Zipcar sounds business decisions with insufficient experience and
Zipcar is in its early stage of development having created and tested the basic service and associated technology pertaining to car sharing and has also acquired customers. Chase has developed an aggressive growth model to create a profitable firm, however, there are certain key issues that need to be addressed to reduce overall business risk and invite additional funding to finance national expansion. Zipcar needs to prioritise the strengthening of its management team, implement measures to ensure costs are contained and profit milestones are met and also focus on searching for subsequent rounds of funding.A detailed discussion of the key issues at hand and essential steps to be taken are outlined below. Management Team At this stage, Zipcar’s management team consists of Chase (full time) and Danielson (part time), both with limited entrepreneurial experience especially with respect to car rental/sharing expertise and virtually no management experience.
Not only are they understaffed, their lack of experience is highlighted by the poor hiring decision for the role of President.Further, both women also assume the role of mothers to young children and have in the past prioritized family over their careers. Danielson has also avoided full time commitment to the business raising doubts as to her continued involvement. These issues would cause significant concern to any investor given the integral role management is required to play in a start-up firm. Future investors especially will pose two key questions – firstly how will they make sounds business decisions with insufficient experience and secondly should a family crisis arise, who will oversee the business?Volatility of variable costs Chase’s projections show that fuel, insurance and parking costs grow only with respect to growth in the number of vehicles owned. However, fluctuations in these costs especially fuel is almost certain over the period of 5 years given historical trends in fuel prices and this has the potential to have a sizeable impact on profit as illustrated in Appendix A.
If fuel/insurance/parking costs were to rise by 30% this could significantly diminish Zipcar’s ability to achieve profit milestones. CompetitionWhile car-sharing is a relatively new concept in North America, three competitors already exist on the West Coast and given the relatively small investment in developing the required wireless technology, large established car rental companies with an existing customer base, brand recognition and greater access to capital pose a significant threat to Zipcar. Non-profit competitors may also enter the market, placing even greater pressures to strengthen Zipcar’s value proposition to customers by reducing annual fees and/or hourly charge rates.
Profitability could be significantly reduced if a price-war is initiated, reducing the value of the business or even causing bankruptcy. Expansion failure due to misjudgement of new markets Boston represented an ideal launch pad for Zipcar as it had insufficient and expensive off-street parking acting as incentives to individual car ownership and a large concentration of the target customer: college students.Growth in customer acquisition over the last 6 months to November, when the number of members was well on its way to hit the year-end target, showed that Boston was receptive to the new concept rendering it a successful market. While Chase identifies 13 other target cities, it is almost impossible to predict how Zipcar will be received in these new environments given consumer preferences are highly unpredictable as seasoned investors are well aware.Unfortunately, Boston alone would not be sufficient to generate a profitable business due to the high fixed cost requirements which can only be effectively managed by achieving economics of scale.
Economics of Scale To elaborate on the issue raised above, corporate staff remuneration and overheads place a large burden on profit margins (negative in Years 1 and 2) by contributing significantly to operating costs in Years 1 and 2. The fixed/variable ratio however declines steadily from 176% in Year 1 to only 20% in Year 5.Hence the projections rely heavily on the assumption that projected growth of members and subsequently vehicles associated with expansion into other cities will drive down per-car operating costs and thus enable forecasted profit milestones to be achieved.
However, should the Zipcar concept be unsuccessful in the targeted cities, the business will be unable to achieve economies of scale and subsequently collapse. Expansion Capital Zipcar requires additional capital to fund expansion into 6 new cities in Year 2 and 8 new cities in Year 3.This is an aggressive growth model and in order to secure the required funding, it is imperative Zipcar is able to demonstrate the success of the concept in Boston. If it is unable to do so, funding will be highly difficult to obtain and this will have flow on effects with respect to achieving economies of scale and forecasted profitability as aforementioned. Appendix B illustrates the minimum funding required in each year to finance the expansion . Suggested Actions Step 1: Strengthen management team It is of utmost importance that Chase and Danielson firstly hire at least one additional staff to join the management team.They may speak to existing investors and other contacts for recommendations or even request assistance with assessing the capabilities and company fit of shortlisted candidates to mitigate the risks associated with their lack of hiring experience.
In the immediate future, a COO or President is required so that Chase can focus on the business model in the capacity of a CFO where her expertise lies. Given Danielson’s limited time commitment it may also be worthwhile hiring a CIO or an individual with expertise with the technological side of the business.This will increase corporate overhead costs but Chase should be able to justify this is a reduction in the overall investment risk to investors especially given the aggressive expansion model that Zipcar has chosen to adopt. Chase might also benefit from approaching one of the more prominent and experienced investors to act as a mentor as they iron out early stage issues. Step 2: Variable Costs While it is difficult to directly influence fuel and insurance costs to limit their volatility, it may useful to negotiate slightly longer-term contracts with parking administrators (perhaps 2 or 3 years) to lock in parking costs.
Additionally, should the costs dramatically rise Zipcar may need to alter its pricing structure to pass on the costs to customers at least until competition enters the market at which point it might be more difficult to do so. Step 3: Competition While it is impossible prevent the entry of competitors, Zipcar needs to focus on two crucial actions over the next few years: create a strong and unique value proposition to build a loyal customer base and achieve rapid expansion into other cities and work aggressively to reach as much of the target market as possible before new players enter the market.Additionally, it may be worthwhile segmenting the consumer market and directing efforts specific to each market segment e. g. obtain and sign exclusive contracts with corporate customers.
Over the long term, expansion may involve merging or acquiring with one or more of the other car sharing companies located on the West Coast to reduce the competitive threat. Step 4: Obtaining expansion capitalAs previously stated, Zipcar must achieve economies of scale in order to be profitable over the longer term and this in turn needs to be achieved through expansion into other cities (as the customer growth will soon be exhausted in Boston). It is imperative then that Chase starts preparing and actively searching for additional capital in a second round of funding in early-mid 2001 (Year 2).
Appendix C illustrates a valuation of the company with the rounds of financing. In addition, a third round of financing will be required to fund expansion into the remaining cities in 2002.