UNIVERSITY OF STRATHCLYDE
GRADUATE SCHOOL OF BUSINESS

MASTER OF BUSINESS ADMINISTRATION
STRATEGY ANALYSIS & EVALUATION
ASSIGNMENT 2005

The VSM Group

Prepared by:

Name Intake Reg No.
Ivan HO MacNab 200455775
Vui Soon HO MacMaster 200352369
Franco LEE MacNab 200492442
Kim Loong NG MacNeil 200459087
Roland TAN MacNeil 200459176

1 EXECUTIVE SUMMARY 1

2 VSM GROUP 1

2.1 Organisational Purpose 1 2.2 Corporate Governance 2 2.3 Stakeholders 2 2.4 Organisational Performance 2

3 MACRO ENVIRONMENT 2

3.1 PESTEL Analysis 2 3.2 Scenario Building 3

4 SEWING MACHINE INDUSTRY 3

4.1 Global Business Environment 3 4.2 Market Analysis & Structure 3 4.3 Industry Analysis 4 4.4 Competitor Analysis 4 4.4.1 Market Segmentation 4 4.4.2 Strategic Group Analysis (SGA) 5 4.4.3 Customer Value 5

5 STRATEGIC CAPABILITIES 6

5.1 Resources and Competencies 6 5.2 Diagnosing Strategic Capability 6 5.3 Development of New Competencies 7

6 COMPETITIVE/BUSINESS STRATEGY 7

6.1 Basis of Competition 7 6.2 Sustaining Competitive Advantage 7 6.3 Basis of Future Competitive Strategy 7

7 STRATEGIC OPTIONS 8

7.1 Improvement on Operating Profits 8 7.1.1 Production Relocation 8 7.1.2 Revenue Growth 8 7.2 Long-term Growth and Strategies 8 7.2.1 Market Diversification 9 7.2.2 Revenue Diversification 9 7.2.3 Cost Efficiency 9

8 BUSINESS IDEA 10

9 STRATEGY EVALUATION 10

9.1 Suitability 10 9.1.1 Options vs Key Strategic Issues 10 9.1.2 Options vs Scenarios 10 9.2 Acceptability 10 9.3 Feasibility 11 9.4 Evidence 11

10 RECOMMENDATION 11

11 REFERENCE 13

12 APPENDICES 18

EXECUTIVE SUMMARY

VSM group is a key player in medium and high-end market segment of consumer sewing machines. The most influential stakeholders are its controlling shareholders and strategic customers. Despite a healthy gross margin, sales of the group started to decline in the year 2003.

The environmental analysis reveals several opportunities and threats posed by the changing environment. Market potential is huge in high growth Asia countries like China and India, and demand for industrial sewing machines is expected to be huge from China's rapidly growing apparel industry.

The challenges faced by VSM are the weakening US currency, declining demand for low and mid market segment machines, and high costs of production bases.

VSM should consider a combination of strategic fit and stretch to address the key strategic issues. Immediate measures involve moving production to the Zetina plant and an aggressive effort to regenerate revenue growth through market repositioning. For growth sustenance, the group should consider market expansion, revenue diversification and cost efficiency.

VSM GROUP

1 Organisational Purpose

VSM Group develops, manufactures, markets and sells sewing machines and related products on the consumer market that enhance the joy of creative sewing. It has a leading position in the medium to high-end segments of household sewing machines on the world. The group markets its products under two premium brands namely Husqvarna Viking and Pfaff and has six principal products groups targeted at different segments of customers.

VSM has two sets of customers. These are the retailers and the users of household sewing machines. The exclusive retailers are its strategic customers whose expectations must be met for long-term survival. However, this does not mean that VSM should neglect the needs of sewing machine users.

2 Corporate Governance

The group's chain of corporate governance is made up of middle managers who are accountable to the lower-tier board/top management team which in turn reports to upper-tier/supervisory board appointed by Industri Kapital AB. The fund manager, Industri Kapaital, is expected to have the most influence over the group's strategic direction and development. (Appendix 1)

3 Stakeholders

The key players are Industri Kapital, Jo-Ann Fabric and other exclusive retailers. Acceptability of strategies to these stakeholders is of major importance. VSM should satisfy powerful stakeholders in listed Map C through provision of good information to avoid their reposition to Map D. The information needs of stakeholders in Map B should be met to discourage them from lobbying the more powerful stakeholders. (Appendix 2)

4 Organisational Performance

VSM's strategy alliance with Jo-Ann in May 1999 and the opening of 47 exclusive HV shops in the US proved successful whereby sales grew impressively from 1999 to 2002 before stabilising in 2002 and declining in 2003. (Appendix 3)

The improved gross margins from 50% in 2001 to 59% in 2003 reflected the strategic move of organisation toward upmarket segment.

MACRO ENVIRONMENT

1 PESTEL Analysis

Most of the sales of VSM have been generated from high-income western countries. With it’s biggest market US accounting for more than 45% of its total turnover, followed by Sweden and other European countries. Sales in these matured economies are expected to grow at a moderate rate in line with the estimated GDP growth rates of around 3.5% in the US and 2% or less in European areas. (Appendix 4) On the other hand, developing countries in Asia like China and India, each with a population of more than one billion people and GDP growth in excess of 9% and about 7% respectively, provide huge potential for consumer market products and services. (Appendix 5)

However, the outlook of global economy is subject to important downside risks, such as unexpected disruption in oil supply, more rapid increase in interest rate and persistent global imbalances. (Appendix 5)

2 Scenario Building

The most important potential risks stem from the relatively volatile oil market and future path of interest rates. Further oil-market supply shock would force low-income countries to reduce domestic demand and non-oil imports to pay for the higher oil bill. Higher interest rates would increase future borrowing costs of developing countries with high debt to GDP ratios. On the other hand, low interest rates could generate additional inflation that forces a further tightening of monetary policies. (Appendix 6)

SEWING MACHINE INDUSTRY

1 Global Business Environment

Major sewing machine exporting countries are Japan, China, Germany and Taiwan, with each accounting for 24%, 15%, 12% and 10% of the sewing machine exports in the world. China enjoyed impressive export growth of 15% and 16% in 2002 and 2003 respectively while the rest of the major exporters suffered declining export sales. (Appendix 7)

Major importing countries/territories are US, China and Hong Kong, which together make up 47% of the total import of the world's sewing machines. Most of these countries/territories experienced declining import in both 2002 and 2003 except for China, Hong Kong and Turkey which have positive growth of 14%, 12% and 162% respectively in 2002. (Appendix 7)

2 Market Analysis & Structure

The market structure for the retailers and end users are different. The market for retailers are like to be more monopolistic due to smaller number of players compared to the market for end users.

The market structure for sewing machine users is less monopolistic. Competitors in the user market offer similar products that are differentiated in some way from each other. Each competitor retains an element of monopoly power because products are not perfect substitutes.

Price elasticity for sewing machines is high due to availability of other brands. The price is also very elastic because other hobbies other than sewing abound. The elasticity for low-priced machines targeted at lower income groups is higher than the high-priced machines aimed at higher income groups. Consumer goods including sewing machines are normally subjected to high income elasticity. (Appendix 8)

Demand for household machines are affected by factors like costs of other hobbies, steel prices, consumer incomes and preferences. These factors cause change in supply which affect price of industrial machines, input prices and technology. (Appendix 8)

3 Industry Analysis

The five forces framework identifies competitive forces that determine the competition in the home sewing machine industry. The number of international players involved in sewing machine manufacturing are decreasing with the exit of Electrolux, Pfaff, etc. Household machines are mainly distributed through retailers whose bargaining position is strengthening as their size increases. Close substitutes are on the rise with an increasing range and variety of amusement activities and other competing brands. In US and Europe, demand for upmarket embroidery machines is growing while demand for low-priced mechanical and industrial machines has declined substantially. (Appendix 9)

4 Competitor Analysis

1 Market Segmentation

The Market segmentation identifies group of customers who have similar needs based on geographical coverage and product groups. Four major geographical regions are US, Europe areas, Japan, Asia and others and two product groups according to their uses are household and industrial machines.

In western regions, demand for industrial machines and low price household machine has been declining for more than two decades. In contrast, embroidery machines in high-end segment have sold extremely well in both US and a number of European countries.

Huge demand for industrial sewing machines is expected from China's rapidly growing apparel industry and its urgent need- to modernise production facilities in order to improve the product quality. (Appendix 10)

2 Strategic Group Analysis (SGA)

In term of net sales and product/market diversity, SGA identifies two groups of key players each with similar strategic characteristics, following similar strategies or competing on similar bases. VSM, Bernina, Elna and Janome are smaller niche market plays and Brother and Juki are larger producers in multiple market segments. (Appendix 11A)

VSM's ability to diversify into more sophisticated industrial machine production, depends on whether it can overcome mobility barriers like large capital investment, relationship with industrial users, and up-todate technology. (Appendix 11B)

The SGA identifies strategic spaces for VSM to expand its sale coverage beyond western regions to new Asia markets and pursuit horizontal integration into industrial sewing machine manufacturing. (Appendix 11C)

3 Customer Value

VSM has two sets of customers that are the retailers and the users. Information relating to perceived value by the retailers is not available for comparison. Relative performance between VSM and its competitors in providing perceived benefits for sewing machine users has been shown in appendix 12.

