Business

Strategic Management Case Study: Gooseberry Farm Ltd

The entire share capital of Gooseberry Farm Ltd is owned by Giles MacDonald and his wife. Its business is owning and running a 1,200 acre arable farm located five miles outside a small town not far from Bangkok.

A decline in farm income

In order to cut food surpluses, the basis for determining cereal support prices within Thailand is being switched from tonnes harvested to hectares cultivated. As a result Gooseberry Farm Ltd faces a sharp decline in its annual trading profits, which in recent years have averaged CU90,000. Mr MacDonald is therefore considering using 200 acres to establish a new exclusive 18-hole golf course. Local businessmen regard this as feasible, since planning permission will readily be forthcoming and membership waiting lists at the two existing clubs in the area exceed 350.

The golf club company


It is proposed that Gooseberry Farm Ltd will sign a 100-year lease with a new company, Millennium Golf Club Ltd, which will pay an annual rent of CU25,000 to Gooseberry Farm Ltd for use of the land. The issued capital of the golf club company will be two CU1 shares, owned by Mr and Mrs MacDonald, and the remainder of its initial funding will be CU1 million in the form of 15% per annum irredeemable loan stock. Fifty local businessmen, including Mr MacDonald, have each agreed to purchase CU20,000 of this stock. Of the funds thus raised CU225,000 will be spent on converting the arable land to become a landscaped golf course. A further CU25,000 will provide working capital.

The club house company

The remaining CU750,000 will be used to purchase a 25% stake in a separate company, Century Club House Ltd, to develop and operate a club house. This will have conference facilities, a sports hall, two bars and a restaurant. A local property company will subscribe the other 75% of the share capital of Century Club House Ltd. Millennium Golf Club Ltd will pay an annual rent of CU25,000 for the use of the club house, but Century Club House Ltd will manage and run all facilities offered there, taking the profits that will be earned.


When ready to commence business in January 20X6, the new golf club will be much better appointed than the two existing local courses, and the only serious competition for comparable leisure facilities will come from three hotels in the nearest town.

Budgets of the golf club company

Annual operating expenses of Millennium Golf Club Ltd are budgeted at CU450,000, comprising the following.
CU
Salaries, wages and professional’s retainer 125,000
Course maintenance 50,000
Rent of land and club house 50,000
Administration and other expenses 50,000
Finance cost on debenture loan stock 150,000
Depreciation 25,000

The terms of the debenture loan stock issue prohibit a dividend being paid on the two ordinary shares, so that any surplus is applied for the benefit of the club and its members.

On the revenue side, Millennium Golf Club Ltd’s share of profits on the investment in Century Club House Ltd is expected to total CU100,000 in 20X6, the first year of operations. Green fees, chargeable to nonmembers using the golf course, are expected to amount to an additional CU50,000 a year.

On the assumption that target membership levels are achieved, annual subscriptions are initially to be set at CU500 for each member. This will be CU100 less than for full membership at the two rival golf clubs in the area. In addition, no joining fees will be payable in the first year of operation, but thereafter (as with the other two clubs) they will be equal to one year’s subscription.

On this basis Mr MacDonald and his associates are sure that they will be able to recruit around 350 members from the existing two clubs, including a good number of influential local businessmen and low handicap players. In addition, the new club expects to recruit most of those currently on the waiting lists at its two local rivals. The policies of the club
The policy of the club will be to keep the annual subscription fee for members as low as possible while maintaining high quality facilities and helping to preserve the countryside. It is also intended to limit membership to a maximum of 750 players in order to maintain the exclusive nature of the club.

The constitution of the club will put its overall management in the hands of a committee of 12 persons elected by the membership, but with the proviso that two thirds must be debenture holders.

Requirements

You are an employee of the firm of accountants used by Mr MacDonald.
(a) Draft a mission statement that might be suitable for Millennium Golf Club Ltd and identify possible key objectives.
(b) Prepare a memorandum for Mr MacDonald which briefly explains the relationship between, on the one hand, a mission statement, and on the other, an organization’s objectives and its strategic, tactical and operational plans.
(c) Prepare briefing notes for Mr MacDonald providing a critical analysis of the financial and operational arrangements envisaged for the company.

The notes should deal only with the following matters.
 Total demand projections (including a break-even calculation)
 Downside risk
 Upside potential
 Conclusions.
The conclusions should comprise a succinct summary of the major factors supporting your recommendations.

