Sensitivity Analysis For Revenue Enhancement In The Sports Shoe Industry

Sensitivity Parameters Analysis with Justification

Sensitivity analysis helps to recognise the effect of independent variables in presence of dependable variables for a given set of assumptions. This technique can be used in the specific boundary. Overall system depends on the input of one or more than one variables and into the cause and effect changes. The sensitivity analysis helps to understand the prediction that can be made based on certain circumstances or a given scenario. The business organisers usually go for a sensitivity analysis after adopting a decision making about an event with an aim to predict the risks and profits may come from that implementation. In the present case, a sensitivity analysis is going to be attempted in a scenario of enhancing total revenue and marketing sports shoes by competing with the competitors. In order to attempt this, a financial and nonfinancial sensitivity analysis would be done based on the current situation. At the end of this report, derived information for the stakeholders would be suggested from the discussions.       

Sensitive analysis can be done in any condition based on a standard that the change of model in any given condition needs a regular monitoring for the evaluation of its impactful findings on that given condition. This is a standard factor based on which sensitive analyses are attempted by the corporate organisations to predict their position in the financial market from the point of view of profit (Sirbu et al. 2016). There are different parameters that supposed to be addressed while decision making about the utilisation of the sensitivity analysis. Recent studies have found that the application of sensitivity analysis model differs from industry to industry based on the assumption of the strategic implementations.

In a study by, Sahu & Singh, (2015), they have developed their own sensitivity analysis model to evaluate the effectiveness of an analysis model on a given situation. Thereby, it can be commented based on the findings that development of own model is necessary to identify accurate issues and solutions of a problem. Experimental design is a standard parameter that can be used in the given scenario. This design allows using a combination of parameters which are considered as variables (Egorov et al. 2018). It helps to decide at a time based on a given condition how many parameters can be used by assigning the maximum and minimum values before the experiment. Thus, the successful evaluation of the findings of this study could help to build up a positive or negative correlation along with the assigned values in combination with a situation. In the given context it can be assumed that for the project A with an aim of enhancing revenue the company has introduced a product with new pricing and promotion strategy. On the other hand with an aim of determining the profit from the newly launched sports shoe, the profitability variables have considered. Again, both the variables have their own other distinguishing variables that can be correlated with the variables of each other (Tezaur et al. 2015). Thus, it can be stated that the use of a combination of parameters through experimental design can be considered as an effective way of evaluating important findings of this study.   

Measurement Process

Another important measure or parameter for the given scenario can be the ‘what to observe’ parameter. Usefulness of this parameter relies upon the utilisation of value of objectives based on the strategic implementations, values of the decisions variables and also the effectiveness of the two adopted strategies. In contrast, there are some issues that can be faced by the investigators or observers while applying this parameter (Lyle & Jones, 2018). The drawback of a condition can be proven beneficial for another strategy that could vary based on the target market or type of product of a particular region. A pricing strategy for the sports shoe product may of a western region not be much impactful for the eastern part. Thus, considering solely the success factor addressing the geographical barrier could help to make effective strategy making and strategic modification.                            

The measurement process of sensitivity analysis involves a direct method that allows solving of simple derivatives by using time-related sensitivity analysis (Ban et al. 2018). It is a differential process of analysis measurement. There are two more distinctive ways of measuring sensitivity issues that involve one-time measurement and factorial analysis that could also help to address the measurable variables for the present study.  One at a time analysis is also known as a local analysis which indicates an estimated point instead of considering the overall distribution (MacGillivray et al. 2014). It signifies the measurement of parameters that are varying for one time only. Another measure of analysis that involves the determination of sample numbers for a single specific parameter along with its mobilisation of the model for amalgamation.

Utilisation of these analytical measures could help to make an effective decision about the findings of addressing factors. In this case, either one measurable factor can be used or a combination of more than one can also be used. There are consequences for using one measurable factor and combination. One factor helps to focus on a particular variable for the evaluation of the study on the other hand, combination ensures all the variables have analysed from every point of view depending on a particular situation (Lyons et al. 2015) In this case as the combination of experimental design has suggested being used when the combination of measurable factors may help to evaluate effective results. This is because the variables considered in the study are multiple. Application of both of these could help to improve the accuracy of the result based on the current findings. Moreover, it can be considered that this could help to provide effective and relevant information to the shareholders that can have a positive impact on the overall business.

