Cervus Business Model Transformation
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Business Case Competition organized by the University of New Brunswick professor Daniel Doiron and Cervus Equipment. The goal of the case is to propose a strategy to move from $750M in revenues to $2.5B from 2013 to 2020. Winning team: Mirko Crevating, Bernad Hache, Alexandre Legret and Pierre Urier Cattoire. Stated that the current business model of Cervus Equipment could not sustain such growth. Proposed an improvement of the business model. NOTE: This is a case study and in no way does it represent our vision of Cervus Equipment as it is in real life.
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Cervus Business Model Transformation
- 1. University of New Brunswick in Saint John Business Case Competition Bernard Hache Mirko Crevatin Alexandre Legret Pierre Urier Cattoire
- 2. Taking Flight What is Cervus’ value proposition? $734M in revenue Target poor performers 43 owned dealers 12 investment partnerships Strong top line growth Rocky bottom line Rapid Integration Objective: $2.5B by 2020 Integration Model, driven largely by equity, drives quick returns…but ideal?
- 3. Internal Factors Strengths Weaknesses Strong revenue growth Financial position Target Acquisitions with potential for quick turnaround Conglomerate-like structure Unclear Brand (Values, Vision, Mission, and Objectives) Downward pressures in Gross Margin and Net Income Diversified Partial Integration model Decentralized decision-making Local relationships OEM relationships
- 4. Industry benchmarks 0% 5% 10% 15% 20% GM% SG&A Agricultural Industry Average Cervus 0% 10% 20% 30% 40% GM% SG&A Commercial & Industrial Finning Cervus Target customers Farms Material handling Construction Transport Main competitors Main OEMs:53% 31% 10% 5% 2% New Sales Used Sales Parts Services Other Agricultural Sales Mix 55% 7% 21% 13% 4% Commercial Sales Mix Finning Cervus 47% 4% 28% 15% 6%
- 5. 8 months Poor Good Dealership performance Access to resources Strengths Agriculture Commercial Existing Business Model Management OEM Culture Team Customers Products
- 6. Core Issue The current business model cannot sustain 33% growth Build further away from the core Weak trunk Structure is off balance Hard to integrate Our proposal: A stronger core In-depth integration
- 7. Industry trends Asia Bigger equipment for bigger farms Dealership consolidation New technologies Advising/Training services South America Models are growing apart $9,856Bn $9,962Bn $36,157Bn $19,427Bn +12.1% +8.7% 40% Market Share North America +8.7%
- 8. Dealership of the future Solution oriented Consulting and services Client oriented High technicality Very specialized Highly diversified Fast parts availability Service Agriculture CommercialStrategy-Driven Task-Driven 150 650 1200 Hours Small Acreage Large Acreage Dairy 50% 20% 13% 12% 5% New Sales Used Sales Parts Services Other Agriculture in the future Diversify within the industry Afford premium dealerships Possible acquisitions
- 9. Stronger integration Conglomerate? Too small for the game Concentric Independence of dealership Shared resources Back Office support Thought Leader Longer integration and strong support allows better dealership performance 8 months Poor Good Best 16 months
- 10. Stronger trunk Good Best Dealership performance Integration in stages Dealership specialization Dealership independence Standardization of processes Centralization of key resources Move towards premium acquisitions Expand to new markets, brands and products
- 11. Create additional resources for dealerships SummaryRevenues VS profit The bird Model Segments gross profits SG&A per segment Growth in sales and income Our process Business Model SWOT study New Business Model The future Stabilize Cervus and strengthen integration of existing dealers Expand shared services model into additional key areas Driving a new Value Proposition to Dealers and Customers Strengthen the Trunk of the Tree (the core) Drive a move to higher GP services Unload back office functions from the dealers Drive more revenue to bottom line to fund expansion Today, Cervus can make a poor dealer good…this new Value Proposition will make good dealers GREAT! $2.5B by 2020
Hinweis der Redaktion
- Taking Flight – 90 secondsCervus’ revenue of $734M has been achieved through a successful strategy of targeting low hanging fruit in the form of underperforming dealerships, and making them better. This reboot of poor dealerships is accomplished in 8 months which is quick by any measure and drives impressive short term returns Cervus growth is also driven from moves into construction and industrial equipment including their most recent acquisition, a Peterbuilt dealer group.While top line growth has been strong bottom line growth has not been so smooth. The goal, reach $2.5B in revenue by 2020. Cervus’ integration model was an area of particular focus of the group. We wondered, is this shallow and quick integration model best for long term performance or can we take a new approach?One of our first questions was ‘What is Cervus’ value Proposition?’ but we struggled with the answer. It’s clear that Cervus’ strength is taking poor performing dealers and improving their performance. However, aside from this short term boost, what is Cervus long term value proposition to its dealers? The unclear value proposition led us to believe Cervus may be missing opportunities and, as a result, we focused on developing a value proposition for Cervus that will strengthen the current network and enable the necessary future growth and minimize risk all while driving a greater portion of the $2.5B top line straight to the bottom line.
