Question

Consider a firm with the following transformation curve that represents the productive opportunities it faces: (X1+10)+(X2)^2=1314.0625

Where X1 is the value of resources liquidated (sold for cash) in period 1 and X2 is the value funds generated in period 2 using funds invested in period 1.

Capital market rate of return is 5%.

1. From this transformation curve, calculate the total value of resources available in period 1.
2. Suppose you are the manager of the firm, how do you work out the optimal level of investment in period 1 (y1) and the optimal value of funds in period 2 (x2)that will be generated by this investment to maximised time 1 value of the frim.
3. What is the maximised value of the firm in period 1?
4. Present the above answers in a graph with the above transformation curve and an appropriate capital market opportunity line, indicating clearly the value of resources available in period 1, optimal level of investment in period 1, cash flow generated from optimal investment in period 2and market value of the firm in period 1.
5. Is the firm value in period 1 higher or lower than the value of the resources in time 1? Explain why.
6. Using the above graph in d), illustrate how the owners of the firm choose the optimum consumption pattern between period 1 and 2.

Answer 1

The dwindling profits and declining market share of the StillSim calls for strategic alternatives to be implemented as early as possible. Some are listed below.

1. Internal overhaul - To uplift the employee morale and motivation, redefining of roles, responsibilies ad deliverables is required. The company should invest in employee development for enabling them to take strategic, high performance roles. It should incentivise the performers( and punish the laid back) to reinstate the culture of performance. To keep up with competition, it will have to take technology in its stride. Use of Technology for competitive advantage can be more effectively done by the company, leveraging on its domain expertise of 20 years.

Corporate strategies - The firm should develop expertise in a number of niche sectors, those in high demand, besides continuing in those, in which it is doing good. Some less important sectors can be done away with, so the available resources can be put to use in most lucrative prepositions. It should partner with training and assessment firms to provide complete recruitment package to the corporates looking for pre assessed and custom trained candidates. It can integrate with colleges and institutes on one hand and employers on the other hand for competitive advantage.

Operational Strategies - Making the processes lean will help saving on the costs. Identify the non value adding activities or those which take up lots of resources but yield little output, and find low cost alternatives. Focussing on reducing the recruitment cycle time by use of latest means of communication and new technologies to find best manpower for the clients. The cost per recruitment will automatically come down with accelerating the process. Bring this to competitive advantage.