Scenario Analysis

The objective of the company is to improve its entire amount of annual profit and apply such marketing strategies so that they can perform better in the domain. The sports shoe making project requires a fund that is to be undertaken through two projects project A and project B. In project A, funding will be done based on the shares issued by the company and in project B 5% shares and 50% debt funding will be done.

The main factors which should be considered primarily are time and cost. Time is a significant point as it shows the project managers an expected period of project completion (Indartono & Sari, 2017). A realistic frame of time along with resource assignment is required to complete a project. In this case, a payback period is measured in terms of both the projects.  Cost is the second important point to consider as the entire budget allocation should be measured with an approved budget so that project’s progress towards profit or loss can be determined (Leonidou et al. 2015). It is also required to monitor cost throughout the project and control extra expenses so that resources can be used efficiently.

Table 1: Time factor justification

(Source: Created by Learner)

The payback period for project A is 1.6 months whereas the payback period for project B is exact 2 months. Therefore, project A will take less time than project B to generate the expected amount of return so it is clear that project A is better than project B in terms of the payback period.

Table 2: Cost factor justification

(Source: Created by the learner)

The general cost of project A is $4.5 million. The planning cost is $10 million and the design cost is $ 40 million. Engineering cost is $3 million, construction cost is $10 million and the material cost is $2 million to the total cost of project A is $69.5 million.

In the case of project B, the cost structure is comparatively larger than project A. The general cost of project B is $5.6 million. Planning cost is $15 million and the design cost is $60 million. The engineering cost is $8 million, construction cost is $20 million and the material cost is $4 million to the total cost of project B is $112.6 million. In project B every cost structure is greater than project A and o it can be stated that Project A is more profitable as its cost structure is quite less.

Scope and Factors of Justification

Adidas has considered two different projects in order to improve its business strategy so that they can increase their annual revenue. The two projects have a different rate of net present value and internal return rate.

Table 3: Economic Analysis of NPV

(Source: Created by Learner)

Project A has a cash inflow of $1500 and the amount remains the same for consecutive 3 years. Hence, the cash inflow for three years becomes $45000. The discounting factor rate is considered to be 8% and that rate also remains the same for 3 years so after three years the cash outflow becomes $2500. This cash outflow is equivalent to the entire investment cost structure. Therefore, in order to calculate the net present value, cash inflow needs to be subtracted from cash outflow and the resultant number will be $1365 which is the net present value of project A.  

Project B has a cash inflow of $7000 and the amount remains the same for consecutive 3 years. Hence, the cash inflow for three years becomes $21000. The discounting factor is similar to project A’s discounting factor rate and that is 8%. This rate also remains similar for 3 years and so after 3 years, the cash outflow becomes $14000. The cash outflow is equivalent to entire investment cost structure. Therefore, to derive the net present value cash inflow requires to be subtracted from cash outflow and the value becomes $ 4039.7 which is the ultimate amount of net present value.

Table 4: Economic Analysis of IRR

(Source: Created by Learner)

Project A  has $2500 as its investment for one year and its cash inflow amount is $1500 for one year so in order to derive the internal rate of return, cash inflow needs to be divided by the investment amount and the resultant number is 1.67. Hence, the IRR rate in project A is 36%.

Project B has $14000 as its investment for 2 years and its cash inflow is $7000. In order to derive the internal rate of return, cash inflow needs to be divided by investment amount and a resultant number will be 2.0. Hence, the IRR rate in project B is 21%.

In terms of IRR project, A is generating a better amount of return so it is more profitable.

Since Adidas is trying to improve its total amount of annual revenue, so they can face various problems in acquiring it. It is undertaking the shoemaking project for improving the sales revenue and also trying to improve the profitability of the company. Rather than that, this company is basically a sports shoe making company so it can face problems in acquiring a large market of customers because of the other existing competitive brands in the same market.

1. The company can use inbound marketing strategy to match their sales procedure with modern buying procedures in the market. Rather than pushing the sales message out through advertising, telemarketing, and unsolicited email, this strategy of inbound marketing only pulls the interested and potential buyers into sales process by providing relevant content to purchase decision via websites and social media.
2. Referrals can be another great way of generating profit. It basically helps the company to shine among its competitors. Referrals can mainly be used through customer feedbacks. Adidas can ask to provide its customers with a service review in which the customers will refer their known people who can be interested in purchasing items from Adidas. The referral procedure should e rewarded. In the case of employees it can be done with an extra leave, salary increment and in the case of customers, it can be done by giving extra discounts.
3. The company is considering two projects as an ideal model and the one which will generate a better return rate within the due time period will be taken as the final project of choice. This is another challenging aspect because which project will return what kind of return rate might be difficult to know. Hence, the company needs to calculate net present value rate and internal rate of return in order to determine the profitability ratio of each project.

