EXAM CASE: ONLY A MEMO IS REQUIRED

The attached case represents part two of your exam. Your task is to assume that you have been hired as a consultant and thus must propose a feasible solution to the business problem posed in the case. The "Normative Approach", or an appropriately modified version, is to be used for the written "MEMO". The memo is limited to 300 words, exclusive of exhibits and financial statements; please double space using the exam booklet provided.

Judgment of your performance will be based on the conciseness and clarity of the presentation, proportion of problems dealt with, the accuracy of the analysis, soundness of the arguments used to support chosen plans of action, and the implementation plan itself.

Question 41 (40 points)

David's Entrepreneurial Venture

David Edward is a 26-year-old military man and a lifelong resident of Sault Ste Marie, Ontario. Sault Ste. Marie is a beautiful midsized city located where three of the Great Lakes, Superior, Huron and Michigan meet. It has a significant summer resort industry in and around the city. The permanent population is about 75,000 and this multiplied by a factor of 25% in the summer months.

David spent seven years in the Canadian Armed Forces after high school graduation. Returning home in June 2015, David decided to go into business for himself because he could not find a good job in the Algoma area. So, he set up David's Cleaning Company. David felt that his savings would allow him to start the business without borrowing any money. His estimates of required expenditures were $16,000 for a used panel truck in good condition, $2000 for a quality steam-cleaning machine adaptable to carpet and furniture, $1200 for a heavy-duty commercial vacuum cleaner, $200 for special brushes and attachments, $400 for the initial supply of cleaning fluids and compounds, and $1000 for insurance and other incidental expenses. This total of still left David with about $20,000 in savings to cover living expenses while getting started.

One of the reasons David chose this line of work is his previous work experience. From the time he was 16, David had worked part-time for Fred Smith. Mr. Smith operated the only other successful carpet-cleaning company in Sault Ste. Marie. There was one other company in Sault Ste. Marie, but it was near bankruptcy, and as likely to close in the near future.

Mr. Smith prided himself on quality work and had a loyal clientele. Specializing in residential carpet cleaning, Smith has been able to build a strong customer franchise. For 35 years, Smith's major source of new business has been retailer recommendations and satisfied customers who tell friends about the quality service received from Mr. Smith. He is so highly thought of that the leading carpet and furniture stores in Sault Ste. Marie always recommend Smith for preventive maintenance in carpet and furniture care. Often Smith is trusted with the keys to Sault Ste. Marie's finest homes for months at a time when owners are out of town and want his services. Smith's customers are so loyal, in fact, that a national household carpet-cleaning franchise found it next to impossible to compete with him. Even price-cutting was not an effective weapon against Mr. Smith.

David Edward felt that he knew the business as well as Mr. Smith, having worked for him for many years. David was anxious to reach his $120,000 per year sale goal because he thought this would provide him with a comfortable living in Sault Ste Marie. While aware of opportunities for carpet cleaning in businesses, office buildings, motels, and so on, David felt that the sales volume available there was only about $80,000 because most businesses had their own cleaning staffs. As he saw it, his prime opportunity was direct competition with Smith.

To get started, he allocated $2400 to advertise his business in the local newspaper. With this money he was able to purchase two half-page ads and have enough left over to buy daily three-line ads in the classified section, listed under Miscellaneous Residential Services, for 52 weeks. All that was left was to paint a sign on his truck and wait for business to catch on.

David had a few customers and was able to gross about $1000 a week during the first few months. These customers were usually Smith regulars who, for one reason or another (usually stains, spills, or house guests), were not able to wait the two weeks required until Smith could work them into his busy schedule. While these people did admit that David's work was of the same quality as Mr. Smith's, they preferred Smith's quality-care image. During the months of April and May David did get more work than he could handle when resort owners were preparing for summer openings and owners of summer homes were ready to open the cottage (camp). The same rush occurred in September and October as resorts and homes were being closed for the winter. During these months, David was able to gross about $800 -$1200 a day working 10 hours per day.

Toward the end of his first year in business, David began to think about quitting his new business. While he hated to think of having to leave Sault Ste. Marie, he could not see any way of making a living in the carpet and furniture cleaning business in Sault Ste. Marie. Mr. Smith had the whole residential market sewed up except in the rush seasons and for people who needed fast cleaning.

Guiding Questions (answering these questions is not equivalent to writing a memo and will result in a grade of Zero) 1. Evaluate David's approach to starting his carpet-cleaning business. 2. Why was he not able to reach his goal of $120,000 in sales? 3. Is there anything David could do to stay in business?

Question 41 options: