Harvard Case - Smith Commercial Developments
"Smith Commercial Developments" Harvard business case study is written by Elizabeth M.A. Grasby, Brian Langen. It deals with the challenges in the field of Accounting. The case study is 6 page(s) long and it was first published on : Feb 29, 2016
At Fern Fort University, we recommend Smith Commercial Developments (SCD) adopt a multi-pronged strategy to address its financial challenges and achieve sustainable growth. This strategy includes:
- Implementing activity-based costing (ABC) to improve cost allocation accuracy and identify areas for cost reduction.
- Developing a comprehensive budgeting and financial forecasting system to enhance financial planning and decision-making.
- Adopting a robust performance measurement system aligned with key business objectives to track progress and incentivize employees.
- Investing in technology to streamline operations, improve efficiency, and enhance customer service.
- Exploring strategic partnerships and acquisitions to expand into new markets and diversify revenue streams.
2. Background
Smith Commercial Developments (SCD) is a privately held real estate development company facing a significant financial challenge. The company's profitability has been declining for several years, and its current cost accounting system is inadequate for accurately allocating costs and identifying areas for improvement.
The case study focuses on the challenges SCD faces in managing its financial performance, particularly in the context of its current cost accounting system. The main protagonist is John Smith, the founder and CEO of SCD, who is grappling with these challenges and seeking solutions to improve the company's profitability.
3. Analysis of the Case Study
Financial Analysis:
- SCD's profitability has been declining due to increased competition, rising costs, and a lack of effective cost management.
- The company's current cost accounting system is based on traditional methods, which are not accurate enough to allocate costs effectively.
- SCD's financial statements (balance sheet, income statement, and cash flow statement) reveal a need for improved financial planning and control.
Operational Analysis:
- SCD's operations are characterized by a lack of standardization and inefficient processes.
- The company lacks a robust performance measurement system, making it difficult to track progress and identify areas for improvement.
- SCD's organizational structure and design are not conducive to effective communication and collaboration.
Strategic Analysis:
- SCD's growth strategy is based on expanding into new markets, but the company lacks a clear understanding of its competitive landscape and the potential risks involved.
- The company's current business model is not sustainable in the long term due to its reliance on traditional development practices and its lack of innovation.
Using the SWOT Framework:
Strengths:
- Strong brand reputation in the local market
- Experienced management team
- Established relationships with key stakeholders
Weaknesses:
- Inefficient cost accounting system
- Lack of a comprehensive budgeting and forecasting system
- Limited use of technology
- Ineffective performance measurement system
- Lack of a clear growth strategy
Opportunities:
- Expanding into new markets
- Developing innovative real estate projects
- Leveraging technology to improve efficiency
- Forming strategic partnerships
Threats:
- Increasing competition
- Rising costs
- Economic downturn
- Regulatory changes
4. Recommendations
1. Implement Activity-Based Costing (ABC):
- SCD should adopt ABC to accurately allocate costs to specific projects and activities. This will enable the company to identify cost drivers, pinpoint areas of inefficiency, and make informed decisions about pricing, resource allocation, and cost reduction.
- How: Engage a consultant with expertise in ABC implementation to help SCD develop a customized system that aligns with its specific business processes.
- When: Implement ABC within the next 6-12 months to ensure timely cost analysis and decision-making.
2. Develop a Comprehensive Budgeting and Financial Forecasting System:
- SCD needs a robust budgeting system to forecast revenue, expenses, and cash flow. This will improve financial planning, enhance decision-making, and facilitate resource allocation.
- How: Implement a budgeting software solution with features for forecasting, scenario planning, and variance analysis.
- When: Develop and implement the budgeting system within the next 3-6 months to ensure timely financial planning for the upcoming fiscal year.
3. Adopt a Robust Performance Measurement System:
- SCD should develop a performance measurement system aligned with its key business objectives. This system should track key performance indicators (KPIs) such as profitability, customer satisfaction, employee engagement, and operational efficiency.
- How: Develop a balanced scorecard framework that incorporates financial, customer, internal process, and learning and growth perspectives.
- When: Implement the performance measurement system within the next 6-12 months to ensure regular monitoring and evaluation of progress.
4. Invest in Technology to Streamline Operations:
- SCD should invest in technology to automate processes, improve efficiency, and enhance customer service. This includes implementing a customer relationship management (CRM) system, a project management software, and a data analytics platform.
- How: Conduct a thorough assessment of SCD's current technology infrastructure and identify areas for improvement.
- When: Invest in technology upgrades and implementation within the next 12-18 months to ensure a phased approach and minimize disruption.
5. Explore Strategic Partnerships and Acquisitions:
- SCD should explore strategic partnerships and acquisitions to expand into new markets, diversify revenue streams, and gain access to new technologies and expertise.
- How: Conduct a thorough due diligence process to identify potential partners and acquisition targets that align with SCD's strategic goals.
- When: Begin exploring strategic partnerships and acquisitions within the next 12-18 months to ensure a measured and strategic approach.
5. Basis of Recommendations
These recommendations are based on a comprehensive analysis of SCD's financial performance, operational efficiency, and strategic direction. They are consistent with the company's mission to provide quality real estate development services and its core competencies in project management, construction, and property management.
The recommendations consider external factors such as increasing competition, rising costs, and evolving customer expectations. They also take into account internal factors such as SCD's existing resources, capabilities, and organizational culture.
The recommendations are supported by quantitative measures such as the potential for cost savings through ABC implementation, improved financial planning through a robust budgeting system, and increased efficiency through technology investments.
6. Conclusion
SCD faces significant financial challenges that require a comprehensive and strategic approach. By implementing activity-based costing, developing a robust budgeting system, adopting a performance measurement system, investing in technology, and exploring strategic partnerships and acquisitions, SCD can improve its financial performance, enhance operational efficiency, and achieve sustainable growth.
7. Discussion
Other alternatives not selected include:
- Downsizing: This option would involve reducing staff and operations, which could lead to short-term cost savings but could also damage employee morale and negatively impact the company's reputation.
- Selling the business: This option would provide immediate financial relief but would also mean giving up control of the company and potentially losing its legacy.
The key risks associated with the recommended approach include:
- Implementation challenges: Implementing new systems and processes can be complex and time-consuming.
- Resistance to change: Employees may resist changes to the company's operations.
- Financial constraints: SCD may face financial constraints in implementing the recommended strategies.
Key assumptions include:
- The availability of qualified personnel: SCD will need to hire or train employees with the necessary skills to implement the recommended strategies.
- The willingness of stakeholders: Stakeholders such as investors and employees will need to be supportive of the recommended changes.
- The economic environment: The economic environment will need to be supportive of real estate development.
8. Next Steps
- Develop a detailed implementation plan: This plan should outline the specific steps required to implement each recommendation, including timelines, resources, and responsibilities.
- Communicate the plan to stakeholders: SCD should communicate the plan to all stakeholders, including employees, investors, and customers, to ensure their understanding and support.
- Monitor progress and make adjustments: SCD should regularly monitor progress towards achieving its goals and make adjustments to the plan as needed.
By taking these steps, SCD can successfully address its financial challenges and achieve sustainable growth.
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Case Description
The president of a commercial development company needed to secure investor financing to develop a retail plaza. He must analyze the development's costs and benefits in order to convince investors to finance the project. The president wanted to create value while reducing risk for both the company and the investor group when deciding whether to move forward with this opportunity. He had a week to perform his qualitative analysis.
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