In the western world, sewing is more of a hobby than a necessity and is part of their lifestyle where leisure social aspect and pride in creative pursuits own accomplishments are important elements. With these in mind, VSM therefore sought offering is to sell "the joy of creative sewing" rather than merely just sewing machines.

VSM is better than most of its competitors in meeting its customers needs in term of innovation, quality and services. However, it may need to pay more attention to the product's user-friendly feature that is currently outperformed by its competitors. (Appendix 12)

STRATEGIC CAPABILITIES

A successful competitive strategy requires that its resources and competences supporting the strategic position taken by a business.

1 Resources and Competencies

VSM's core competencies in innovative product ie, HV Designer 1, experienced management team and good relationship with exclusive retailers ie, Jo-Ann have reflected in the strong demand for its embroidery machines in US and Europe markets. (Appendix 13)

2 Diagnosing Strategic Capability

The Activity Mapping reveals that the core competency of VSM depends on its ability to create or lead customer demands which underpinning its innovative product features and services package (Appendix 14). This ability has been well supported by creativity idea support activities, innovation culture and blended marketing and technical in product designs.

3 Development of New Competencies

VSM shall consider developing following competencies for future growth and survival: - knowledge and skills of industrial sewing machines manufacturing - insights about the business environment and customer needs of Asia markets - understanding of culture and skills of staffs in low cost producing countries

COMPETITIVE/BUSINESS STRATEGY

1 Basis of Competition

VSM has adopted differentiation strategy targeting at the medium to high segments of consumer sewing machine market to achieve its competitive advantage (Appendix 15). This strategy seeks to provide products that offer benefit different from those competitors and that are widely valued by the consumers. The strategy worked well and resulted high gross margin and ROC in the past few years (VSM case: Appendix 4) until sales started to decline in 2003. Now, VSM may need to consider whether to maintain its current strategic position or pursuit new strategic direction for long-term survival.

During 2003, VSM encountered declining turnover and operating profits as a result of continued weakening of US currency, intense price competition in mid market segment, declining demand for low priced machines, and restructuring costs.

2 Sustaining Competitive Advantage

The sustainability of VSM's current competitive advantage depends on its ability to maintain a leading position in innovation. To achieve this, VSM need to create difficulties to imitation that sustaining differentiation and reinvest margin into branding, and research and development.

3 Basis of Future Competitive Strategy

Future strategy of VSM shall be based on repositioning to household upmarket, diversifying into industrial machines, entering high growth Asia markets and maintaining cost efficiency.

STRATEGIC OPTIONS

1 Improvement on Operating Profits

1 Production Relocation

By moving the production of Pfafff machines to Zetina plant, which is very cost efficient and currently under-utilised, instead of Huskvarna plant will help resolve the current problems of plant integration due to incomparable engineering principles and high production cost of German plant. Furthermore, Zetina plant is crucial to the production of Pfaff machines because the Haskvarna plant cannot produce any Pfaff machines.

Continuous improvements in cost efficiency have become threshold strategic capability for any organisations to survive in the long run. VSM should look into cost drivers such as economies of scale, supply costs, product design and experience curve.

2 Revenue Growth

Since sales in mid segment machines is declining as a resulf ot the price competition and demand for emboridery machines is growing strongly, VSM may consider becoming a niche player in high-end market segment or adopting focused differentiation strategy. This strategy provides high perceived product benefits with a substantial price premium and will eventually improve the bottomline of VSM.

2 Long-term Growth and Strategies

Future economic growth of western countries, which VSM currently rely on, is expected to be moderate in the future. VSM should consider its future strategic direction and strategic options available for future growth and survial. Diversification into related business such as industrial sewing machines has been proved successful by some ot its international competitors like Brothers and Juki. (Appendix 23)

1 Market Diversification

With a large population of 1.3 billion coupled with growing spending power, China market offers huge potential for VSM's to grow its sales of household machines (Appendix 4). A similar dealer-partner programme may be offered to some of the larger retailer in China ie, Bailan group and French owned Carrefour, to set up small sewing machine outlets in their large sale points.

Further information about the China market such as culture, lifestyle, spending habit and power need to be gathered and evaluated before any further decision on the market expansion.

2 Revenue Diversification

VSM may consider venture into industrial sewing machines manufacturing through its existing joint venture with Zoje to capture the strong demand from China's rapid growing apparel industry. This will helps VSM to reduce its dependence on both US and Europe markets for survival. Pfaff's previous experience and knowledge in industrial machine production will be valuableresources to support this strategy.

Government policies toward foreign investment and ownership, investment incentive, knowledge and skill of workforces, local banking systems and capital market are some of the more critical factors need to be considered in having production facilities in China.

3 Cost Efficiency

Although currency-protection measures may mitigate the impact of currency depreciation, weakening dollar also led to increased price competition from the competitors whose bases of productions are based in China and other low cost countries. (Appendix 10)

In the long run, VSM should consider moving production for low and medium segment machines to low-cost countries like China, Vietnam, etc, to overcome its cost disadvantage and put it on the same level of cost competitiveness with its Japanese competitors who already shifted most of their production bases to these countries. (Appendix 10)

In addition, emergence of low cost offshore development centres in China and India also provides VSM an opportunity to reduce its costs through outsourcing some of its R&D and software development activities to these low cost countries. (Appendix 4)

BUSINESS IDEA

The business idea for consumer sewing machines indicates a positive feedback loop which driving the growth of VSM. VSM's success depends on its ability to create or lead customer demands ahead of its major competitors. However, it doesn't seem to be difficult for any competitors to emulate VSM's competencies in its business idea. (Appendix 20)

STRATEGY EVALUATION

1 Suitability

1 Options vs Key Strategic Issues

The strategic options have the most positive impacts on VSM are production relocation to Zetina plant, market expansion in Asia and revenue diversification. The outsourcing of R&D and software development will compliment the options and bring VSM closer to its customers in China. (Appendix 21)

2 Options vs Scenarios

If status quo maintain, the impact is positive for most strategic options except "do nothing" and "unrelated diversification". Under the worst scenario of sewing machine twilight, all except "unrelated diversification" and "relocation to Zitina plant" are negative. The impact under leisure sewing society are positive except for "unrelated diversification". (Appendix 21)

2 Acceptability

The most influencial group over the future strategies of VSM is likely to be the controlling shareholder, Industri Kapital., who will normally consider the trade off between risk and return of investments. Since it has a plan to divest within a five-year periods, it may favourate incremental strategic changes like production relocation and focus differentiation rather than long-term leap changes such as new market entry and revenue diversification. (Appendix 22)

3 Feasibility

Financial evaluation of each option considered is impossible without detailed information about VSM's operations. If this information available, net present value, fund flow forecasting and breakeven analysis will be performed for each option and their sensitivity tested against different scenarios in assessing their financial feasibility.

Besides financial feasibility, resources deployment assessment may be performed to identify the resources and competencies needed for the proposed strategies.

4 Evidence

Evidences showed that both Brother and Juki started as sewing machine manufacturers and have successfully diversified into other related businesses. (Appendix 23)

RECOMMENDATION

We recommend that management of VSM shall: - take the necessary actions to operationalise the strategic options identified above to sustain the competitive advantage over its competitors. - maintain a clear strategic direction to address all the long-term challenges of the organisation beside the more immediate issue of improving operating profits. - develop and build the competencies required to support its future strategic moves into Asia markets.

