Background information
Minor Buses is faced with the threat of aggressive competition from Major buses. Although the bus companies did not have direct completion in the past, new Major buses owners have launched direct competition against Minor buses. Minor buses have their operations between villages A, B, C, D, and E. Minor buses use three different routes. A total of eleven buses are used on a daily basis while two buses are kept as spare. The major route of operation for Manor Buses is a route between villages A and C via B. This route is assigned a total of eight buses on daily basis. The other routes, A to D via C and C to E, are assigned one and two buses respectively. Route 1 is the most profitable route for Minor buses. Having served the route for a long time, Minor Buses has been able to develop loyalty from its customers.
Major Threat
The main competitor to Minor Buses is Major Buses Company. This company runs its operations from village C. The first Major Buses route is between C and F via village D and C. The other route has been between village C and G via route B. Although sharing some routes, Minor Buses and Major Buses have not been having direct competition. With new owners, Major Buses intends to increase its completion against Minor Buses. In addition, Major Buses intends to start operation in Minor Buses’ strong route, route 1.
Major Buses’ new owners are known for their aggressive competitive tactics. Taking into consideration that bus operations are not regulated in the area, Minor Buses must act fast to increase its competitive advantage.
Investment Option
Minor Buses must take advantage of the royalty that it has from its customers. Minor Buses must work to increase this royalty as well as increase its strength in bus services. Taking into consideration that Major Buses has strengths in high operational capacity and capital base, Minor Buses must seek to capitalize on customers’ royalty. With 1.5 pounds, Minor Buses can buy new buses, lease or buy second-hand buses. The short and long-term implications of either of the investment options should be considered before deciding on the option to take. For Major Buses to continue with its operations between village C and A, it must be able to make profits within the first eighteen months. In consequence, Manor Buses must increase its competitive advantage on this route to ensure that Major Buses Company is not able to make a profit within this period.
There are two major factors that were considered in the analysis of the best investment option: the period of time that is taken for investment money to be recovered and the accounting rate of return (Pogue, 2004, p. 566).
Among the three investment options, buying second-hand buses is the best investment option. Since Minor Buses has a long-term investment in bus services, it should not opt for leasing. Buying new buses, green second-hand buses, and white second-hand buses have 3.4199, 4.02, and 4.18 accounting rates respectively. In addition, the investment options have 2.74, 2.35, and 2.19 years payback periods respectively. These figures indicate that buying fifteen white second-hand buses is the best investment option.
To protect itself from aggressive competition from Major Buses, Minor Buses must increase its competitive advantage in their areas of strength. Minor Buses should consider buying fifteen white second-hand buses to increase their capacity.
References
Pogue, M., 2004, Investment Appraisal: A New Approach. Managerial Auditing Journal.Vol. 19 No. 4, pp. 565-570