Rain Dance Property Solutions, Inc.(Instructor's Note)

Fletcher, Linda Pickthorne ; Helms, Marilyn M. ; Willis, Marilyn 等

CASE DESCRIPTION

When Porter Raulston, the CEO of Rain Dance Irrigation and Lighting Company, met with Jack Hatcher, the principal partner in Hatcher-Deerfield, Inc., a consulting firm specializing in organizational planning, development and governance, he was interested in a new venture. Hatcher's idea was to combine Raulston's business with two other businesses - landscaping and construction - to form a new entity to serve as a one-stop shop for the homeowner. Their new company, Rain Dance Property Solutions, would merge the three companies and entrepreneurs and could even result in a template for future franchising in other markets beyond Chattanooga, TN. The case explores the merger process as well as strategic planning, mission statement development and goal setting for the new entity.

CASE SYNOPSIS

Synergy is when the whole is greater than the sum of the individual parts. Synergy in business requires imagination, creativity and innovation. Rain Dance Property Solutions, Inc. evolved from such a process. This case presents entrepreneurship and synergy at work and the problems that arise when the original entrepreneurial concept is ignored in the implementation process.

This case covers entrepreneurship, new venture creation, and the implementation of entrepreneurial concepts. The case further illustrated the need for conducting proper due diligence and having a strong leadership team in a merged, in an entrepreneurial venture.

The primary subject matter of this case concerns issues faced when merging three entrepreneurial companies. Secondary issues examined include ways to value merging companies, issues in combining operations, employees, and managers into one entity, and personality issues involved in such an endeavor with traditional entrepreneur/owners. The case has a difficulty level of three and four - appropriate for junior and senior-level undergraduate students. The case is designed to be taught in one class period and is expected to require one to two hours of outside preparation by students.

INSTRUCTOR'S NOTES

This case is appropriate for an undergraduate class in entrepreneurship or small business management. The case can be used in a number of ways: as a take home exam using assigned questions; as homework case for analysis and subsequent class discussion; as a team assignment for role playing the views of the partners, or used for in-class discussion particularly for problem identification and brainstorming of solutions. The case also works well following the discussion of entrepreneurial characteristics. The case can be used early in the course as an introduction to the process of entrepreneurship and to illustrate the issues involved in a new combined start-up.

This case has been successfully used in an innovation/creativity class. This case generates a great deal of interest by students in a number of business majors. It demonstrates the need for well-though out strategy and its implementation and thus is of interest to students in principles of management courses as well as strategic management, particularly at the undergraduate level. The case highlights marketing, accounting, and financial differences and it further allows students the opportunity to "fix the problem" with innovative ideas.

The Epilogue at the end of the Instructor's Notes can be used as a follow up for discussion and to update students on the current status of Rain Dance.

Learning Objectives

* To introduce students to the various stages of the entrepreneurial life cycle, particularly focusing on making a good innovation or idea successful.

* To explore partnership and agreements and discuss challenges with selecting an entrepreneurial team and challenges in implementing the idea when multiple entrepreneurs are involved.

* To review the difficulties in implementing the plan and why planning seems to often take priority over day-to-day activities.

* To critique the value proposition of Rain Dance and explore the backgrounds and the aspirations of the individuals involved.

Questions for In-Class Discussion:

1. Was the idea of a "one-stop" shop for home maintenance a good idea?

Yes, this is especially appealing to customers with high income levels who value their free time over cost. The emphasis is on service, quality work, and maintenance-free residences, each of which is important to higher-income homeowners. In addition, the demographics findings indicated there are a large number of potential customers within the immediate area. The state itself has other pockets of high-income areas that are ideal for franchising the venture. Contiguous states at the borders also are well-established with prosperous communities that also would be targets for franchise operations.