REFERENCE

o 2005 Brother Group Social & Environmental Report, Brother Industries Ltd, www.brother.com o Aging and Employment policies, OECD, www.oecd.org o An Overview of Chinese Sewing Machinery: Management Briefing, www.researchandmarkets.com o Analysis Report on China's Sewing Machinery Industry, Research and Markets, o www.researchandmarkets.com o Annual Report 2004: Corporate Profile, Juki Corporation, www.juki.co.jp o Annual Report 2005, Brother at a Glance, Brother Industries Ltd, www.brother.com o Summary of Consolidated Financial Results for Fiscal 2005, Janome Sewing Co Ltd, o www.janome.co.jp o Annual Report: Financial year ended 31/03/2003, VSM Group AB, www.vsmgroup.com o BengtGerborg Announces Retirement Plans, www.husqvarnaviking.com/us/2827_4680.htm. o Bernina Company Website, www.bernina.com o Bernina of American Inc., Business and Company Resource Centre, http://galener.galegroup.com o Brother Industries Ltd., www.brother.com o Business Plan ISO/TC 148 Sewing machines, International Organization for Standardization, o http:isotc.org o Cairns G, Moore C,Reid C, Scouller J and Wilkie R (2002), Exploring the Business Environment, o The University of Strathclyde, Graduate School of Business o China Business Summit 2005, World Economic Forum, www.weforum.org o China Could Become World's Largest Exporter by 2010, OECD, www.oecd.org/document o China Economic Information Network, www.cei.gov.cn/ o China International Association of Sewing Machinery and Accessories, www.cisma.com.cn o China Sewing Machine Demand Expected to Grow, China Textile Information Center, o www.ctei.gov.cn/english/e_show.asp?xx=73 o China Textile Machinery and Accessory Industrial Association (CTMA), www.ctma.com.cn o China's 10th Five Year Plan (2001-5), The World Bank, http://web.worldbank.org o China's WTO Scorecard: Selected Year - Three Service Commitment, The US-China Business o Council (USCBC) o Clothing Retailing in China, Research Store, www.just-style.com/store/products_detail.asp? o Country Survey, OECD, www.oecd.org/economics o Czinkota, MR, Ronkainen, IA and Moffett, MH, International Business, The Dryden Press, o Economic Statistics Briefing Room, The White House, http://www.whitehouse.gov/fsbr/income.html o Economic Outlook, OECD, www.oecd.org/economics o Economic Policy Reform: Going for Growth, OECD, www.oecd.org/economics o Economic Survey, OECD, www.oecdchina.org o Economic Survey of the China 2005, OECD, www.oecd.org/document o Economic Survey of the US 2005, OECD, www.oecd.org/document o Education at a Glance 2005, OECD, www.oecd.org/education o Elna Company Website, www.elna.com o Elna USA, Business and Company Resource Centre, http://galener.galegroup.com o Fastest population growth found in ‘red states', USA Today, http://www.usatoday.com o Gerry Johnson, Kevan Scholes and Richard Whittington (2005), Exploring Corporate Strategy, 7th o edition, Prentice Hall o Global Economic Prospects 2006, The World Bank, http://web.worldbank.org o Home Sewing Association, www.sewing.org o Hong Kong Trade Development Council, www.tdctrade.com o Household Type Sewing Machines: 2004 Global Trade Prospective - World Market, Research and o Markets, www.researchandmarkets.com o How Europe Can Age Gracefully, www.channeloklahoma.com/money/6395969/detail.html o Indian Manufacturers Strengthen HK/Chinese Mainland Textile Trade, Internation Market News, o www.tdctrade.com/imn/05112905/textiles026.htm o Janome Sewing Machine Co. Ltd., www.janome.com o Japan Sewing Machinery Manufacturers Association (JASMA), www.jasma.or.jp o Juki Corporation, www.juki.co.jp o Market Profile on Chinese Mainland, www.tdctrade.com/main/china.htm o Martin Neil Bailey, The US Economic Outlook, Institute of International Economics o Michael Mussa, Global Economic Prospects: Growth Slowing Below Potential In 2006, Institute of o International Economics o Monthly Oil Market Report - November 2005: Crude and product price movement, Organization of o the Petroleum Exporting Countries, www.opec.org o OECD Economic Outlook No 78, November 2005, OECD, www.oecd.org o OECD Science, Technology and Industry Scoreboard 2005, OECD, www.oecd.org/science o Permas R and Scouller J, Business Economics, The Operation of Market, Market Forces, and o Market Equilibrium, Chapter 2, pg 24-47, Oxford University Press. o Porter, M.E. (1987), From Competitive Advantage to Corporate Strategy, Harvard Business Review, o vol 65, issue 3, pp 43-60. o Prospects for the Global Economy, The World Bank, http://web.worldbank.org o Prospects for the Textile and Garment Industry in Vietnam, Research and Markets, o www.researchandmarkets.com o S Vedala and N Rossiter, Can the Tiger and Dragon Hunt Together ?, www.globaloutsourcing.org o Sewing machinery manufacturing sound, 03/05/2004, Industrial Profile, Hong Kong Trade o Development Council, www.tdctrade.com/report/indprof/indprof_04501.html. o Sewing machines, Global Information Inc, o www.the-infoshop.com/study/go9714_sewing_machines_toc.html o Singer Sewing co., Business and Company Resource Centre, http://galener.galegroup.com o Statistical Data, Japan Sewing Machinery Manufacturers Association (JASMA), www.jasma.or.jp o Strategy Analysis and Evaluation Workbook, 2005-6 edition, University of Strathclyde o Strategy Analysis and Evaluation: Calmac, University of Strathclyde, www.intranet.gsb.strath.ac.uk o Strategy Analysis and Evaluation: Cendant, University of Strathclyde, www.intranet.gsb.strath.ac.uk o Strategy Analysis and Evaluation: Field Packaging, University of Strathclyde, o www.intranet.gsb.strath.ac.uk o The Home Sewing Association, US, www.sewing org o The Looming National Benefit Crisis, USA Today, http://www.usatoday.com o The Three-year Business Strategy, CS B2500 - Challenge and Strategy to Brother 2005, Brother o Industries Ltd, www.brother.com/brother_En/news_e/001.html o The World Bank, http://web.worldbank.org o The World Bank in India, Country Brief 7/2005, The World Bank, www.worldbank.org/in o Van Der Heijden K (1996), Scenarios: The Art of Strategic Conversation, chapter 3, John Wiley & o Son Ltd o Van Der Heijden K, Bradfield R, Burt G, Cairns G and Wright G (2002), The Sixth Sense: o Accelerating Organisational Learning with Scenarios, John Wiley & Sons Ltd o VSM Group Company Website, www.vsmgroup.com o VSM Group AB, Business and Company Resource Centre, http://galener.galegroup.com o VSM_Group_Case_Study12 o ZheJiang Zoje Sewing Machine Co. Ltd, www.zoje.com

Other Sources:

o www.berninausa.com o www.census.gov o www.globaloutsourcing.org o www.husqvanaviking.com o www.intranet.gsb.strath.ac.uk o www.outsourcing2india.biz o www.pfaff.com o www.researchandmarkets.com o www.siruba.com o www.waymaker.net

APPENDICES

APPENDIX 1 CHAIN OF CORPORATE GOVERNANCE 17
APPENDIX 2 Stakeholder Mapping: Power/Interest Matrix 18
APPENDIX 3 ORGANISATION PERFORMANCE 19
APPENDIX 4 PESTEL ANALYSIS 22
APPENDIX 5 GLOBAL ECONOMIC OUTLOOK 26
APPENDIX 6 SCENARIO BUILDING 28
APPENDIX 7 BUSINESS ENVIRONMENT On SewIMG MACHINE INDUSTRY 33
APPENDIX 8 MARKET ANALYSIS AND STRUCTURE-USERS 36
APPENDIX 9 PORTER'S FIVE FORCES MODEL 38
APPENDIX 10 MARKET SEGMENTATION 41
APPENDIX 11A STRATEGIC GROUP ANALYSIS 49
APPENDIX 11B MOBILITY BARRIERS 49
APPENDIX 11C STRATEGIC SPACE 51
APPENDIX 12 CUSTOMEr VALUE-USERS 54
APPENDIX 13 STRATEGIC CAPABILITIES & COMPETITIVE ADVANTAGE 55
APPENDIX 14 ACTIVITY MAP 57
APPENDIX 15 STRATEGIC CLOCK 58
APPENDIX 16 VALUE NETWORK 59
APPENDIX 17 ANSOFF MATRIX 60
APPENDIX 18 SWOT ANLYSIS 61
APPENDIX 19 TOWS ANALYSIS 63
APPENDIX 20 BUSINESS IDEAS 64
APPENDIX 21 OPTIONS EVALUATION - ISSUES MATCHING/SCENARIOS 66
APPENDIX 22 OPTIONS EVALUATION – STAKEHOLDERS 68
APPENDIX 23 OPTIONS EVALUATION – EVIDENCES 69

APPENDIX 1 CHAIN OF CORPORATE GOVERNANCE

Sources: Adapted from David Pitt-Watson, Hermes.

APPENDIX 2 Stakeholder Mapping: Power/Interest Matrix

❖ Map A ▪ General public ▪ Retail investors ❖ Map B ▪ Lending banks (D/E ratio 38.7%) ▪ Retailers – Others ▪ Retailers - After market service ▪ Consumers or household users ▪ Communities

❖ Map C ▪ Lending banks - holding co (D/E ratio 370%) ▪ Institutional investors ▪ Government: US, Swedish, German and Brno ▪ Employee representatives (BOD) ▪ Environmental Council ▪ Employees ❖ Map D ▪ Industri Kapital ▪ Alliance - Jo-Ann Fabrics & Craft ▪ Retailers - Exclusive

APPENDIX 3 ORGANISATION PERFORMANCE

In 2000, the strong growth in revenue was primarily driven by the acquisition of Pfaff brand in May 2000 and the growth throttles into year 2001.

Faced with stiff competition from Brother, Juki and Janome with lower price strategy have negatively impacted the revenue growth in 2002.

Since Pfaff brand came on board, it has in fact competing with Viking brand head-on, this coupled with the strong competition from the Japanese has impacted the revenue growth significantly resulted in negative trend in year 2003.

Acquisition outlay drove the ROC down by 3 points and 4 points respectively in years 2000 and 2001 as expected. The drop in revenue in year 2003 has brought down the ROC to a level below 1999 level.

Refer to Table 1 and 2.

