed, the success of the growth strategy relies upon being able to change the way that Élan is funded, from being debt financed to being equity financed. To allow this to happen, and to make market leadership a possibility, the current owners have to relinquish a large proportion their share in the company to private individual stockholders or to a funding institution to raise the market capitalization required. The growth strategy is only executable if the owners are agreeable to this action. Additionally, the working capital required to meet the market leadership goal is substantial and the growth strategy is only viable if sufficient shareholders provide enough total shareholder capital.

Manufacturing efficiency
Nairn and Strickland (2003:178) state that American Performance Marine was poorly managed and had high manufacturing costs. The firm had been manufacturing the American Skier model for 25 years, since 1975, and obviously had much know-how and the firm had travelled a long way along the experience curve. It's assumed that the original workforce is retained by Élan in the company purchase and, therefore, its difficult for labour efficiency to be increased, unless fundamentally different ways of boat manufacture can be adopted, before the economies of scale are realized. This leaves Élan with the problem of developing new manufacturing techniques, reducing compensation or reducing material costs. Compared with the market leaders, Élan's material purchases are very small and further discounts would be difficult to obtain. Difficulty in increasing manufacturing efficiency is a major potential barrier to implementation of the growth strategy.

REFERENCES

Nairn, F. & Strikland, A.J. 2003, 'Élan and the competition ski boat industry', in Thompson & Strickland (Eds) Strategic Management Concepts and Cases, 13th edn., New York: McGraw-Hill pp. C-153 - C-183.

I originally wrote this article, “SWOT analysis” in February 2004.

SUMMARY

A case study by Nairn and Strickland (2003) of the Élan Boat Company is used to identify the strengths and weaknesses of the company and the opportunities and threats within the external environment of the company. According to Nairn and Strickland,

“Ben Favret, professional water-skier, World Champion, V.S. Champion, and Pro-Tour champion, was resting on the dock after a slalom training run one afternoon when a call came through on his cell phone. Jay Blossman, his high school tennis partner and now politician, was on the other end. Out of the blue, Jay announced to Ben that he was buying American Skier, the competition ski boat company owned by financially troubled American Performance Marine. Ben instantly knew that Jay had found himself a great boat and suspected that he was getting a great deal in buying the company, but he also realized that while Jay was an excellent tennis player, Jay lacked the necessary insider knowledge about building, marketing, and selling ski boats. Excited and eager to be involved in this rare opportunity, Ben was on the next flight to New Orleans to meet Jay and look into the situation.

As Ben took the tour of the American Performance Marine plant in Kentwood, Louisiana, he learned that the company had recently filed for bankruptcy. Ben concluded that with his firsthand knowledge of the waterskiing industry and the boatbuilding capabilities that lay before him in the Kentwood plant, he and Jay ought to be able to resurrect the ailing company. With all the enthusiasm and high hopes of an entrepreneur entering the industry of a sport he loves, Ben Favret dove headfirst into building ski boats. In keeping with this excitement and attitude, Ben renamed the company Élan Boats. The word Élan means ‘vigorous spirit and enthusiasm‘.”

The purpose of this report is to identify the firm's key capabilities and trends within the macro environment to develop a clear strategy for the Élan Boat Company.

The Basic Design School Model is the strategic framework for the analysis. External and internal appraisals are carried out. Key success factors within the external environment and the distinctive competencies of Élan are identified.

Opportunities exist for Élan if water sports receive greater publicity and because the profitability and customer service of the market leaders is unsatisfactory. . The success of the company is threatened by a declining market (which is highly cyclical), the competition's established dealer networks, a poor powered watercraft safety record and suppliers locked into the industry leaders.

Élan's strengths are it's brand names of 'American Skier' and 'Ben Favret'. The company's weaknesses are its projected profitability and liquidity.

The seven conclusions and recommendations of this report are:

(1) Consider changing the position of the new plant, in 2004, from Covington to a location within the Great Lakes area, where demand is highest.

(2) Investigate rationalization of the company's product range with a view to reducing the product line from eight to one, two or three variants.

(3) Raise manufacturing efficiency and lower overhead costs to increase gross margins from 30% to 40% and net profit from between 1% and 5% to 10%.

