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Serves Equipment Corporation

Cervus Equipment Corporation:
Harvesting a New Future

Master of Management
Business Strategy
Prof. Gerry Kerr

November 3, 2014

Main Issue
Cervus Equipment Corp, established in 1990s, is committed in acquiring and operating authorized agricultural, industrial and commercial equipment dealerships. Over the past 10 years, it has grown its business substantially. The board of directors is now looking for new growth strategy to reach their goal of $2.5 billion in revenue by 2020-triple in the current size. Cervus Equipment Corp mainly considered the opportunities and threats of expanding international markets and stepping in new industries for further growth.

External Analysis

PESTEL Analysis
Political: based on the regulatory changes in the agriculture industry, Canada Wheat Board regulations encouraged (larger) farmers to market their product directly instead of the wholesaler in the supply chain. The political environment for acquiring businesses haven’t been mature in alternative countries like in New Zealand, Russia and Eastern Europe.
Economical: global economy experienced slowdown. But customers’ unparalleled growth in a dynamic business environment made Cervus Equipment gain revenue and profits. With the development of farming technology, farming industry in Western Canada realized fast growth in 2012 and the commodity prices were historical high. The global agricultural machinery market is predicted to increasingly growth in the future. Due to the interest rates were low in recent years, a large amount of famers would like to get equipment with loans or leases. The global construction equipment market was expected to expand especially in China and India.
Social: World population was predicted to grow 23% in 2025, with less new arable land. Accordingly, World food production would also increase by 50% during the same time. Younger farmers with larger farms were more welcomed than before, which drove the farm business development.
Technological: Farming technology and techniques revolution happened within the industry.
Environmental: Environmental factor, especially the weather change, influences the farming industry greatly. Drought was supposed to growth in dry area of the world, but it would not impact the water rich Alberta and Saskatchewan.
Legal: In 2012, some legal provisions stimulated the growth in agricultural industry. For example, higher levels of bio-fuel in gasoline were required by the legislation, which caused a higher demand for corn acreage.

Porter’s 5 Forces
Threat of new entrants: Profitable markets usually attract new organizations to join in, but due to the large dealership network, infrastructure, high capital cost and the resources needed to be successful in this industry the threat to new entrants was low. To be successful in this industry a good supplier relationship is essential and this takes time to build
Supplier Power: The relationship between Cervus Equipment and their OEMs was more of a partnership than a view of just “Suppliers” because Cervus believe that this will aid them in been less confrontational or contentious in their dealings, the supplier power in this industry was relatively low and this is due to the fact that Cervus has amassed a large dealership network across Canada and hence had strong bargaining power.
Buyer Power: Cervus Equipment knew that partnering with John Deere which has a strong brand name and viewed as the premium producer in the North American Market would make their product more desirable in the market and also the rural location of the dealership lead to lower competition, hence the buyer power was low.
Competition: Cervus Equipment manufactures has two main competitor; Rocky Mountain Equipment
(Western Canada) and Titan Machinery (United States) , there is a high competitive rivalry in this industry .RME has sales exceeding 1 billion but due to its faster growth and lower margins , marketing analyst where hesitant to support it hence the lower valuation when compared to Cervus while Titan Machinery was solely based in The USA with no immediate plans of exploring the Canadian market .The fact that differentiation is hard to achieve in this industry leads to higher rate of competition .
Threat of Substitutes: In the Agricultural and Industrial equipment Industry the threat of substitutes is low and this is due to the fact the equipment’s in use are highly specialized for this industry. Although some products may be modified from their original forms to be used in this industry but they are not direct substitutes.

Porter’s national Diamond Analysis
Porter’s Diamond Analysis for Australia 1. Factor Conditions: emphasizing on the role of the highly specialized resources. * Lands for Agriculture * Skilled labor. * Climate helps the agriculture industry. 2. Related Supporting Industries: National competitive strengths tend to be associated to key industries. * Cattle raising industry. * Farming industry. * Oil industry. * Transportation industry. * Grocery shop industry. 3. Demand Conditions: Domestic market provides the primary driver of innovation and quality improvement. * Meat industry is supported by the obsessive love for beef. * Transportation industry supported by farming industry. 4. Strategy, Structure and Rivalry: * Agribusiness has grown significantly that it has gone abroad offering its products.

Porter’s Diamond Framework for Brazil 1. Factor Conditions: emphasizing on the role of the highly specialized resources. * Time Zone * Distance to HeadQuarters (Canada) * Government regulations for export and importing agriculture products. 2. Related Supporting Industries: National competitive strengths tend to be associated to key industries. * Restaurants and retail industry. * Agriculture industry. 3. Demand Conditions: Domestic market provide the primary driver of innovation and quality improvement. * Agriculture industry is the world’s third largest exporter. * Oil Industry (Ethanol). 4. Strategy, Structure and Rivalry: * Agribusiness has grown significantly due to MERCOSUR trade.

Internal Analysis

VRINE Analysis
Valuable: The network of dealership that has been established especially in the rural regions is essential to the success of the organization, it has also built a good brand image been known for quality and premium products.
Rare: Cervus Equipment principles over policy model and its decentralized decision making offers a unique approach to its dealership management, and allows for a higher customer support and satisfaction.
Inimitable: Cervus strategy and dealership network can be copied by its competitors but due to its present position in the market a large amount of investment will be needed if any organization tries to copy this model
Non-Substitutable: They are other competitors in this industry with varying strategies and goals and hence Cervus does not have resource that can be deemed to be non substitutable, although they may be hard to substitute and require significant amount of investments.
Exploitable: Cervus has exploited its resources to achieve its present’s growth and expansion, Cervus has built a good brand image, good customer service and a partnership with its major OEM “John Deere”.

