For this project there is a Business case example that needs to be read and analyzed.
The outline for the case analysis is printed towards the bottom of the short story.
Ones done reading the short story please answer the questions in the Outline for a
Case Analysis. This must be in APA format and be at least 3 Â½ pages long. Please let
me know if this project will work for you.
Eagle Towers was a development company set up specifically by property investors to purchase a run-down south coast hotel, demolish and then rebuild it into 20 retirement flats. The company had three founder investors and was run day-to-day by an experienced project manager working on a contract basis. The old hotel was bought with outline planning permission for redevelopment for $750,000 and the three investors raised $1 million overall from personal and family resources, allowing some working capital to cover the initial phases of the project (fees to the project manager, architects and legal costs) and the work on the initial group of five flats. The overall build was split into three phases with the exact timing of the final phase especially likely to be influenced by market conditions. All the building work on phase one was subcontracted to a specialist contractor for a fixed price (including quality and delivery targets for the work). The projected selling price per unit (after legal costs) on the phase was $100,000 per unit. The land cost $37,500 per unit and on-site build costs were a further $30,000 a unit, leaving a projected profit from each flat of $32,500. Based on the projections from the first five units, across the whole three phases, the founder investors believed the redevelopment work should finally generate $650,000 profit from an initial $1 million investment. Phase one built and sold according to plan. All five units sold within a month of them being marketed. Phase two for a further five units was started immediately using the same builder and a similar fixed price arrangement (building costs per unit went up slightly between phase one and two but this was more than offset by house price inflation, so profit margins in excess of 30% per unit continued). However, early on in phase two, the project manager reported problems with build quality under the contract, as well as some slippage in the pace of construction. The investors became very worried that the early marketing for phase two would be wasted as potential buyers would go elsewhere. Indeed, the phase one site was adjacent to phase two. Completion of phase one also began to be impacted by work on-site with most of the new residents due to move into the new flats in the coming weeks (the overlap would increase further as phase two slipped behind schedule). As the five sales in phase one had been through exchange of contracts, if the completion did not occur on time, penalty clauses would be due. As the worries of the investors mounted, the advice from the project manager was to bring the building work in-house. The building firm was in breach of both the quality and delivery targets in the phase two contract, and Eagle Towers had the right to end the contract without compensation (ensuring that the builder was paid for all the work actually completed and the materials on site). The project manager also knew that the building firm worked mainly through subcontractors anyway and Eagle Towers could work direct with them provided he was able to bring in a foreman as well. As this revised project plan was implemented, the directors of Eagle Towers spotted a further problem. At the start of phase one, the investors provided $250,000 above the land purchase costs to start building work. After fees and legal costs, the project manager was left with $200,000 to pay for construction, enough to build between six or seven houses. The idea was that the proceeds from phase one would come on stream providing additional funds to complete phase two and so on, until all three phases were built. However, advance purchasing of materials by the builder, combined with the cost of hiring a foreman and worries about delays to the legal completions from phase one, had the potential to quickly lead to a cash-flow problem. The solution for the directors of Eagle Towers was to accelerate the start of phase three. Although this strategy required additional working capital it was obtained by a deal struck with a national chain of care homes for elderly people who were looking to diversify into development activity. The care home owner invested $400,000 into Eagle Towers for just under 30% equity share of the business. This investment was sufficient to overcome any worries over the cash-flow for phase two, as well as provide resources for phase three. Eagle Towers Property Development Ltd. only traded for three years and was wound up before its fourth anniversary. All 20 properties were sold and house price inflation ensured that the phase three units averaged $115,000 each. As a result, the total project revenue was $2.150 million against land and building costs of $1.430 million. Consequently, the original three investors received a combined gross development profit of $511,000 and the care home chain $209,000. Discussion Construction and real estate-related businesses account for nearly one in five SMEs so the example of Eagle Towers is not uncommon. Speculative real estate development presents a number of challenges for firms seeking debt funding (unlike builders who are working on a contract basis). This is because such projects only generate funds to repay debt on completion and, until then, the work consumes cash well in advance of any security value. (In contrast, a contract builder would work to a schedule and normally receive stage payments to cover any loan repayments.) Taking this consideration into account, the $1 million founder equity set up the venture on a solid base. The initial plan was to use the equity invested as initial stake to support the lifetime of the project, combined with some careful cash-flow management in the scheduling of sales receipts from the various phases of activity. This plan was reinforced by the fixed price costs negotiated for phase one and part of phase two. Unlike most of the case studies discussed in this chapter, the business no longer exists and was wound down after the building work was completed. The project was a success, although the funding plan had to be modified and a new third-party investor brought in to ensure success (although this decision reduced the returns to the original investors, albeit this impact was offset by market price inflation on the selling values on phase three units). Even when facing a cash-flow problem, the original investors decided to raise more equity rather than seek an overdraft. Moreover, when the building work was taken over by Eagle Towers, no other finance products were used by the business as the construction activity was still undertaken by subcontractors. A final observation is that the funding decisions made by the owners of Eagle Towers and the external finance sources used illustrate that the distinction between cash-flow and entrepreneurial activity can become blurred. As discussed in Chapter 1, speculative real estate is an activity in which this often happens. As this is a one-off project, the cash-flow and entrepreneurial aspects of funding have merged into one. Only by raising enough funds to underpin cash-flow can the entrepreneurial objective of the business be achieved. This provides a contrast with, for example, a manufacturing activity where funds raised to underpin research and development activity provides an entrepreneurial boost to the order book, followed by a production phase where cash-flow needs to be sustained to fund output to fulfil contracts.
OUTLINE FOR A CASE ANALYSIS
1) EXAMINE AND DESCRIBE THE BUSINESS ENVIRONMENT
a) Describe the nature of the organization under consideration and its competitors.
b) Provide general information about the market and customer base.
c) Indicate any significant changes in the business environment or any new endeavors upon which the business is embarking.
2) DESCRIBE THE STRUCTURE AND SIZE OF THE BUSINESS
a) Analyze its management structure, employee base, and financial history.
b) Describe annual revenues and profit.
c) Provide figures on employment. Include details about private ownership, public ownership, and investment holdings.
d) Provide a brief overview of the business’s leaders and command chain
3) IDENTIFY THE KEY ISSUE OR PROBLEM IN THE CASE STUDY
a) In all likelihood, there will be several different factors at play.
b) Decide which is the main concern of the case study by examining what most of the data talks about, the main problems facing the business,
c) Examples might include expansion into a new market, response to a competitor’s marketing campaign, or a changing customer base
4) DESCRIBE HOW THE BUSINESS RESPONDS TO THESE ISSUES OR PROBLEMS
a) Draw on the information you gathered and trace a chronological progression of steps taken (or not taken).
b) Cite data included in the case study, such as increased marketing spending, purchasing of new property, changed revenue streams, etc
5) IDENTIFY THE SUCCESSFUL ASPECTS OF THIS RESPONSE AS WELL AS ITS FAILURES
a) Indicate whether or not each aspect of the response met its goal and whether the response overall was well-crafted.
b) Use numerical benchmarks, like
i) a desired customer share
ii) show whether goals were met
iii) analyze broader issues
iv) employee management policies
v) talk about the response as a whole
6) POINT TO SUCCESSES, FAILURES, UNFORESEEN RESULTS, AND INADEQUATE MEASURES
a) Suggest alternative or improved measures that could have been taken by the business
b) Using specific examples and back up your suggestions with data and calculations
7) WHAT WOULD YOU DO?
a) Describe what changes you would make in the business to arrive at the measures you proposed
c) changes to organization