(4) Increase the liquidity of the company to allow for depressed sales until an economic upturn in the U.S. economy.

(5) Reconsider the company's distribution channel philosophy of selling directly to customers without a dealer network.

(6) Develop a close supplier relationship with a top engine manufacturer who has both good performance and customer service records.

(7) Continue to associate Élan with safety, and actively promote activities which improve the safety of Élan's customers.

STRATEGIC FRAMEWORK

There are many schools of strategic management thought and they can be grouped as being either Prescriptive or Descriptive. Within the Prescriptive Group are the Design School, Planning School and Positioning School. Mintzberg (1990:112) illustrates the Design School Model, and (applied to Élan Boats) it can be described as having eleven
components, and these are briefly described below.

External appraisal
An examination of the external elements will influence Élan's strategy options. This involves investigating customers, competitors, market and the environment. Where the environment is political, economic, society, technology and ecology considerations.

Threats and opportunities in the environment
The external appraisal will reveal the opportunities that Élan can exploit and the threats it faces. Opportunities can be regarded as positive trends and threats are negative trends.

Key success factors
Key success factors are competitive assets or competences that Élan need to compete successfully in the power boat industry. An absence of strategic necessities would be a
weakness and possession of strategic strengths will give advantage to Élan.

Internal appraisal
An examination of Élan's employees' skills, resources, innovations and financial position will disclose how the company may be constrained by it's capabilities and resources.

Strengths and weaknesses of the organization
Any activities that Élan does well will be identified as strengths from the internal appraisal. Any lack of resources or activities that Élan does not do well will be identified as weaknesses.

Distinctive competencies or assets
Distinctive competencies are the activities that Élan does exceptionally well. It's strategic assets are brand names or customer base that is strong, relative to Élan's competitors.

Social responsibility
Social responsibility is Élan's obligation, beyond that required by the law and economics, to pursue long-term goals that are good for society.

Managerial values
These describe how the company's managers establish, promote and practice Élan's values. The building of team spirit, influencing marketing efforts, shaping of employee behaviour and guidance for managerial decisions and actions are examples of the main purposes of managerial values.

Creation of strategy
Strategic alternative strategies need to be developed for Élan Boat Company for evaluation. These strategies should take advantage of environmental opportunities and exploit the company's strengths.

Evaluation and choice of strategy
Some of the criteria used for selection of a strategy from alternatives are scenario consideration, sustainable competitive advantage pursuit, organizational vision and objectives consistency, feasibility and their relationship to the other strategies of Élan.

Implementation of strategy
For Élan to succeed, the chosen strategy must be implemented and this involves
converting strategic alternatives into an operating plan.

KEY ISSUES

Current strategy
According to Nairn and Strickland (2003: 178), Favret and Blossman have the following mission statement for the new company, Élan:

"The mission of Élan Boats is to be hyper efficient in the manufacturing and marketing of Inboard Runabout Boats for recreational and competitive water sports enthusiasts. Élan Boats is dedicated to building long-term relationships with customers through superior training and customer support. We will do business consistent with the definition of the company's name. Élan - vigorous spirit of enthusiasm. Synonyms: Style, Confidence, Flair, Elegance, Flamboyance."

Additionally, Ben believes that an offensive attack on the major competitors is the best option and that Élan was "gunning for, and will take down MasterCraft, Correct Craft and Malibu". Nairn and Strickland (2003:179) quote Ben as wanting Élan to be the "true market leader in profitability, quality, manufacturing cost efficiency and, eventually sales."

Identification of Key Success Factors
A cost advantage, through cost efficiency, would be a strategic strength to any power boat manufacturer and Nairn and Strickland (2003:179) state that none of the industry leaders were particularly cost-efficient. A boat builder who was superior at servicing their customers would also have a strategic strength. A strategic necessity is effective promotion.

Current performance assessment
Nairn and Strickland (2003:180) report that, as of 2000, Élan Boats had 30 clients. According to the FAQ page of Élan's website, the company has spent thousands of hours and dollars reconditioning their moulds, updating their facility and equipment. The FAQ page also quotes Ben Favret as saying, "getting boats built for factory demos and dealer sales was our first problem. We had to fully hire, train and manage an entirely new production team. That combined with dealing with vendors who were sceptical slowed us down this year. Our production was backed up through August and now we have caught up. That hurt because we could not make a strong sales effort this summer. Our Team Élan members have been very helpful in working with us to do demos and let other people experience our boats."

