Case 2:

Ocean
Carriers
Prof. Graeme Warren

FIN 4422

Miguel Oyola
Z23136486

Feb. 25, 2014

Case 2 – Ocean Carriers M. Oyola

Ocean Carriers

1) Identification of the strategic issues and problems

Strong Tie Ltd. (STL), a family-owned corporation, has been the leader of its industry

segment with a market share of 70% and through the years has obtain a remarkable

reputation for its quality, especially on custom products.

In recent years, STL has lost 10% of its market share and now at 60% is having trouble

maintaining its leadership in the industry segment due to the arrival of new competitors,

especially from China. These new competitors have obtained 30% of market share and

are still growing.

The problem identified is the high cost the company has, which has led STL to struggle

in maintaining its leadership; in addition to these costs the start of the recession in late

2007, a 28% increase in metal prices at the beginning of 20081, and aggressive

competitors have had an impact on the company performance, consequently, reporting a

NEGATIVE growth of 5.76% in sales for 2007 – 2008.

1. Mark Skaer. "Steel Prices Continue to Rise." AHR Expo. N.p., 31 Mar. 2008. Web. 08 Feb. 2014.
http://www.achrnews.com/articles/steel-prices-continue-to-rise

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Case 2 – Ocean Carriers M. Oyola

2) Analysis and evaluation

Strategies

 Due to fluctuating prices of raw materials, STL tried to implement just-in-time

(JIT) strategy. JIT brings out efficiency when companies can accurately forecast

demand. This strategy is not the most efficient for STL, given that the company’s

60% market share is composed of standardized products and custom design

services, consequently, it is hard to accurately forecast demand for custom design

services.

 STL has a strategy for ALL sales to be on terms Net 60. This strategy is currently

inefficient and compromising cash on hand, since most of its accounts are

stretching their payments due dates.

 STL has reinvested on its factories, purchased new equipment, computers and

software to reduce labor costs and improve its competitiveness. It seems that all

these investments are not currently being use to the fullest, since the company is

gradually losing market share to its competitors.

Financials

 Due to the current strategies, STL has developed high costs as Table 1 shows.

These factors will not aid in the survivability of the company in the future.

Table 1 2008
v 0.823
w 0.35
c 1.1704
F 3130

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Case 2 – Ocean Carriers M. Oyola

 By continuing with its current management policies, STL will find itself in even

more trouble than what already it is in. Table 2 shows the current financial

struggle STL will find itself in the future if no action is taken.

Table 2 2009 2010 2011 2012

CATO -885.437 -868.244 -843.838 -130.507
Gross Debt 5130.437 5598.681 6042.519 5773.026
Net Operating CF -229.056 -195.305 -145.988 590.955
GROWTH 8.72% 9.72% 10.72% 4.00%

If no action is taken, the forecasted CATO for the following 4 years will be

negative, Gross Debt will increase steadily, and Net Operating Cashflows will

eventually turn positive by the end of the fourth year. The current strategies will

push the company against the wall and make its survival challenging even with a

positive growth.

 Another effect of not changing the current management policies is the continuing

loss of market share to aggressive competitors. This loss will affect STL’s growth

in the following years along with CATO remaining with a negatively growth.

Gross Debt will also have a stable increase as shown by Table 3.

Table 3 2009 2010 2011 2012

CATO -725.783 -739.732 -748.818 -395.83
Gross Debt 4970.783 5310.515 5659.333 5655.17
Net Operating CF -69.4 -75.29 -66.3 305.24
GROWTH 5.50% 6.50% 7.50% 4.00%

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Case 2 – Ocean Carriers M. Oyola

 Nonetheless, with a few changes the company can somewhat turn this impending

crisis around, and survive long enough to see a positive CATO by the end of the

fourth year in the forecast. But first STL will have to be more cost efficient and

come up with a new marketing strategy to regain some of the market share lost.

Table 4 shows what could be a more conservative management of expenses.

Table 4 2008
v 0.819
w 0.3
c 1.1704
F 2800

 Table 5 shows the positive CATO by the end of the fourth year, a steady

reduction in Gross Debt, positive Net Operating Cashflows in the first year of the

forecast and continues and gains strengths on the fourth year, and also shows a

growth thanks to an improved marketing campaign.

Table 5 2009 2010 2011 2012

CATO -481.20 -363.78 -238.42 191.38
Gross Debt 4726.20 4689.99 4528.41 3937.03
Net Operating CF 175.18 287.65 411.09 832.29
GROWTH 8.00% 8.00% 8.00% 4.00%

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Case 2 – Ocean Carriers M. Oyola

3) Recommendations

My recommendations for STL in order to survive this dire economic situation are:

1) Maintain current market share and regain back the market share it has lost over

the years through an improved marketing campaign. This marketing campaign

could be funded by cutting some of the expenses and allocating the cash into this

campaign. As shown in Table 5, a stable growth is possible for four years, thus

real sales will grow by (1+[0.08 – 0.02])3 – 1 = 19.10%.

2) In order to survive the next year and the following ones, it is important and highly

necessary to cut expenses at all levels of management. It is possible to cut F by

$330, F(1-t) will drop $223.84. This cut will have to come from staff reduction

and salary reduction. Even after having a bad economic year in 2008, employment

rate in Manitoba has actually increased by 1.8%2, thus I am confident that the

people who are let go would be able to find a job while STL restructure itself.

2. "Labour Force Survey." Statistics Canada. N.p., 05 Dec. 2008. Web. 09 Feb. 2014.
http://www.statcan.gc.ca/daily-quotidien/081205/dq081205a-eng.htm

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Case 2 – Ocean Carriers M. Oyola

Analysis: In order to determine current financial state of strong tie we performed a ratio analysis,
a trend analysis and a common size analysis, comparing strong tie financial performance to its past
performance, as well as to industry standards. More specifically, we consider the financial position
of the firm with respect to profitability, asset management, debt management & liquidity.With
respect to profitability we found that gross & net profit declined from 2006-2008 and are now
below industry average, specifically CGS cost have increased from 64% to 72% as % of sale and
S& A costs have increase from 19% to 20.5% as of net salesIn sum the firm’s financial
performance has be deteriorated for the last 3 years due principally to increased raw materials
costs, increase S & A cost and no commensurate.