Table 1
| | |2003 |2002 |2001 |2000 |1999 |
|VSM | |US$ million |US$ million |US$ million |US$ million |US$ million |
| |Revenue | 329 | 379 | 350 | 265 | 163 |
| |Growth % |-13% |9% |32% |63% |22% |
| |Operating Income | | 30 | | | | |
| | |3| | | | | |
| | |1| | | | | |
|ROC | | | | | | | |
| |% | |33% |37% |27% |31% |34% |
| |Growth | |-3% |10% |-4% |-3% |9% |

Gross margin has dipped in years 2000 and 2001 mainly due to the integration of Pfaff acquisition. Business was back to normal in years 2000 and subsequent cost rationalisation and efficiency gain pushed the gross margin by 4 points in year 2003.

Refer to Table 3.

Table 3
|Gross margin | |2003 |2002 |2001 |2000 |1999 |
| |% | |59% |55% |50% |50% |55% |
| |Growth | |4% |5% |0% |-5% |3% |

Despite the fact that revenue dropped significantly in year and profit margin in years 2003, Return on Capital Employed was almost double from 2002, mainly due to a lower Total Assets value in 2003, than 2002 value.

The drop in assets value were primarily contributed by a 40% drop in fixed assets implied indicating assets write off and a 45% drop in Intangible Fixed Assets value suggesting an impairment hit in the Profit and Loss statement.
[A drop in “Other Shareholder Funds” concurred the statement]

Refer to Table 4.

Table 4
|Profitability and Return | |2003 |2002 |
| |Profit margin | |7.43% |7.96% |
| |Return on Shareholders Funds | |60.65% |33.87% |
| |Return On Capital Employed (ROCE) | |18.72% |13.39% |
| |Return on Total Assets (ROA) | |10.28% |9.60% |

There were marginal improvement in efficiency ratios but it was not significance enough to cause any material changes in the company position.

Refer to Table 5.

Table 5
|Efficiency | | |2003 |2002 |
| |Debtor Payment Period (days) | | 45.0 | 44.0 |
| |Creditor Payment Period (days) | | 30.0 | 22.0 |
| |Stock Turnover | | 5.21 | 5.55 |

Borrowing remained the same level as 2002 but there was a shift from long-term debts to short-term borrowing but it was not significant. Working Capital has dropped from 2002 level as expected given the drop in revenue and reduction in profitability.

Gearing and liquidity ratios were heading to the negative zone driven by a huge drop in assets value and drop in profitability.

Refer to Table 5 and 6.

Table 6
| | | |2003 |2002 |
|Capital Structure | | | |
| |Gearing ratio | |369.8% |199.0% |
| |Interest cover | |4.51 |6.61 |
| | | | | |
|Solvency & Liquidity | | | |
| |Current ratio | |1.92 |2.97 |
| |Liquidity ratio | |1.02% |1.54% |
| |Solvency ratio | |16.95% |28.35% |

Conclusion, all available information point to a position where revenue growth and profitability have been negatively impacted driven by external competition as well as internal competition [from Pfaff brand], non-competitive pricing and high operating cost.

APPENDIX 4 PESTEL ANALYSIS

❖ Political

▪ China Inc.'s march aborad as evidenced by high profile globalization moves such as the IBM-Lenovo deal and the failed CNOOC-Unocal deal. (www.weforum.org)

▪ Under China's WTO accession agreement, China has made substantial market access commitments covering agricultural, industrial and services sectors. China has agreed to provide trading rights to foreign companies, to be progressively phased over three years. Majority ownership in wholesale joint ventures will be allowed within two years of accession and there will be no establishment restrictions in retailing within three years of accession. (www.tdctrade.com)

❖ Economical

▪ World GDP is estimated to have increased by 3.2 % in 2005, stable in 2006, before strengthening in 2007. While growth in Europe still under performing potential, Japan and US are expecting at close to their maximum sustainable rate. Among large developing countries, China will continue to grow in excess of 9% annually (www.worldbank.org). The centre of gravity for the world's economy is shifting to Asia which is going to underpin global growth for the next 30 years (www.weforum.org).

▪ Emergence of key international players notably, China, which was ranked third with an external trade of USD 1,155 billion in 2004, could overtake US and Germany to become the largest exporter in the world in the next five years. With its ample human resources and high technological capabilities China has powerful competitive as the "factory of the world". (www.oecd.org/economics)

▪ Current account imbalances seem to widen substantially over the next two years. The US external deficit is estimated to exceed 7% of its GDP and the China and Japan will move into extremely large surplus (www.oecd.org/economics)

▪ Rising interest rate differentials relative to European assets made private-sector purchases of dollar denominated assets more attractive. As a result, the dollar appreciated some 2.5% during the first seven months of 2005. However, beginning in the second quarter 2005, the dollar again faced renewed downward pressure (www.worldbank.org)

▪ While crude-oil supply is growing marginally faster than demand, the supply condition is remain tight. Therefore, the crude-oil prices which currenly embody a large risk premium are expected to fall rapidly. Without any major supply disruptions occur, the oil prices will decline gradually toward $40 per barrel by 2010. This implies an average price of $56 for a barrel of oil in 2006 and $52 in 2007 (www. worldbank.org)

▪ The future path of long-term interest rates and spreads, which have been at historically low levels for an extended period, is an important uncertainty. Most of the factors holding interest rates at low levels are temporary and expected to abate gradually. The recent rise in long-term yields and inflation suggest that a higher interest-rate scenario is a real possibility. (www.worldbank.org)

❖ Socio cultural

▪ With a population of 1.3 billion, China's consumer market offers huge potential. Spending power in the country is growing rapidly as the economic boom continues. China's wealthy, those earning more than RMB 100,000 a year (USD 12,080), amounted to an estimated of 2.8 million households representing a major market for upmarket brands. Mass market brands, meanwhile, are targeted at China's quality and price conscious middle and lower-middle income earners (RMB 10K to 30K per annum), who numbered a further 150.5 million households. (www.just-style.com)

❖ Technological

▪ Long-term trend towards a knowledge-based economy. Science, technology and innovation have become the key factors for economic growth. Growing globalisation of knowledge has become more pervasive mainly driven by the use of ICT. (www.oecd.org.com)

▪ Global outsourcing spending is in excess of one trillion dollars and growing rapidly. IT enabled outsourcing represents approximately 40% of the estimated 214 million global outsourcing market and is expected to grow at about 25% every year. China will be the largest offshore development center after India. (www.globaloutsourcing.org)

▪ In 2003, Sweden had the highest R&D intensity (4% of GDP) followed by Findland, Japan and Iceland (all over 3%). China has become the third largest R&D performer behind US and Japan. (www.oecd.org)

❖ Environmental

▪ Growing attention to Corporate Social Responsibilities (CSR). Businesses that develop CSR are investing in their long-term health and profitability. The consumers punish companies that are found to be ignoring the public interest. (www.weforum.org)

▪ EU's Restriction of Hazardous Substances (RoHS) Directive: to reduce six substances, lead, cadmium, mercury, hexavalent, chromium and certain brominated flame retardants (PBBand PBDE). (www.brother.com) ❖ Legal

▪ Growing numbers of patent application and high concentration of patenting activities in few developed countries like France, Germany, Japan, US and UK. Two technology fields contributed more than average to the overall surge in patenting are biotechnology and ICT. (www.oecd.org)

APPENDIX 5 GLOBAL ECONOMIC OUTLOOK
|GDP Growth % |2007F |2006F |2005E |2004 |2003 |
| |World | | |3.3% |3.2% |3.2% |3.8% |2.5% |
|o |High Income Countries | | | | | | |
| | |US | | |3.6% |3.5% |3.5% |
| | |East Asia & Pacific | |7.4% |7.6% |7.8% |8.3% |8.1% |
| | |China | | | | |9.3% |9.5% |
| | |India | | | | |

The global economy is estimated to grow at 3.2% in 2005, stable in 2006, before strengthening to 3,3% in 2007. US is expected expanding at close to its maximum sustainable rate of between 3.5% to 3.6% in 2005 to 2007. Europe will improves from 1.1% in 2005 to 2% in 2007. China and India continue to expand rapidly in excess of 9% and about 7% respectively.

|GDP Per Capital |2007F |2006F |2005E |2004 |2003 |
|( |USD | | | | | |
| | |World |8,232 |7,710 |7,145 |6,711 |6,070 |
| | |US | | | | | |
| | |Euro | | | | | |
| | |China | | |1,490 |1,330 |1,176 |
| | |India | | |686 |610 |547 |
|( |Growth | | | | | |
| | |World |2.2% |2.1% |2.1% |2.7% |1.4% |
| | |US | | | | | |
| | |Euro | | | | | |
| | |China | | |8.6% |8.8% |8.7% |
| | |India | | |5.5% |5.4% |7.0% |

|Population (millions) |2007F |2006F |2005E |2004 |2003 |
|World | | |6,113 |6,050 |5,987 |5,922 |5,857 |
|China | | | | |1,308 |1,299 |1,291 |
|India | | | | |1,095 |1,080 |1,064 |

Source: Global Economic Prospects, The World Bank, www.worldbank.org

APPENDIX 6 SCENARIO BUILDING

o HIGH IMPACT AND HIGH UNCERTAINTY FACTORS

Keys: A: Oil prices B: Interest rate C: Population growth D: Government regulation

o DIFFERENT POSSIBLE FUTURE A) Oil prices (i) Increasing (ii) Decreasing (iii) Stable B) Interest rates (i) Increasing (ii) Decreasing (iii) Stable Source: Prospect for the Global Economy: Risks and Uncertainties, http://web.worldbank.org

o SCENARIOS BUILDING

Scenario of Plausible Configuration of Factors

1. No Great Change (when both oil price and interest rate remain stable)

A sharp increase in oil price (A(i)) produces inflationary shock and this is most prevalent in countries which are (a) large scale importers of oil and (b) have many industries which require oil as an essential part of input in production (and thus which demand and consumption is insensitive to, and does not correlate to, oil price increases (A(i))). (To put this into perspective, when oil prices rose (A(i)) from USD4.00 a barrel in 1973 to USD40.00 a barrel in 1980, inflation rose to over 18% (and growth dropped) in the United States. And when oil prices increase (A(i)) from USD25.00 to USD35.00, inflation rose by 0.5 percentage points and GDP dropped by 0.2 percentage points in the United States).

