BALDWINCORPORATION

SBUStrategicPlan:HighEndSegment20192022

Chief Executive Officer Chief Financial Officer Vice President Human Resources Vice President Marketing Vice President Operations Vice President Technology

Deborah Chiffon Caroline Zhao Eric Guzowski Sascha Asher Jennifer Deas Garrett Carson

April 29th, 2010 MGMT 471W Section 2: Professor Brown

Table of Contents

Item:Page:
Targets: SBU Mission Statement SBU Objectives 3 3

Background Analysis External: Industry Analysis External Factor Evaluation Matrix Competitive Analysis - Competitive Profile Matrix 4 12 14

Background Analysis Internal: Strengths & Weaknesses - Internal Factor Evaluation Matrix 16

Strategy Formation: TOWS Matrix NBD Matrix Strategy Matching & Selection 18 20 22

Strategy Evaluation: Qualitative Evaluation QSPM Matrix Quantitative Evaluation Financial Statements Quantitative Evaluation NPV Analysis Strategy Selection Optimal Strategy 23 26 30 32

Strategy Implementation: Action Plan 33

Targets: SBUMissionStatement
The mission of the Ultimate Division (High End segment) is to provide its customers with the
most-advanced technological products on the market that meet and exceed their needs without sacrificing product quality.

SBUObjectives
Our main goal is to maintain our leading position in the high-end sensor industry by retaining our competitive advantages and quick response time to our customers demands. In order to keep our promise, and in view of expected continuing market growth, we have established the following 3-year-term objectives for our current strategy: o Conduct relentless R&D to keep segment products on or close to exact yearly customer specifications set by established demand drift rates o Plan to introduce a new product in order to better meet our customers age requirement o Achieve/maintain a 85% - 95% product awareness for Boost and potential future products and a 100% segment accessibility index o Produce the highest-quality products in our industry (i.e. highest MTBF among competitors) o Increase segment sales by 15% to 20% each year o Remain profitable All the aforementioned objectives are to be met while keeping a positive segment net contribution margin and achieving/maintaining the highest total market share in our sector, even during potential future expansionary periods.

BackgroundAnalysisExternal: IndustryAnalysis
Definition: The High End / Digital Imaging Sensor Industry
The Baldwin Corporation competes in the sensor industry, providing a vast assortment of sensors that appeal to diverse groups of customers in different technological industries ranging from movement detection to aeronautics. The focus of this report is on one of Baldwin Corporations subdivisions, the Ultimate Division, which competes in an industry that supplies state-of-the-art digital-imaging sensors to its customers in the digital camera industry. While we adopted a Niche-Differentiation strategy and, hence, currently only specialize in producing the latest sensors in form of Charge-Coupled Devices (CCD) for use in digital cameras, this division still competes closely with other companies manufacturing sensors in that segment. These are very close in terms of technical specifications, making them suitable for reengineering in order to make them viable substitutes for our own sensors.

Digital Imaging Supply Chain

Note: Supply chain is simplified and only shows relevant participants.

Porters 5-Forces Model

Risk of Entry by Potential Competitors 1. Economies of Scale: Increasingly Significant The economies of scale are already very notable at this point, while not quite as impressive as one can observe in the low-cost sensor industries due to much smaller production volumes in the High End industry. These are continuously increasing year-by-year along with the growth rate, giving the established companies lower variable costs in the process. When comparing these costs with what a new entrant would face, the reductions through economies of scale are significant. The current competitors are eight years ahead on the experience curve, making it extremely difficult for new entrants to realize similar gains within a reasonable time frame.

2. Brand Loyalty: Very High While customers may be somewhat inclined to switch among currently established brands due to very similar technical specifications, they are very unlikely to switch to new market entrants. For one, the customer awareness for the top four products ranges from 85% to 95% due to substantial marketing expenditures, making it almost impossible for a new entrant to establish an adequate position in the customers mind. Only years of costly advertising exposure would yield acceptable results. Additionally, a new entrant does not have the option to offset this disadvantage through predatory pricing, as customers in the High End segment are very price insensitive (low price elasticity).

3. Absolute Cost Advantages: Very High While material and labor costs are generally higher in our segment than in others, giving the High End segment a lower cost advantage in those areas, significant industry-wide investments in TQM initiatives in the areas of Material Cost Reduction (11.65% industry average) and Labor Cost Reduction (13.64% industry wide) would put new entrants at a significant disadvantage. Major initial investments would have to be made in order to benefit from the same results. Furthermore, new entrants also need to raise and invest significant amounts to acquire the factors of production and also do not benefit from savings through the Reduction in Admin Costs initiative (54.8% average industry wide) that current competitors add to their bottom lines.

4. Customer Switching Cost for Buyers: Currently High Since our customers are few in numbers (B2B) and usually buy our sensors in immense quantities, switching costs are likely to be fairly high. That is, as long as the sensors remain significantly different in terms of structure for use in different products. Should any competitors go for a more main-stream engineering approach, making designs more and more alike, switching costs could be drastically lowered.

5. Government Regulation: Minimal There are currently no applied government regulations that would hinder an entry of potential competitors.

Rivalry Among Established Companies 1. Industry Competitive Structure: Growth Industry, Oligopoly The competitive structure is quite clear. As of now and for the foreseeable future, the highend sensor industry can be considered as a growth industry, which is lead by an Oligopoly. Despite the fact that Oligopolies usually are characterized by a market dominance of very few companies, say two to three, the structure here is nowhere close to being fragmented, as the six competitors also are the only ones in the market - no extra small fries are present.

2. Demand Conditions: Increasing Demand Obviously, there is always a certain amount of rivalry among competitors (hence their name) to gain more market share and reap higher profits than the other companies. Competition is always welcome as it encourages innovation. Since, as mentioned before, this is a growth industry, the rivalry here is more of a healthy competition for dominance rather than a struggle for survival. The continuous growth assures that each company has a chance to acquire new customers who enter the market, rather than having to solely rely on attempting to lure customers away from competitors.