Financial review
Naim and Strickland (2003:179) quote Ben Favret as saying that he wanted Élan to be "the true market leader in profitability and manufacturing cost efficiency". Élan needs gross margins and net margins (after tax) in excess of 40 percent and 10 percent respectively, to achieve this. Acceptable liquidity is also required.

Industry stage and trends
The current stage of the power boat industry in it's half-century history and current trends amongst the 17 manufacturers will influence Élan's chances of success.

Market trends and segmentation
If the market is expanding and demand within Élan's targeted segment is buoyant then this would be favourable to the company.

Customer preferences
Élan and some of it's competitors have boat model features that are designed to cater for customer preferences for wake form and control. However, customer preferences are
not fixed and change over time.

Value chain
Nairn and Strickland (2003:179) report that "Élan planned to bypass boat retailers and sell directly to the end user". However, this strategy appears to have changed as the FAQ page of Élan's website, states that Élan are making their first run at setting up their dealer network now and completing the few remaining Team Élan openings.

HCA (Human Capital Assessment)
Ben Favret did not purchase American Performance Marine as a going concern and, therefore, did not acquire any human capital with the purchase. Nairn and Strickland (2003:178) note Ben’s thoughts that, because of his own connections in the industry, [he had] the ability to recruit top talent in manufacturing, sales, and marketing". This he subsequently did and the FAQ page states that he recruited; a general manager with 22 years expertise (Mary Travis), a sales and development manager with 17 years experience (Darren Landry), and a top fibreglass consultant (Rick Delone).

Distinctive competencies
Élan's distinctive competencies are mainly strategic assets as, when the case study was
written, the company had only been trading for 10 months. These strategic assets include the 'American Skier' and 'Ben Favret' brand names.

Competitor analysis
An analysis of competitors such as Mastercraft, Classic Craft, Malibu and Infinity will reveal their strengths and weaknesses.

ANALYSIS

A situation analysis is made using the external and internal analyses of Mintzberg's Design School Model. Condensed opportunities, threats, strengths and weaknesses are described.

Opportunities

Customer
(a) World Games include waterskiing and wakeboarding.
(b) ESPN X-Games and the Gravity Games include wakeboarding.
(c) Gravity Games drew 370,000 spectators and high TV ratings.
(d) New Cable Parks are a way to introduce potential new boat buyers.
(e) Gulf Coast customers targeted in Texas, Louisiana, Mississippi, Alabama.
(f) Better service, delivery, sales force efficiency with regional advertising.
(g) Élan plans to sell directly to the end user, bypassing boat retailers.
(h) Under marketed competition ski boat segment to be targeted.
(i) "Free week of ski school" to be offered to water skiers and wakeboarders.
(j) Élan had 30 customers in 2000 and projected 50, 60, 72 in '01, '02 '03.

Competitors
(a) MasterCraft has high overheads due to large facility, marketing, etc.
(b) Correct Craft sales fell 17.2% in 2000 due to poor marketing, competition.
(c) None of the industry leaders are particularly cost efficient.
(d) Leaders vulnerable to unhappy buyers, sliding profits, excess capacity.
(e) Ben wants Élan as market leader in profitability, quality, cost and sales.
(f) Élan will achieve cost advantage by revamping it's activity cost chain.
(g) Élan aim to offer a better boat than the competition at a lower price.
(h) Competitive offensive aimed at rivals who service customers poorly.
(i) Objective to win disenchanted customers with service oriented company.

Market
(a) U. S. is largest boating I water skiing nation in the world.
(b) Estimated that waterskiing interest will double if it becomes Olympic event.
(c) Boating industry held approximately 200 boat shows annually across U.S.

Environment
(a) International Water Ski Federation lobbying IOC hard.
(b) Cruise control and driver videotaping have allayed IOC's concerns.
(c) Waterskiing came very close to being included in the 2004 Athens Games.
(d) IWSF is now focusing it's sights on the 2008 Games in Beijing.
(e) Ben anticipates investing in a new facility in Covington Industrial Park.
(f) Team Élan launched to get qualification for Regional and National events.

