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.