3. Cost Conditions: Problematic Overall, costs are extremely high in this industry, be it labor, material or any other related cost. There are really only two ways to significantly reduce the cost structure: TQM initiatives and higher automation. All companies have invested heavily in TQM initiatives to lower relevant costs, giving neither a significant advantage over the other but still result in noteworthy savings. A higher automation saves on labor cost but gives a competitive

disadvantage as it slows down R&D. These issues, while cutting severely into overall segment profits, are offset by the continuously increasing demand, so that these costs can be overcome through volume (economies of scale). However, as price expectations are lowering every year and the growth stage may abruptly turn into shakeout, rivalry may intensify tremendously in the near future.

4. Height of Exit Barriers: Surmountable The exit barriers are high but not insurmountable. Each of the companies in the high-end industry also compete in other sensor industries, making the elimination of one sub-branch emotionally and financially easier, as the overall corporations are not solely dependent on the high-end sector. The main concerns are obviously plant, machinery, and labor. Since all sectors are growing, workers may be able to be relocated and retrained for handling the somewhat similar machines in the other industries. The machinery can be sold at a minimum rate of 50% (unless a buyer offers more), keeping the losses manageable.

Bargaining Power of Buyers This is indeed an important factor. The bargaining power of buyers is quite elevated. As noted, we do not provide sensors for individual customers but instead for large companies (B2B) that use these sensors in their products. This means that the number of buyers is fairly low and the size of their orders enormously high, making the competitors extremely dependent on these buyers. Fortunately, this dependency is mutual, as our buyers need our sensors to make their products and the choice of suppliers is very limited. Furthermore, as noted earlier, the switching costs remains fairly high as the current sensors are not (yet) uniform. However, the technical expertise of the buyers gives them the option to enter the industry themselves should the prices sway too far from what is expected.

Bargaining Power of Suppliers Again, as noted in the paragraph above, the dependency of buyers and suppliers is mutual. High dependency, high switching costs, and a low number of suppliers give the suppliers a great amount of bargaining power. Suppliers have a potential countermeasure as well, as their high technical expertise may grant them the option to enter the buyers market (i.e. produce digital cameras).

Threat of Substitutes The threat of substitutes in the High End sector is fairly high. For one, the potential for other sensors to be reengineered to fulfill similar needs is quite elevated due to the fast-evolving nature of the technological field. Furthermore, new technologies may quickly emerge and make the current sensors obsolete. Lastly, especially pertaining to the digital-imaging sensor Baldwin produces, there already is a viable alternative to the CCD out there called the Active-Pixel Sensor (APS), which essentially performs the same duties as the CCD. Any competitor could move into the industry any day offering this alternative which would force current providers to lower their prices, making this segment even more competitive and less profitable.

Industry Structure
The overall sensor industry is currently composed of five sub-industries, namely the Low End sector, the Traditional sector, the Performance sector, the Size sector, and finally the High End sector. Each of these sectors is populated by six major companies: Andrews, Baldwin, Chester, Digby, Erie, and Ferris.

While the sensors in the High End segment are very close in terms of technical specification, each competitor produces sensors for a variety of different industries. Andrews, Chester, and Ferris provide sensors to unspecified industries; Baldwin caters to the digital-imaging industry, Digby to the medical industry, and Erie to the scanning, obstacle-detection, and opticalnavigation industry. Note: Please refer to the tables below for a basic overview of the industry layouts.

Sensor Industry - 2018

Andrews Market Share Sales Profits Cumul. Profits Contr. Margin ROS ROA ROE Leverage
9.5% $152,168,935 $25,853,470 ($51,836,367) 50.9% 17.0% 26.4% -550.4% (20.9)

Baldwin
21.7% $347,501,383 $50,185,855 $141,547,517 39.6% 14.4% 24.5% 44.3% 1.8

Chester
13.4% $214,632,514 $23,877,042 $70,292,443 40.2% 11.1% 15.3% 30.6% 2.0

Digby
21.8% $349,182,764 $54,067,222 $131,526,278 47.1% 12.8% 19.7% 34.2% 1.7

Erie
19.3% $309,438,338 $47,809,740 $114,493,943 45.8% 12.3% 23.2% 41.3% 1.8

Ferris
14.2% $227,757,494 $11,792,175 $95,007,419 32.9% 13.8% 6.0% 11.8% 2.0

High End Subdivision - 2018 Segment % of Overall Sensor Industry Segment Growth Rate Company Products Market Share Contr. Margin Andrews Anvil 10.4% 28% Baldwin Boost 18.9% 22% Chester Cid 13.3% 30% Digby Dixie 14.7% 30% 13.9% 16.2% Erie Echo, Eve 15.9% + 13.7% = 29.6% 37%, 37% Ferris Fist, Feast 11.2% + 1.9% = 13.1% 25%, 2%

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High End Customer Buying Criteria - 2018

Rank 1. Ideal Position 2. Age 3. Reliability 4. Price Expectations
Performance = 16.1 + 0.9 expected yearly drift rate Size = 3.9 - 0.9 expected yearly drift rate

Importance
43% 29% 19% 9%

0 MTBF 20,000 25,000 $26 - $36 - $0.50 expected yearly price-range drift

Industry Life Cycle

The entire sensor industry is currently in the growth stage of the industry life cycle. The High End subdivision enjoys the third-largest growth rate in the overall sensor industry of 16.2%. This means that sales and market share are expected to continue rising in the foreseeable future as customers keep entering the market. This gives room for several opportunities and threats that are related to the goal of capturing major pieces of the inflating sales pie. We will discuss these in the next segment.

Opportunities and Threats

The opportunities and associated threats are numerous. As mentioned earlier, the sensor industry is in a growth stage, promising notable returns for anyone ready to overcome the mentioned barriers (if not already in the market) and incur the necessary investments to compete in this industry. This poses a major threat to the Baldwin Corporation, which despite its lead, needs to assess its overall strategic situation in the market place in order to make rational decisions that will help it maintain its position while continuing to grow market share and most importantly for the shareholders profits. In the next segment we will look at the Ultimate Divisions competitive position and analyze how certain factors, external or internal, affect that position in the High End sector and in the overall market place in general.