Threats

Customer
(a) A 2001 sales decline would mean fewer people trading up in 2002 to 2005.
(b) Excessive customer dissatisfaction with overpriced/underperforming boats.

Competitors
(a) Technology and innovation accelerate in economic downturns.
(b) MasterCraft has exclusive Gravity Games towboat provider 3 yr. contract.
(c) Indmar has exclusive customization program with MasterCraft and Malibu.
(d) Indmar has private label with MasterCraft for electronic fuel ignition.
(e) Indmar has considerable name recognition and brand awareness.
(f) Indmar is visble at grassroots waterskiing competitions.
(g) Customer loyalty to MasterCraft, Malibu and Correct Craft is entry barrier.
(h) Three industry leaders have large dealer networks and scale economies.
(i) Three industry leaders have greater supplier bargaining power.

Market
(a) Waterskiing participation fell 18°J'o from 7.2 M in 1998 to 5.9 M in 2000.
(b) Motor boating and waterskiing are ranked 13th and 40th for participation.
(c) Boating industry suffers during periods of economic decline.
(d) Decline in recreational boater numbers accelerated in 2001.
(e) PWC sales fell 54°J'o from 200,000 in 1995 to 92,000 in 2001.

Environment
(a) Spare money is not used for boat-related expenses during recessions.
(b) Income restrained households will depress prices if opting out of boating.
(c) Waterskiing as an Olympic sport has been delayed over driver concerns.
(d) PWCs had a bad reputation with boaters & law enforcers from rowdiness.
(e) There were 83 fatalities associated with PWCs in 1997.
(f) There were 506 deaths and more than 11,000 injured in the last decade.
(g) PWC injuries are six times greater than motor boat injuries.
(h) Blunt trauma is the leading cause of PWC related deaths.
(i) Many new regulations are imposed on PWC use because of bad record.

Strengths

Brand/firm association
(a) Ben knew Jay had found a great boat and a great deal in buying company.
(b) Company had been building to highest possible standards since 1975.
(c) Company had earned a reputation for quality, product perf. and innovation.

Relative cost
(a) Company purchased at low price, giving low overheads and no debts.
(b) Élan Boat company was started with a low capital expenditure.
(c) Inherited R&D, shaping and mold design can cost in excess of $400,000.

Innovation
(a) American Skier is over 600 Ibs. lighter than any other boat on the water.

Management capability
(a) Ben Favret is excited and eager to be involved in this rare opportunity.
(b) Ben Favret has first hand knowledge of the waterskiing industry.
(c) The Kentwood plant is already constructed with boatbuilding facilities.
(d) Ben has entrepreneur enthusiasm entering industry of the sport he loves.
(e) Ben renamed the company Élan, meaning vigorous spirit and enthusiasm.
(f) Ben is a professional water skier and World, US, and Pro-Tour Champion.
(g) Jay Blossman is a politician and high school tennis partner of Ben Favret.
(h) Ben has the ability to recruit top talent in manufacturing, sales, marketing.
(i) Ben will make history as the first professional skier to buy a boat company.
(j) Élan's facility in Kentwood had capacity for 150 units a year.

Weaknesses

Profitability
(a) Projected 1 % I 5°k after tax net income contradicts Élan's profitability goal.
(b) Projected 29.5% gross margin conflicts with Élan's profitability goal.
(c) Projected current ratios of 1.5, 1.7,2.1 give liquidity concerns.
(d) Projected acid test ratios of 0.6/ 0.66 for 2002/2003 cause for concern.
(e) Diminishing cash flow from operations too low to cover current liabilities.

Brand/firm association
(a) American Marine had been unfocused, poorly managed, undercapitalized.
(b) American Skier plant closed it's doors in Jan '01 and filed for bankruptcy.
(c) American Skier had high debt, high production costs, poor management.
(d) Élan prevented from strong sales effort because of backlog of work.

Management capability
(a) Jay Blossman lacks necessary insider knowledge about ski boat industry.
(b) Ben Favret fully hired, trained and managed entirely new production team.

