PHIL'S HAULAGE Case Study Solution
Decision Criteria
Decision criteria are based on various critical points that are considered to be important while taking the decision regarding the future. It is important for the evaluation purpose and to take the desired outcomes for the company. It is used to compare different alternatives for the company and to choose the best among them. Various alternative options for the company could be evaluated on the basis of the following points:
- The option must reduce the overall operational and sub contractual cost of the company.
- The option must increase the company’s business scale.
- It must provide benefit to the company in the long run.
- The option must improve the company’s liquidity position.
- The option must improve the overall financial performance of the company.
Options Analysis
The following are the available alternatives that could be considered to achieve the long term objectives of the company:
Option-1: Expand to Excavating Business
One of the available strategic options for the company in order to achieve its long term objective is to expand its operations in excavating segments. This option would allow the company to reduce its manufacturing costs, which is related to its topsoil business. Furthermore, the implementation of this option would allow the company to save its operational cost. Moreover, it would also allow the company to increase its operational capacity and contributes to its cost savings in terms of subcontractor costs and transportation costs.
A detailed analysis is performed in order to understand whether the company should choose this option or have an expansion in the excavating segment to fulfill its objectives. Exhibit-6, 7, 8 and 9show the calculations regarding this option. All of the assumptions taken are mentioned in the case except for the discount rate[2]. The discount rate is assumed as 18%. Expansion in excavating business would allow the company to make seven to fifteen contracts in upcoming years. On the basis of this assumption, we have calculated the cash flows and NPV of this project by making three sceneries i.e. if the company gets seven contracts then it would be considered a worst case, if the company gets fifteen contracts then it would be considered as the best case, and if the company gets 11 contracts then it would be considered as an average case. Depreciation would remain constant due to the straight line method. All the cases are showing positive net present value (NPV) of the project at every stage of the project. The NPV of these stages are:4,759,324 dollars (worst)[3], 15,530,560dollars (best)[4]and 10,144,942dollars (average)[5] respectively. However, the internal rate of return (IRR) of these stages are: 34 percent (worst)[6], 108 percent (best)[7] and 70 percent (average)[8] respectively.
Pros:
- Higher NPV and IRR.
- The company would be able to maintain a strong liquidity position.
- The company would be able to gain long term benefits.
- Saves various costs.
- No additional marketing expense.
Cons:
- High additional investment wouldbe required to purchase the machinery and other equipment.
- Additional labor would berequired.
Option-2: Expand Business to Topsoil Business Segment
One of the available strategic options for the company in order to achieve its long term objectives, is to expand the business to the topsoil business segment. The pros and cons of this option are as follows:
Pros:
- Diversifies the company’s portfolio.
- Allows the company to save cost.
- Topsoil business segment is 15% of the overall business revenues, and is expected to grow at the rate of 5 % on an annual basis in future.
Cons:
- Restricts the company to invest in the expansion of excavating segment.
- Additional investment would be required.
- Low impact on the company’s profitability and low improvement in its liquidity position.
Option-3: Expand Business to Other Site Preparation Services
A strategic option for the company in order to achieve its long term objectives, is to expand its business in other preparation sites. The pros and cons of this option are as follows:
Pros:
- Allows the company to diversify its business operations.
- Additional service in the portfolio, which would improve the reputation of the company.
Cons:
- Additional marketing cost would be required.
- It requires skilled labor.
- It would require certain expertise in this field as well as an in-depthanalysis of costs and benefits.
- Slight impact on profitability.
- Shifts the company’s focus from its core competencies.
Recommendations Implementation
On the basis of SWOT, PESTLE, and Porter’s, financial analysis,i.e. ratios, discounted cash flows and the available options discussed above, it is recommended that the company should go with option-1 and expand its operations in excavating segments. The option one has higher benefits in all the available alternatives, as it is a relevant diversification in site preparation process business and a great opportunity for the company which needs to be availed immediately, otherwise its competitors can grab this opportunity, which could create negative impact on the company’s cash flows, revenues and profits. This option will strengthen the company’s profitability and its liquidity position and provides it with long term benefits. This option would allow the company to focus on its core competencies, and would help it to maintain
[1] Exhibit-5: Decision Matrix
[2]Exhibit- 6: Case Data
[3] Exhibit-7: DCF Valuation of the Excavation Opportunity (Worst Case)
[4]Exhibit- 8: DCF Valuation of the Excavation Opportunity (Best Case)
[5] Exhibit- 9: DCF Valuation of the Excavation Opportunity (Average Case)
[6] Exhibit-7: DCF Valuation of the Excavation Opportunity (Worst Case)
[7] Exhibit- 8: DCF Valuation of the Excavation Opportunity (Best Case)
[8] Exhibit- 9: DCF Valuation of the Excavation Opportunity (Average Case).........................
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