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BackgroundAnalysisExternal: ExternalFactorEvaluationMatrix
To begin, we will take a look at how Baldwin Corporations digital-imaging sensor industry is affected by outside factors and how the current industry strategies respond to these effective or potential influences. To do that, we will use what is called an External Factor Evaluation (EFE) Matrix. The matrix lists six major opportunities that may exist in the current or outside markets as well as six major current and possible future threats that the high-end sensor industry may encounter soon or in the long term. Note that these are outside factors that cannot be directly influenced by the company. The opportunities and threats were identified by pulling together the collective knowledge of Baldwins executive officers and ranked in order of importance (or threat level). Additionally, all factors were given a weight relative to their overall perceived importance, all weights amounting to a total of 1.00 (100%). Then, each factor was assigned a rating on a scale from 1 to 4 1 meaning that the current segment strategies respond poorly to either an opportunity or threat and 4 meaning that the current strategies have a superior response to the current/emerging opportunity or threat. Once both weights and ratings have been assigned, each factors weight is multiplied by its respective rating to give it a weighted score. These are then summed to get a total weighted score. This total score will range from a minimum of 1.00 to a maximum of 4.00. A score closer to 1 then would mean that the company is currently not responding adequately to potential opportunities and threats, while a score closer to 4 would mean that the response is rather commendable. One can then infer that a score of 2.5 would mean that the response to possible opportunities and threats is average. (Discussion continued on page 13)

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External Factor Evaluation Matrix

Key External Factors Opportunities 1. 2. 3. 4. 5. 6. Lower material costs (i.e. outsource/integrate vertically) Expansion of product line (introduce new product) Expansion into new global markets (i.e. China) Diversification of product line (expand into other industries) Grow company (i.e. acquire competitor) Take advantage of continuous growth and increase market share .15 .15 .10 .10 .05 .05 1 2 1 1 1 4 .15 .30 .10 .10 .05 .20 Weight Rating Weighted Score

Threats 1. 2. 3. 4. 5. 6. Entry of new competitors or products Increase of labor / material costs Sudden end of growth stage Competitors form alliance or merger Newly-emerging technologies / substitutes Economic changes drastic demand shifts .10 .10 .05 .05 .05 .05 1.00 3 2 2 1 2 1 .30 .20 .10 .05 .10 .05 1.70

Total

Keeping the above-mentioned grading scale in mind, one can quickly see from the matrix that the total weighted score of Baldwins current strategies in the high-end sector in relation to potential opportunities and threats lies quite a bit below average, with a score of just 1.70. In other words, while this in no way means that Baldwins strategies are to be judged as poor (as its current excellent market performance proves) it does mean that the Ultimate Division currently does not effectively take advantage of potential opportunities and is rather ill prepared for possible threats. This analysis suggests that the current strategies need to be modified in order to better respond to these external factors, especially in the areas of expansion and diversification.

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BackgroundAnalysisExternal: CompetitiveAnalysisCompetitiveProfileMatrix
Before we move on to the internal analysis, we will take a look at the Ultimate Divisions position relative to its direct competitive environment. For this purpose, we will use the help of the so-called Competitive Profile Matrix, which evaluates close competitors relative to their performance in certain critical-success areas. As previously, Baldwins executive officers came up with what they believed were critical factors to successfully compete in the high-end sensor industry. Weights were assigned according to relative importance, cumulating in a total sum of 1.00. Then a rating scale was imposed that again ranges from 1 to 4 1 meaning the company basically does not capitalize on this critical success factor and 4 meaning this factor is very well implemented and the company is reaping the benefits from it. This time around, though, Baldwins scores are put in direct relation with its two closest competitors. While none of the five other companies in the industry compete directly with the Ultimate Division, as we are following a Niche-Differentiation strategy in the digital-imaging industry, they still make sensors that are close in terms of technical specifications which undergo a similar production process. For this analysis, the companies Digby and Erie have been selected due to their strong relative market strength in relation to our own. Both of these companies were evaluated based on the same factors and assigned a rating based on their relative performance in accordance with that factor in the high-end industry. Each companys ratings were then multiplied by their respective weights to obtain a factor score. Each companys factor scores were then added together to give it an overall total score, which could then be compared to the other two companys scores. The minimum score is again 1.00, and the maximum achievable score is 4.00. (Discussion continued on page 15)

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Competitive Profile Matrix

Baldwin Critical Success Factors Performance / Size meet customer criteria Marketing Low product age TQM investments Unique competitive advantage Market share Total Weight .25 .20 .15 .15 .15 .10 1.00 Rating 4 4 1 4 4 3 Score 1.00 .80 .15 .60 .60 .30 3.45 Digby Rating 3 3 1 4 3 2 Score .75 .60 .15 .60 .45 .20 2.75 Erie Rating 2 3 1 4 3 4 Score .50 .60 .15 .60 .45 .40 2.70

The scores show that Baldwin, with a score of 3.45, currently has a better competitive position relative to the success factors than its competitors Digby (2.75) and Erie (2.70). This is mostly due to Baldwins advantage in meeting the customer buying criteria better and following marketing strategies that afford it with higher customer awareness and loyalty, as both of these have the highest weights of .25 and .20 respectively. Perhaps the section Unique competitive advantage should be explained a bit further. This section rates companies according to whether they have a unique factor that distinguishes their product from one another. Digby and Erie received a rating of 3 as they differentiate their products by not building them to exact customer specification. Baldwin earned a 4 here because it produces the only product from the top-selling ones that possesses an elevated MTBF, giving its product superior quality and reliability. Lastly, one area that should be noted is the Low product age section, for which all three companies have been rated poorly despite its importance. This in fact proves to be a soft spot in the market that could quickly be exploited by other competitors if none of the three companies follow up with younger products as requested by the customers.

