Silver Ships Case Study Essay Example

pay a premium price for a custom made boat built with the very best materials using the newest innovative techniques. This strategy is evident in the use of aluminum rather than less expensive materials, the investment in facilities to protect the boats and materials at every stage of production, and the company's investment in experienced boat builders. 2. Explain the competitive pressures facing the aluminum military and workboat industry. What can a five-forces analysis tell us about the nature and strength of the competitive pressures facing Silver Ships? Which of the five forces is the strongest? A five-forces analysis of the military and workboat industry reveals three competitive forces that are significant threats to Silver Ships (Porter, 2008).

The greatest threat to the company is that described by Porter as "Bargaining Power of Buyers". With the military being a major customer for Silver Ships, a major portion of the business for which it competes is awarded based on bids. These are large jobs to build many ships and can provide stable work and margins for the winning boat builder. The military is therefore in a position to bargain over the terms of the contract.

The other extremely important competitive force that Silver Ships should be aware of is "Rivalry Among Existing Competitors". With the number of companies building boats of this nature, Silver Ships has found that a few major competitors have merged. These competitors have similar interests in earning the coveted military contracts. Silver Ships must also contend with the threat of the "Bargaining Power of Suppliers". Because the costs of the aluminum used in building the ships and the labor required

are very high in proportion to the total operating costs, Silver Ships is at the risk of these costs rising.

Finally, the case does not mention any threat of "New Entrants" in this industry. As described in the case, the cost of facilities and the level of expertise needed to successfully compete in this market would make it difficult for a newcomer to compete effectively. Likewise, the discerning customers who seek boats that are so highly appointed and customize are unlikely to find other ways to meet those needs in the short term. For that reason the "Threat of Substitute Products or Services" is considered less critical than the other threats mentioned.

What are the key success factors for competing in the aluminum boatbuilding industry? The key success factors for competing in the aluminum boatbuilding industry are tied to the ability to build high quality boats at competitive prices Efficiencies created by the use of innovative technologies (such as CAD) are critical and supply management is important, as the costs of inputs are significant. McCarty has a clear consistent strategy which is producing boats of excellent quality. McCarty has stayed true to his value proposition, "If you never let a little problem go, you won't have to deal with a big problem later" (page C-218).

McCarty is committed to ensure each boat is better than the last. He recognizes this is not done without complete buy-in from his employees. He is committed to improving operating efficiency through continuous evaluation of competitors, creating a culture of Kaizen continuous improvement. McCarty’s long-term vision has positioned Silver Ships and its employees to absorb some of

the future unknowns: higher taxes, a slowing economy, and higher than anticipated costs. This will continue to separate Silver Ships from its competitors and remain nimble with strategies as dynamics of the environment shift.

What does SWOT analysis reveal about Silver Ships' attractiveness? How attractive is the company's situation and position? The SWOT analysis reveals Silver Ships is attractive to a niche market due to innovation; quality which is not sacrificed due to cost, and social responsibility. Silver Ships' strong brand reputation has provided enhanced marketing opportunities and brand recognition as the company is invited to two elite boat shows reaching an extremely targeted market.

While the strengths are significant (Figure 1.1), the weaknesses and threats can have dramatic impact on the future if not managed properly. Economic uncertainty, increasing raw material costs, and increase in taxes will hinder future hiring and narrow the profit margin that could stagnate capital expansion. However, McCarty has foresight by hedging against increasing aluminum costs by forecasting inventory and storing in their insulated warehouse for the future. The company also repurchases scrapped aluminum at a 25-30% reduced price, giving it a competitive advantage. McCarty prudently manages fixed costs. He does not hire more employees to expedite production process, adhering to his original goal of never laying off an employee. This quality constructs employee loyalty to create a consumer and employee-centric company. This steady process in managing and leading distinguishes Silver Ships from its competitors. When planning for the future design and assembly of the boats McCarty designed and located his warehouse to minimize negative consequences from external elements.

The location of the warehouse was "45 feet

about mean tide level protect[ing] the boatbuilding operation from flooding even in the worst hurricanes" (page C-219) and was located inland in a fully enclosed insulated location to avoid corrosion and storm damage. This strategic planning reduces the threat of rivals gaining market shared. This increased productivity efficiency and minimized passing additional costs on to the consumer and contributed to the quality construction. 5. What is your assessment of Silver Ship's financial performance and condition? Is the company in good financial shape? Why or why not. Use financial ratios to help support your assessment.

As demonstrated in Appendix A, Silver Ships delivered solid financial results during the years 2006 – 2009. The only notable drop in net income occurred from 2006 to 2007, which could be directly attributed to the higher than expected jump in direct materials. During this four year period there has been steady growth in net income and return on equity (ROE). Cash levels have remained positive with the company carrying no debt. In addition to cash, inventory levels have also remained at a positive level. In addition to these favorable trends, gross profit margins and the existence of deferred revenues provide further insight to the financial condition of the company.

Silver Ships experienced a period of significant growth during 2007 and 2008 when sales practically doubled. During this period the company was able to maintain consistent and or slightly increasing gross profit and net profit margins. This is a sign that leadership is able to adapt to changing production levels without sacrificing performance. Being able to leverage operating expenses was a key driver in being able to maintain these

favorable margins. Historically, companies will often lose efficiencies during periods of high growth. Displaying greater system efficiencies during periods of growth is a positive reflection on management’s grasp of their backside operations.

