This case study draws on a real issue facing an engineering manufacturing company in 2016. For reasons of confidentiality, aspects of business information and the financial data provided in the second half has been constructed specifically for this assignment, although these do reflect general market conditions/prices and will be in line with anything you encounter. Everything else is real. Rotary Engineering UK Limited have been a key competitor in the specialist sector highlighted. They collaborated in the construction of this case and this is now being used as the basis for exploring fresh opportunities for potential business development.
In pursuing the research you are required to undertake in order to complete this assignment you should NOT attempt to contact Rotary Engineering. You will be exploring opportunities BEYOND any existing activities.
Background
Rotary Engineering UK Ltd is a Sheffield based company formed in 2003 following a Management Buy-Out, which can be taken to indicate that there are very strong motivators amongst the management team for the company to be successful and also that there is a good degree of confidence in the knowledge and skill base within the company in terms of the market sectors they service.
The fundamental business was around motor rewind and magnet technology and by 2003 they had commenced diversification of markets into the renewable energy sector and, in particular, wind turbines. This allowed them to exploit their existing engineering skills with a sector that was of personal interest to the management team. Indeed, if you were to ask them about the motivation for this diversification, one word that would be used would be passion. Not only did they possess the skills and expertise to service this sector, but it was a sector the team wanted to be involved in.
Their first turbine was erected in 2005 and their positioning in the market has been developed upon the basis of them being engineers first and so they can solve challenges, design and maintain equipment without reliance on buying in expertise. Alongside a core strategy built around developing strong customer relationships and maximising the possibility of high levels of 'lifetime value' from their customer base, this has seen the company continue to expand. The next, logical, business development was into solar panels and they use the same technology on their current business premises. Providing both a testbed for development and a demonstration of the commercial viability of this technology for the business sector.
New investment in 2010 led to a move to new premises and increased capacity for expansion. Since that time interest in the solar sector has continued to grow, but changes in UK market conditions have raised questions over quite how this should continue and where they should concentrate their efforts.
An overview of the company can be found on their website at: https://www.rotary.co.uk
Current Market Situation: Solar Panels
Solar panel installation was a booming industry in the UK, allowing owners to sell surplus energy into the national grid at a very preferable rate (feed-in tariff). This all changed recently and the first signs and fears of impact were announced at the end of 2011:
"Planned government changes to subsidies on solar power may deal the industry a "fatal blow", two parliamentary committees are warning. The Environmental Audit Committee and Energy and Climate Change Committee say ministers are right to make changes, but are doing so "clumsily"."
https://www.bbc.co.uk/news/science-environment-16288267
By June 2012 there was a suggestion that the sector was recovering,
https://www.solarpowerportal.co.uk/news/uk_solar_market_shifts_shows_further_signs_of_recovery_5478
But it remained clear that the reduction of feed-in tariff incentives from April 1, the introduction of new EPC requirements and consumer confusion continued to have a In fact a new support scheme had been introduced and it is, perhaps the consumer confusion and the inability of installation companies to re-visit their own business models that are the real barrier to a more speedy development. A typical observation from an industry spokesman being:
"We are pleased to see that the UK market is slowly stabilising after the sharp drop in installations in March 2012 when the new support scheme took effect. We believe that the DECC degression model supports sustainable growth for the UK solar market as it delays cuts in FiTs if demand is lagging....... We believe market growth could be stimulated through net metering in addition to longer-term visibility for solar customers and suppliers...." (Jan Jacob Boom-Wichers, Managing Director, France, Benelux, UK and Ireland, for REC Solar)
By 2013, industry experts began to suggest that the market may be about to shift. One interesting observation being that "A lot of people felt when the feed-in tariff rates were cut by 50 percent that solar was dead, but in the past year the cost of installing a solar power system has dropped by around 60 percent, which means the returns are still attractive at around 12 percent....Financial directors have recognised this and are really now seeing the benefits of investing in solar energy to cut high energy costs and generate income." (Gary Sucharewycz, EvoEnergy) Against this comparison, the company continued to invest in and explore further business in this field, but ongoing changes in Government support continued and viability became less certain. Despite the appeal for this type of power. As we moved into 2016, essentially support mechanisms have been either removed or dramatically wound down further - with the government arguing the industry should largely be fending for itself while bill payers should be spared unnecessary cost. For details, see here:-https://www.theguardian.com/environment/2016/apr/16/solar-power-clouds-gather-six-years-success-uk
Faced with this and against the reducing returns potential, the company decided to eventually refocus upon other aspects of their business and moved away from solar as a viable business stream. Research Requirement
In making business decisions, there are always multiple factors to take into account. Many of which will not be evident to outsiders. It is not the purpose of this task, therefore, to question or challenge the decision of Rotary Engineering.