- Internal Factors– 90 seconds (gained 30 seconds)Strengths A strong and stable relationship with John Deere has been the foundation upon which Cervus has grown. Continuing to build strong relationships with all of Cervus’s manufacturers will support future growth.Revenue growth has been very strong since Cervus’ inception due to a large number of acquisitions leading to an increasingly well diversified company.Cervus’ financial position today is strong with a strong balance sheet and income statement. Cervus’ market capitalization also indicates investor sentiment is good.Dealers have strong relationships with end customers and this is critical to continued success. We believe that the corporate structure today, one which encourages decentralized decision making, will help preserve these relationships.WeaknessesWe believe Cervus’ business approach is similar to that of a conglomerate. While this can be successful we don’t believe it plays to Cervus’ strengths.Establishing the Cervus brand will become a strength but we believe the current values, vision, mission and objectives of the brand are vague and may hamper strategic planningPerforming a partial integration, leaving a dealership mostly intact, drives quick results. However, it does not expose the true potential and the associated returns. Resolving this weakness drives a very real opportunity. Finally, the past 5 years have seen a slow erosion of Gross Margin % and Net Income % which may indicate challenges in the growth model.
- Industry BenchmarksIn order to better understand the overall industry, we decided to look at some of the direct and indirect competition, OEM and Customers.Main Competition: (20 sec)Direct competition: Titan and Rocky Mountain Equipment A lot of information was available from the case.Indirect competition: AutoCanada and Finning InternationalFinning being very interesting for us with $6B in sales globally, $3B of which in Western CanadaMain OEM: (5 sec)Mostly agricultural:Closely looked at Caterpillar, John Deere’s equivalent in the commercial sectorMain Customers: (5 sec)FarmersContractorsTruckersAgricultural (45 sec)At first, we were concerned about the relatively high portion of sales attributed to “Equipment” sales and the pressure the used equipment was putting on margins so we decided to look at the overall industry. It turn out that unfortunately, this trend was standard across the Ag segment.Fortunately, Cervus benefited from the John Deere brand with higher margins with similar sales mix as the industry. However, SG&A was also higher and the result was that the bottom line remained the same.Sales mix is similar to the industry averagePossibly because of the John Deere brand advantage. 2% higher GM but also 2% higher SG&A…Why? Is it because of inefficiencies or added value? Commercial & Industrial (45 sec)We decided to look at the commercial sector to find answers.Finning, being a publically traded equipment dealer since the 60’s, have been around for a longer time and are currently over-performing the industry. What can we learn from that???GM almost 10% higher than averageSG&A slightly higher than CervusAs a result, BOTTOM LINE is almost double the industry.What are they doing differently???Using similar GM for each revenue streams, the SALES MIX is driving higher GM.FINNING more focused on Parts & Services. Mostly driven by more hours on construction equipment.
- As compared to its competition, Cervus has a key competitive advantage residing in its fast, profitable integration. After screening the industry, Cervus sees a falling apple, this dealership already has existing features such as:OEM relationshipManagementCultureCustomersProduct linesSales teamRight before it falls, Cervus targets it and brings it to its own tree, in a period of eight months. Positioned on two main branches, namely Agricultural and Commercial/Industry, the dealership is transformed from a poor performer to a good performer, thanks to key resources provided by Cervus: the strengths mentioned by Mirko earlier, and an existing image and the access to key shared resources such as cash. We define them as the trunk on which dealerships are supported, and this concludes our vision of the existing business model for Cervus.
- But this model has a core issue: it cannot sustain 33% growth for 7 years: the trunk is too weak. Let us look at the entire tree.As Cervus expands, it adds more apples to its existing branches without strengthening its core. This core is central to the overall stability of the structure and is composed of key shares activities and resources. As Cervus expands, its new dealerships move further away from its core. The trunk is wakening as Cervus builds away, and it is a self-sourcing cycle. As the structure gets evermore off balance, it gets harder to integrate new dealerships.Our proposal is to work on a more in depth integration while creating a stronger core to encompass more key shared resources and support new expansion without the risk of heavy branches supported by only a twig.This proposal is based on important external factors.