The inflationary shock arose out of the “knock-on” effect of increased costs in the supply chain through e.g. the increased costs of aviation fuel, plastics, chemicals and other materials. The sewing machine industry, as an industry which relies heavily on plastics and chemicals, may suffer the brunt of an oil price increase. These increased costs will ultimately be passed on to consumers and thus giving rise to increased inflation. As inflation means an erosion of the purchasing power of a unit of currency, the effect would be to dampen sale of products regarded as “non-essentials”. Sewing machines may be the first casualty.

Faced with the twin increases in oil price and inflation, policy makers are faced with a Hobson’s choice: whether to support growth in the face of dampened spending by lowering interest rates (B(ii)); or fight inflation by raising interest rates (B(i)). Most experts believed the correct thing to do is to raise interest rates (B(i)) – by more than the increase in inflation caused by the oil price increase (A(i)) itself. This will reduce demand for storable commodities and increase supply (thus reducing inflation) by:-

▪ decreasing producers’ incentive for borrowings but instead rely more on the income stream from extraction ▪ decreasing producers’ incentive for carrying higher than usual inventories (i.e. by increasing the costs of carrying inventories)

Thus, it could be seen that if oil price increases (A(i)), interest rate is likely to increase (B(i)) as well and if oil price is stable (A(iii)), interest rate is likely to be stable (B(iii)) as well. Thus, where oil price and interest rate are stable, there may be no great change in the business environment.

2. Sewing Machine Twilight (when both oil price and interest rate increase)

Martin Baily in an article titled “The US Economic Outlook” released in September 2004, stated that with high energy prices (A(i)), weakness in the housing market, coupled with the Federal Reserve’s tightening of monetary policy (B(i)), the growth prospect for the US market is a slow growth of around 2.5 %. Despite Hurricane Katrina’s effects, economic pressure would possibly ease off in year 2006. Oil prices are not expected to return to the US$ 30-40 range in the short term (B(iii)), possibly over a longer period of 5 years and above. According to WTI Crude Oil Prices and Futures 1999-2011, WTI Crude Futures prices are above US$60. Nevertheless, Martin predicted that the US economy will not spiral into recession given that inflation is moderate and thus housing collapse is unlikely.

Michael Mussa, in his write up titled “Global Economic Prospect: Growth Slowing Below Potential in 2006 (Assessment as of mid-September 2006)”, has predicted that global growth is likely to slow down further in 2006 given the slow growth in the US economy, continuing impact of Katrina and the likely further easing of investment in China. The uncertainty on the world energy prices and the unwinding of External Payments Imbalances between the US and the rest of the world could lead to an improbable virtuous scenario of a significant slowdown in demand growth in US economy, without any pick up (or even a slowdown) of demand growth in the rest of the world. This combination ensures the world economy does not head into recession. Thus, global output growth will inevitably slow.

Carl Mortished, an International Business Editor for The Times Online, reported that OPEC has aimed to maintain crude oil price to average between US$ 45 and US$ 50 barrel in 2006 (B(iii)).

Against the backdrop of the above conditions, global economy is expected to slow down in 2006 and possibly beyond depending on the oil prices in the coming years as well as any consequential inflationary impact. Demand growth i..e. consumer-spending is expected to slow down in general. Thus, sewing machines, particularly household sewing machines, which generally do not figure as a consumer-spending priority, will mostly likely be negatively impacted. Although there is insufficient information to support any evidence on “consumer-spending ranking”, but it is generally accepted that a sewing machine is not a critical item in any household, particularly in more developed nations such as the US, which is the biggest market in the world.

Hence, given that the demand growth in all major markets is expected to slow down, the outlook for sewing machine industry in the short term looks discouraging, particularly as a sewing machine is viewed as a non-essential item in most of the modern households.

3. Leisure Sewing Society (when both oil price and interest rate decrease)

Galeotti et.al (2003) confirmed that widespread differences in adjustment of gasoline price will make changes in input price i.e gasoline prices adjust faster when oil price increases (A(i)) than when it decreases (A(ii)).

Because oil is critical input to production, oil-price decrease (A(ii)) would act as a stimulus to productivity. The increase in labour and shifting of labour demand encourage more employment and the equilibrium of real wage will rise.

If oil price decreases (A(ii)) in tandem with the lower interest rate (B(ii)), cost of energy will be cheaper and be affordable to many, and cost of borrowing is cheaper too .This will encourage excess disposable income in many consumer who will be able to indulge in affordable leisure activities such as leisure sewing hobbies.

APPENDIX 7 BUSINESS ENVIRONMENT On SewIMG MACHINE INDUSTRY

❖ The Market

▪ Industry sewing machines and garment machines are mainly produced in Asia, but the main exportcountries are Japan, China and Germany, followed by Taiwan, Italy and the US. The total exports of industrial sewing & garment machines in 2003 amount up to EUD 4.3 billion. (http:isotc.org)

▪ A peculliarity of industry sewing machines is that sewing units and systems are frequently built up by the users from components emanating from various manufacturers. Furthermore, unites and systems may be adapted by the users for different tasks by means of the interchange of components or the addition of supplementary equipments. (http:isotc.org)

▪ The historical market leaders like US, Europe and Japan in sewing machine manufacturing increasingly have to rely heavily on their technological development, capital resources and capacity to diversify, to retain market shares. It's now evident that countries like China, Taiwan and South

▪ Korea account for more than 50% of the worldwide output of sewing machines. The users of sewing machines ie, apparel manufactureres have begun a significant drift towards those economies where labour coast are less significant than those for technology. (http.isotc.org)

❖ Market Structure & Major Market Players ▪ The major manufacturers of sewing machines are various Chinese manufacturers, Brother and Juki from Japan, Pfaff, Duerkopp Adler and Union Special from Germany, various manufacturers from

▪ Taiwan and Korea, Rimoldi Necchi from Italy and manufacturers from US. (http:isotc.org)

▪ Most of the Customers are in the low price areas of the world, like East-Europe, East-Asia, Southeast-Asia, South-America. But the headquarter are still in industrial countries in Europe,

▪ North-American and Japan. The customers are garment manufacturers and manufacturers of technical textiles ie, automobile industry.

▪ The worldwide sewing machine market for both household and industrial use is undergoing significant changes. Two important industry trends appear to be the continued automation of production and the internationalisation of company operations. From being a low technology and labour intensive industrial sector, it has rapidly become technologically driven within industrialised countries. (http:isotc.org)

❖ ISO/TC 148

▪ Standards developed by ISO/TC 148 are on household sewing machines, determinations ie, stability of needle thread tension, sewing capacity, directional stabilty, creep of one ply of material over another and reproducibility of stitch length setting; on industrial sewing machines, safety requirements, units and systems.

❖ International Trade of Sewing & Garment Machines
| | | |2003 |2002 |2001 |
| | | |Euro $ | |Euro $ | |Euro $ | |
| | | |(million) | |(million) | |(million) | |
| | | | |% | |% | |% |
|Total export | | 4,303 |100% | 4,564 |100% | 4,618 |100% |
|Japan | | | 1,018 |24% | 1,197 |26% | 1,182 |26% |
|RP China | | | 637 |15% | 550 |12% | 479 |10% |
|Germany | | | 509 |12% | 570 |12% | 638 |14% |
|Taiwan | | | 446 |10% | 561 |12% | 581 |13% |
|Italy | | | 256 |6% | 270 |6% | 304 |7% |
|US | | | 233 |5% | 290 |6% | 321 |7% |
| | | | 3,099 |72% | 3,438 |75% | 3,505 |76% |
| | | | | | | | |
|Growth % | | | | | | | |
|Total export |-6% | |-1% | | | |
|Japan | |-15% | |1% | | | |
|RP China | |16% | |15% | | | |
|Germany | |-11% | |-11% | | | |
|Taiwan | |-20% | |-3% | | | |
|Italy | |-5% | |-11% | | | |
|US | |-20% | |-10% | | | |

| |2003 |2002 |2001 |
| |Euro $ | |Euro $ | |Euro $ | |
| |(million) | |(million) | |(million) | |
| | |% | |% | |% |
|Total import | 3,273 |100% | 3,177 |100% | 3,101 |100% |
|US | | 576 |18% | 677 |21% | 693 |22% |
|RP China | | 567 |17% | 627 |20% | 548 |18% |
|Hongkong | | 402 |12% | 519 |16% | 463 |15% |
|Germany | | 212 |6% | 222 |7% | 240 |8% |
|Turkey | | 179 |5% | 246 |8% | 94 |3% |
| | | 1,936 |59% | 2,291 |72% | 2,038 |66% |

|Growth % | | | | | | |
|Total import |3% | |2% | | | |
|US |-15% | |-2% | | | |
|RP China |-10% | |14% | | | |
|Hong Kong |-23% | |12% | | | |
|Germany |-5% | |-8% | | | |
|Turkey |-27% | |162% | | | |

Source: http: isotc.org

APPENDIX 8 MARKET ANALYSIS AND STRUCTURE-USERS

Elasticity of demand

❖ Price Elasticity

▪ Closeness of substitutes Other hobbies are close substitutes for recreational sewing. In addition, other brands of sewing machines also close substitutes for HV and Pfaff brands.

