Masri Toy Company Case Analysis
Introduction
Masri Toy Company is a family business registered in 1983 to create, design and distribute children toys and books to other retail firms spread out over several regions around the country. The business since it was established had been under the management of Samir’s father until 2008 when he died. One of the sons (Samir Masri) took over the management and leadership of the business from that point forward. Prior to the father’s death, the business performance had taken a declining trend a fact that even the father kept worried, however for the year 2009 to 2010, the general industry performance for toy business went up. However, to Masri Toy Company the overall growth and promising positive shift in the industry was not felt. In a shift rejoinder to jam start the process, Samir Masri saw it fit to engage an expert to spearhead the necessary changes to turn around the business to profitability path. After careful deliberation, he managed to attract Nader Mansour a former sales manager with a competing distributor of foreign toys with competitive salary and share of the company’s profits share at the end of fiscal year.
Decision Dilemma
Sale option. A consultant has valued the company investment and gave it a figure between $ 145 million and $180 million. One possible justification for deciding to sell the company is the average declining margins that may face out the company from doing business in the next few years.
Option 2. Strategize for growth by diversification through re-investing in the same company through an investment code-named premium project as advised by the new general manager. This will be a capital investment worth $2 million. It will be able to produce high-quality designer dolls that have and higher prospects in the market than standard dolls currently being sold by the company.
Situational Analysis
Analysis of strength, weaknesses, opportunities and threats of Masri Toy Company reveals the following
Discussion of issues facing Masri Toy Company
With the declining profit margin, the business needs to put in strategies to improve it cash flow and take back its profitability to double digit.
Issue 1. Declining margins versus hiring of new general manager hired.
Masri Toy Company is currently facing declining profits margins, a fact that even the late masri’s father acknowledged and attributed to the overall industry performance for toys and books. However, during his tenure as the sole manager of the business be operated at an average before tax of 10%. In contrast, during the son’s leadership the average performance has gone down to 6%. After the death of the father, the year 2009 and 2010 was very good for the toy industry in general. Despite, that promising industry performance was not felt at Masri Toy Company. However, the profits margins continued to steadily decline. Due to this shimmering profitability is already sending Samir Masri in panic. At the point when he is still at cross road whether to sell the company or reinvest and before any consultant advice is sought, he has decided to bring in Nadir as the new general manager. Nadir though was getting in with the wealth of experience having previously worked for a competitor as sales manager for toy exports. However, the terms of engagement is a mess at a time when the business is supposed to scale down costs; Nadir has been given hefty pay package together with a promise of company’s share of profit.
Issue 2. Decision to sell the company and its viability using consultant report
The rationale for selling the company is supported by the fact that the profit margins in the industry are no longer promising and if care is not taken then the company may not survive. The consultant report places the investment at $145 million and $ 180 million as the most suitable range. Mr. Misri contemplates to sell, and the amount reinvested in a more promising industry.
Issue 3. The decision to re-invest in the company and the cost associated with it
The decision to re-invest is being spearheaded by the new general manager. First we have to understand he wants to secure his job and perhaps that was his main role for engagement. According to the manager the company to pursue growth through diversification. The standard doll is no longer in taste and preference of most customers. However, bringing in variety will allow customer to exercise their free will of choice as they are doing their shopping. This attempt is proposed to increase sales and change the profit equation. In order to achieve this option, a machine designer for premium doll has to be purchased. The machine cost is estimated to be $2 million. However, in case the business does not do well, and the company can resort to selling it, the salvage value is $100,000. The machine is capable of producing 3000 dolls per month for the next 10 years. Each doll is $ 40 which means expected revenue from the machine per month is $120,000 per month which translates to revenue collection of $ 1.44 million per year. Assuming that the collection is net revenue and other company expenses will be met by standard doll then, the cost of investment will be recouped within a second year or third making the investment viable.
Issue 4. Financing Decision
Currently, the company debt ratio remains at 40%. The major debt is bank overdraft that is a short term loan facility, and the banker is already warning the business that they cannot get any financing due to almost above the expected threshold limit. Equally, an overdraft is rather more expensive and with a company with declining margins which means cash flow problem, the future of the company is already at stake.
Issue 5. There is no mention of proper control in the management of company affairs. Even its reported the financial statement presented the accountant did selectively that can only take place in areas where there is weak control.
Decision alternatives
Option 1.Strategise to increase sales. Employ sales staff on a commission basis with a small retainer to motivate them to increase sales.
Option 2. Restructure the entire staff and remain with lean staff including a review of the terms of general manager to meet the industry practice and margin levels of the business. Sharing company after tax profit clause in his engagement to be repealed. Perform analysis of cost centers of the firm and eliminate some cost elements that are not adding value and replace with centers targeting generating revenue to the firm
Option 3. Increase sales by introducing premium dolls and video games
Option 4. Become proactive towards debt collections to assist increase cash flow to minimize the company chances for going for additional overdraft that may increase loan interest expense cost to the business.