Critical issues
The critical issues for the Élan Boat Company are:
(1) Long-term demand for personal watercraft is declining.
(2) American Skier and Ben Favret brand names are Élan's strategic assets.
(3) Élan's profitability and liquidity are cause for concern.
(4) The personal watercraft industry performance is highly cyclical.
(5) Competitors have established dealer networks.
(6) Suppliers have exclusive agreements with competitors.
(7) Poor safety and a bad user reputation influence PWC demand.

CONCLUSIONS AND RECOMMENDATIONS

Élan Boat Company is operating in the U.S. PWC market that has been contracting since 1996. The Kentwood plant is not located within the highest demand area of this market. If the plant is to be relocated in 2004, as stated by Nairn and Strickland (2003:180), then a location within the Great Lakes area should be considered.

'American Skier' is the brand name that end-users recognize. It is doubtful as to whether Élan Boat Company benefits from having three varieties of this model and five more boat varieties in the Volante and Eagle ranges. The design, tooling, set-up and material costs for these eight product variations should be analyzed. This may reveal that Élan's product line should be reduced to between one, two or three product varieties.

Élan's profitability is at variance with it's mission statement and Ben's goal to be the "true market leader in profitability…” is not reflected in projected gross margins of 29.5% and net margins (after tax) of 1 % to 5%. These figures need to be a minimum of 40% and 10% respectively. This could be achieved by increasing manufacturing efficiency and reducing overheads. Élan's projected assets may cause liquidity problems as most are in the form of inventory and the cash flow from operations does not cover current liabilities. Inventory levels and the amount of working capital should be investigated.

The demand for personal water crafts, as luxury goods, is reduced when the U.S. economy is on the downside of the economic cycle. This means that Élan should have sufficient financial reserves to support the company until the economic upturn, and they should look at the sensitivity of Élan's finances to reduced sales during this period.

Nairn and Strickland (2003:179) state that "Élan planned to bypass boat retailers and sell directly to the end user." This would be done through advertising. Dealers are used to sell personal watercrafts because it is the type of product that potential customers prefer to see in reality so that they can touch it, sit in it and walk around it. It is recommended that Élan should re-appraise their distribution channel strategy.

Indmar is the most popular engine and this supplier, naturally, has created close relationships with the market leaders. As Élan had less than ¹/₆% of the competition ski boat market in the second quarter of 2001, according to Nairn and Strickland (2003:171), it is possible that the market leaders may not regard Élan as a serious threat and a supplier relationship between Élan and Indmar may be possible.

The poor historical safety associated with personal watercraft use influences sales. Élan promote safety on their main web page and offer ski schools. This is a good strategy and it is recommended that this should be built upon.

REFERENCES

'Frequently asked questions', Élan Boat Company. Retrieved: from http://www.elanboats .com/elanfaq.htm.

Mintzberg, H. 1990, ‘Strategy Formation - Schools of Thought', in J.W. Frederickson (ed) Perspectives on Strategic Management, Harper Business, New York.

Nairn, F. & Strickland, A.J. 2003, 'Élan and the competition ski boat industry', in Thompson & Strickland (Eds) Strategic Management Concepts and Cases, 13th edn, New York: McGraw-Hill pp. C-153 - C-183.

I originally wrote this article, “Managerial control” in July 2003.

A group of my friends have what you believe to be the opportunity of a lifetime.

They graduate this year and the father of one of my friends has asked two of them if they would like to buy the air-conditioning business he founded and operated for thirty years. It has been a very lucrative business for him; today he is a millionaire several times over. They are aware his firm is the leader in its field in their area and they see the possibility of expanding because many new homes are being built locally.

My friend's father will finance the buyout through a loan, to be paid off over the next ten years. Both of my friends have some degree of expertise in the heating and air-conditioning field since they have both worked for my friend’s father during university vacation times. My friend’s father has also agreed to be a consultant to the two of them for the first year or so if they need his advice.

The business has almost 60 well-qualified employees, a large inventory, 40 service trucks in excellent condition and a well established list of clients. At the same time the return on investment has been lower than average for the past three years, labour costs are very high, and the company has attracted only a few new clients during the past two years. In addition they have some indication that the firm is not carrying the most up-to-date heating or air conditioning equipment and the four large structures used to house showrooms and service centres are in need of refurbishment.

My friends are discussing the possibility of buying the firm. In considering the situation I reviewed the control forms and processes that I would use to ensure effective control over the operation.

