Stan’s sounds a company with a vision to setup a chain of outlets across Texas, sells standard sound equipments via Stan’s sounds and customised products via Cen-Tex Audios. It has shown consistent growth in Westville and it has expanded to 3 shops in the same locality. Now the company has an opportunity to expand. Problem definition Though the objective of the company is to own a chain of stores, it is reluctant to expand aggressively since it just opened a new store in its locality.
The company has to decide between expanding and postponing the expansion thereby concentrating on the local market. On the basis of the objectives the list of criteria based on which the options could be evaluated are Financial viability, change in the Organisational complexity, Profitability and the Risk associated. Inventory: Cost of the items is less but we need to maintain a big inventory so it will get added on to the overall expenditure.
Investment: This comprises of inventories in the new shop, fixed cost associated with the shop and the initial investment needed for other expenses like advertising. The investment for the new expansion can be funded by adding more share capital but Mr. Kramer already has
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Decreasing Debt to Equity ratio means proper back of the loan taken previously. Its clear from the graph net profit of around 5 % is maintained. The first year loss can be attributed to the fact that it operated only for two months but the fixed expenses cannot be scaled down. The drop in the loss profit in 1977 can be attributed to Cen-Tex audio reducing its customer size.The absolute value of asset turn over(around 3. 5) seems fairly acceptable Hence it is more likely that the company will get their loan sanctioned. Organisational complexity
Reporting structure: We have to appoint a new manager for the Wardlow shop. Since this increases the complexity of the structure, we have to form an efficient reporting structure which will form a basic frame work for future expansions as well. Experience:Kramer and Porter have around five year experience in the field of standard audio equipments. They can use that skill in wardlowand to avoid the problems faced in a start-up. Inventory maintenance:Since we have predominantly Stan’s sound shops we can use a buffer inventory for sales.
This further increase in the cost but this helps to serve the customers sooner. Suggested reporting structure is as follows. Profitability Profit margin: Since the population of Wardlow is less, the quantity sold will be scaled down. There is a high chance for capital getting locked in inventory. Also the profit margin is very less in standard audio products so we can expect less profit compared to Westville shop. Competition factor: Competitors in Wardlow is limited. Hence there is a potential possibility to cover the Wardlow market if operated properly.