Somebody elses fault

The Acme management team was engaged in an acrimonious argument after the latest years results became available. These results included the accounts for the new product EarPhone, a device for listening to radio programmes without interference on public transport that had been under development for three years and was finally launched last year. Previously Acme had focused on the production of the LaserAlarm, a high-tech system designed to provide protection for cars in built up areas. Accountant: Look at the reduction in our gross profit; this is what happens when you divert everything into a new product. It wasnt my fault because I was occupied with raising an additional $5 mil lion loan for plant. Marketing completely overestimated the market for the EarPhone; Production underestimated the unit cost. At the same time we lost 10% of the Lasers market share. Marketing manager: I always said there was a risk and it didnt help that the EarPhone development took a year longer than we were originally promised. When MegaCorp launched their Plaser at a lower price and with several more features than the LaserAlarm we had to do some serious price cutting; in spite of this, we lost market share and the Plaser has captured market leadership with 25% market share. So its not my fault. Production manager: I kept the unit cost of the LaserAlarm under control in fact, its down from $273 to $263; I intensified production on the LaserAlarm and shifted a lot of resources to the EarPhone. I understand how to produce LaserAlarms but we were going into new technology with the EarPhone and we didnt know how to price it. So its not my fault. Development manager: The timing of the launch was not my concern I was trying to produce the best specification possible because thats where the future lies. So dont blame me. CEO: Its nobodys blame individually things often dont work out. But lets not worry too much because we are still making a profit and I am sure we can recover the situation. When the Chairman of the Board heard about this he said, It was somebodys fault the CEOs. He had plenty of information to see this coming. Furthermore, despite what he says, I think Acme is heading towards disaster.

Acme Plc
Operating Account at end year: Production cost, and revenue ($000) Before After SALES REVENUE COST OF GOODS SOLD 5 367 6 003 GROSS PROFIT 4 383 2 072 Before 9 750 After 8 075

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Operating Account at end year: Overheads and Operating Surplus ($000) Before Corporate Factory overheads Hiring & redundancy cost Development expenditure TOTAL OVERHEAD After Before After

1 000 1 000 300 28 500 1 828 1 384 OPERATING SURPLUS Cash Flow for year ($000) Before After INCOME 2 000 2 081 240 720 Interest on assets 120 40 Before After 2 555 688 300 84

OUTLAY Material purchase Loan interest Wage cost Line cost Product development Product marketing Total overhead Total outlay

1 410 1 614 1 040 1 040 700 800 180 926 Sales revenue Total income NET CASH FLOW 9 750 9 870 1 852 8 075 8 115 170

1 828 1 384 8 018 7 945

Balance Sheet at end year ($000) Before FIXED ASSETS Factory Plant TOTAL FIXED ASSETS CURRENT ASSETS Raw materials Finished goods Cash TOTAL CURRENT ASSETS TOTAL ASSETS OWNERS EQUITY DEBT Long-term loan TOTAL DEBT TOTAL LIABILITIES 3 000 3 000 24 173 8 000 8 000 23 468 2 000 1 173 4 000 7 173 24 173 21 173 2 000 468 1 000 3 468 23 468 15 468 8 000 9 000 17 000 8 000 12 000 20 000 After Before After

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Report on Products for Year Before Laser Market share (%) COMPOSITION OF DEMAND Orders Warranty demand TOTAL DEMAND 19 500 17 000 9 500 195 170 30 After Laser 20 Ear 10 COMPOSITION OF SUPPLY Output Start year Inventory TOTAL SUPPLY 20 000 13 750 11 000 4 000 4 305 Before Laser After Laser Ear

19 695 17 170 9 500

24 000 18 055 11 000

DISTRIBUTION OF SUPPLY Warranty replacements Sales to orders End year Inventory 195 170 9 500 1 500

19 500 17 000 4 305 885

Account at end year Wage cost ($000) Assembly line cost ($000) Cost of material used ($000) Product development ($000) Product marketing ($000) TOTAL COST ($000) Sales revenue ($000) Cost of goods sold ($000) GROSS PROFIT ($000) 1 410 1 040 1 500 700 800 5 450 9 750 5 367 4 383 1 134 715 1 031 105 627 480 325 550 75 299 Labour force Working time (%) Labour attrition rate (%) Competing price ($/unit) Price ($/unit) Unit cost ($/unit) 470 100 2 500 500 273 350 120 8 440 380 263 160 100 1 200 170 157

3 612 1 729 6 460 1 615 4 510 1 493 1 950 122

Report on Development of EarPhone BEFORE Launch Launch date Estimated market peak Estimated market at launch Estimated competing price ($/unit) Estimated Production cost ($/unit) 1 year 200 000 120 000 200 120 Development expenditure To be spent in year ($000) Total to date ($000) Forecast market share (%) 500 2 500 15

Required: 1. Use strategic models to assess the Chairmans view that the CEO had sufficient information to see what was happening. 2. Assess the CEOs argument that financially Acme is not all that badly off and the contrasting argument of the Chairman that Acme is heading into disaster. With whom do you agree?

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