Financial Analysis
Cervus has very strong financial conditions. There shareholders’ equity was $ 5.1 million in 2003 and it’s always in upward sloping, which has been reached $183.7 million in year 2011. Annual growth rate at 2003-2011 is 56.5% in terms of equity. Book value of equity per diluted share growth rate is also very good which 31.7% is. In 2003 book value of diluted per share was $1.35 million and it rose gradually to $12.5 million in 2011. Cash and cash equivalent was $6,536,000 in year 2011, which increases to $8,156,000 in 2012. The growth rate at 2003-2011 of pre-tax earnings per share is 15.1%. Pre-tax EPS .57 million in 2003 in 2008 it climbed up to 1.6 million. Then it had started falling in 2009 & 2010 then again rose in 2011 to 1.75 million. The growth rate of total assets is 34.6% at 2003-2011. The growth rate of revenue is 33.2% 2003-2011. Cervus Equipment revenue came from agriculture at 2011 was 73.2%, which become lower in 2012 and become 65.4%. On the other hand in 2011 26.8% came from commercial & industrial which become higher in 2012 by become 34.6%. Even after acquisition Cervus total comprehensive income increase by $6,456,000 at 2012 from 2011.
On the other hand, Industry itself is very strong and high profitable and high competitive. Economic growth is higher than national growth rate in Canada both in agriculture and commercial.
According to BCG growth share Matrix, Cervus belongs to star segment because it has high relative market share (cash generation) and high market growth rate (cash usage). If it can maintain its large market share it will become cash cow segment when market rate is decline.

Ghemawat’s CAGE Analysis
Due to the lack of space the frames illustrating this analysis are attached to the appendix pages. In this analysis were done for both country Australia and Brazil.

Criteria of Decision Making
Cervus has to meet its goal previously set up by the board of directors, which is already written as hitting $2.5 billion in revenues by 2020. Therefore, three criterias are used to choose the most accrue decision. 1. Optimize the resources between new acquisitions and existing dearleships in order to balance the growth of distribution networks. 2. Develop the agriculture business unit for latest technology (GPS solutions, yield data systems, and site-specific forming). 3. Diversify product offering.
Alternatives
1. Cervus should reach International markets such as Brazil and Australia. Brazil and Australia are potential markets to introduce the agriculture business, due to their low developed industry and big sizes of lands that they have.
Positive Aspects A. Gain high market share due to be the first exploring it. B. Diversifying the revenues, which reduce the fluctuations of just one market. C. The future of the business is based on Globalization.
Negative Aspects A. It requires a deep research of the countries environment and high investment. B. This alternative takes time to establish and might risk capital. 2. Cervus should develop and grow the construction business unit as it did with agriculture unit. It will help to reach other target market that needs to satisfy its necessity, while diversification strategy is apply to the business.
Positive Aspects A. Increases profit and expand there market share. B. Attends others customers needs C. Diversify the portfolio of products.
Negative Aspects A. It requires a deep research and development; as well as, high investment. B. Miss out a opportunity to grow internationally. C. Focuses only on the need of one market. 3. Status Quo, Cervus grows the business as the agriculture industry grows. This alternative makes Cervus to establish only short goals in order to attend the fluctuation of the market, while this grows due to the increasing of the population.
Positive Aspects A. Customer Relationship Management is improved. B. Reduction of risk. C. Low investment is needed.
Negative Aspects A. High cost of opportunity to grow the business internationally. B. It can be affected by the market fluctuation.

Recommendation
On considering the various alternatives that currently exist we recommend a mix of alternative 1 and 2. We recommend that Cervus first improves its industrial offerings and build that component of its business in its local market first as it allows the organization to diversify its product offering and increasing its customer base, this is the less risky of all the alternatives and offers a base for implementing further growth strategies.
If it is successful, then an international strategy is important as this allows them reduce the risk of over dependence on local market. An international expansion may involve a large amount of risk but it does offer a lot of rewards. Cervus should expand internationally by partnering with already existing local companies in this market as this reduces the risk and uncertainty of expansion, this could lead to Joint Ventures or creation of separate Business units in this markets. Cervus expansion internationally means it needs to improve or acquire new competencies to make it competitive in such market. An international expansion is not without it risks and also needs financial resources, below we shall detail how funds can be raised to achieve this goal.
Financing Recommendation
As Cervus goal is to reach $2.5 billion revenue by year 2020, so it must have strong financial alternatives. Cervus could invest in bond market by issuing hybrid bonds. These bonds are subordinated corporate bonds, which are combined of debt and equity and offer unlimited timeframe or long term. For future betterment Cervus could start equity financing to oppose lender rather investor can invest in public equity market this will help money run within organization and when market growth will low Cervus can utilize it rather than outsourcing for financial need.

Implementation
The main steps that are used for implementing our recommendation are listed as follow in chronological order: 1. Continue with acquisition and consolidation of Canadian dealerships (Q1 2013) * Analysis of present dealerships to find the least effective and profitable * Locate and acquire dealerships that fit corporate strategy 2. Concentrate on improving construction product offerings (Q1 2013 – Q1 2015) * Discuss with OEM partners and outline short and long term goals * Technology development with OEM, and acquisition of new product offerings suitable for the industrial market. 3. Research and expand into Brazil and Australia (Q2 2015) * Research and analyze markets to see where possible growth opportunities exist * Explore possibility of partnership with already existing local business * Expand into international markets.
In a word, this implementation plan involves both a domestic and international expansion; however, it is a necessity that this plan should be related to key OEMs suppliers in order to ensure a smooth operation of the supply chain. Furthermore, in order to make acquisition management more effective, it is necessary to centralize parts like human resources, outsourcing and information technology (IT) system in the future 2 years to integrate the whole dealerships.

Appendix

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