▪ Proportion of income spent Proportion of income spent on purchases of sewing machines are normally low and therefore inelastic. ▪ Periods Elasticity of demand tend to be higher than in the long run than the short run. ❖ Income Elasticity Consumer goods like household sewing machines normally have high income elasticity.
Changes in Demand

❖ Price of other goods

▪ Substitutes Increase in costs of other hobbies may induce consumers switching to recreational sewing and so lead to an increased demand for household sewing machines.

▪ Compliments An increase in steel price leads to a decline in demand for sewing machines.

▪ Consumer income An increase in income results an increase in demand for computerised and embroidery machines (normal goods), and a decrease in demand for low-priced mechanical & electrical machines (inferior goods).

▪ Consumer preferences Increased preference for the joy of sewing results more consumer sewing machines being demanded.

Changes in Supply

❖ Price of other goods A rapid increase in the price of industrial sewing machines may induce manufacturers to switch production from household machines to industrial machines.

❖ Input prices As input prices rise, production of sewing machines become more expensive, producers may either raise price for a given output o reduce quantities produced at a particular price. ❖ Technology Improve in sewing machine technology will increase profitability and so increase quantities supplied.

APPENDIX 9 PORTER'S FIVE FORCES MODEL

❖ Potential Entrants

▪ Traditional household machine manufacturers had either diversified into other related business ie, Brother (printing devices) and Juki (digital consumer electronics), or moved out of the industry ie, Electrolux (consumer electronic) and Singer.

❖ Buyers ▪ The strategic customers, exclusive VSM retailers especially Jo-Ann, in US and Sweden market have high bargaining power.

▪ Trend has been moving toward fewer and bigger international retailers who are gaining power of bargaining. In the US the three largest retail chains account for almost 60% of sales of major applicances.

▪ Threat of backward integration is likely to be low.

❖ Suppliers

▪ As there are a numbers of smaller suppliers for parts and medium-sized OEM manufacturers for low-priced mechanical machines in Asia, their bargaining positions are likely to be weak relative to their customers.

▪ There is a possibility of direct competition by OEM manufacturers in Asia who may be attracted by the high margin home sewing machine industry.

❖ Substitutes

▪ There is an increasing range and variety of amusement activities such as gardening, gym, aerobics, yoga, cooking, etc, competing for the households' disposable incomes.

▪ Availability of off the shelf design, specialist sewing and design shops and other brands.

▪ As household sewing machines are supply and technology led industry, it's easier for any players to produce industrial machine than those interested in reaching economic of scale by producing household machines.

❖ Competitive Rivalry

▪ The global sewing machine market has reached its mature phase as indicated by continuous declined export of 1% in 2002 and a further 6% in 2003. On the other hand total import grow moderately by 2% in 2002 and 3% in 2003. With its rapid growth in a matured market , China is gaining the market share at the expense of other major exporters.

▪ Declining demands for industrial machines and low-priced consumer machines in western region.

▪ Competitions from volume manufacturers in Asia who access to low cost production facilities.

APPENDIX 10 MARKET SEGMENTATION

A) PRODUCT GROUPS

▪ Home Sewing Machines Product Description

Electrical & mechanical Used for simple projects a beginner or seasoned sewer can enjoy machines

Computerised sewing Help to create beautiful and colourful patterns Machines

Embroidery machines To make the designing and creating experience more enjoyable

Sergers/overlocks Together with sewing machines, the sergers enable construction of quality garments and projects with a professional finish. The sergers will neaten seams or edgers of fabric or create fast rolled and fluted hems, blind hems, insert elastic, gather fabrics and produce many decorative type effects.

Cover stitch machines Offer the ability to create a wide range of high quality professional stitches on all types and weights of fabric for both decorative and project construction applications.

Sewing software An all in one package that allow to create design and patterns, then edit and digitize it and finally execute the format conversion. The software allows you to transfer you designs from computer to your embroidery machine.
Sources:
www.brother.ca/en/products/summary.asp?id=6 www.elna.com/en/index ▪ Industrial Sewing Machine Product Description

Machine With Hooper For sewing on fine or extraheavy material, such Lockstitch as shirt, suit, jeans, plastic, leather.

CHARACTERISTICS 1. Top and bottom feed mechanism, smooth feeding, and excellent stitching for heavy weight material. 2. Automatic thread trimmer (optional), to increase sewing efficiency and educing production cost. 3. Large arm and bed space

Top and bottom feed lockstitch For extra heavy-weight materials, ex: canvas, leather gods etc.

CHARACTERISTICS: 1.Top and bottom feed mechanism, smooth feeding, and excellent stitching for heavy weight material. 2.Automatic thread trimmer (optional), to increase sewing efficiency and educing production cost. 3.Large arm and bed space (length: 335mm, height: 150mm)"

Lockstitch compound feed for sewing heavy materials on items such as car sears, upholstery and bags.

CHARACTERISTICS 1.Five functional push buttons to increase efficiency 2.Big operational space 3.Two-presser feet step distance can be adjusted from 1mm up to 7 mm 4.Stitching distance can be switched in accordance with the sewing needs. 5.Presser foot lifting lever is set at the up-left side, very convenient for operation 6.Additional under bed thread trimmer is available" Post Bed For Shoes, Leather Sewing. Sewing narrow and curved areas for shoes, sport shoes, leather goods and caps... etc.

Machine With Looper Overlock Stitch For regular seaming on light to medium fabric Chain stitch with direct Regular cover stitching, can be equipped with drive motor various devices for different sewing. Suitable for plain seaming and bottom hemming of underwear, sportswear etc Cylinder bed double General Seaming > For hemming sleeves Chain Stitch and bottoms of light to medium knit fabric of T-shirts and underwears etc. Flat bed double ChainStitch Lap seaming > on light to heavy weight fabric such as working clothes or jeans etc Zigzag chainstitch Good for making decorative zigzag stitches on woman's under wears, handkerchief, table clothes, gowns, children's wears, sports wears and pillow cases.

Special Features: 1) Unique design of cylinder bed machine, makes sewing more smooth and easy, especially it is good for tubular sewing type machine.

2) Push-button stitch length regulator saves time and procedures.

3) Automatic oiling system lubricates these moving parts and increases the machine durability.

4) Closed structure of thread take up prevents oil leakage (Traditional type has a hole at the front of the arm)

5) By changing different gauge sets for stitching various single or double edge decorative sewing type." Portable Bag Closer Lightweight, easy operation with automatic threads cutter and presser foot lifter. Equipped with lubricating device for oiling and prolongating machine life. For closing all kinds of paper, cotton, PP/PE and gunny bags for packing feed, seeds, fertilizer, flour, chemical powder etc. Also available for closing textile end-joint before dyeing.

Source: www.siruba.com/english/products/products-1.htm

B) GEIOGRAPHICAL SEGMENTS

➢ United States of America

Generally, the overall economic outlook of VSM Group main market looks stable for the next few years if there is no major disaster. E.g. The shutoff of Middle East oil field. We look at this expectation from 4 major aspects:

• The USA population is expected to have 1% growth rate and the nation will have 311.7 million people in 2010. The female population is projected to continue to outnumber the male population by mid century.

• GDP growth was expected to be around 3.3 to 3.5% for the coming year of 2006 and 2007 despite damaging hurricanes and large increase in oil prices as well as military related expenditures. • In Nov 2005, real disposable income increased by 0.7% while per capita income remained at the level of USD 27,000 per annum. • With the provision of medical care and social security by government, there is a trend for aging population and early retirement.

➢ Euro

Moderate recovery is expected over the next two years in European Union member countries despite oil price and inflation effect. For easier comparison of these 2 major market of VSM Group, we consider the same 4 major aspect to lay solid foundation for scenario planning:

• The population of the European Union is estimated to have increased by 2.3 million or 0.5% in 2004, slightly more than in 2003 (2.1 million). • GDP growth was estimated positive 2.1% and 2.2% for 2006 and 2007 respectively. • Per capita income in Europe could rise by almost a quarter until 2025, if the reforms envisaged in the relaunched of Lisbon Strategy are adopted. • Similar with US, Europe is also posed with aging population. The share of the population older than 65 will increase from 17% to 30% by 2050.