I outlined the control issues and potential problems that I considered relevant to this case. I recommended control processes to be put into place to ensure the continued success of the business. Using my knowledge of the concepts and classification of controls, I applied these concepts of control to their particular situation.

The proposed purchase, by my friends, of the air-conditioning business raises many issues that are discussed. I've identified ten potential problems with the acquisition. Half of the potential problems are controllable and I propose four control process models to reduce the risk of business failure.

Issues

Organizational control of the air-conditioning business is required if my friends are to be successful in this venture. Daft (2003, p. 654) defines organizational control as the 'systematic process through which managers regulate organizational activities to make them consistent with expectations established in plans, targets and standards of performance.' The importance of control is evidenced by the fact that it is one of the four basic management functions - planning, organizing, leading, controlling, as explained by Robbins, Bergman, Stagg and Coulter (2003). Controlling is required throughout the depth of the organization (strategic, tactical and operational) and the breadth of the organization (financial, operations, information and people).

As part of the control process, they need systems to measure and compare actual performance. This will allow them to take corrective action if performance deviations are found. They should only control processes which will contribute to the success of their business. One method of selecting these particular processes is by resource-dependency, as described by Bartol (1997). The standards of the existing air-conditioning business need to be reviewed, amended and supplemented, where necessary.

Having established which of the business process performances are to be measured, my friends need to determine if measurement is to be through observation or reporting, i.e. statistical, oral or written. If they find deviations in performance against their standards then they may; take action to change the performance, alter the standard or they may choose to take no action. Depending on the business process, they should use feedback, feed-forward, concurrent control or a combination to match the application. Additionally, the results may be simply mechanically processed or may require subjective judgment.

Up to four managerial approaches to implementing controls are described by various authors. All sources include bureaucratic and clan (decentralized) control. Robbins, Bergman, Stagg and Coulter (2003, p. 558) add a third approach, described as 'market control', which uses external market mechanisms to establish standards in the system. Mullins (2002, p. 774) further identifies a fourth approach which he labels personal centralized control. This approach is found in small owner-managed organizations where decision-making and initiative are centralized around a leadership figure.

My friends need to study the managerial control style used by my friend's father. They should determine if this style is most appropriate to the operations and to the new leadership. Existing control systems and new control systems should be assessed to ensure that they have the right qualities. They also need to consider how the control systems could be misused, manipulated or be negatively viewed.

Ten potential problems

I’ve identified ten potential problems with the management of the air-conditioning business. The first five problems do not lend themselves readily to the application of control processes and they are; their inexperience, business purchase price evaluation, role of the current owner, financial loan terms and nepotism. The remaining five potential problems may be monitored through control processes and they are; inventory turnover, asset turnover, return on investment, profit margin and sales growth.

My friends have some experience in the heating and air-conditioning field, since they both worked for my friend's father during university vacation times. Whilst there are advantages of an early entry strategy into the business, Hodgetts and Kuratko (2001, p. 61) identify a disadvantage that normal mistakes tend to be viewed as incompetence in the successor. The problem centres around the ability of them to gain credibility with the firm's sixty existing employees. This is in contrast to a delayed entry strategy which would involve my friends in gaining experience outside of the business, prior to takeover. This would have the advantages of; self-confidence development outside the firm, credibility and acceptance through outside successes and a broader business perspective.

Establishing a mutually agreeable and fair purchase price with my friend's father for the air conditioning business is a potential problem. Assuming that all of the current personnel will remain, the major concerns are the inventory condition, state of other assets and quantifying the contribution of goodwill. The inventory is large and I have noticed that the firm is not carrying the most up-to-date heating or air-conditioning equipment. Storage costs for this equipment need to be considered and if the products are obsolete then they contribute minimal or no value in the inventory portion of the purchase price. The four large structures used to house showrooms and service centres are in need of refurbishment. The condition of these assets attracts significant maintenance expenditure, required within the immediate future of operating the new business, and this cost needs to be factored into the price. Quantifying the goodwill contribution to the purchase price is complicated by the fact that the company has attracted only a few new clients during the past two years.