Option 5. Introduce effective control to improve operational effectiveness and prevent fraud and falsification of records.
Major Lessons in the case (Managerial and Conceptual)
There is a managerial weakness. Mr. Samir Masri is an undecided director. He makes a lot of mistakes as he ponders on the right course of action for the business. He has just hired a new manager with hefty pay and other exaggerated terms like a share of the profit at a time when the margins are declining. One rationale for justifying his action is that he knows very well the share of the profits perhaps will be negligible. While he brings Nadar to spearhead growth that even Samir in not certain whether it is a better option. As a leader, you have to show direction and have faith and confidence on whatever cause of action you are pursuing. He totally a worried man and wants the result now and then otherwise he is ready to sell the business. His confidence in getting figures will spill over to the subordinates.
However, the new general manager get in will clear focus to increase sale number. In his first is good, investigating why sales penetration is low amidst improved industry performance. Though we see more sales strategies that managerial control to loopholes where perhaps the business is losing funds. We see a report presented to the bank that is only selectively done. In a good management where there is control proper checks and balances must be instigated to prevent frauds and falsification of documents like what the accountant has done. One possibility where this company is not getting it right is weaknesses in internal control.
The new manager promised to control costs, but we see him increasing costs through hiring an additional sales team to increase sales. One can say his clear focus is on what he will get at the end of the year in terms of market share on profits, not event net but before tax. He needs not to concentrate in one area but focus on the entire support departments for proper coordination of all units that compose the organization.
The paper towards growth look a little bit realistic and it makes business sense. First the general manager promises cost control and to dig into the in-depth matter and avail the reasons for declining performance. He promises to check the efficacy of all the products lines and eliminate products that do not add value. We only see that in the paper but not in practical. Just like most managers who think management is presenting policy papers to be seen you are working, what Nadar is doing is managing the expectation of his boss and want to impress the boss the figures will come soon. Despite sales have improved due to additional sales force employed, the margin have not changed. The dividend to shareholders has gone done suggesting that the management are not fully utilizing business assets efficient to create value for shareholders.
The department of internal audit needs to be established and perhaps compliance headed if processing of premium doll project is successful. Lack of internal audit could have been the reason for laxity in controls. Internal audit should report directly to Samir Masri. Audit department if supplemented with strong controls at finance department and sales force may change revenue to go up.
What are the potential applications and implications to your advanced Rehab Center
Advanced Rehab Center and Masri Toy Company are similarly run in terms of leadership structure. The mistakes Samir Masri has done are useful lessons that we can use to move Advanced Center to a better growth path. Our vision is to see ourselves as the most preferred rehabilitation center in Saudi Arabia. Our environment is not a level playing ground; there is the impact of competition. We have now to position ourselves to penetrate the market to be able to reach our desired goal.
At all times, I should not be seen as undecided especially when handling serious business decisions with my subordinates. I am the pacesetter, the rest of my team are looking at me to encourage them and give them morale and confidence at center. If I look like a defeated person the tea
What I expect at the end of the trading period is a defeated result. I need to analyze the cost-benefit analysis of every major decision that involves financial implications. More so, at all times I will adhere to pursue one line of idea at a time without juggling up issues like Samir Masri has done. I will embrace change earlier before I get changed. The family of Mari had an opportunity to introduce premiums dolls much earlier. Businesses are dynamic; we have to change with technology and customers’ preference and taste to remain relevant. To be at the top means I have efficient operational procedures, and I am at the grasps of customers. Besides, at the center we have to ensure that we closely monitor our rival’s actions so that we are not left as retardants center. I will also not place very high expectations on my manager. I will tend to be realistic and accept that growth is a journey that may not take place over night but a gradual process. I will also ensure that if am using debt financing for my capital projects, I will go for long-term debts for a long time where the repayments are amortized to maintain a healthy cash flow as opposed to overdrafts
Recommendation
1. The business to be sold and perhaps the proceeds to be divided among family members for each and everyone to decide what to do with the funds.
2. The shareholders to agree to contribute additional funds for purchasing machinery for designing premium dolls. However, the business require a consultant like MacKay’s to do process and operational overhaul at the same time examine the effectiveness of the internal controls to protect and safeguards the company’s assets
3. Management decisions making process should never be left in the hand of one person. The company needs to constitute a board to ensure that decisions pass through shareholders vetting and approval. Only decisions thoroughly vetted and cost effective should be allowed to proceeds.
4. Create department of internal audit who reports directly to Samir to assist appraise on occasional manner the kind of controls that exists in the business. In that manner, the internal audit will report on management controls and access their capability to safeguard assets of the business to generate returns for shareholders.
5. The business to negotiate for conversion of overdraft facility to long term long to reduce repayment amount and seek for more funding to spearhead the growth plan, for the estimated returns are greater than costs.
