(solution) CCC is a specialist car manufacturer, based in Y, a country in Europe. Three ex-employees of a major

(solution) CCC is a specialist car manufacturer, based in Y, a country in Europe. Three ex-employees of a major

CCC is a specialist car manufacturer, based in Y, a country in Europe. Three ex-employees of a major car manufacturer founded CCC in 1992 as a private limited company. CCC has never required further finance to aid its expansion, and remains a private company owned by the three founders. The three, who are all engineers, decided to leave their former employer in order to establish a business producing hand-built high performance sports cars for wealthy customers. The major car manufacturers are not able to supply such vehi- cles, as their systems are all based on the assumption that they will produce each car model in sufficient numbers to benefit from significant economies of scale. CCC has always been profitable, and has grown significantly in recent years. It is now the second largest specialist car manufacturer in Europe and employs 300 staff at its head office and factory near the capital city of Y.The specialist car industry The customers who buy specialist cars are very status-conscious, and want a car that is totally unique. They are prepared to pay a very high price for their new car, in compari- son to ‘top of the range’ models from the major manufacturers, but require extremely high quality and service levels in return. At present there are fewer than twenty specialist car manufacturers in Europe, and only six of these (including CCC) produce sports cars. The others specialise in off-road vehicles, armour-plated cars or limousines. As the cars are produced to customer order, there has historically been little price competition between the various specialist sports car manufacturers. CCC, in common with other specialist car manufacturers, has invested a significant sum in creating the design of its two car models. It also spends a large proportion of its annual budget on sales promotion and marketing. This includes placing expensive advertisements in upmarket car magazines, and attending many car shows and exhibitions. CCC also has a reputation for paying higher than average salaries to its senior designers and production staff. As a result, staff turnover at CCC is virtually non-existent. Customers, who are often loyal to a particular manufacturer, can specify modifications to the basic design, such as minor changes to the body shape of the car, or major changes to the engine performance and driving characteristics of the car. The directors of CCC have always assumed that their customers are not particularly price-conscious, as they are often wealthy individuals with high disposable incomes. For these customers, the alternative to buying a car from CCC might be to purchase a yacht or go on a round-the- world cruise. CCC manufactures most of the components of its cars in-house. The main exceptions are electrical and control equipment, wheels and tyres. The only major bought-in compo- nent is the car’s engine, which CCC buys from a major car manufacturer and then sends to SSS (a subcontractor) for modification and performance upgrades. While the engine is relatively expensive, it is the work of SSS that represents the single most significant cost of producing each car. CCC has, on occasions, paid SSS the equivalent of 25% of the final sales price of a car.The board meeting At the most recent board meeting of CCC, the directors discussed the worsening finan- cial position of the organisation. Having spoken to the Sales Manager they came to the conclusion that, with the economies of Y and neighbouring countries in recession, customers had recently become more aggressive in negotiating down the purchase price of their cars. This had put pressure on the profit margin of CCC for the first time in its history. The directors, therefore, felt it was necessary to commission an independent review of their industry. The Finance Director provided the following summary of CCC’s performance: € million 2005 2004 2003 2002 Revenue 11.75 11.12 10.06 10.10 Pre-tax profit 0.88 1.43 1.55 2.01 Dividend paid 0.08 0.50 0.50 0.50 The directors were particularly alarmed that SSS, the engine modification sub-contractor, seemed to be making almost as much profit on one of the engines as CCC was on the whole car. The Purchasing Manager of CCC said that it was impossible to negotiate a lower price with SSS, as most of CCC’s customers specified that their car must have its engine prepared by SSS. The Sales Manager agreed that one of the ‘unique selling points’ of CCC’s cars was the work done by SSS. At present, SSS does not supply engine modification services to any of CCC’s competitors, but there is no contractual obligation to prevent it from doing so. The Purchasing Manager reported that CCC has no long-term supply contract with SSS, and the owner-manager of SSS had declined the offer of such a contract, believing that to enter into such an agreement would not be in the best interests of himself and his seven staff.SSS The Purchasing Manager has obtained the following information relating to SSS.Extracts from the financial statements of SSS Ltd: 2005 €'000 Revenue 2,455 Cost of sales 1,398 Other costs 867 Profit before tax 190 Profit after tax 133 Dividend paid 65 At 31 Dec 2005 €'000 Non-current assets 894 Inventories 232 Receivables 146 Cash 32 Payables 244 Equity share capital 100 Retained earnings 960 Information obtained from the Motor Trade Association Automotive component and service suppliers: Average P/E ratio (for those suppliers with quoted share prices) 7.5 Average annual growth rate in reported post-tax profits (1995–2005) 2.5 Average pre-tax profit margin 4.3% Average pre-tax return on capital employed 11.2% Average receivables days 65 Average payables days 28 Average revenue per employee €128,500 Requirements Using Porter’s “five forces” model as a framework, evaluate the competitive envi- ronment in which CCC operates. Evaluate the financial position and performance of SSS, as at 31 December 2005. Note: There are up to 12 marks available for calculations in this part of the question . Advise the directors of CCC how the organisation might overcome the bargaining power of SSS.