➢ Japan

|Household |2004 |2003 |2002 | |
| | | | | | |
|Output |Units | |270,258 |305,520 |263,214 | |
| | |Yen (million) |10,071 |11,196 |12,433 | |
| | |Growth % | |-10% |-10% |1% |Shifting of production to China |
|Export |Yen (million) |4,731 |5,884 |6,378 | |
| | |Growth % | |-20% |-8% |29% |Shifting of production to China |
|Import |Yen (million) |9,236 |8,269 |9,424 | |
| | |Growth % | |12% |-12% |7% | |
| |
|Industrial |2004 |2003 |2002 | |
|Output |Units | |376,869 |414,208 |418,417 | |
| | |Yen (million) |55,817 |63,276 |69,831 | |
| | |Growth % | |-12% |-9% |6% |Shifting of production to China |
|Export |Yen (million) |52,448 |58,449 |68,444 | |
| | |Growth % | |-10% |-15% |29% |Shifting of production to China |
|Import |Yen (million) |3,181 |4,022 |3,241 | |
| | |Growth % | |-21% |24% |27% | |
| | | | | | |
|Source: | | | | | |
|Statistical Data, Japan Sewing Machinery Manufacturers Association (JASMA), www.jasma.or.jp |

➢ China

| |2004 |2003 |
| |Forecast |Total |Home |Industrial |Embroidery |Parts |
|Output |Units (million) | |16.9 |11.0 |5.9 |0.0 | |
| |RMB (billion) | |23.0 | | | | |
| |USD (billion) | |2.8 | | | | |
| |Growth % | |10% |23% |17% |25% |9% | |
| | | | | | | | | | |
|Export |Units (million) | |13.0 | | | | |
| | |Growth % | | |16% | | | | |
| | |USD (million) | |597 |N/A |319 |60 | |
| | | | | | | | |103 |
| | |Growth % | | |39% | | | | |
| | | | | | | | | | |
|Import |Units (million) | |1.1 | | | | |
| | |Growth % | | |42% | | | | |
| | |USD (million) | |430 | | | | |
| | |Growth % | | |0% | | | | |
| | |

By 2003, 60% of the world's sewing machines were made in China, accounting for a gross industrial output of RMB 23 billion (USD 2.78 billion). (www.researchand markets.com)
Sources:
An Overview of Chinese Sewing Machinery: Management Briefing, www.researchandmarkets.com sewing Machinery Manufacturing Sound, www.tdctrade.com/report/indprof/indprof_040501.htm

▪ According to an estimate made by the US textile sector, China will produce 60% of textile products and garments in the world by 2005. At the same time, the China textile and garment making industry is in a period of industrial structure and production upgrading, needing to introduce a large amount of technology and equipments to update products and added value.

▪ This is undoubtedly a good opportunity for the domestic sewing machine manufacturing sector. (www.tdctrade.com)

▪ China's sewing machine manufacturing sector will face a better international situation brought about by the free trade after 2005. Developed countries will be shifting their garment production bases to developing countries, of which China is their first choice of investment because of its stable political situation, high speed economic growth, huge market and high quality but low cost labour force. Japan has already moved most of its production of ordinary garments to China, while Korea has already well prepared itself for investment in China's garment production sector. (www.tdctrade.com)

▪ The demand for sewing machines is expected to grow as China's apparel industry is un urgent need of modernizing their factories to upgrade the quality of their products. An industry sewing machine is on average used for about eight years. The China's apparel industry began to grow rapidly around 1992, so companies which newly introduced machines at that time are expected to modernize their factories. (www.ctei.gov.cn/english/e_show.asp?xx=73)

➢ India

▪ Hongkong and Chinese mainland textiles and home furnishing manufacturing have begun seriously exploring the Indian market, deciding whether it could be a significant source of sales.

▪ With rising incomes and exposure to western lifestyles, Indian consumers are spending huge amount, anything between USD 2,000 to 30,000, on decorating their homes, of which 20% is accounted for by home furnishing and home textiles. (www.tdctrade.com/imn/05112905/textiles026.htm)

▪ The Indian home textiles sector remain an export-oriented one, with not much attention to the domestic market. The Indian market for home textiles was not a very big one. Not more than 5% of the Indian household sector use branded home textiles. Most of the home brands have a very limited range of colours and designs. (www.tdctrade.com/imn/05112905/textiles0263.htm)

APPENDIX 11A STRATEGIC GROUP ANALYSIS

A comparison among major sewing machine players in terms of no of market segment including non sewing machine against net sales achievement in year 2003. The conclusion is optimal no of manageable market segmentations for sales maximization.

Assumptions:

1. As there is no sales data available for Elna and Bernina, we assumed their market positioning as more towards domestic market like USA, UK and Ireland for Bernina to reflect a holistic view of global sewing machine market ; well balanced of every single feasible country coverage for Elna including South Africa, Iran, Thailand and Venezuela besides main USA and Europe where competitions are intensified.

APPENDIX 11B MOBILITY BARRIERS

This diagram attempts to find out the main obstacles VSM group faced in diversifying from purely sewing machine to industrial machines and other electronic tools that create synergy to existing operations.

Stage 1

VSM operates in a saturated market environment where there are too many global and local players. The products are very close to each other. Demand must be pushed by manufacturers to increase sales. Quality sewing machine has long economical life and therefore a very durable good, gives lesser room for repeat order. Household sewing machine used simpler electronic machine as compared to sophisticated industrial machine, this comfort zone makes sewing machine manufacturer not ready technologically.

Stage 2

To increase sales, VSM incorporated many electronic features into medium to high-end machine, this might end up facing software piracy as software is easily downloadable from the website. By expanding from one country to another, VSM has to compete with established local players like Bernina and Elna. Due to cultural differences, VSM must be ready with suitable model to suit diverse culture and distribution channel.

Stage 3

By the time when VSM group is ready to go into industrial machine segment, they must overcome:

a) Huge investment on plant and machinery, handling of industrial users, keeping up with up to date technology and its rapid change.
b) Competing with existing industrial machine manufacturer especially from Taiwan and China in Asia, Germany and Italy in Europe.

At the beginning stage, new entrants might have not enough of industrial customers to enjoy economic of scale from many aspects.

APPENDIX 11C STRATEGIC SPACE

The above diagram reflects an international strategy common to all global sewing machine manufacturers.

Instead of 2 market segments, VSM group has emerged as “two Brand Company”: 1) Husqvarna Viking (strong presence in US, Sweden, Europe, Scandinavian and worldwide market) 2) Pfaff (dominated German-speaking markets like Germany, Austria and Switzerland)

Both brands are equally strong and targeting at different market segments..

Pfaff was acquired in year May 2000 through acquisition for the below benefits:

▪ Full rights of Pfaff brand ( both household and industrial sewing machine) ▪ Karlsruhe plant in Germany ( not cost efficient plant) ▪ Zetina Plant in Czech Republic (more cost efficient plant)

Relatively, Huaqvarna plant in Sweden manufactured electronic models whereas low priced mechanical and over-lockers were sourced from Asian manufacturers.

To achieve profitable exit through IPO after 5 years from now, VSM urgently need to look into five major value chain activities:

1) Brand consolidation and integration. Pfaff for German speaking market and Huaqvarna for non German speaking market.

2) Centralization of procurement to enjoy bulk discount on volume purchase for both brands

3) Well coordinated and decentralized production to be maintained both in Zetina Plant and Sweden plant.

4) Re-engineering of Karlsruhe plant to single loop line manufacturing system to align with Sweden plant for maximum production efficiency or closed down Karlsruhe plant if capital involvement too high. Financial analysis to study the existence of positive NPV need to be carried out.

5) Harmonisation of dealer-partner programme between pfaff and Husqvarna by bearing in mind two different direction: ▪ Huaqvarna: Non German speaking customers who are innovative, family oriented, caring and fun ▪ Pfaff: German speaking customers who are elegant, independent and sophisticated.

APPENDIX 12 CUSTOMEr VALUE-USERS

|Company |Product Description |
|V |VSM |Innovative, quality, and user friendly |
|Bn |Bernina |Simplicity, reliability and performance (Quality benchmark and less product |
| | |development) |
|E |Elna |Quality, innovation and service |
|Jn |Janome |Ease of use, quality, reliability and innovation |
|Jk |Juki |Quality and user friendly (Less product development and modest features) |
|Br |Brothers |Quality and services |

Information on the perceived importance of product features by customer is not available. As a guide, product features quoted by VSM such as innovation, quality and user friendly have been used as a basis for the evaluation. The comparison also take into account of information about the Bernina and Juki from the case.

