How would Intervela approach future innovation in the context of both the ONE sails group and the financial crisis?

CASE 8B

INTERVELA VICTORY SAILMAKERS, PART B The year was 2011, and Zeljko Perovic was driving on that familiar highway between Materija and the bay of Koper. He was using this weekend to catch up on his beloved hobby-sailing. As he watched the Slovenian countryside pass by him, he thought about how sailing had defined so much of his life, both personally and professionally. His mind wanderedover the past 1 0 years that had seemed to go by so quickly. he thought of how Intervela began as a small-scale project with his

friend Zvonko and had become something much larger than either of them could have imagined. When Zeljko finally reached the bay and felt the cool sea air on his face, he still could not fully leave the thoughts about his business behind. He continued to reminisce about Intervela over the past 10 years, a decade full of some considerable gains-and some very big losses.

DECISION ABOUT THE NEW SAIL LOFT As business continued to expand after 2001, Zvonko and Zeljko felt that they were outgrowing their current space at the Koper marina. In addition to the inadequate size of the Koper sail loft, the marina had started to demand their own slice of the Victory Sails pie by increasing rent costs to the two entrepreneurs, and the two needed a cheaper place to produce their sails. In the past year, Zvonko and Zeljko had been planning on buying a sail loft in Italy and had even been training an Italian to manage the new loft. When it became apparent that Slovenia would join the European Union in 2004, however, Zvonko and Zeljko saw no more need for a concrete presence in Italy. It would be better to take advantage of the new single EU market and centralize their production. The two then began to search for new premises within Slovenia. They found an interesting offer in the Slovenian town of Materija, roughly 32 km inland from Koper, and a 30-45 minute drive to Rijeka, Croatia, and Trieste, Italy. A textile plant had recently gone bankrupt, and the municipal authorities of Materija were looking to solve a twofold problem with one stroke. First, the city simply wanted to find a company that could employ the laid-off textile workers. The second problem had to do with a nightclub on the premises that the previous owner had rented out as a source of additional revenue. The nightclub was reportedly engaging in questionable activity, and the city wanted to find a buyer for the land who would agree to expel the business. With the city so eager to see new owners for the property, the two entrepreneurs considered the Materija plant with much optimism. Zvonko and Zeljko saw the move to Materija as a prime opportunity for several reasons. Being inland from the coast, the price was right, which would certainly add to the bottom line. They were dealing with a very supportive town government instead of the Bay of Koper.

authorities, who had become too demanding and \Vere cutting into profits. Size would also be veryimportantfor the new production facility. The Materija plant was about 2500m2-much larger than their space in Koper. They could even continue to rent space to a kindergat:ten .on the premises as a source of revenue. Materija was closer to their other production facility in Rijeka, Croatia, making coordination between the two facilities much easier; Almost providentially, the sewing skills of the textile workers were directly transferable to sailmaking. Finally, Zvonko and Zeljko were ready to get out of the marina environment; there was too much pressure in the spring and summer seasons to meet sailors' constant demands for immediate sail repairs, and they felt they could better focus on the business from a quieter area. The two decided to purchase the Materija plant, and were able to finance their new purchase through their excess cash flows and a bank loan. They moved their plotters, cutters, and other production equipment to Materija and set up. a significantly larger production floor for the manufacture of much larger sails. Victory Sails headquarters were officially moved to Materija in 2003. SMOOTH SAILING The move to Materija proved to be a great success. Zvonko and Zeljko were quite happy with their new headquarters and enjoyed both their quieter surroundings and their larger production floor. They were now able to increase their production as well as start producing some sails for larger boats. The two entrepreneurs continued many aspects of their marketing strategy (advertising in nautical trade journals, attending nautical fairs, and supporting contestants using Victory Sails at regattas) but began to expand their reach geographically. In an effort to increase the international presence of the Victory sails brand, Zvonko began visiting some of the top regattas in Europe. He traveled to competitions in Hyeres in France, Medimblick in Holland, and Kiel in Germany-the top three regattas in Europe. He attended the continental and world championships to promote the Finn class of sails in various locations. As more and more sailors won races using Victory Sails, Intervela's international prestige grew. Zvonko also won more notice within Slovenia when he began working with the Slovenian sailing team. He became the selector for the sailing federation of Slovenia and it was his responsibility to determine who would represent Slovenia in major regattas. Beyond Slovenia, they focused greatly on the Croatian market.

