WHAT IS OUR NEXT STRATEGY?

Drop in Sales

It was 9 o’clock on a bright sunny Friday of 11thJanuary, 2013. Ms. Sharon just stared
at the latest sales report on her table. Yesterday, she could not sleep throughout the
night. “Why did the annual sales drop again?” she asked herself. Suddenly, her
phone rings and it was an unexpected call from Mr.Razak, the Chief Executive
Officer (CEO).
Mr. Razak: Hello Sharon. I hope you know why I called? (sounded annoyed and
harsh)

Ms. Sharon: Oh yes…I think it is about the sales of ceiling fans.

Mr. Razak: I am glad you are able to read my mind. I am very upset that our sales
continued to drop! Fortunately, this doesn’t happen to water heaters. I
want to see you and the accountant next Tuesday morning in my office.
Tell me your plans for the first quarter sales in 2013. Bear in mind that we
have not met our targeted sales for ceiling fans since 2010. No more
excuses for 2013!

Ms. Sharon: Ok, Mr. Razak. I will call for the meeting to work on this. We will see you
on Tuesday morning. Have a good weekend. Thank you.
She quickly asked her secretary to call for an urgent meeting at 11o’clock
on the same day.
Company Profile
In June 1996, AA Electric incorporated as the sales and marketing division for its
main activities business as manufacturing company, called AA Manufacturing Sdn
Bhd. Both companies owned and managed by three brothers who were also
directors of the companies. When AA Manufacturing established in 1990, it was the
original equipment manufacturer (OEM) of water heaters for brands such as
Panasonic Cornell, Exxon and Hesstar. During the market downturn in 1997, some
brands of water heaters were withdrawn, causing sales to decline significantly. This
downturn triggered one of the directors of AA Manufacturing to introduce AA’s own
brand of water heaters in Malaysia. Mr. Razak, the eldest brother and the CEO, was
determined to make AA grow with the brand. At the end of November 1990, the two
companies started to operate from its current headquarters and factory located in
Shah Alam Industrial Area. Since then, there was no turning back for Mr. Razak.
Survival of AA through enhancing its own brand is a battle that it must be won. After
ten years, AA Manufacturing introduced the electric fans in 2000. These two
products were the two core product lines of the business until now. AA spread its
branches to other states such as Penang, Melaka, Johor Bharu, Ipoh, Sabah,
Sarawak, Terengganu and Kelantan. With total employees of 300, AA could be
categorised as a medium-sized company. The company exported its electric
appliances to many countries in South East Asia, such as Laos, Cambodia, Thailand,
Singapore and Philippines.

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The vision and mission of AA is as follows:

Vision

As a brand, to make AA an instantly recognizable and highly desirable name

around the globe. As a company, to make AA known for its innovation,
responsibility, caring corporate citizenship.

Mission

To create innovative, well-designed and highly functional home appliances

that are perfectly suited to modern, cosmopolitan lifestyles.

The mission of AA Electric and AA Manufacturing was to create innovative and well-
designed products to meet the needs of modern and cosmopolitan lifestyles. AA was
the pioneer in engineering new, consumer-driven features for water heaters, shower
pumps and shower accessories in the Asian market. Its commitment towards
innovation leads the company to earn the award called Special Awards for Innovative
Products and Good Design Mark Award in 2008.

In addition to its water heaters, AA invented the designer and decorative ceiling fans
for the high-end customers. The fans are named based on AA brand name, for
examples AA ceiling fan with flower, AA ceiling fan with lights and AA ceiling fan with
decoration. With high competition faced by the ceiling fans, branding became more
important to help distinguish AA’s fans from other brands. Besides innovative
designs, the company undertook aggressive promotion through various mediums
such as, exhibition in the annual HOMEDEC, media advertisements, billboards and
KLCC convex crossing. In order to get new ideas for its new products and to
introduce the company to the market, AA participated in national and international
exhibitions.

Sales and Financial Performance

Annual sales of ceiling fans for AA from 2008 until 2012 are shown in Table 1 below:

Table 1: Annual Sales of Ceiling Fans

2008 2009 2010 2011 2012

Sales in 630,000 585,000 565,000 550,000 510,000
units
Sales in RM 170,100,000 157,950,000 152,550,000 148,500,000 137,700,000
Gross margin 42,525,000 39,487,500 38,137,500 37,125,000 27,540,000
in RM

Unlike water heaters, the ceiling fans required less specific technical knowledge.
Furthermore, the water heaters sold in electrical outlets where relatively, as these
shops were more concerned about branding. In 2008, AA was proud of its 12%
market share for the ceiling fans. AA’s signature fan was the fan with five blades that
gave a stronger wind output than the normal four-bladed ceiling fan. In addition, the
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five-bladed fans were made of a plastic-like material which was free from rust and
easy to clean. The remote controlled the speed of the fan, switched the fan on and
off, and set timer of 1, 3 or 6 hours. There was also an option called “natural” which
would make the fan produced somewhat like the natural wind. Due to the high
demand, the company had back orders for this design. In general, about two-third of
the total annual sales revenue for the ceiling fans were contributed by the five-bladed
ceiling fan over these five years.

The sales of water heaters for AA showed an increasing trend since its exports to
Middle East has doubled since 2011. There were no concerns with counterfeit water
heaters and the new entries into the market for water heaters were limited. The
targeted gross margin of 20% had achieved and with the execution of the contract to
provide 10,000 units to an international hotel in 2013, the gross margin would further
increase. The sales of water heaters for each of the years from 2008 to 2012 shown
in table 2.

Table 2: Annual Sales of Water Heaters

2008 2009 2010 2011 2012

Sales in units 50,000 60,000 79,000 90,000 103,000
Sales in RM 35,000,000 42,000,000 55,300,000 63,000,000 72,100,000
Gross margin in 7,000,000 8,400,000 11,060,000 12,600,000 14,420,000
RM

Based on the five-year strategic plan (2008-2012) of AA, the targeted market share of
ceiling fan was supposed to increase by 2% annually. An annual growth rate of 5%
forecasted for ceiling fans in Malaysia to meet the increased demand especially from
owners of many newly built houses over these years. Due to the decrease in sales,
AA’s targeted market share was below the target again in 2012. The market share
for both products shown in table 3.

Table 3: Market Share of Water Heaters and Ceiling Fans for AA

Water Heaters (%) Ceiling Fans (%)

Year Targeted Actual Targeted Actual
2008 15 13 8 12
2009 16 15 10 13
2010 18 20 12 12
2011 20 22 14 13
2012 22 25 16 12

The 11 o’clock Meeting

The meeting attended by the accountant and the managers from research &
development department, marketing department and production department. The
discussion went as follows:

Ms. Sharon: Thank you all for coming today although just a short notice…

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R&D Manager You look upset … is it about the sales of ceiling fans? I cannot
(Mr.Aqil): believe it too especially when the sales of ceiling fans for the
Malaysian market is on the upward trend during the last five
years. Luckily, our sales for water heaters for both oversea and
local markets are okay.

Marketing Manager I told you … we couldn’t rely on the lighting stores… they just
(Mr.Rashid): sell any brand as long as the customer pays. Lately, I heard
many companies selling fans especially manufactured in
China. Of course, at half of the price!

Ms. Sharon: Please allow me to interrupt … We have to come up with

possible actions to improve sales. Mr. Razak wants the plan to
discuss this drop in sales at 9.00 a.m. on Tuesday morning
next week.

Production I saw one comment in the internet that our ceiling fan looks
Manager nice. They like the five-bladed fans but they complained the
(Mr.Amran): remote is hopeless! No wonder our fans are not selling!
Meanwhile other brands like Panasonic, KDK, EuroUno are
doing well….

R&D Manager That does not make sense! …especially our R&D unit has
(Mr.Lukman): worked round the clock to improve the remote in July 2012. My
employee turnover was the highest last month. I heard they
have left for our competitors who offered them better benefits.
We need new recruits and of course competent employees.

