Optimal Technology Solutions (OTS) Optimal Technology Solutions (OTS) is a privately owned high technology company established in 2002 by computer engineer, Brian Nguyen. It is situated in the country of Mantiev, a prosperous developed nation with a stable political system. Successive governments in Mantiev have promoted technology by providing grants and tax incentives. Tax credits are also provided to offset company investment in research and development. The government, like many governments worldwide, have invested heavily in a national telecommunications infrastructure. However, in 2010 the country suffered an economic downturn that led many companies to postpone technological investment. By 2010 OTS employed 75 full-time employees in a new, purpose-built factory and office unit. These employees were a mixture of technically qualified engineers, working in research and development (R&D), factory staff manufacturing and assembling products and a small sales and service support team. Product areas By 2010 OTS employed 75 full-time employees in a new, purpose-built factory and office unit. These employees were a mixture of technically qualified engineers, working in research and development (R&D), factory staff manufacturing and assembling products and a small sales and service support team. Product areas In 2010, OTS had three distinct product/service areas - data communication components, network management systems and, finally, technical support. OTS sells data communication components to original equipment manufacturers (OEMs), who use these components in their hardware. Both the OEMs and their customers are predominantly large international companies. OTS has established a good reputation for the quality and performance of its components, which are competitively priced. However, OTS has less than 1% of the domestic marketplace and faces competition from over twenty significant suppliers, most of who also compete internationally. Furthermore, one of the company's OEM customers accounts for 40% of its sales in this area. The international market for data communication components had increased from $33billion in 2001 to $81billion in 2010. Forecasts for 2011 and beyond predict growth from increased sales to currently installed networks rather than from the installation of new networks. The maturity of the technology means that product lifecycles are becoming shorter. Success comes from producing high volumes of reliable components at relatively low prices. OTS produces components in a relatively prosperous country where there is significant legislation defining maximum work hours and minimum wage rates. All new components have to be approved by an appropriate government approval body in each country that OTS supplies. This approval process is both costly and time consuming. The second product area is network management systems. OTS originally supplied fault detection systems to a small number of large end-users such as banks, public utility providers and global manufacturers. OTS recognized the unique requirements of each customer and so it customized its product to meet specific needs and requirements. They pioneered a modular design which allowed customers to adapt standard system modules to fit their exact networking requirements. The success of their product led to it being awarded a prestigious government technology award for "technological innovation in data communications". This further enhanced the company's reputation and enabled it to become a successful niche player in a relatively low volume market with gross margins in excess of 40%. They only have two or three competitors in this specialist market. Unlike component manufacture, there is no requirement to seek government approval for new network products. Finally, the complexity of OTS products means that technical support is a third key business area. It has an excellent reputation for this support. However, it is increasingly difficult and costly to maintain the required level of support because the company does not have a geographically distributed network of support engineers. All technical support is provided from its headquarters. This contrasts with the national and international support services of their large competitors. Current issues OTS currently manufacture 40% of the components used in its products. The rest of the components, including semiconductors and microprocessors, are bought in from a few selected global suppliers. Serious production problems have resulted from periodic component shortages, creating significant delays in manufacturing, assembly and customer deliveries. OTS is still a relatively immature organisation. There are small functional departments for sales and marketing, technical research and development, manufacturing and procurement. Brian still personally undertakes all staff recruitment and staff development. He is finding the recruitment of high calibre staff a problem, with OTS' small size and geographical location making it difficult to attract the key personnel necessary for future growth. Financial situation In response to poor internal investment decisions, Brian has introduced a more formal approach to quantifying costs and benefits in an attempt to prioritize projects that compete for his limited funds and time. His first formal cost-benefit analysis helped him select a new machine for producing certain components in his factory. The results of his analysis are shown in Figure 1. The cost of the machine was $90,000, with annual maintenance fees of $5,000. Brian has seen the machine working and he believes that he can save the cost of one technician straight away. These savings are shown as reduced staff costs. The manufacturer of the machine claims that the accuracy of the machine leads to reduced wastage of "up to 10%". OTS have detailed measures of the wastage of the current machine and Brian has used this to estimate wastage savings. The increased accuracy of the machine over time is reflected in his estimates. Finally, the manufacturer claims 'energy savings'. OTS currently know the energy costs of the whole factory - but not of individual machines. However, Brian thinks that his estimates for energy savings are realistic. He concludes that "over five years the machine breaks even, so this seems a reasonable business case to me". Overall summary financial data for OTS is presented in Figure 2. Figure 1: Business case for new machine Year 0 1 2 3 5 All figures in $000 Cost of the machine 90 Maintenance costs 0 5 5 5 5 5 Reduced staff costs 0 15 15 15 15 15 Reduced wastage 0 2 4 6 8 10 Energy savings 0 2 2 2 2 2 Figure 2: Financial analysis OTS 2007-2010 Financial analysis - extracted from the statement of comprehensive income All figures in $000 Revenue Domestic 2010 2009 2008 2007 6,235 6,930 6,300 4,500 International Total Cost of Sales 520 650 500 300 6,755 7,580 6,800 4,800 4,700 5,000 4,200 2,850 Gross profit 2,055 2,580 2,600 1,950 Overhead expenses 1,900 2,010 1,900 1,400 Profit before tax and 155 570 700 550 finance costs Finance costs 165 150 120 25 Tax expense 17 62 75 60 Profit for the year -27 358 505 465 Extracted from internal statistical reports Employees % of orders late Order book 75 75 10 2,500 3,750 60 45 7 5 4,150 3,505 Required: (a) Evaluate the macro-environment of OTS using a PESTEL analysis. (b) Analyse the industry or marketplace environment that OTS is competing in. (3 marks) (3 marks) Professional marks will be awarded in part (b) for clarity, structure and an appropriate approach. (c) Figures one and two summarise two financial aspects of OTS (i) Analyse the financial position of OTS (assesss the profitability ratio: gross profit margin, net profit margin, revenue per employees and other appropriate ratios) (2,4 marks) (ii) Prepare the payback period calculation and Evaluate the cost-benefit analysis used to justify the purchase of the new machine. (1,6 marks) (10 mark)