Should the Scuba Business Dive into the Expansion Case Solution

1. What are the advantages of the proposed dive shop?

The scuba business is facing immense pressure in terms of increased competition within the industry in the Cayman Islands. For this purpose, any edge that can be taken over the competitors should be seen as a blessing. The new shop provides this edge to Don Foster's Dive for a number of reasons.

Firstly, it allows Don Foster's Dive to increase its revenues. For a firm that is struggling with lowering profits, this is a great opportunity. It will allow the firm to come out of its downward revenue trend. Secondly, the opportunity to expand into a new location will allow Don Foster's Dive to increase its customer base, which is an extremely important aspect considering the tightly competitive market, and a stagnating industry in terms of growth. Thirdly, given the location of the new setup, where most of the clientele are young vacationing families who are most likely to participate in water sports, it will provide the business with a great opportunity to market their brand. Marketing themselves as a premium service provider, by associating themselves with a highly prestigious hotel brand will, in turn, allow them to build a reputation in the industry. This can prove to be of extreme value. All of these factors will end up improving the scenario in which Don Foster's Dive currently operates.

Another important advantage of the new shop will be the ability to divide administrative costs onto a larger revenue base. This will increase the business’ profitability, which seems to be suffering a great deal at the moment. Diversification of some of the business risks will also be achieved through this expansion. Since currently a large chunk of the revenue (about 40%) is generated by a single shop located outside the Radisson Resort, a second revenue-generating base will curb the risk associated with business operations.

2. What are the disadvantages of the proposed dive shop?

The single largest disadvantage of the proposed dive shop is the risk of the failed launch at the new location. Considering the fact that the new shop requires a significant amount of capital investments, all of which are to be financed by a bank loan, which will come attached with its own financing costs, a failed launch will have the potential to undermine the entire business franchise.

Secondly, the new shop is located at the same beach area as the Radisson Resort, which can possibly cannibalize the sales generated by the Radisson Shop. Taking this factor into account will require an analysis of the incremental cash flows of both the shops. Either way, it will reduce the impact of the new launch, and thereby its usefulness.

3. Projected Financial Statements

There are some assumptions that need to be made in order to make the projected financial statements for Don Foster's Dive’s new shop. The foremost assumptions are that the costs are directly dependent on the number of sales made; therefore, are directly proportional. The exceptions to this assumption are depreciation and loan payments, which will remain constant.