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BackgroundAnalysisInternal:
Strengths&WeaknessesInternalFactorEvaluationMatrix
Next, we will take a look at how different factors affect the Ultimate Division internally. For this analysis we will use an Internal Factor Evaluation (IFE) Matrix, which is structured in a similar way as the EFE Matrix. The factors have again been pooled by the collective input of Baldwins executives and been ranked by importance, this time in the categories of internal strengths and internal weaknesses. These are factors that the Ultimate Division can directly influence. As before, weights have been assigned according to relative importance, which amount to a total weight of 1.00. Ratings ranged again from 1 to 4, but this time they have a slightly different meaning. The rating scale no longer evaluates responsiveness to outside factors but rather the internal strength of that factor. For example, a rating of 1 means that this factor is a major weakness of the company, while a rating of 4 is assigned to a major strength. A rating of 2 then signifies a minor weakness and a rating of 3 a minor strength. Individual weights are then again multiplied by their respective rating to obtain a weighted score. These are then summed to get a final total weighted score between 1 and 4. A score closer to 1 means that the weaknesses likely outweigh the strengths, while a score closer to 4 means that the strengths outweigh the weaknesses. A score of 2.5 once more marks the point of average, demonstrating a balanced relationship between the companys strengths and weaknesses. Looking at the total weighted score from the matrix analysis on the next page, one can see that the Ultimate Division fared much better in terms of its internal competencies. The score of 2.75 puts it above average, meaning that its strengths somewhat outweigh its weaknesses. We need to keep in mind, though, that the maximum score is a 4.00, which is still a full 1.25 points away from Baldwins actual score, leaving much room for improvement. Furthermore, one can see that all strengths except one have been rated with a perfect 4, suggesting that the internal weaknesses impose themselves quite heavily onto the final score. In other words, while Baldwin possesses excellent attributes that help it maintain its leading position in the high-end sensor market, its weaknesses may become a significantly increasing issue in the future and therefore need to be addressed as soon as possible.

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Internal Factor Evaluation Matrix

Key Internal Factors Internal Strengths 1. 2. 3. 4. 5. 6. Superior marketing effectiveness (awareness, accessibility, survey scores etc.) Product closely tailored to customers demands Highest segment product quality / reliability Excellent financial position Highest individual product market share Continuously relatively accurate forecasts (manageable inventory-holding cost) .15 .15 .05 .05 .05 .05 4 4 4 3 4 4 .60 .60 .20 .15 .20 .20 Weight Rating Weighted Score

Internal Weaknesses 1. 2. 3. 4. 5. 6. Decreasing contribution margin Costly low automation High dependency on increasingly costly labor Aging product Niche strategy in only one industry Very narrow product line only one product in the market .10 .10 .10 .10 .05 .05 1.00 2 2 1 2 1 1 .20 .20 .10 .20 .05 .05 2.75

Total

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StrategyFormation: TOWSMatrix
Now that we have identified the major factors that affect the Ultimate Division externally as well as internally, it is time to put these together in a single matrix in order to determine what kind of strategies may be able to address the different internal and external issues. For that purpose, we will be using the so-called Threats-Opportunities-Weaknesses-Strengths (TOWS) Matrix, which attempts to match strengths and weaknesses with opportunities and threats. On the next page, one can see the mentioned 3-by-3-box matrix. In the second and third box of the first row, one will see the six strengths and weaknesses that had already been established in the IFE Matrix. Likewise, box one of row two and box one of row three contain the preestablished opportunities and threats of the EFE Matrix. The remaining boxes in rows two and three are reserved for potential strategies that address as many of the related factors as possible. For example, the SO-Strategies box displays strategies that address a multitude of factors from the Strengths and Opportunities boxes. In other words, the strategies attempt to make use of the given internal strengths to take advantage of external opportunities. Similarly, the WO-Strategies box for example, displays strategies that attempt to overcome internal weaknesses to shield the company from potential outside threats. Each of the four Strategy boxes has been filled with two potential strategies, each of them identifying in brackets which of the factors would be addressed by implementing that strategy. So if we take a look at the WO-Strategies box for example, we see that the first strategy consists of outsourcing the production of the firms sensors to China. This strategy would improve upon the weaknesses of Decreasing contribution margin, Costly low automation, and High dependency on expensive labor. Why? Because outsourcing the production to China would significantly lower Baldwins labor cost, drastically lessening the enormous negative financial impact of the low degree of automation to the bottom line, while at the same time increasing the contribution margin. Furthermore, sending the production process to China gives Baldwin the opportunity to acquire cheaper parts, lowering material costs (Opportunity 1 [O1]), and dip its toes into foreign market waters, thereby addressing Opportunity 3 [O3].

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Strengths S
1. Superior marketing effectiveness

Weaknesses W
1. Decreasing contribution margin 2. Costly low automation 3. High dependency on expensive labor 4. Aging product 5. Only in single industry

TOWS Matrix

2. Product closely tailored to customers demands 3. Highest product reliability 4. Excellent financial position 5. Highest product market share

6. Only one product in the market

6. Relatively accurate forecasts

Opportunities O
1. Lower material costs 2. Expansion of product line 3. Expansion into new global markets 4. Diversification of product line 5. Grow company within industry 6. Increase market share

SO Strategies

WO Strategies

1. Form joint venture with Japanese company to produce quality digital cameras for foreign and domestic markets [S1, S2, S3, S4, O3,O4, O6]

1. Outsource sensor production to China (strategic alliance) [W1, W2, W3, O1, O3]

2. Backward integration (acquire supplier) [S1, S3, S4, O1, O4]

2. Acquire Andrews [W1, W6, O1, O2, O5, O6]

Threats T
1. Entry of new competitors or products 2. Labor/material cost increase 3. End of growth stage 4. Competitors form alliance or merger 5. New technologies/substitutes

ST Strategies

WT - Strategies

1. Forward integration compete in digital-camera industry [S4, T1, T3, T4, T5, T6]

1. Related diversification - build sensors for medical industry [W1, W5, T1, T3, T4, T5, T6]

2. Invest in higher automation [S3, S6, T2]

2. Introduce a new product [W4, W6, T1, T4]

6. Drastic demand shifts

Note: Some factors may have been shortened or reworded in order to better fit into the grid.