- - Global growth for both market- But we will focus on Agri because huge change in agri industry:- High growth in emerging markets (Asia, Latin America)- 4 main players in Agri industry with 40% worldwide market share- Dealership consolidation in NA- Bigger equipment for bigger farms ( and Farmers are updating all of their equipment now instead of buying one piece at a time > package of equipment)- New technologies (e.g Precision farming, automated, Farm management information systems, wireless connectivity).- Advising/Training services needed in the farming industry as tech (complexity) increases- Agriculture and construction model are growing apart so let’s see what the dealership of the future will look like.
- Dealership of the FutureCommercial & Industrial: (30 sec)Task-Driven Mostly Day-to-dayVery specialized and diversified – One equipment for 1 specific jobVery focused on PARTS and SERVICE mainly because of higher equipment usage compared to agricultural.Agriculture: (1:15)Strategy-Driven Results in the future = Harvest!!!We believe that the dealership of the future will be much more SOLUTION ORIENTED by focusing on offering CONSULTING and other SERVICE.A close RELATIONSHIP with the clients will be primordial to make it work.Will be focused on DETAILS and those will be varying by regions.As a result, we believe that this new demand can help DIVERSIFY the SALES MIX with increased emphasis on Services.We can also DIVERSIFYwithin the industry itself by targeting regions with increase equipment usage. DAIRY farm being a good example and mostly concentrated in Quebec and Ontario. Higher usage can drive more Parts & Services and higher margins. The main reason why focusing on higher margin is to be able to increase bottom line to AFFORD larger dealership networks in regions where consolidation already happened. Few example!Green Diamond in Atlantic CanadaAgritex in QuebecPrairie Coast in BC The challenge to keep SG&A low is better integration and shared resources.
- Conglomerate structure• Limited partnership structure• Too small for the game in terms of market capitalization and doesn’t gives advantages to Cervus.• Need to be closer of center of gravity.Integration in 8 month is good but not enough to strongly implement CERVUS.Longer integration (in 2 years) and strong support allows better dealership performance.• Tools: Best Practices & Key Metrics• Implement new Values/Mission/VisionNew integration model includes:• Independence of dealership (strong asset for the company)• Shared resources (Centralized part warehouses >> more efficiency, used inventory network between dealership > help sell more easy, services)• Back Office support (focus on the core of the dealership) • Thought Leader (University, Employee development plan, R&D, Expertise)
- Let us see how this will help Cervus build a stronger core. The goal is not only to foster growth to reach $2.5bn in revenues, but to be able to sustain it without breaking the structure apart. To do so, we don’t only want to make the dealership good, but to have it over perform the industry. To support the dealership of the future we just described, we propose integration in stages to allow a stronger link to the new trunk. Keeping dealership independence in decision making combined with their specialization will sustain the existing strength of strong customer relationships.Cervus, as a core, will centralize resources and standardize support processes to let dealerships concentrate on satisfying customers. All supporting activities of the value chain should be managed by Cervus, not the dealerships. In the long run, and with proper training, this will create strong, sustainable growth which in turn will make Cervus a stronger buyer, allowing it to move towards premium acquisitions and support expansion to new markets, brands and/or products.
- Summary – 1:15 seconds (original 45 seconds)Extrapolating from growth to date, Cervus could hit $2.5B in about 7 years. However, we don’t believe Cervus can sustain such growth as the current integration model build ever heavier branches, but does not strengthen the trunk.The current shared services model is not meeting its potential. Centralizing more back office functions, consolidating key IT systems, standardizing processes and developing new services for dealers will allow them to focus on selling and local relationships, be more responsive, reduce operational cost pressures and increase margins all while maintaining local day to day control.The new value proposition for Cervus’ dealers will help make dealers more efficient; customers better served and will drive more revenue to the bottom line. This value proposition will include:New resources including strategically placed parts depots, used stock cross selling and continued and possibly expanded use of the Cervus UniversityA move to the sale of products and services that drive higher gross margin percentages including selling a greater volume of used products and a shift in product mix that will include more commercial products. These changes will drive more service and parts revenue both of which boost gross margin percentage.Emphasis on centralizing key back office functions will allow dealers to focus on customers and sales, facilitated composite reporting for the dealer group by head office and lower SG&A at the dealer level freeing up more cash for acquisitionsTransforming a poor performing dealer into a dealer with good performance is relatively simple, especially when it’s a John Deere dealer. However, this expansion model requires an available inventory of discounted poor performing dealerships. With few such targets left, higher value dealerships and dealer groups need to be targeted. Cervus model needs to frees up the cash and build the equity required to pay full price, or even a premium, for well-run dealerships and dealer groups. The proposed full integration model, along with the proposed expanded shared services, will drive more income from the current dealer group by taking them from good to great. This model will also allow new acquisitions that are already good become great where today the payback on such acquisitions would make it difficult to rationalize the investment. This will ensure that Cervus continues to expand and grow rather than become the target of an acquisition itself.