Your task is to explore the current market conditions within the UK and to establish whether or not companies like Rotary who have chosen to remain suppiers/installers of solar panelling have a viable market. Sufficient to sustain themselves until 2020.
Financial Considerations
Existing suppliers are able to provide a range of complete solar panel systems but for the purpose of this piece of work you should assume that a "standard" product would be a 50KW fully installed system. The costs involved in this installation can be broken down as follows:
Solar Panels £29,400
Electrical Equipment £16,
Specific Task:
You are seeking to demonstrate the viability or otherwise of this opportunity for an existing solar panel operator and in doing this are expected to demonstrate an understanding of the demand for solar panels, the nature of the customers they might be supplying, the basis of competition and any market conditions that will affect demand and the potential for long term profitability. PLEASE NOTE - that a potential customer might be another company within the supply chain of the end user.
Specifically, you need to:
- Provide a 'picture' of what the market currently lookLabour £8,000
Both labour and materials are expected to rise by 3% per year for the foreseeable future.
Throughout the company an overhead absorption rate is used in order to recover the indirect costs. (These include all overheads, mechanical equipment, travel etc.) The rate is based upon material costs and is currently 25% of direct material costs.
You should assume that no on-going costs are incurred other than direct costs and those which are met by overhead recovery. Taxation, both direct and indirect should be ignored and you should assume that all receipts and payments are in £ sterling.
Your Specific Task:
- Provide a 'picture' of what the market currently looks like, which might include alternative power options,
- Identify key competitors (not just solar!) and primary customers,
- Indicate future potential market demand (degree of static/growth/decline) - as in, provide recommendations on how you see the market developing,
- Demonstrate, financially, what this will mean in terms of a return on their investment. Note: you will use your financial calculations to demonstrate whether this is a viable market of not.
In doing this, you are required to:
1. Research: This is a fairly specialist area and, as such, the availability of data to help you make your decisions may be variable. With this in mind you will need to find a realistic way of allocating and managing the resources available to you. You are EXPECTED to use the Internet as your primary source of information. Beware, this medium, whilst accessible, can deliver both flawed on contradicting information. Thus use what you find intelligently
2. Interpret: The data gathered and consider the accuracy and reliability of what you have discovered. What does the data actually tell you? Be realistic in your observations. The nature of market research is that it often suggests something you have not looked for and fails to fully answer the questions you set so do not draw conclusions unsupported by the data.
3. Apply: Your findings to the task of building up a picture of the marketplace and establish how you think it looks now and how it might be evolving. Look at your current indicators of supply and demand for what drives demand for the cutting services and, if they become apparent, consider the buying chains and decision making processes to reinforce your final recommendations. Also consider aspects of 'Segmentation, Targeting and Positioning' and how they might apply. (As in, what are the segments, how attractive are they, and why!).
4. Evaluate: The impact of your findings on an existing company in terms of the potential for the chosen sector. Establish your projections for the demand for solar panels in your identified segment/s over the next 3 years. (Use the market data to plot the potential in 2020, but calculate financial date forwards three years) Draw conclusions and demonstrate your justification for these.
5. Consider Financial Viability: Drawing on the figures provided above, how might the market indicators you have identified impact upon company profitability and what would be your recommendations for future activities?
6. Identify Potential Pricing Options: Again using the base figures as a starting point, what pricing policy options are available to companies and what are the implications of these?
7. Recommend: A pricing policy that you would consider over the next 3 years and how companies should monitor the marketplace so as to avoid being caught out by potential future changes in demand. In this respect, what are the key indicators of demand that you would recommend they monitor?
Reflect: IN YOUR INDIVIDUAL ASSIGNMENT ONLY: Write up your findings and consider, if you were an existing company reading this, to what degree would you be happy with what this says? What might be missing and why? If you were to undertake this research and evaluation again what would you do differently and why?