To: Dragon’s Den
From: C. R. Plastics
Re: Pitch Memo

Recommendations: 1. We want to ask for additional $2 million of equity financing, under the assumption of choosing the level production method 2. We would like to give up 30% of the equity control of our company 3. Based on our analysis, the return on $2 million investment will be 12.9%, which is almost 4% higher than the bank interest rate 4. If the investors can provide us with some extra support, such as management teams, marketing support, branding effect, corporation opportunities, we will consider to give up more equity controls (e.g. 5% more) 5. We believe our company’s differentiation strategy will make us unique and very attractive for investors. We have been focusing on creating high-quality, eco-friendly, durable, and recycled plastics furniture, which represents the future trend. We believe our company has a huge potential growth, and both future demand and sales will increase. As a result, the investors will earn higher return on investment

Analysis:
Overall, we believe our company has huge potential growth. According to the industry analysis in exhibit 3, most competitors are pursuing low-cost strategy. Their products are basically the same as other competitors with undifferentiated features, thus, their future profit margins are constrained by these disadvantages.

On the other hand, for our company, we successfully differentiate our product by creating high-quality, environmental-friendly, durable, and innovative recycled plastic outdoor furniture. This strategy helps us to gain market shares. Our main product is the original Adirondack, which comprises 50% of our total sales. We keep on introducing new designs and colors to improve the function of our product. Moreover, the environmental mission and durable design is playing a more and more important role in consumers’ mind when selecting furniture, which gives our company a competitive edge over other competitors, since almost no one is thinking green.

In addition, we may get an opportunity to expand our distribution channels by selling our product to Costco. Costco has the capacity to store more inventories that helps us to reduce holdings. We will continue to work on brand identity and to increase our customer base.

Ratio Analysis:
Our company’s current ratio increased from 1.99 in 2010 to 3.77 in 2011, and the cash ratio also increased from 0.102 in 2010 to 0.137 in 2011, which shows that our company has improved our working capital management. Both inventory turnover and A/P turnover increased, but A/R turnover decreased. Thus, its cash conversion cycle dropped dramatically from 354 days in 2010 to 183 days in 2011. Due to higher sales and net income, our company’s ROA, ROE, and profit margin all increased from negative numbers to positive numbers, which indicates higher profitability. Its debt-to-equity ratio dropped from 3.59 in 2010 to 1.2 in 2011, which shows that our company has improved its capital structure.

We decide to choose the level production instead of the seasonal production. Under the level production, we are able to increase our labor efficiency and generate much more net income. Some risk factors are considered and listed below by using level production. First, our company will end up with more inventories at the end of each month during the slow season. We have to consider whether we have enough space to store the additional inventories in our current warehouse. If not, we can rent another warehouse to solve this issue, which increases our fixed costs. Second, we have to hire and keep more full-time employees to maintain the stabilized production level, which may result in higher labor cost.

Analysis Assumptions:
Based on our analysis, without applying for any extra external debt, we need around $2 million financing from equity investors. Our own money, line of credit, and company’s credit card will act as buffers just in case of emergency conditions, such as recessions. According to the calculations, we conclude that the equity investment worth 25% of the total market value, which is the lowest we have to give up (see exhibit). In this case, both our company and the investors will receive annual return on investment of 10.4%.

To find the highest percentage of equity our company can give up, we made several assumptions. First, we calculated the weighted average profit margin (50% historical, 50% forecasted), which is 5.75%. The profit we want to guarantee in 2011 is $477,587. Therefore, the investors can earn at most $372,000 and receive maximum of 44.483% equity control. In this case, the return on investment is 19%. Based on the above assumptions, we figure out the the range of equity control we can give up is from 25% to 44.5%.

Conclusion:
In conclusion, we choose to implement the level production method as it generates more net income and improves the overall output. We have also considered the risks associated with this method, but we are able to figure out the solutions to minimize these risks. According to industry analysis, our company has strong competitive advantages over other competitors because we are able to differentiate our products by using unique recycled materials. We believe our products will be more popular in the foreseeable future with higher demand and sales.