Time

Due diligence is primarily a procedure of an investigation to strengthen investment or other commodities to approve all considered facts like identification of all financial documentation. In addition, it can be stated that the facts could also involve any commodity that is considered to be a material (Van Gelderen, Kautonen & Fink, 2015). There are various sectors of the due diligence process and they are as follows:

Administration Due Diligence- This particular sector of due of diligence is naturally considered to be the most important one because it deals with the verification of administrative documents of a company (Hofmann, Schleper & Blome, 2018). Hence, Adidas has to provide the hierarchy the authentic information contained documents about their occupancy rate, number of retail stores, financial reports so that they can be verified.

Figure 1: Due diligence procedure

(Source: Mashika, 2016)

Taxes of Due Diligence- This section of due diligence includes identifying a procedure that determines all the taxes a company is required to pay based on each country’s judiciary and taxation system (Cumming & Zambelli, 2017). Adidas has to follow certain steps in order to make its taxation system enough clear and transparent. The company has to maintain an authentic document of tax returns which will include income tax, sales tax, and other taxes. Any paper documents related to the net operating loss or any type of other deductions from its cost structure needs to be monitored periodically.

Intellectual property right in Due Diligence- The intellectual property right maintenance is another important factor in the due diligence process (Shackelford, Russell & Kuehn, 2016). Adidas has to follow certain rules so that its right of intellectual property does not get hampered. The company has to clear the pending patents from time to time and also the review of copyright, trademarks; brand images need to be looked after in due time period.

The information given to the stakeholders by an organisation can be differentiated into two groups such as qualitative information and quantitative information. The qualitative information signifies the non-financial information, whereas the financial information provides the quantitative information. A recent trend of organisations is moving forward to the provisions of corporate social responsibility information to the stakeholders. Thereby, the social responsibility information is provided from an internal and external point of view to the stakeholders (Dhaliwal et al. 2014). In order to formulate a written and non-written internal and external communication the organisers usually utilise the financial and nonfinancial information predicted or achieved previously by the organisation. Financial information represents quantitative data regarding the social responsibilities and environmental matters to the stakeholders. This could help them to make a financial decision by the stakeholders about whether to invest in the company or not.  Schnackenberg & Tomlinson, (2016), has also shown a positive impact in the decision making of the investors in case of more clear perspectives about the organisational decision. Thus, by improving the transparency perception an organiser can influence the investment related decision-making g of the stakeholders. Therefore, total revenue for a year, total asset and net profit along with the environmental perspective can be considered as important data to make the stakeholders informed about it.

Cost

On the other hand, the qualitative, tangible data of the company about the non-financial aspect such as number of employees, number of production, marketing of the amount of products, selling rate of the fresh products are other variables that also influence the decision making of the stakeholders about the organisation (Vidaver-Cohen & Brønn, 2015). However, it can be contradicted that this information influences the investment decision making based on the type of product and their demand on the market among the targeted population. Hence, it is difficult to make any standardisation that, these factors could lead to bringing a profit to the investors by its investments or not (Rensburg & Botha, 2014).                    

Conclusion

The profit made by Adidas by introducing a sports shoe in the market has initiated by adopting the price skimming strategy. The price skimming strategy has proven impactful in a detailed analysis which has assumed before by considering the brand reputation of the company. Therefore, based on this finding it has to be stated that the utilisation strategy for the brand name of Adidas is really effective to make a profit for the organisation. This is a dependent variable with the enhancement of total revenue of the organisation. The indication of the company that adopted strategy has successfully enhanced the number of customers, increase in the sales and frequency in the transaction for per customers could have a positive impact in the total revenue of the company. Therefore it can be stated that the two mentioned variables are having a positive relationship with each other. Along with the given parameters are directly proportional to variable factors. Therefore, it can be suggested that stakeholders may take a risk by adopting any new business strategy or a huge amount of investment for the benefit of the organisation.

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