2. What are the advantages and disadvantages of combining the concept of multiple businesses into one?

Assuming the merger is successful, advantages include: (1) improved coordination of services for clients with multiple services being available with "only one p[hone call"; (2) the opportunity to market additional services to a client when making a specific service call (3) greater potential market for services due simply to the combining of customer lists of each of the individual businesses (there was little duplication of clients between the three businesses; and (4) cost savings in employees that overlap in functions (reduction in personnel costs) as well as overhead savings for the individual businesses, especially after the physical consolidation of the three ventures; and (5) the opportunity to expand the variety of services even into other areas as a result of the synergistic effect of the combination (i.e., not only remodeling services but aesthetic indoor and outdoor design/decorating).

Disadvantages of a successful merger include: (1) coordination of administrative functions; (2) possible downsizing of operations with adverse effects in long-term employees who are displaced; (3) difficulty in cross-training existing employees; (4) inability or problems in imposing new rules and restrictions on current employees; and (5) possible loss of control by previous entrepreneurial owners.

3. Discuss the characteristics of entrepreneurs that both support and limit such a business combination.

Characteristics of entrepreneurship and entrepreneurs that could impact the business, both in terms of support and limitations, include: (1) the need of the entrepreneur (in this case, Hatcher) to be in control of all aspects of the business, either directly or indirectly by supervising functions delegated to other individuals; (2) the need for organized efforts to implement and manage the venture; (3) the failure to recognize functional deficiencies especially in the areas of marketing, accounting, and finance; (4) tenacity and perseverance; (5) an understanding of the concept of, an need for competitive advantages; (6) the ability to anticipate and quickly react to market opportunities and changes; (7) detailed planning both before and after the business has been set-up; and (8) conscious innovation and creativity.

Assigned Questions and Solutions:

1. Is there a potential market for the services of Rain Dance?

To get a better understanding or their target market, students should review on-line demographics of the Chattanooga, TN area and of Lookout Mountain, in particular. The following data was from the Chattanooga Hamilton County's Chamber of Commerce. The Lookout Mountain community of Chattanooga's population was 1,881 individuals in 2006 living in 836 homes: 791 occupied; 723 owners occupied; and 68 renter occupied. Since there are such a large number of homeowners there are lots of prospective clientele who could be looking for permanent work such as renovations, landscaping and other services Rain Dance has to offer.

The estimated median household income in 2006 was $105,100 with 62.35% of households making $75,000 or more and 21.16% making $200,000 or more. The estimated median house/condo value is $447,800, with most homes ranging from $200,000 to $1 million. Sixty-five percent of Lookout Mountain residents have lived in the same house for at least five years. Thirty-nine percent of houses were built in 1939 or earlier, eighty-four percent were built in the 1970's or earlier and only 4.5% of houses were built from 1990 on. This means that the majority of houses on Lookout Mountain are at the point where maintenance, renovation and updating are necessary.

This is a prime market for Rain Dance to reach and help get their business up and going. One of Rain Dance's most influential types of advertising could be word of mouth. When people see and hear about Rain Dance's many services, they will want to give them. Communities like Lookout Mountain, however, do not allow billboards, sign advertisements in yards, or other marketing materials. Rain Dance must use on-vehicle marketing and find other methods to reach this potentially lucrative audience.

2. Is the business a good idea? Support your answer.

Yes, the business has great potential, especially for affluent homeowners. Positive points include: name recognition; an understanding of the challenges (identifying the right person to market and the person to launch the enterprise); the existence of an experienced, licensed and independently skill-certified staff; and an established client base. It must, however, be operated as a consolidated entity to capitalize on the idea and to provide the array of services it has marketed to the community. In addition, there must be a systematic effort to engage in innovative and creative activities and anticipate consumer needs and new markets.