Production I heard customers complained that they did not know where to
Manager get our products except during the annual HOMEDEC
(Mr.Amran): exhibition. Do you know why Rashid?

Marketing Manager Cannot be … our marketing efforts have been done through
(Mr.Rashid): exhibition fairs, newspaper advertising and next month we will
extend to use internet marketing. I need more people … the
workload is too heavy now.

Mr. Manan, the accountant, was silent throughout the meeting. Mr. Manan knew that
AA has increased its Research and Development (R&D) expenses by threefold in
2012. The litigation costs for the infringement cases on patent filing did not reduce
since 2011. The company had incurred additional RM10,000 cost for filing the patent
of its new design fan. Since sales have not increased, the gross margin of ceiling
fans fell in 2012. The net profit for the ceiling fan also has dropped to 10% in 2012
from 15% last year.

AA’s main supplier has asked for price increase but Mr. Amran negotiated for bulk
purchase and cash payments in lieu of price hike. If AA paid cash, it could not afford
to sell on credit to the dealers and sellers. In 2012, the credit periods for some
dealers have exceeded the two-month credit policy of AA. Finally, Mr. Manan spoke:

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Accountant From another point of view, I think maybe we should reduce
(Mr. Manan): the remuneration paid to the Directors since this represent 15%
of our compensation costs in both 2011 and 2012. Maybe AA
could not sell on credit anymore for 2013. If AA did not
increase sales next year, the ceiling fans could be in red. This
would be bad news for Mr. Razak. Do not worry too much
Sharon. I will work with you this weekend on our proposal to
turnaround the sales of the ceiling fans.

Ms. Sharon: It seems you all have the answers. But Mr Razak does not
want any excuses! I want all of you to e-mail your report by
6.00 pm today. In your report you need to address the issues
and reasons of sales drop and please think the question of
what next? Thanks everyone.

The meeting was adjourned at 12.00 noon.

In AA, the Chief Executive Officer (CEO) was known for his no-nonsense character
especially if it concerned with the financial performance of the company. Last year,
he had rudely asked the previous accountant, Ms Zaiton to pack her bag during a
management meeting. Ms. Sharon still vividly remembered the tears in the eyes of
Ms. Zaiton who slowly left the meeting room to pack her things and left soon after
that. The CEO’s brother, Mr. Ahmad was the Director in charge of marketing. He
had reserved the two vacant posts as Assistant Marketing Managers for his two
nieces currently enrolled in the Bachelor in Biotechnology and Chemistry program at
UPM and expected to graduate in April 2013. The posts had been vacant since 2010.
The marketing unit comprised the director, the manager and two salesmen to serve
both the sales of water heaters and ceiling fans. Besides marketing, Mr. Ahmad was
also very busy taking care of R&D and Human Resource (HR). The third and
youngest brother, Mr. Ishak was the Director responsible for financial matters. Ms.
Sharon heard the rumors that these two siblings did not see eye-to-eye on many
matters. As a result, Mr. Ishak was rarely visible in AA. Thus, decision normally
decided by Mr. Razak or Mr. Ahmad, or sometimes by both of them. The accounts
unit comprised the Director, one accountant and one assistant accountant.

Back to her problem, Sharon asked herself, “How on earth could we achieve the 18%
target market share for ceiling fans next year when sales have not picked up?”
Sharon was certain that AA started right for the ceiling fans but now she was not sure
anymore. Why has AA failed to attract brand loyalty among its customers? What
went wrong with the ceiling fans?

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QUESTIONS:

1. What are the problems and critical issues facing by AA?

2. Analyze this case using the Strength, Weaknesses, Opportunity and Threat.
(S.W.O.T.)

3. Is AA company successful with its branding strategy?

Explain your reasons.

4. Based on the information and suggestion provided by the accountant, you

may suggest and explain several ways to improve the financial position, the
related issues in questions 1 and the overall performance of AA.