Model Answer to the Case Study

(a) Mission statement

The mission of this club is to provide high quality, value for money golfing and leisure facilities. To
achieve this the club will limit membership to a level compatible with ensuring that the course and
leisure facilities will be well maintained, that the environment is protected and that membership fees
are as low as possible.

Key objectives
(i) To commence business on 1 January 20X6
(ii) To achieve target membership of 750 by 31 December 20X6
(iii) To achieve green fees of CU50,000 in 20X6
(iv) To earn CU100,000 from Century Club House in 20X6.

(b) Memorandum

ToMr MacDonald
FromConsultant
DateToday
SubjectMission, objectives, strategic tactical and operational plans

The relationship between the elements of planning can be shown in the following diagram.

Mission

The mission attempts to define the purpose of a business. It may include information about the values and methods. The mission must pay some attention to the environment and markets in which the business operates. The information might show that the type of business being carried on has little future. If so the nature of the business would have to change together with the mission statement.

Objectives

Objectives are normally quantifiable targets which are time limited. A statement such as ‘We aim to increase profits in the future’ is not an objective, the profit increase has not been quantified nor has a deadline been set. A valid objective would be ‘We aim to increase profits by 20% by 31 December 20X6.’

Objectives can be long term, affecting the whole company. They can then be broken down into departmental and individual objectives allowing management by objective to be implemented. If everyone achieves his individual objective, the group as a whole should meet its objectives. In practice, organizations will often have to cope with multiple and possibly conflicting objectives.

Strategic plans


Strategic plans are long-term plans setting out how the objectives can be met. Typically a strategic plan will be for a period longer than a year and will affect the whole group. For example, to meet the objective quoted above, the strategic plan might be to gain a strong presence abroad, or it might be to acquire a competitor.

Tactical plans


Tactical plans are typically for a period of a year and represent detail as to how the strategy is to be achieved. For example, the tactics for achieving a strong presence abroad might be to approach foreign companies with a view to co-operation.

Operational plans


Operational plans are very detailed short-run plans showing exactly what steps have to be carried out. Continuing the example from above, the operational plan would set out how and when goods are first to be sold by our new trading partners, what prices will be charged, how the profits will be split.


(c) Briefing notes

To: Mr MacDonald
From: Consultant
Date: Today
Subject: The operational and financial arrangements envisaged for the Millennium Golf Club Ltd
Total demand projections
Members for the new club are expected to be recruited from two sources.

(i) Those currently waiting for membership of the two existing clubs (350).

(ii) Those who are already members of the two existing clubs (350 expected to change membership).
CU50,000 of green fees and CU100,000 from the club house are also forecast, giving a breakeven point as follows.

Operating expensesCU
450,000
Century
Green fees
(100,000)
(50,000)
300,000

Break-even =CU300,000/CU500= 600 members

The membership fees are substantially lower than those charged by competing clubs, and to encourage people to join in the first year of operation, no joining fee will be charged at that time. This, together with the high quality facilities that are to be offered, should mean that break-even is achieved (600 members) and that the target membership of 750 is feasible.

To support the projections a market survey should be carried out to gauge the reaction of members of the existing clubs and those on the waiting lists. It is important to assess total demand in the area and which of the clubs is potentially the weaker if cut-throat competition results.

2 Downside risk

The company is very highly geared, with an interest burden of CU125,000. To meet that amount 250 members will have to be recruited. If a smaller than expected membership is recruited, income from the clubhouse will also fall. If the club fails, the receiver or liquidator will be able to avoid paying rent for the land and you will therefore have lost the use of the land, will not receive rent or interest and are likely to have lost the amount you invested in the debentures.

3 Upside potential

Some 200 acres of the farm are being leased to the new company on a 100-year term. The income you will receive from that will be CU25,000 rent and CU3,000 interest. Income from the farm has been averaging CU90,000/1,200 = CU75 per acre per year, and this is expected to fall. The 200 acres rented to be leased to the golf club will earn a rent of CU125 per acre. Therefore, the current level of rent is attractive.

Another way of looking at the problem is that you will be earning an incremental annual return of CU13,000 for an investment of CU20,000. The incremental return is likely to increase since rents of agricultural land decline as the protection afforded from the CAP is gradually eroded.

In case agricultural rents should increase in the future, it would be an advantage to be able to adjust the golf club rent upwards in line with those.

4. Conclusions

If the club reaches its targets for membership (750), green fees and income from the club house, a profit of CU75,000 will be made. If membership is to be limited to 750, there is no great potential for increasing profits. All the profits are to be retained for the benefit of the club and its members. No dividends can be paid out to the shareholders

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