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StrategyFormation: NBDMatrix
Next, we will attempt to generate additional new strategies for the Ultimate Division with the help of the New Business Development (NBD) Matrix, also known as the Ansoff Matrix. The Ansoff Matrix is used to establish four potential growth strategies based on either focusing on current products or creating new ones in the current or other outside markets. A quick look at the matrix on the next page will clarify the actual layout. The top-left box is called the Market Penetration quadrant and examines strategies that are based on strengthening the current products positions in the current market with the goal of increasing market share. The box to its right, the Product Development quadrant, favors strategies where the company remains in the same market targeting the same consumers, but with new products. The bottom-left box signifies the exact opposite. This quadrant demonstrates strategies that keep the focus on current products, but tries to carry over and adapt these products to new market segments. Hence, this box is called the Market Development quadrant. To conclude, we have the box on the bottom right, which is called the Diversification quadrant. In this quadrant, strategies suggest to not only find a new target audience, but to also provide this new market with entirely new products. As one can see, each of these four quadrants has been filled with two potential strategies, ranging from simply sticking to the status quo, over reengineering the current product for a different audience, to diversifying into newly-emerging technologies in completely different technological markets.

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New Business Development Matrix

Products Existing
1. Continue with current strategy, revising Boost every year for current customers

New
1. Introduce a new segment product that meets exact customer criteria (like Boost) but with a perfect age 2. Introduce a complementary nonsensor product that targets the same customer 1. Build a brand new sensor with new features that would target other industries (i.e. medical, aviation)

Existing

2. Make Boost a bit less powerful in order to shorten R&D cycle times (earlier market entry) 1. Adapt Boosts features for sale in other less-performance-demanding sensor markets (i.e. motion detection) 2. Reengineer Boosts structure for use in other devices that demand similarly-high features

Markets

New

2. Build Light-Emitting Diode (LED) displays for flat-screen televisions

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StrategyFormation: StrategyMatching&Selection
Lastly, after forming a multitude of potential new strategies, it is finally time to look at a few that appear to be most promising while at the same time reasonable to implement , given our current resources and core competencies. We will choose two strategies from the TOWS Matrix and/or NBD Matrix in addition to our currently implemented strategy, NBD EE1 from our top-left box in the NBD Matrix, for a total of three. When one looks at the strategy boxes of the TOWS Matrix, it is easy to see that diversification appears to be the overall most-effective solution to tackle the majority of the issues facing Baldwins Ultimate Division. Obviously, it wouldnt be possible to implement all the strategies concerning diversification at the same time, so we have to look at the one that will initially bring the greatest benefits. This strategy appears to be SO1, as it gives the division the opportunity to integrate forward, giving it more control over the overall quality of the end product, while at the same time diversifying its product line in order to minimize the tremendous risk of only competing in one corner of the sand box. The beauty of strategy SO1 is that it essentially incorporates the benefits of ST1, the standard forward integration, but at the same time also gives Baldwin the chance to enter the global market place with the guiding hand of a Joint-Venture partner, who is familiar with the competitive, economical, and political environment in that country. SO1 then shall be our second strategy. As our third strategy, we want to pick one that gives an alternative to diversification. The most appropriate one in that category appears to be strategy WO2 from our TOWS Matrix. This strategy suggests that we simply perform a horizontal integration, acquiring one of our competitors, the Andrews Corporation. This strategy not only allows us to drop the total competitor count from six to five, but this acquisition would actually come relatively cheap, as Andrews has been in a shaky and unprofitable position for quite some time now. Additional benefits would be that we acquire their capacity and demand, which would boost our economies of scale and lower our overall costs as we can eliminate duplicate assets. This internal company growth would not only provide us with an additional product, but also provide us with the

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necessary leverage to defend ourselves effectively against potential new market entrants or further product introductions. Now that we selected our final strategies, it is time to evaluate them in comparison to each other in order to come up with the single best near-future strategy for the Baldwin Ultimate Division.

StrategyEvaluation: QualitativeEvaluationQSPMMatrix
As mentioned, we will next evaluate our three selected strategies in comparison each other. For that purpose, we will use the Quantitative Strategic Evaluation Matrix (QSPM), which essentially is a model to evaluate the alternative strategies qualitatively based on the existing external and internal factors, yielding a quantitative score that can be used to interpret the value of that alternative relative to the others. As one can witness on the next page, the QSPM has a familiar layout as it essentially is a merger of our previously used EFE Matrix and IFE Matrix; it lists the same external and internal factors we came up with earlier and their respective weights we had assigned, again amounting to 1.00 in the external and internal categories. This time around, however, we will not rate the Ultimate Divisions performance in relation to these factors but instead rate the alternative strategies on their attractiveness relative to the factor at hand. Our alternative strategies are: NBD EE1 = our currently exercised strategy of competing in the digital-imaging sensor industry with one product; SO1 = we enter a Joint Venture with a Japanese partner to produce digital cameras for sale worldwide, which use our sensors; WO2 = we acquire Andrews, taking over their assets, their products, and hopefully, their customers. The rating ranges from 1, which means that this strategy is not attractive relative to how it may capitalize or improve upon the particular factor, to 4, which means that this strategy is very attractive in view of the factor. Should the strategy be completely unrelated to a certain factor, no rating is assigned. So for example, let us look at (Discussion continued on page 25)

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Quantitative Strategic Evaluation Matrix

Strategic Alternatives* NBD EE1 Critical Success Factors Opportunities 1. Lower material costs 2. Expansion of product line 3. Expansion into new global markets 4. Diversification of product line 5. Grow company Take advantage of continuous growth and increase 6. market share Threats 1. Entry of new competitors or products 2. Increase of labor / material costs 3. Sudden end of growth stage 4. Competitors form alliance or merger 5. Newly-emerging technologies / substitutes 6. Economic changes drastic demand shifts Strengths 1. Superior marketing effectiveness 2. Product closely tailored to customers demands 3. Highest segment product quality / reliability 4. Excellent financial position 5. Highest individual product market share 6. Continuously relatively accurate forecasts Weaknesses 1. Decreasing contribution margin 2. Costly low automation 3. High dependency on increasingly costly labor 4. Aging product 5. Niche strategy in only one industry 6. Very narrow product line Sum Total Attractiveness Score Weight AS TAS SO1 AS TAS WO2 AS TAS

.15 .15 .10 .10 .05 .05

1 1 1 3

.15 .15 .05 .15

2 2 4 4 4 2

.30 .30 .40 .40 .20 .10

3 4 2 3 4

.45 .60 .20 .15 .20

.10 .10 .05 .05 .05 .05 1.00 .15 .15 .05 .05 .05 .05 .10 .10 .10 .10 .05 .05 1.00