Based on our assumptions above, the range of equity control we can give up is from 25% to 44.5%. However, we want to make this investment more attractive, and hope it could benefit both the investors and our current shareholders. Thus, we want to ask for additional $2 million financing, and we believe 30% is a reasonable percentage we can give up on our equity control. Under this situation, the return on investment will be 12.9%, which is nearly 4% higher than the interest rate charged on bank loans. Overall, this is a wise choice, and we are looking forward to corporating with the potential investors.

Exhibit 1 – Mission and Management Preference Mission | We aim to create outdoor furniture with beautiful and functional designs from recycled plastic. High quality, innovation, and environmental mission are important and fundamental features of our company. This mission has steadily increased in scope since 1994 | Management Preference | Our company operates as a family business. Bailey, the owner and president, wants to maintain control over his business with at least 70% of shares all the time | ImplicationsWe aim to differentiate our product by creating high-quality, environmental-friendly, and innovative plastic outdoor furniture. Also, we possess a strong management preference since Bailey allows the business to rapidly grow without giving up most of the control. |

Exhibit 2 – Strategy Triangle and Strategy Identification Goals | - Sustain the sales growth by retaining market share and competitive edge- Maintain the high quality of the produced furniture- Expand operations and improve production capacity and efficiency- Focus on design innovation and introduce more new products- Expand its distribution channel to large independent dealers, such as Costco | Core Activities / Internal Value Chain | - Substantial value added by designing and manufacturing plastic furniture- Substantial value added by two-tiered sales channels that combines distributors with small independent dealers- Moderate value added by creating customer awareness and building brand | Product Market Focus | - Offered more than 20 different outdoor furniture designs, mainly consisting of the original Adirondack chair (main product), dining table and chairs, bench, and foot stool; products in 15 different colors- United States and Canada as the mainly target geographic locations- Families or public area governors who pursue durable casual furniture as the target market | Value Proposition | - To design and create high-quality, recycled, durable, and functional outdoor plastic furniture around the world | ImplicationsWe have employed the differentiation strategy, specifically by charging a premium on our high-quality products. Most value is added by the process of product development. Therefore, in order for us to enjoy a higher profit margin, we should put more attention to the brand recognition, product design, and new materials innovation. Moreover, we should bring our new idea of recycling plastics towards global marketplace, such as United Kingdom, Sweden, and China. |

Exhibit 3 – Outdoor Furniture Industry Porter’s Five Forces Analysis Threats of New Entrants | High- Overall, the industry possesses relatively low entrance barriers as it does not require much initial investment and technology to start a new business- Skills and materials are the major resources in the furniture business, which are relatively easy for newcomers to acquire- Furniture companies usually operate at large economies of scales- The differentiation level is relatively low as some products are easy to copy, and similar furniture can always be introduced- It is not hard to access the distribution channels due to the large number of small furniture dealers | Bargaining Power of Buyers | Medium - The buyer group consists of distributors and furniture dealers/retailers - Small dealers offer wide geographical coverage, but they are not able to store large amounts of inventory, so they typically do not purchase in large volumes - The differentiation level of furniture is moderate, which allows dealers to choose between alternatives - Due to brand loyalty, customers’ switching cost is medium | Bargaining Power of Suppliers | Low- Low switching cost for furniture companies to change suppliers due to the large number of suppliers and their limitation to produce all kinds of wood- Many kinds of materials can be used as input to produce furniture- There is little possibility of forward integration | Threats of Substitutes | Low- There is almost no substitutes for furniture products, popular materials include wood, metal, plastic, and other new materials- Furniture has been existing in people’s everyday lives and activities, till now, its function cannot be substitutes by others | Rivalry Among Existing Firms | High- The industry is highly fragmented and very competitive- Manufacturers concentrate in U.S. and low-cost overseas countries- Although the industry is growing, the number of competitors is also growing- The existing competitors are roughly equal in size and power | ImplicationsOverall, the outdoor furniture industry is not very attractive to the companies that pursuing low-cost strategy. Since their products are basically the same as other competitors, their profit margins are constrained. On the other hand, for our company, we successfully differentiate our products by creating new recycled materials that are durable and fashionable. The idea of the environmental mission is the future trend of furniture. This strategy helps us to gain market shares and turn to be very profitable. There is huge room for growth, and the economy today and going forward is not going to be accentuated by large industrial companies. |