3. What mistakes were made that could have been avoided?

o Management should have been hired from the outside rather than relying on the talents of the principals

o Due diligence was not exercised in the valuation of contributed assets and incurred liabilities

o Each business should have undergone an independent business appraisal prior to merging

o Details of organization and implementation were unresolved for too long a period of time

o The strategic plans developed were not carried through in company implementation and company operations

o A statement of the financial position (a beginning balance sheet) of the newly formed company was not developed

o Overall, the financial projections were based on unsubstantiated and realistic methods and the principals never sought professional financial advice. For example the basis of the valuation of the stock was made without the report from the CPA. In addition, the method of valuation - combined total aggregate sales and project gross profit -- was unrealistic and implied that there was equity in the new company that did not exist. Moreover, the per-share stock valuation was indefensible, especially in light of the undisclosed debt.

4. What are the limitations of having multiple partners?

The key limitations are lack of control and the need for an organizational structure that may dilute the role and authority of some of the partners. For example, they cannot all be CEOs and this may be a difficult transition for some or most entrepreneurs. In addition, as the business grows or changes, some partners may not be able or willing to adjust to these events, thus impeding the adoption of new ideas and/or the need to eliminate or change existing activities. A disgruntled partner can be destructive and can lead to a forced or voluntary buy-out.

5. Would a looser supply chain or referral program be preferable to linking the companies together?

Rain Dance will find that their largest competitors will be small companies that appeal to home and property owners simply because the potential customer may not need everything that Rain Dance is offering. Customers could include plumbers, landscaping firms, electrical contractors and remodeling firms, heating and air conditioning firms, and other property maintenance firms. However, Rain Dance does provide extended financing, while most other companies will not, which could be a large deciding factor for many homeowners.

6. Could joint marketing or promotions achieve the same objective?

Possible joint marketing or promotions could achieve the same objective but customers would not just be interviewing or finding out about one company but multiple companies. This combination offers ease of service for the customer.

Marketing is also easier in the combined firms with possible cost savings from the elimination of duplicative services and negotiated lower pricing for promotional materials.

7. How is the formation different from traditional entrepreneurial start-ups? Are these differences advantages?

The only entrepreneur was Hatcher. The three remaining principals did not understand the concept of entrepreneurship. The purpose of the business was clearly delineated and a detailed strategy was developed. Without Hatcher's involvement, there was no entrepreneur to oversee the vision and objectives of Rain Dance. This was contrary to an entrepreneurial principle that the entrepreneur must be the driving force of the operational aspects of the venture.

In addition, there was no due diligence indicated prior to and during the start-up by any of the principles. These start-up differences were a major disadvantage to the success of the business and in effect, prevented Rain Dance from achieving its entrepreneurial objectives.

8. What are the opportunities and threats of combining businesses in general? What about these three in particular?

In general and for the three specific companies, opportunities include cost savings broader market appeal and the ability to reach a unique market niche. The threats are the difficulties in merging three existing businesses as well as reaching agreement between three entrepreneurs about the structure, mission, and strategy of the new company. Even with the help of a management consultant, the transition was difficult. Often it may be easier for one owner to buy out the other businesses while retaining some of the skilled employees to reach successful operations in a faster time frame. Other threats include failure to successfully execute the merger, and loss of personalized serviced provided by a smaller, single business.

9. Do you agree with their mission statement and key objectives for 2007? 2008?

Students should note that while short and succinct, the mission and objectives for 2007 seem appropriate for the ideas and vision discussed by the owners. Students should also note that few changes were made to either document between 2007 and 2008, at least few material changes. One issue that "A" students should note is the continued emphasis on planning and creating missing statements seems to be preventing action toward the successful merger of the companies.

10. Prioritize the SWOT analysis variables provided. Are some issues in the wrong category? Discuss.

Students should note the large number of weaknesses the company is facing. The top strengths seem to be their current customers and the combination of companies. Since the case discusses the issues with the combination of the companies, it appears the second strength is not entirely true and may be more of a weakness. For weaknesses, it seems the top two issues are lack of a CEO or appropriate leadership and role definition and the fact the organization structure is incomplete. With effective leadership in place with the authority and responsibility to put appropriate individual in key positions, many of the marketing, accounting, and financial issues could be quickly resolved. For opportunities, the aging houses in the Chattanooga and Lookout Mountain area in particular, seem to be a good opportunity along with an aging population that may not have the time or skills for home maintenance. As for threats, the ease of entry of more cohesive competitors is a threat but probably the key threat is the economy and the declining housing market. However, when economic conditions improve, there should be opportunities to perfume maintenance on houses and other properties that have deferred these services.