1 1 1 1 1 1

.10 .10 .05 .05 .05 .05

4 2 4 3 4 4

.40 .20 .20 .15 .20 .20

3 3 2 4 2 1

.30 .30 .10 .20 .10 .05

4 4 4 4 4 4 1 1 1 1 1 1

.60 .60 .20 .20 .20 .20 .10 .10 .10 .10 .05 .05 3.40

3 3 3 4 2 4 4 3 3 4 4 4

.45 .45 .15 .20 .10 .20 .40 .30 .30 .40 .20 .20 6.40

4 3 4 4 4 4 3 2 2 3 2 3

.60 .45 .20 .20 .20 .20 .30 .20 .20 .30 .10 .15 5.75

Note: Some factors may have been shortened or reworded due to lack of space. * NBD EE1 = current strategy; SO1 = Joint Venture with Japanese partner to produce digital cameras (domestic & foreign sale); WO2 = Acquire Andrews

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item 4 of the Opportunities section, Diversification of the product line. The SO1 strategy received an Attractiveness Score (AS) of 4, as it is obviously a highly-attractive strategy in terms of that it diversifies the Ultimate Divisions product line by adding a completely new product (digital cameras) which competes in a different industry. WO2 merely received an AS of 2 since it is only somewhat attractive in a sense that it does in fact expand the product line with a slightly different sensor, but this sensor still competes in the same segment. NBD EE1 received no score at all, as the current strategy does not consider any type of diversification, as we would continue revising the same old product every year. As in previous matrices, we then simply multiply the weight of the factor by its respective AS rating to obtain the Total Attractiveness Score (TAS). These are then summed for each strategy to obtain the Sum Total Attractiveness Score (STAS). This score then determines which of the strategies should be picked based on a qualitative evaluation. Keep in mind that this score does not have the usual 4.00 maximum, but instead 8.00 as we combined the internal and external factors into one matrix. The lowest possible score would be a 0, which would only be possible in the highly-unlikely case that a strategy had no relevance whatsoever to any of the listed factors. In our case, we can see that our current strategy NBD EE1 scored lowest with a cumulative score of 3.40, WO2 has the second-highest score of 5.75, and SO1 received the leading score of 6.40. Again, these scores are relative, so no mathematical inferences can be made to determine by what percentages certain strategies are superior to others. Nevertheless, our overall conclusion would be that our SO1 strategy, our foreign Joint Venture, is the most attractive of the three in view of the established external and internal factors.

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StrategyEvaluation: QuantitativeEvaluationFinancialStatements
After completing our qualitative analysis and comparison between our three strategies, it is now time to perform a quantitative evaluation. For that purpose, our chief financial officer has prepared financial statements and a NPV analysis for all three of our scenarios, assuming an eight-year lifespan for each investment. We will begin with the financial statements and go over the NPV analysis in the next segment. First up is our NBD EE1 strategy, our current strategy for which we simply continue producing one product in the high-end sensor industry, which we adapt to our customers preferences on a yearly basis. Our base year is 2018, whose column reflects the financial data that can be found in the Capstone Courier. The percent column displays the percentage these numbers make up in relation to total sales. (Discussion continued on page 27) NBD EE1 Current strategy:

IncomeStatement Baldwin Inc. High End Segment

2018 Sales Variable Costs: Labor Material $ 23,871 $ 21,077 317 41% $ 27,738 $32,232 36% $ 24,491 $28,459 1% $ 368 $ 428 $ 37,453 $ $ 33,069 $ $ 497 $ 43,521 $ 38,427 $ 578 $ 50,571 $ 44,652 $ 672 $ 58,763 $ 51,885 $ 780 $ 68,283 $ 60,291 $ 907 $ 79,345 70,058 1,054 $ 57,793
% of Sales

2019

2020

2021

2022

2023

2024

2025

2026

100% $ 67,155 $78,035

$ 90,676 $ 105,366 $ 122,435 $ 142,270 $ 165,317 $ 192,099

Inventory Carry $ Total Variable Contribution Margin Period Costs: Depreciation SGA ( R&D,
Promo, Sales, Admin)

$ 45,265 $ 12,528

78% $ 52,598 $61,119 22% $ 14,558 $16,916

$ 71,020 $ $ 19,656 $

82,525 $ 22,841 $

95,894 $ 111,429 $ 129,481 $ 150,457 26,541 $ 30,840 $ 35,836 $ 41,642

$ $ $ $

1,040 6,220 7,260 5,268

2% $ 11% $ 13% $ 9% $

1,208 $ 1,404 7,228 $ 8,399 8,436 $ 9,803 6,121 $ 7,113

$ $

1,632 $ 9,759 $

1,896

2,203

2,560

2,975

3,457 20,675 24,132 17,510

11,340 $ 13,236 $ 9,604 $

13,177 $ 15,380 $ 11,160 $

15,312 $ 17,872 $ 12,968 $

17,792 $ 20,767 $ 15,069 $

Total Period Net Margin

$ 11,391 $ $ 8,265 $

Note: All numbers are in thousands. Constant market share is assumed.

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All other calculations, from the year 2019 to 2026, are based on 2018s percentage weights and sales and an assumed 16.2% growth rate per year. So for example, 2019s sales of about $67.155 million are a 16.2% increase from 2018s $57.793 million just as 2026s net margin of $17.510 million is a 16.2% increase of 2025s $15.069 million. For our SO1 strategys income statements, our Joint Venture with a Japanese partner, the underlying calculations remain the same. The column for year 2018 our year zero remains unchanged as well as the derived percent-of-sales weights. What changes is our expected sales number for year 2019, which signifies the first year of our strategy implementation, as well as a few extra rows and new assumptions for the margins. For the 2019 sales, we simply assumed that our sales would double compared to our no-changes strategy, since we now also would be selling digital cameras with a partner in Japan. Hence, we doubled our year-zero sales of $57.793 million and grew them by 16.2%, which we assume to also be the growth rate in the digitalcamera industry, to obtain a sales total of $134.311 million. This number is compounded each year by the same rate throughout our eight-year period, as are all other numbers in the table. However, since we now would have entered a Joint Venture, we cant simply assume to receive all the profits. These need to be shared among partners. Therefore, the initial total net margin represents the profits for Baldwin before a certain percentage is given away. We assume that half of this amount, for example $12.243 million in 2019, was earned in the U.S. market through regular sensor sales. This sum amounts to $6.121 million, which Baldwin then gets to keep for itself. The other half is earned internationally with the cooperation of our Japanese partners. Since they provide most of the assets to produce the digital cameras and are responsible for the market implementation and localization, our contracts provide them with 60% of the profits, while we receive 40% respectively. Multiplying the $6.121 million by 40% yields $2.449 million, which is the amount Baldwin can then add to its bottom line as actual income from foreign operations.