My friend's father has agreed to be a consultant to my friends for the first year or so, if they need his advice. Despite the obvious advantages of such an arrangement, there are potential problems. Although my friends will be the owners of the new business, the presence of my friend's father could lead to management conflicts when the sixty existing employees naturally still see him as still being in control of the business. This situation could be further complicated if my friend's father previously used a personal centralized control technique. As company founder, with thirty years of experience, it would not be possible for my friends to emulate his previous style.

The terms of the financial loan need to be thoroughly investigated. Whilst the interest rate could be readily agreed upon, there are other factors of great importance to be formalized. The payment frequency, principal and interest apportioning, payment default definition, contractual terms and security all need to be negotiated.

Nepotism between my friends and my friend’s father is a delicate issue and a potential problem one friend.

As stated previously, the firm has a large amount of stock, due to low inventory turnover, and is not carrying the most up-to-date heating or air-conditioning equipment. The obsolete inventory is a burden, incurring storage costs, and reflects badly in the financial ratios of the business - if it is not already written off. They may inherit this stock if my friend's father insists on compensation for it within the business purchase price.

The four large structures used to house showrooms and service centres are in need of refurbishment. It's possible that this is a result of poor building maintenance planning. Alternatively, short-term cost savings may have been sought by avoiding building maintenance.

Return on investment for the business has been lower than average for the past three years. Labour costs are very high and the firm uses forty service trucks.

The final two potential problems are associated with the fact that the company has attracted only a few new clients during the past two years. If sales revenues are flat or declining then the ability to retain the sixty well-qualified employees, who incur very high labour costs, is in question if the profit margin on sales is to be an acceptable value. Additionally, a certain level of sales are required to achieve total asset turnover to compensate for the forty service trucks and the four large structures used to house showrooms and service centres.

Four control processes

Four processes should be implemented to control the latter five potential problems. The first two processes have the objective of testing the operations and they control inventory turnover and total asset turnover. The remaining two processes have the objective of monitoring profitability and they are profit margin and return on investment. The model of Robbins, Bergman, Stagg and Coulter (2003, p.567) is used to explain the four control processes.

Inventory turnover control process

The inventory turnover control process model is designed to make sure that all warehoused inventory is saleable. This is accomplished by setting an acceptable standard average time period, measured monthly, for all inventory. The average time assumes a standard deviation and may be adjusted so that all inventory remains within their technically and commercially useful life. Price reductions, writing off and scrapping are possible courses of action for obsolete items. The acceptance criteria may be increased if newer models are slower to reach the market and if shelf life permits.

Total asset turnover control process

Robbins, Bergman, Stagg and Coulter (2003, p. 623) identify that 'the fewer assets used to achieve a given level of sales, the more efficiently management is using the organization's total assets'. The main assets of the air-conditioning business are the four large structures used to house showrooms, service centres and the forty service trucks in excellent condition. If the total asset turnover ratio falls below an acceptance criteria then asset re-financing or disposal should be carried out.

Profit margin on sales control process

I initially estimate that the overall gross profit for the air conditioning business should be 40 percent and that the net profit margin should be 7 percent. If the profit margin on sales ratio falls below this standard then they should attempt to increase sales through increased promotion and advertising. Additionally, they may reduce business costs for either labour, materials or overheads.

Return on investment control process

I noticed that the return on investment for my friend's father's business has been lower than average for the past three years. They need to establish the cause for this and to remedy the situation. I propose that they set a standard for their return on investment, identify the cause for any under performance and take action to correct the performance. The control process model shows that they should reduce labour, material or overhead costs if the acceptance criteria is not met for the month. Additionally, the total asset costs should be reduced through re-financing or disposal.

List of references

Bartol, K.M., Martin, D.C., Tein, M. & Matthews, G. 1997, Management: A Pacific Rim Focus, 2nd edn, Sydney: McGraw-HiII pp.6SS-6S8

Daft, R.L. 2003, Management, South-Western, Mason, Ohio, U.S.

Hodgetts, R.M. & Kuratko, D.F. 2001, Effective Small Business Management, Harcourt College Publishers, Orlando, Florida, U.S.

Mullins, L.J. 2002, Management and Organizational Behaviour, Pearson, U.K.

Robbins, S.P., Bergman, R., Stagg, I. & Coulter, M. 2003, Management, Pearson, Australia.

