Case Study 3: QWERTY It is now June 2013. Qwerty Limited is an Irish based company that designs, manufactures and sells a wide range of wireless computer keyboards to retailers in both Ireland and Northern Ireland. QWERTY is co- owned by twin brothers Paul and Joe Hayes, who founded the company after graduating from their local university with undergraduate degrees in Computer Science and Electronic Engineering respectively. Since then, QWERTY has experienced rapid sales growth (with modest but growing profitability) and now employs 55 full-time employees from their Limerick base. Paul and Joe are the only directors of the company. Performance Measurement As a result of the on-going difficulties experienced by QWERTY in acquiring adequate levels of credit from their local financial institutions to fund their working capital, Paul and Joe have decided with immediate effect, that if any of their products are budgeted to be loss-making for the forthcoming year, they should be discontinued immediately in an attempt to protect the future viability of the company. Consequently, the 2014 budgetary data for one of QWERTY's most popular (and to-date profitable) keyboards called Exile, is causing Paul and Joe a lot of concern (see Appendix I for the 2014 budgetary data on Exile). In an on-going attempt to reduce their costs, all of QWERTY's 2014 budgetary forecasts were jointly prepared by the company's co-owners, having previously been contracted out to a small local firm of Chartered Accountants. In addition to focusing on product profitability as a key performance indicator, Paul and Joe are also keen to consider the use of some non-financial metrics to guide them in making future strategic decisions. Having discussed the various options available, allied to the nature of the industry in which they compete, they have collectively decided on innovation as the key non-financial success factor for QWERTY to focus on in the short to medium term, although they have yet to agree on any specific performance measures. Growth Opportunities Paul has always been more growth focused than Joe and for the past year has been exploring various options to expand the company. He has identified a venture capital investor, with an interest in small technology companies. The investor has made an offer to invest / 2 million in QWERTY for 36% of the equity. Paul and Joe agree that this is an attractive offer. An agreement has been signed and this investment will go ahead within the next three months. The venture capital investor is impressed by Paul and Joe's management of QWERTY but has some concerns that it does not have the corporate governance structures to sustain its growth over the medium to long term. As a condition of the investment the venture capital investor is insisting that he has a position on the board of directors and a veto over major strategic decisions made by the company. Paul and Joe are agreeable to these conditions. Paul is proposing that they use the funds raised from the new investor to part-finance the acquisition of Screen Magic Limited (SCREEN), an Irish company which manufactures computer screens. Paul has had preliminary discussions with the owner (and managing director) of SCREEN, who has told him he is keen to retire soon after finding the last few years increasingly stressful trying to resolve a complex tax issue affecting SCREEN and dealing with increasingly onerous regulations on environmental standards in manufacturing. He may be interested in selling SCREEN and has provided information on the company (see Appendix II). Paul has been pushing a growth by acquisition strategy for several years because he believes QWERTY is too narrowly focused on one sector and believes acquisitions almost always deliver significant value through synergies and economies of scale. He is confident that if QWERTY acquires another company he and Joe have the management skills required to ensure a successful integration. Paul is eager to agree the terms of the takeover of SCREEN before the venture capital investor takes his seat on the board as he is not sure if the investor would approve of the takeover. Bridging finance would be available from QWERTY's bank to finance the acquisition pending receipt of the new equity funds. This facility would be personally guaranteed by Paul and Joe. CASE STUDY 3 QUESTIONS QUESTION 1: Discuss three (3) non-financial considerations that Paul and Joe should also consider prior to making their final decision as to whether or not to withdraw the Exile wireless keyboard from sale in 2014. (9 Marks) QUESTION 2: Critically evaluate Paul and Joe's new proposed policy in respect of discontinuing any products, which are budgeted to be loss making within QWERTY. In addition, suggest any improvement to the proposed policy that you consider appropriate. (11 Marks) QUESTION 3: Suggest and justify any three (3) specific performance measures in relation to innovation that you think QWERTY should adopt to enhance their future performance. (9 Marks) QUESTION 4: Identify one (1) potential ethical issue facing Paul and Joe and discuss how it should be resolved. (5 