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SO1 Joint Venture:

IncomeStatement Baldwin Inc. High End Segment (Foreign and Domestic Market)
2018 Sales Variable Costs: Labor Material $ 23,871 $ 21,077 317 41% $ 55,476 36% $ 48,983 1% $ 737 $ 64,463 $ 56,918 $ 856 $ 74,906 $ 66,139 $ 995 $ 87,041 $ 76,853 $ 1,156 $ 101,142 $ 89,304 $ 1,343 $ 117,527 $ 103,771 $ 1,561 $ 136,566 $ 120,582 $ 1,814 $ 158,690 $ 140,116 $ 2,107 $ 57,793
% of Sales

2019

2020 $ 156,069

2021 $ 181,353

2022 $ 210,732

2023 $ 244,870

2024 $ 284,539

2025 $ 330,634

2026 $ 384,197

100% $ 134,311

Inventory Carry $ Total Variable Contribution Margin Period Costs: Depreciation SGA (R&D,
Promo, Sales, Admin)

$ 45,265

78% $ 105,196

$ 122,238

$ 142,040

$ 165,051

$ 191,789

$ 222,859

$ 258,962

$ 300,913

$ 12,528

22% $ 29,115

$ 33,832

$ 39,312

$ 45,681

$ 53,081

$ 61,681

$ 71,673

$ 83,284

$ $

1,040 6,220

2% $

2,417

2,809

3,263

3,792

4,407

5,120

5,950

6,914

11% $ 14,455

$ 16,797

$ 19,518

$ 22,680

$ 26,354

$ 30,624

$ 35,585

$ 41,349

Total Period Total Net Margin (Japan

and Dom estic)

$ $

7,260 5,268

13% $ 16,872 9% $ 12,243

$ 19,606 $ 14,226

$ 22,782 $ 16,531

$ 26,472 $ 19,209

$ 30,761 $ 22,321

$ 35,744 $ 25,937

$ 41,535 $ 30,138

$ 48,263 $ 35,021

Actual Net Margin

(Dom estic)

6,121

7,113

8,265

9,604

$ 11,160

$ 12,968

$ 15,069

$ 17,510

Actual Net Margin (Japan) Actual Total Net Margin (All

Operations)

2,449

2,845

3,306

3,842

4,464

5,187

6,028

7,004

8,570

9,958

$ 11,572

$ 13,446

$ 15,624

$ 18,156

$ 21,097

$ 24,514

Note: All numbers are in thousands. Constant market share is assumed. And lastly, once more the same rules as in the previous income statements also apply for the WO2 strategy, the Andrew acquisition. The format is identical to NBD EE1s income statements. Our 2018 column remains untouched and so do our percent-of-sales weights. Again, the only difference lies once more in the assumed sales number for year 2019, which then grows at a 16.2% rate. The main question here is: how did we come up with $102.5 million for the first year? Basically, we took the $57.793 million in sales and grew them by 16.2% to $67.155 million. This is what we expect to make just from our initial Baldwin assets in our segment. Since we now would have acquired Andrews, however, we need to make an educated guess about how much in sales their product Anvil would contribute to our sales total. As we know,

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Boost had a 19% and Anvil a 10% market share in 2018 (please refer to the Capstone Courier for details), which we assume to stay constant over the eight-year period. So then, all one has to do is to divide the $67.155 million by the 19% market share and multiply it by the 10% to get Anvils contribution of $35.345 million. Note that this is assuming an identical price for both products. When added together, we obtain the already compounded sales number of $102.5 million. This number is then, as usual, compounded by 16.2% over the remainder of the years. WO2 Andrews Acquisition:

IncomeStatement Baldwin Inc. High End Segment

2018 Sales Variable Costs: Labor Material $ 23,871 $ 21,077 317 41% $ 42,337 36% $ 37,381 1% $ 562 $ 49,195 $ 43,437 $ 653 $ 57,165 $ 50,474 $ 759 $ 66,426 $ 58,651 $ 882 $ 77,187 $ 68,152 $ 1,025 $ 89,691 $ 79,193 $ 1,191 $104,221 $ 92,022 $ 1,384 $121,105 $106,930 $ 1,608 $ 57,793
% of Sales

2019

2020 $119,105

2021 $138,400

2022 $160,820

2023 $186,873

2024 $217,147

2025 $252,325

2026 $293,201

100% $102,500

Inventory Carry $ Total Variable Contribution Margin Period Costs: Depreciation SGA (R&D,
Promo, Sales, Admin)

$ 45,265 $ 12,528

78% $ 80,280 22% $ 22,219

$ 93,286 $ 25,819

$108,398 $ 30,001

$125,959 $ 34,862

$146,364 $ 40,509

$170,075 $ 47,072

$197,627 $ 54,697

$229,643 $ 63,558

$ $ $ $

1,040 6,220 7,260 5,268

2% $

1,845

2,143

2,491

2,894

3,363

3,908

4,541

5,276

11% $ 11,032 13% $ 12,876 9% $ 9,343

$ 12,819 $ 14,962 $ 10,857

$ 14,895 $ 17,386 $ 12,616

$ 17,308 $ 20,202 $ 14,659

$ 20,112 $ 23,475 $ 17,034

$ 23,371 $ 27,278 $ 19,794

$ 27,157 $ 31,697 $ 23,000

$ 31,556 $ 36,832 $ 26,726

Total Period Net Margin

Note: All numbers are in thousands. Constant market share is assumed.

