Minor buses have been in business serving the local community for 100 years operating in routes 1, 2, and three. A closer look at the three routes shows that only route one is profitable. Routes 2 and 3 are making losses. The company has made large profits from route one because it is the only one that has had regular operations in the route. Throughout the years, there has not been stiff competition from major buses which operate in other routes.
The decision by major buses to engage competition in routes dominated by minor buses requires an urgent reaction from minor buses to ensure that they do not only lose the traditional market but also gain some of the markets dominated by major buses. Solutions are developed after a clear analysis of the situation facing minor buses. Starting from the new developments, Major Buses has new management that intends to introduce competition for minor buses. The only condition is that the new routes taken up have to be profitable within the first 18 months. This implies that if Minor Buses is able to maintain a large portion of customers, then major buses would have to quit after 18 months of not making profits.
Minor Buses has some resources available for enhancing competitiveness and expansions. At the same time, there is a new generation of buses with low floors which attract customers better. A new bus with this latest technology costs £120000 while a two-year-old bus costs £98000 or £102000 after an overhaul of its appearance. It is also true that buses are deregulated in the area. However, there is a statutory notice of 56 days before venturing to the new markets. Before investing in the buses, the company should determine the period that will be taken to recover the money it intends to invest. If this payback period is short, the company should invest. Determining the annual rate of return is also important. This can be estimated by summing all the inflows and subtracting the investment costs from the answer to give the profit. The annual rate of return will then be obtained by dividing the profit by the number of years invested and the cost of investment. Since the company has two options of buying buses, the option that will be more profitable and that will the higher annual rate of return can be taken. There is also an option of leasing buses so as to ensure that the major buses company does earn any profits within the first eighteen months.
The strategy to ensure the business survives entails the following. First, Minor Buses should improve internal efficiency. Routes 2 and 3 are making losses. This could be due to the fact that the depot is located afar from the route hence increasing fuel costs. This being the case, the company should identify new locations for the buses allocated to routes 2 and 3. This will help drive down the overheads. Secondly, Minor buses should take the battle to the enemy. The company should apply for a license to operate in routes dominated by Major Buses. It should then purchase the15 two-year-old buses and introduce some on the new routes while the others revitalize the traditional routes. This action will be an attack on Major Buses which has the potential to reduce the aggressiveness towards acquiring new markets. This is because they have to watch their domestic routes lest they lose out on both the traditional as well as the new markets. Again, the traditional route will get a facelift which offers the customers who are already loyal to the company a better perception of the services offered by the company (Sriniv, 2010, p3).
- 12 buses (£.120, 000 each)
- Purchasing new buses 15 white (£98,000 each)
- Purchasing second-hand buses 14 painted (£102,000 each)
- Leasing buses (£.2000 each)
- Payback period=Investment required÷ net cash flow
- For the new buses, the accounting rate of return= 120 000/45598=2.6 years
- For the green second-hand vehicles, the Accounting rate of return=102 000/45598=2.24 years
- For the White second-hand buses, the accounting rate of return=98 000/45598=2.15 years
- Accounting rate of return= Average net income÷ Average investment
- The average income is £.410, 384
- For the new buses, accounting rate of return= 410 384 ÷120 000=3.4199
- For the green second-hand vehicles, the Accounting rate of return=410 384÷102 000=4.02
- For the White second-hand buses, the accounting rate of return=410384÷98 000=4.18
Taking advantage of the experiences over the past 100 years and the already well-developed customer royalty, Minor Bus Company has the ability to not only overcome the pending competition but also expand its market to include routes dominated by Major Buses. The most important thing is that the company maintains firm control of its traditional routes with great emphasis on route 1 for 18 months and the competition will be over after which it can continue with its expansion program.
If the company invests in second-hand buses, it will take two years to recover the investment money. The accounting rate of return for buying the fifteen second-hand buses is about 4.18. The company should therefore invest the money and buy fifteen second-hand buses.
References
Sriniv R. 2010. When Competition Hots Up. (Online). Web.