One of the fastest growing balance sheet accounts is deferred revenue. This is a sign that production contracts have grown in size and take more time to complete. Not being able to recognize revenues is a significant operational risk but this risk appears to be mitigated by increasing cash levels and steady receivables. An area for concern over the deferred revenues is the lack of annual growth in inventory and/or CIP levels. Deferring revenues should be complemented by capitalized costs that grow proportionally. Not capitalizing costs in a CIP type of account is a risky behavior that is directionally pointed towards lowering tax liabilities.

Going forward, it will be very important for Silver Ship’s management to take these lessons learned from their growth period and apply them to their current challenges. In an article by the Birmingham Business Journal, Silver Ships is competing to win a $58mm contract with the Coast Guard (Journal, 2011). This would be a material growth in sales and presents interesting revenue and cost recognition challenges, as these are likely long-term challenges. The company has already demonstrated its ability to react to rapid growth scenarios so management is well equipped for the challenge.

Although the Coast Guard contract would be an amazing opportunity for the company it must be careful in its execution. Appendix A demonstrates a variable relationship in its asset turnover ratio. It is assumed that Silver Ships is constantly buying and selling their

assets to meet the needs of the next contract, but this can be risky behavior. To maximize margins on these large contracts, it is important to leverage existing assets and to not purchase too many new assets that are not supported by future orders. One of the concerns with this type of directional growth is the heavy reliance on their customer base. If they win the Coast Guard contract and the government backs out of their negotiations, then Silver Ships will essentially be without boats to build.

Based on your analysis of the aluminum boatbuilding industry and Silver Ships' financial condition, what problems and issues should McCarty consider? Which of these merit "front-burner" attention?

Based on historical trends, the contracts being awarded for boat builders are growing at a highly increasing rate. According to Appendix A, Silver Ships’ current ratio has been in steady decline since 2006, which is indicative of their potential inability to meet their current liabilities. One of the key elements driving this ratio in an unfavorable manner is deferred revenue. By addressing the revenue recognition systems in place for the now larger contracts, the current ratio will in turn improve and demonstrate a strong ability to meet current liabilities. This will be especially important if the company was to take on a line of credit to help bridge the growth opportunity.

Another problem Silver Ships should consider is their use of fixed assets. Their fixed asset turnover ratio in Appendix A demonstrates an inconsistent use of assets to generate revenues. As the company grows it will be important that Silver Ships only spends their valuable time and financial

resources on assets that will be used to generate future streams of cash. To ensure that fixed assets are being properly controlled, management will want to carefully monitor the relationship of yearly changes in assets and depreciation levels so that their levels are predictable and make sense.

Finally, Mike McCarty is a "key man" in the Silver Ships Company. As founder and president, Mike is involved in every aspect of the business, yet there has been no succession planning. To ensure a successful future, Mike should mentor individuals to take important roles in shaping Silver Ships' strategy and implementation going forward.

What specific actions would you recommend to McCarty to improve Silver Ships' competitive and financial positions? Succession Planning and Management Team Expansion As noted above, Mike McCarty built Silver Ships from the ground up and is heavily involved in every aspect of the day-to-day operations. He constantly monitors the building process to make sure his quality standards are met, he has an open door policy to identify developing operational issues, and personally controls all purchases of aluminum.

McCarty’s role in the growth and success of Silver Ships cannot be overstated, however McCarty’s increasing age and lack of any known succession plan could lead to a hasty decision to sell the company. Despite the difficult economic climate, there are many growth opportunities of which Silver Ships can take advantage. But first, McCarty must take immediate steps to develop or hire a capable management team that can take on more of the day-to-day oversight of the business, letting McCarty focus more on the vision and strategic planning for the company. Raise Capital for

Expansion

Silver Ships is currently 100% equity financed, which is not always the most optimal. Due to a strong balance sheet, the Company has the flexibility to take on some debt, which would allow the Silver Ships to expand and may lower its cost of capital.

Growth and Expansion It is recommended that Silver Ship continue to aggressively pursue military and federal contracts. Opportunities include an industry shift to maneuverable boats capable of patrolling the littoral zone and a possible joint venture with General Dynamics European Land Systems (GDELS) to replace the army’s bridge erection fleet. Silver Ships should also look to increase state and municipal market share. Currently Silver Ships entire production is centered in its main production facility, which leads to difficulties to obtaining new customers due to transportation costs and road or bridge limitations. The Company can reach new markets by building smaller assembly plants in specific target markets where modular parts can be assembled closer to new customers, which would mitigate these distance limitations. Diversification

Silver Ships has built its competitive advantage on controlling the quality of its products by becoming the expert in aluminum. The Company could diversify its offerings by taking advantage of this expertise and providing quality control consulting for aluminum processing in other industries, such as building construction. This could be particularly useful due to the anti-corrosive properties of aluminum in a highly corrosive coastal climate. Due to the historically low cost of aluminum and the ability for Silver Ships to expand its facilities, it is also recommended that Silver Ships substantially increase its inventory above what is needed for production and hold for

resale to other aluminum customers when the market price increases. By stockpiling at low prices, the Company can later charge above its cost basis but below the prevailing market rate, ensuring strong demand and increasing revenues.