They promoted the Optimist class heavily and collaborated with Sime Fantela, the Croatian Optimist champion. They also collaborated with Karlo Kuret, an Olympic Finn class sailor for Croatia (who continues his partnership with Intervela by helping them with sales and promotion to this day). As they expanded their promotion and advertising, Intervela enjoyed increasing revenues. Except for their single corporate customer Elan (a sailboat manufacturer), Zvonko and Zeljko continued to custom-make their sails for each individual sailor on an on-demand basis. As business continued to grow in the mid-2000s, Zvonko and Zeljko began to delegate some of the operational and managerial work to some other employees and took advantage of their new free time. They even bought motorbikes for themselves to enjoy in their newfound free time. Although business was going well at the time, the smooth sailing would not last for long. 6:00p.m., 06-06-2006 On the evening of June 6, 2006, Zvonko Bezich was enjoying a ride on his new bike on the Croatian peninsula of !stria when, at approximately 6:00p.m., tragedy struck. Zvonko, heartbreakingly, was in a serious crash and did not survive. Zvonko's passing of course meant Intervela had lost one of its leaders, but this was nothing compared to Zeljko's loss of his best friend. Despite his pain, Zeljko had no choice but to continue the business he had founded with his late friend. THE ONE SAILS DECISION Zeljko Perovic was now not only in charge of sail production and development, but of Zvonko's previous marketing and distribution responsibilities as well. Using work as an outlet for his grief, Zeljko worked diligently and was able to keep Intervela on its successful course of profit and growth. Standing alone in competitive sails market, however, had already begun to take its toll on business. Before Zvonko's passing, the two entrepreneurs had begun to consider two options for the future of the business: (1) expand the plant and begin producing some materials themselves, such as canvas and cloth, or (2) partner with other sailmakers in the form of a business group. Each option had certain benefits and drawbacks. Expanding the production plant and beginning to integrate vertically would allow Intervela to extend the reach of its brand name and would allow Zeljko more autonomy in running the company. This course of action also entailed much risk and a considerable amount of stressful work. Joining a group, on the other hand, would mean that the Victory sails brand name would be replaced with the group's name and trademark, and Zeljko would have less of a say in the marketing of Intervela products. The bene fits of joining a group were increased international aware ness, increased purchasing power relative to suppliers, and minimized costs for each member individually for promo tion and advertising. Weighing the pros and cons of each option, Zeljko decided to join the ONE sails group. ONE sails brought together 15, mostly Italian, sailmakers. Zeljko was confident in his decision to join the ONE group for several reasons. Although Intervela and Victory Sails had gained international recognition on their own, ONE sails took international visibility of his sails a steep further. Intervela sails now benefited from the well-known ONE trademark and were able to penetrate more markets. Due to the ONE sails group's size and purchasing volume, Zeljko was now able to obtain materials at lower prices. Zeljko also found that outsourcing much of the marketing and promotion work allowed him to focus on sail develop ment and production, his area of expertise. THE PERFECT STORM Zeljko was happy with his decision to join the ONE sails group. His business seemed to benefit from the new capabilities of the ONE sails network - cloth prices were down and Intervela gained access to an even more international market. Zeljko was also grateful that the majority of the marketing responsibilities were carried out by others who could devote more time to it. Then the financial crisis hit. The worldwide economic downturn of 2008 did not spare the sails market. Revenues for Intervela had grown to 2.6 million dolars in 2008 before the crisis, but had fallen to 1.4 million by 2010 (see Exhibit 1). Not only was the demand from individual sail ors down, but Intervela's largest corporate customer, Elan, found itself in financial hardship as well. Because of the crisis, payments to Intervela were coming in late or not at all. In some cases, Intervela was paid with sailboats - a nice gesture perhaps, but such nonliquid assets were of little help to Intervela's business needs. The persistence of the global recession only made matters worse and ensured continued hardship for the sails market and for Intervela. INTERVELA IN 2011 Intervela is still fully operational, and Zeljko Perovic con tinues to manage the Materija sails loft. Zeljko has had

several ideas for new projects and expansions, but banks are still reeling from the financial crisis and are less willing to lend their money. The banks' conservative lending policies mean that, unlike in years past, future cash flow projections are little help when securing a loan and coiiateral is preferred. Despite the inconvenience, Intervela has been forced to finance some operations with short-term loans because of continued late payments by some customers. Given these hardships, how can Intervela return to and exceed their pre-crisis revenues, and how can Zeljko put Intervela on a long-term course for growth?

lntervela total Revenue 2005 1,434,121 2006 1,762,463 2007 2,198,522 2008 2:615,625 2009 2,192,241 2010 1,422,547