Marks) Case Study 3: QWERTY It is now June 2013. Qwerty Limited is an Irish based company that designs, manufactures and sells a wide range of wireless computer keyboards to retailers in both Ireland and Northern Ireland. QWERTY is co- owned by twin brothers Paul and Joe Hayes, who founded the company after graduating from their local university with undergraduate degrees in Computer Science and Electronic Engineering respectively. Since then, QWERTY has experienced rapid sales growth (with modest but growing profitability) and now employs 55 full-time employees from their Limerick base. Paul and Joe are the only directors of the company. Performance Measurement As a result of the on-going difficulties experienced by QWERTY in acquiring adequate levels of credit from their local financial institutions to fund their working capital, Paul and Joe have decided with immediate effect, that if any of their products are budgeted to be loss-making for the forthcoming year, they should be discontinued immediately in an attempt to protect the future viability of the company. Consequently, the 2014 budgetary data for one of QWERTY's most popular (and to-date profitable) keyboards called Exile, is causing Paul and Joe a lot of concern (see Appendix I for the 2014 budgetary data on Exile). In an on-going attempt to reduce their costs, all of QWERTY's 2014 budgetary forecasts were jointly prepared by the company's co-owners, having previously been contracted out to a small local firm of Chartered Accountants. In addition to focusing on product profitability as a key performance indicator, Paul and Joe are also keen to consider the use of some non-financial metrics to guide them in making future strategic decisions. Having discussed the various options available, allied to the nature of the industry in which they compete, they have collectively decided on innovation as the key non-financial success factor for QWERTY to focus on in the short to medium term, although they have yet to agree on any specific performance measures. Growth Opportunities Paul has always been more growth focused than Joe and for the past year has been exploring various options to expand the company. He has identified a venture capital investor, with an interest in small technology companies. The investor has made an offer to invest / 2 million in QWERTY for 36% of the equity. Paul and Joe agree that this is an attractive offer. An agreement has been signed and this investment will go ahead within the next three months. The venture capital investor is impressed by Paul and Joe's management of QWERTY but has some concerns that it does not have the corporate governance structures to sustain its growth over the medium to long term. As a condition of the investment the venture capital investor is insisting that he has a position on the board of directors and a veto over major strategic decisions made by the company. Paul and Joe are agreeable to these conditions. Paul is proposing that they use the funds raised from the new investor to part-finance the acquisition of Screen Magic Limited (SCREEN), an Irish company which manufactures computer screens. Paul has had preliminary discussions with the owner (and managing director) of SCREEN, who has told him he is keen to retire soon after finding the last few years increasingly stressful trying to resolve a complex tax issue affecting SCREEN and dealing with increasingly onerous regulations on environmental standards in manufacturing. He may be interested in selling SCREEN and has provided information on the company (see Appendix II). Paul has been pushing a growth by acquisition strategy for several years because he believes QWERTY is too narrowly focused on one sector and believes acquisitions almost always deliver significant value through synergies and economies of scale. He is confident that if QWERTY acquires another company he and Joe have the management skills required to ensure a successful integration. Paul is eager to agree the terms of the takeover of SCREEN before the venture capital investor takes his seat on the board as he is not sure if the investor would approve of the takeover. Bridging finance would be available from QWERTY's bank to finance the acquisition pending receipt of the new equity funds. This facility would be personally guaranteed by Paul and Joe. CASE STUDY 3 QUESTIONS QUESTION 1: Discuss three (3) non-financial considerations that Paul and Joe should also consider prior to making their final decision as to whether or not to withdraw the Exile wireless keyboard from sale in 2014. (9 Marks) QUESTION 2: Critically evaluate Paul and Joe's new proposed policy in respect of discontinuing any products, which are budgeted to be loss making within QWERTY. In addition, suggest any improvement to the proposed policy that you consider appropriate. (11 Marks) QUESTION 3: Suggest and justify any three (3) specific performance measures in relation to innovation that you think QWERTY should adopt to enhance their future performance. (9 Marks) QUESTION 4: Identify one (1) potential ethical issue facing Paul and Joe and discuss how it should be resolved