I originally wrote this article, “Virtual team working” in June 2003.

Robbins et al (2003, p.4) define an organisation as being "a deliberate arrangement of people to accomplish some specific purpose." If the people working together within the organisation are separated by distance and/or time then the organisation type can be described as being 'virtual’. It is uncommon to find a fully virtual organisation. Virtual teams however, operating within an organisation, are commonplace and their growth in numbers raises many management issues.

Organisation

The virtual workplace has the potential to allow team members to be more effective by matching work times to when people are likely to be at their best. Greater efficiency can be realized by removing time wasted commuting to, and from, a traditional workplace.

Mintzberg's interpersonal, informational and decisional management roles within the virtual workplace may be very different to that of a traditional organisation. Anderson and Shane (2002) report that some virtual teams use shared leadership. They also suggest that having only one team leader can slow decision making. Knowledge management, as an informational role, is a key component of management in virtual organisations according to Witzel (2002).

When evaluating the technical, interpersonal and conceptual skills required for a successful virtual team, Adres (2002) quotes various researchers as stating that interpersonal skills are most important. This is because the lack of physical proximity between team members reduces the number of communication channels available and can lead to an increase in 'noise'.

It could be argued that contributions from Peters (1992) could be considered as worthy of being added to the works of recognized general administrative theorists like Henri Fayol and Max Weber in predicting that "information networks will be decisive to relative future competitiveness”. However, no, universally accepted approach is yet available for the management of the virtual workplace.

Taylor (2001) describes the challenges faced by labour unions in coping with fragmented labour markets in virtual workplaces and introduces the concept of 'e-picketing' by virtual workers as a new form of protest.

Globalisation is seen by Hagen (1999) and many other authors as being a major force in the rise of numbers of virtual workplaces. Workforce diversity is created by the employment of minorities and mobility-impaired people who may otherwise experience difficulties in being accepted by certain traditional organisations. Additional diversity is provided by the fact that people of different countries, nationalities, religion or culture may be part of the same virtual team.

There are certain dimensions of the successful virtual organisational culture that have common characteristics. High team orientation, low aggressiveness and high innovation and risk taking are important. Conner (2003) suggests that organisations will no doubt have to foster proactive employee behaviour in terms of selection, socialization and policies that encourage individual initiative.

External and internal environments

The interface between the external environment and a virtual organisation can be quite different from that of a traditional organisation. Many virtual organisations extensively utilize outsourcing, strategic alliances and similar partnerships to realize their goals, according to Fitzpatrick and Burke (2001). Walters and Buchanan (2001) believe that more cooperation among competitors, suppliers and customers makes it harder to determine where one company ends and another begins.

The proportion of U.S. workers employed in manufacturing has halved in the last thirty years and Konrad and Deckop (2001) attribute this decline to globalization. Virtual teams are a natural choice for geocentric organisations that break down the barriers of time, distance and national borders to execute projects.

Social responsibility and ethics

The classical view that management's only social responsibility is to maximize profits is exemplified by the virtual organisation, according to Conner (2003), who states that [virtual] "organisations are cutting cost and streamlining operations by reducing or eliminating the need for facilities, levels of management and work sites. This contrasts with the socioeconomic view of Businessline (2002), which argues that virtual organisations offer flexible working practices to mobility-impaired talent, women and minorities.

A consideration of ethics within the virtual workplace raises the issues of collective bargaining, communication, security and trust.

Williams (2002) claims that outsourcing of workers affects wage bargaining and quotes Young as stating that, 'in outsourced businesses, the most important flexibility is that of employees in accepting lower wages and intensified work.' However, Taylor (2001) has an interesting notion that the web enables unions to communicate directly with workers in their homes, thus bypassing the employer.

A lack of courtesy may be experienced within the virtual workplace due to the use of e-mail over face-to-face communication. This may lead to assertive and hostile language as reported by Andres (2002) from research carried out by Siegel. Although e-mail has the convenience and casualness of conversation, it is a written record and the contents of some messages can be regretted at a later date.

The dispersed team members within the virtual workplace rely upon internet, satellite and telephone networks for communication and this gives rise to potential security problems. 'In the Net economy, organisations are forced to strike a delicate balance between accelerating their transformation to e-