11. What should their new marketing strategy be?

It is important to effectively market the new combined company. First they should merge the customer list of the three former entities and develop a letter of introduction and promotional brochure listing the new expanded list of services and mail these to current customer. Employees should receive sales training and pricing information so they can cross sell additional services to existing customers.

Next the firm must begin a complete marketing and promotional campaign to spread the work about their services in traditional locations including yellow page advertising, newspapers, billboards, and advertisements on their service vehicles. Since word-of-mouth is critical, calling on neighbors and asking for customer referrals is important as is a web-site and more emerging marketing forms including a Face book page and various blogs discussing maintenance and landscaping and perhaps even a Twitter page with recurring seasonal "tweets" to customers as a reminder for upcoming services. Working with home shows, booths at trade shows, and soliciting builders and realtors for referrals is also recommended.

12. Will Rain Dance survive? Why?

Recommend innovative strategies to resolve the problems facing Rain Dance.

Students should brainstorm possible team meetings, face-to-face interaction, and ways to resolve the problems with the partners and the structure. Students may want to role play the meeting and decisions to resolve the issues.

Discuss the objectives of each of the partners. Why is there conflict? What skills/abilities/traits, etc. is the team lacking?

Students should do a strengths/weakness analysis on the partners and discuss what they bring to the leadership team.

The short answer is "yes" Rain Dance will survive, especially in the current form. It basically is operating as two separate companies under one roof. Bickley (contract side) is very strong and can subsidize the irrigation division if necessary. The irrigation side is stable but probably will not grow because of the absence of an effective marketing plan.

13. Is this business one that could be franchised?

Yes, this company could be franchised. Hatcher had described every step of the "how to" organize such a business. Strategic plans, objectives, and operational strategies had been developed in great detail. The lack of an actual business to demonstrate the potential success of the idea, however, would be a major disadvantage for future franchising success.

EPILOGUE

Faculty may want to share and discuss the following epilogue with students after thoroughly analyzing the case.

Hatcher had personally bought the building he located in late 2007. Rain Dance finally moved into the new space in January 2008. The purchase was made with the understanding that Hatcher would lease space in the facility to Rain Dance as well as to other businesses. The lease also included a provision that required all the principles of the company to develop the property, i.e., find other leases for the facility. The lease was executed and is still in effect. To date, no other tenants are in the building.

By January 2009, Hatcher had exhausted his patience and decided not to continue acting as a consultant for Rain Dance. The two remaining principals were financially unable to buy out his minority interest in the company so he was still linked to it in terms of his stock ownership. In addition, the potential of the building had not been developed. Hatcher is attempting to separate the ownership of the building from the stock ownership and develop the property on his own.

To date, although there has been substantial interest expressed in the building because of its location, the current market for real estate, particularly commercial real estate, is soft. Hatcher is convinced there is great potential in developing the property or selling it.

As of early 2010, Rain Dance continues to be profitable - i.e., salaries and other expenses were being paid. The owners, however, have yet to receive any dividends from the company. From the beginning of the discussions about the new Rain Dance concept, Hatcher envisioned a strategy for "harvesting" the results of the entrepreneurial venture. With that end in mind, he created and documented a detailed record of the process for establishing and operating duplicate businesses. He intended to franchise Rain Dance Property Solutions, Inc. Despite his inability to fully implement the original idea, he has pursued the franchise concept. To date, he has several interested investors and he is continuing to explore the franchise possibility.

Linda Pickthorne Fletcher, University of Tennessee at Chattanooga

Marilyn M. Helms, Dalton State College

Marilyn Willis, University of Tennessee at Chattanooga