APPENDIX 13 STRATEGIC CAPABILITIES & COMPETITIVE ADVANTAGE

| |RESOURCES |COMPETENCIES |
| | | |
|THRESHOLD |Threshold resources |Threshold competences |
|CAPABILITIES | | |
| | | |
| |Sales outlets |4,100 sales points |
| |Finance |Financial support from Institutional shareholders |
| | |Experience leadership and top management team in US. |
| |Human resources | Customer and value chain information |
| | |New and replacement products |
| |Information systems |Low cost materials and parts |
| |Research & development | |
| |Centralised purchasing | |
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| |Unique resources |Core competences |
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|Capabilities |Two strong brands: Husqvarna Viking and Pfaff. |Dominance of Pfaff in German speaking countries. |
|for |Lease department program |Good relationship with Jo-Ann Fabric. |
|COMPETITIVE |The Emnet Ltd. |Industry leadership in software development for domestic sewing |
|ADVANTAGE | |machines. |
| | | Strong demand for Designer 1 from US and Euro. |
| |Top of the line HV Designer 1 embroidery machine. | Pfaff's previous experience and knowledge in the production of |
| |Pfaff 's industrial machine division. |industrial sewing machines. |
| | | Very cost efficient production facility |
| | |Existing present in the world's largest consumer market. |
| | Zetina plant. | |
| |Exiting joint venture with Zoje in China. | |
| | | |

APPENDIX 14 ACTIVITY MAP

APPENDIX 15 STRATEGIC CLOCK

❖ VSM has positioned itself as a leading international player in the medium to high end segments of consumer sewing machines. It has six principal products groups targeted at different segments of customers.

❖ Bernina's product range resembles that of VSM and similar corporate situation makes it an important quality benchmark for VSM.

❖ Janome is VSM's largest competitors by volume. Its main activity was domestic sewing machines with no manufacturing of industry sewing machines. It has several important industry innovations.

❖ Brother is a well known manufacturer of office machinery and very active in the sewing industry both the consumer and industry markets. It produces innovative products couple with price undercut VSM group by 20 to 30%.

❖ Juki is more specialised on sewing machines than Brother and manufactures both industry and domestic machines. Juki's models are very modest in features.
APPENDIX 16 VALUE NETWORK

APPENDIX 17 ANSOFF MATRIX
| |PRODUCTS |
|Existin|Existing |New |
|g | | |
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| |Protect/build |Product Development |
| | | |
| |Improving cost efficiency via relocation production and |Regular launching of new products to meet changing customer needs. |
| |outsourcing of R&D. |Continuous investment in R&D for new & innovative products. |
| |Maintain current market share in saturated/matured markets |Provision of comprehensive range of |
| |ie, US and Europe. |products & services. |
| |Gain market share from existing competitors via aggressive |Product branding. |
| |promotions and improved quality & innovations | |
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|New |Market Development |Diversification |
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| |Setting up new sale outlets in major cities of Asian |Forward integration – distribution channels (transportation, |
| |countries especially China. |distribution, repairs & services) |
| | Moving up to embroidery market segment from low-price | Forward integration – customer channels (apparel & garment making)|
| |mechanical segment in both US and Europe markets. |Backword integration (raw materials, machinery, labour, finance and|
| | |R&D) |
| | |Horizontal diversification into industry sewing machine market |
| | |Diversification into unrelated business ie, communication & |
| | |printing device (Brother), consumer electronic (Juki) |
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APPENDIX 18 SWOT ANLYSIS

|Strengths |Weaknessess |
|Existing joint venture with Zoje in China for the production of Pfaff|Difficulties in moving production from Karlsruhe to Swedish |
|machines. |Huskvarna plant due to different engineering principles. |
|Industry leader in software development for household sewing machines|Under utilisation of Zetina plant as an assembly line. |
|(Emnet). |R&D centre in high cost locations ie, Huskvarna, London and |
|Top of the line HV Designer 1 selling at premium price (USD 5,900). |Karlsruhe. |
|Lease department program with US's largest fabric chain, Jo-Ann |Single source of revenue from sales of household sewing machines. |
|Stores Inc. |Sales in weakening US currency affects both sales and profits. |
|Experienced leadership & management team in North American. |Over dependence on US market (40% of turnover) and small domestic |
|Dominance of Pfaff in German speaking market with high market share &|market in Sweden. |
|brand |Substantial losses in German market due to declining sales and |
|awareness. |high plant costs. |
|Possession of two strong brands: VK and Pfaff. | |
|Pfaff's previous experience and knowledge in industrial sewing | |
|machine production. | |

|Opportunities |Threats |
|WTO opening up access to China's huge consumer market and growing |Potential entrance of new competitors into home sewing market ie, |
|affluent female population especially in coastal areas. |China's Inc march abroad. |
|Asia will be the centre gravity for world economy. |Expected expansion of US external deficit over next two years. |
|The need to upgrade production equipments in China's rapid grow |Rising interest scenario in US and world-wide. |
|apparel industry which will account for 60% of the world's textile & |Declining demand for industrial machines and low priced mechanical|
|garment products by 2005. |household machines in western region ie, US and Europe. |
|Emergence of low cost producing countries especially China with ample|Renewed downward pressure on US currency. |
|human resources and high technological capabilities. |Growing requirements over CSR, environment protection and |
|With a total population of 1.1 billion, only |corporate governance. |
|5% of the Indian household use home brand textile. |Price competition in low and medium segments from Japanese low |
|Strong demand for new embroidery machines (Designer SE) and softwares|cost producers. |
|in both US and Europe. |Competition from Brother with innovative products and price |
|Very cost efficient Zetina plant (Pfaff), which currently |undercutting. |
|under-utilised. | |
|Emergence of China as the largest offshore development centre after | |
|India. | |
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APPENDIX 19 TOWS ANALYSIS

| |Strengths |Weaknesses |
|Opportu|SO |WO |
|nities | | |
| |Promoting Pfaff brand household machines to tap the growing |Moving production of Pfaff machines to Zetina plant, which is very|
| |affluent female population in China and other Asian countries. |cost efficient and under-utilised, instead of Huskvarna, to avoid |
| |Revenue diversification into industrial sewing machine |the problem of plant integration and to overcome problem of high |
| |manufacturing through Zoje to capture the demand from high |cost of German plant. |
| |growth apparel industry in China. |Outsourcing of R&D activities from Huskvarna, London and |
| |Outsourcing of software development in London to low cost |Karisrube, to low cost offshore development centres in India and |
| |offshore development centres in India and China. |China. |
| |Focus differentiation strategy to tap strong demand for upmarket|Market diversification/expansion into high growth Asia market to |
| |embroidery machine segment. |avoid over dependence on US and European markets. |
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| |ST |WT |
|Threats|Strengthening existing relationship with Jo-Ann Store via equity|Core business in sales of household sewing machines in US and |
| |participation, to prevent lobbying from new competitors. |Europe, which are currently matured/saturated markets. |
| |The management may adopt currency protection measures to |Weak US dollar couple with growing costs of compliance with |
| |mitigate effect of potential currency depreciation. |environment protection may impact the profits. |
| |Moving to upmarket embroidery segment from declining low price | |
| |mechanical machine segment. | |
| |Relocation of production of low and medium segment machines to | |
| |Zoje plant in China. | |
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APPENDIX 20 BUSINESS IDEAS

❖ Customer Value Creation

Sewing is seen as more than of a hobby rather than a necessity. It's part of the lifestyle where the social aspects and pride in own accomplishment are important elements. VSM's offering create customer value by providing satisfactions to these recreational needs.

❖ Nature of Competitive Advantage

VSM's position at high end embroidery market. It associates the customer with the brands of innovative, high quality, user friendly and services, and supports them with creative sewing ideas, inspirations and adivces.

❖ Core Competencies

VSM has a numbers of core competenceis which reinforcing each others in realising its entrepreneurial invention. ▪ Leading or creating customer demand activities ▪ Leading market positions in US and Europe ▪ Strategic alliance with Jo-Ann Fabric ▪ Strong branding and innovative products

❖ The Positive Feedback Loops

The strategic loop in the business idea drives growth of VSM group. The satisfied customers will continue to pay premium prices for the products and services which in turn provides a good return for the company to satisfiy its stakeholders and reinvest in its research and development capability and hence more innovative and quality products.

APPENDIX 21 OPTIONS EVALUATION - ISSUES MATCHING/SCENARIOS

APPENDIX 22 OPTIONS EVALUATION – STAKEHOLDERS

APPENDIX 23 OPTIONS EVALUATION – EVIDENCES

❖ Japan has already moved most of its production of ordinary garments to China, while Korea has already well prepared itself for investment in China's garment production sector. (www.tdctrade.com)

❖ Brother Industries Ltd was established in 1934 to manufacture and distribute sewing machines. Since then, the company has striven to add more value to the products so as to "help people to realize their dreams all over the world". Today, its line of products includes not only sewing machines for home and indusrial use, but also machine tools and information and communications equipments such as printers and facsimile machines. (2004 Annual Report, Brother at a Glance, www.brother.com)

❖ Yuki commenced production of household sewing machines in 1947 and rapidly became Japan's premier sewing machine manufacturer. Now, it's the world's leading manufacturer of industrial sewing machines and export apparel related manufacturig equipments to all over the world. Recently, it has diversified into Surface Mount Technology systems on the basis of high precision technologies developed through the manufacturing of sewing machines. It will further develop its production and sales activities for industrial sewing machines in China, the world's largest apparel manufacturing country. In the industrial and household sewing machine businesses, the company is rapidly promoting local production in China. By developing more appealing new products and sustaining rigorous quality assurance, Juki try to reinforce its position as a brand that customers can rely on completely. (Annual report2004: Corporate Profile, Juki Corporation, www.juki.co.jp)