Question

PIETROLUNGA TIMBER MERCHANTS LTD

Pietrolunga is a small stock market-listed Italian timber merchant involved in forestry management, timber production, and the export of specialist woods used in the production of fine musical instruments – so-called “singing wood.” The company, based in the mountains of Trentino in the North Italy, has a reputation as the world’s finest producer of woods to produce concert-grade grand pianos.

Pietrolunga has a thirty-year contract to supply all of the piano wood requirements for a leading manufacturer based in Japan, in addition to numerous small-scale contracts with master luthiers around the world who specialize in producing high-quality hand-made classical stringed instruments from violins to double bass. The trees used in piano production take around sixty years to reach the required level of maturity, but the maple used for the backs of the stringed instruments takes much longer, and these trees are more susceptible to disease. This long lead time requires careful planning by the staff at Pietrolunga, who face huge uncertainties about the long-term demand for such items. In addition, significant amounts of working capital are tied up in the forestry stocks because even once felled, the slow air-drying processes mean that wood cannot be sold for several years.

There is also a high level of uncertainty within the company’s current business environment. The primary geographic market for products is South East Asia, in the countries of Japan, Singapore, and China, but both the European and North American markets are in decline, except for cheap student-grade instruments that are now being produced in huge numbers under factory conditions in China. Chinese producers have also gained a foothold in the professional grade of instrument making, by sending staff over to train in the leading instrument-making schools of Europe, and then using these masters to train local staff back in China. The Chinese instruments are made using local, tropical woods rather than the spruce and maple commonly used in Europe, but the resulting instruments are highly rated by many professional players and are priced at less than half of their traditional equivalent. In contrast to the market for classical instruments, that for hand-made guitars is growing. In recognition of this, Pietrolunga entered into a joint venture arrangement in 2006 with a US-based company that supplies wood to North American luthiers. Under the terms of the joint venture agreement, in which costs, income, and profit are shared 50:50 between the two parties, Pietrolunga takes responsibility for forestry management and felling, while the US party then stores, dries, prepares, and manages the sale and distribution of the wood. Due to different climatic conditions, the trees grown in the US are not the same as those in Italy, although maturity cycles are similar. The resulting tonewood is, however, very well suited to the US guitar market

All revenue from trade sales and transactions within mainland Europe are priced in euros, but sales to all other geographic areas are priced in local currencies. Contract prices are fixed on felling the selected trees an average of 24 months before delivery.

Required;

1. Identify five risks that the company is exposed to and explain their potential impact to financial performance for the entity. For each risk also propose the various strategies that can be used to control/mitigate the risks you have identified.   

Answer 1

Risks are..

1) Demand of the product:

The demand for singing woods were very less. It cant be made with any predictions of demand because the demand for these products like violin, guitar with timber were less. The company have risks for their product..If demand for the product decreases the company cannot get profit.

...........Strategies that used to control this risk is produce the products that can be affordable by any customers. The demand of these products can be increases when more advertisements for such products and place a good ambassador for each products.

2) Competition :

China also producing musical instruments with timber. They are making the instruments with cheap quality of woods but Pietrolunga Timber were producing high quality wood instruments. but customers are always searching for cheap products and they are always buy cheap products than luxury products without noticing the quality of product. In this situation the company faces risks.

............In order to control competition the company must want to produce products that are more cheaper than other companies and more designs than other companies and more affordable for customers than other companies.

3) the occurrence of diseases in woods:

decrease used in piano production take around 60 years to reach the required level of maturity but the maple used for the backs of the stringed instrument take much longer and these trees are more susceptible to disease. This long lead time requires careful planning by the staff at Pietrolunga who face huge uncertainties about the long-term demand for such items.

.................To prevent such situation the company must take care of the woods and take precautions of the Woods being diseased.

4) climatic conditions:

Due to different climatic conditions the trees grown in the US are not the same as those in Italy although maturity cycles are similar. The resulting tonewood is however very well suited to the US guitar market. So the demand for the US product increases and Italy products decreases.

.........Climatic condition cannot be changed by human being but the company can prepare proper planning for this situation and take strategies according to the climate change

5) different currency rates:

All revenue from trade sales and transactions within mainland Europe are priced in Euros, but sales to all other geographic areas are priced in local currencies. Contract prices are fixed on felling the selected trees an average of 24 months before delivery. When currency rate decreases a profit also decreases.  

The company must take proper decision when the contract prices are fixed. If the chance of contract prices increases then the company must rethink when the contracts are assigned.

........ln contrast to the market for classical instruments that for handmade guitars is growing. In recognition of this pietrolunga entered into a joint venture arrangement in 2006 with a US based company that supplies wood to North America luthiers. Under the terms of the joint venture agreement in which cost income and profit are shared 50:50 between the two parties stronger takes responsibility for forestry management and felling, while the US party then stores, dries, prepares and manage the sale of distribution of the wood. The financial performance of the entity are stable and these are shared by two companies.