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StrategyEvaluation: QuantitativeEvaluationNPVAnalysis
Now that we determined the future cash flows for each strategy for the next eight years, it is time to perform a NPV analysis to see which project has the highest overall value relative to its investment. Before we begin, a few variables need to be briefly explained. To calculate our WACC discount rate, we used the formula WACC = ((Equity x ROE) + (Debt x ROD x (1 Tax Rate))) + Added Risk Rate, where Equity = 0.554, Return on Equity (ROE) = 0.45, Debt = 0.446, Return on Debt (ROD) = 0.116, and the Tax Rate = 0.35. Also note that Equity + Debt = 1. These numbers can be found in the Capstone Courier and are a result of our financial structure that is laid out to maintain a leverage ratio of 1.8. The Added Risk Rate in the formula represents the extra percentage that is added to the WACC rate to demonstrate the elevated risk of certain strategies over others. So for example, while the Added Risk Rate for our current strategy is 0, it is 5% (0.05) for our Andrews-acquisition strategy and 8% for our foreign Joint Venture. These yield final WACC ratios of 28.29%, 33.29%, and 36.29% respectively. Finally, we also need an initial investment, or cash flow zero, for our three scenarios. For our current strategy, we estimated it to be $9 million, as this amount approximately covers the cost of R&D, marketing initiatives, and capacity expansions to keep Boost competitive in the high-end sensor market. For the Joint Venture, we estimated an initial investment of about $4.5 million, which is intended to cover the cost of hiring an international team, identifying an appropriate partner, and providing initial assets related to our sensor technology. And lastly, for our Andrews acquisition, we estimated an initial investment of $11,782,740. This number was estimated by considering the overall market value of the entire Andrews firm and roughly calculating to what extent its high-end division contributed to that value. At the end of 2018, Andrews market cap stands at $91 million. Its overall unit sales were 6,835,000 to which Anvil, its high-end sector product, contributed 885,000 units or about 12.95%. When that percentage is taken from the overall company value, we obtain our $11,782,740.

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NBD EE1 Current strategy:

WACC Calculation Equity (E/V) Debt (D/V) ROD ROE WACC 55.40% 44.60% 11.60% 45.00% 28.29%

SO1 Joint Venture:

WACC Calculation Equity (E/V) Debt (D/V) ROD ROE WACC 55.40% 44.60% 11.60% 45.00% 36.29%

NPV Analysis Years Cash Flows $ -9,000 CF0 (2018) $ 6,121 Co1 (2019) $ 7,113 Co2 (2020) $ 8,265 Co3 (2021) $ 9,604 Co4 (2022) $ 11,160 Co5 (2023) $ 12,968 Co6 (2024) $ 15,069 Co7 (2025) $ 17,510 Co8 (2026) NPV $ 18,693 Assumptions WACC 28.29%

NPV Analysis Years Cash Flows $ -4,500 CF0 (2018) $ 8,570 Co1 (2019) $ 9,958 Co2 (2020) $ 11,572 Co3 (2021) $ 13,446 Co4 (2022) $ 15,624 Co5 (2023) $ 18,156 Co6 (2024) $ 21,097 Co7 (2025) $ 24,514 Co8 (2026) NPV $ 26,245 Assumptions 36.29% WACC

WO2 Andrews Acquisition:

WACC Calculation Equity (E/V) Debt (D/V) ROD ROE WACC 55.40% 44.60% 11.60% 45.00% 33.29%

NPV Analysis Years Cash Flows $ -11,782.74 CF0 (2018) $ 9,343 Co1 (2019) $ 10,857 Co2 (2020) $ 12,616 Co3 (2021) $ 14,659 Co4 (2022) $ 17,034 Co5 (2023) $ 19,794 Co6 (2024) $ 23,000 Co7 (2025) $ 26,726 Co8 (2026) NPV $ 24,645 Assumptions 33.29% WACC

Note: All numbers are in thousands.

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StrategyEvaluation: StrategySelectionOptimalStrategy
At this point, we have evaluated our three alternative strategies qualitatively as well as quantitatively. It is now time to pick an overall winner that will be implemented. For that purpose, we will make a direct comparison between all three strategies in respect to their QSPM scores and NPV.

Strategy Selection
Strategy NBD EE1
Current Strategy

SO1
Foreign Joint Venture

WO2
Andrews Acquisition

QSPM Score Analysis NPV

3.40

6.40

5.75

$18.693 million

$26.245 million

$24.645 million

It appears that both the QSPM as well as the NPV analysis favor our SO1 strategy, the Joint Venture with a Japanese firm. Hence, this is the strategy we will be implementing.

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StrategyImplementation: ActionPlan
Now that we selected an appropriate strategy, it is time for its implementation so that our Ultimate Division can benefit from it. An action plan of implementation is provided below.

Strategy SO1: Joint Venture in Japan

Action Step Begin Date 2010 End Date 2010 Resources Responsible Department(s) Responsible Position(s) Complement Required Assets/Expenses Required Expenses in Thousands

Hire / Train International Team Hire / Train 2 Japanese Natives Research / Identify Potential Partners

May 10

May 31

Human Resources

Director of Human Resources

6employees, each 10hrs/wk for 2 wks = 120hrs

$1,000 Salaries, PC, Internet, Training Materials $300

May 31

June 28

International

Director of International Relations

2 employees, each 20hrs/wk for 4 wks = 160hrs 1 employee, 20hrs/wk for 4 wks = 80hrs 2 employees, 40hrs for 1 wk = 80hrs 5 employees, each 40hrs/wk for 1 wk = 200hrs

Salaries, Phone, PC, Internet

$200

Legal Search

May 31

June 28

Legal

Director of International Law Director of International Relations Director of International Relations and Director of International Law Director of Foreign Operations

Salary, PC, Internet, Legal Literature

$100

Contact Potential Partners Trip to Japan Negotiations Finalize Contracts Provide Technological Assets

June 28 July 12 July 13 July 15 July 23

July 9

International

Salaries, Phone, PC, Webcam Plane Tickets, Accommodations Salaries, Formal Dinners, Salary Additions Salaries, Trucks, Sea Shipping, Machines Total Initial Investment

$100

July 17 July 15 July16 International / Legal

$50

$275

August 6

Operations

3 employees, 40hrs for 2 wks = 240hrs

$2,475

$ 4,500

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