The Real Chocolate Company Inc - Essay Example

The Real Chocolate Company Inc Introduction Business strategy is defined as “the direction and scope of an organisation over the long-term, which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations” (Johnson and Scholes, 2002). The Real Chocolate Company Inc. has been in business for approximately three decades and now has become one of the top hundred fastest growing small public companies in the USA. Its concentration on gourmet niche chocolate market in the US is particularly significant against the backdrop of ever increasing diversity and complexity of the gourmet chocolate industry. With a almost 300 chocolates in the portfolio and a further 100 turned out on special occasions like the Valentine’s Day, the company has achieved a marvelous feat of targeting every segment of the gourmet chocolate market. The company’s success is determined by the quality and strange enough the quantity of the product. With a gamut of popular proprietary recipes of its own, the company has positioned itself in the US market with unparalleled success. Its use of the best ingredients and chocolates has led to the current wave of demand for its caramel-coated apples, truffles, toffees and fudges among others which include even a range of sugar-free sweets. The company has been marketing a health-centric line of products to the health conscious customer. According to the National Confectioners’ Association (NCA) retail confectionery sales reached $ 28.9 billion in 2006 in the US while retail chocolate sales surpassed $ 16.3 billion in the same year. The gourmet chocolate consumption is about 10% of the total and was worth $ 1.3 billion in 2005. Multinational chocolate marketers like Master Foods USA, Nestle USA Inc., Crafts Food Inc. and Ferrero USA Inc. have captured a sizeable market for each while upcoming firms like RCC Inc. has been dependent on the innovation-related strategic strength. Such strategic initiatives necessarily require a shift in both internal and external operational policies. Business strategy encompasses a series of other segmental operations that themselves can be regarded as sub-strategies within the holistic process of overall business strategy. For instance operational or production strategy and marketing strategy are all part of the business strategy of the company. RCC Inc. has adopted a functionality-based approach to business strategy and decision making in the larger context of corporate expansion, both within the US market and abroad. Thus its organizational culture and leadership strategies are reflected in its focused strategic initiatives such as SWOT, PESTEL, Porter’s Fives Forces and so on Analysis 1.1. External analysis “Gourmet chocolates have come out of the closet and are showing some muscle in the mass market arena with exceptional branding that is making gourmet indulgence a household phenomenon” (Montuori, May 8, 2006, www.findarticles.com). RCC Inc. has predictably well got into the pre-act of proactive marketing strategy by pushing a line of candy-based products that have captured the imagination of kids and adults alike. Mass market product placement strategies are determined by a number of factors such as price and income elasticities of demand, supply constraints, regulatory regimes, the market structure, e.g. oligopoly and the nature of competition. SWOT or strengths, weaknesses, opportunities and threats analysis is a technique used by business analysts to identify and analyze environmental factors that influence a business organization’s performance in a variety of ways, including its decision making and corporate behavior (Mello, 2003, p.40). SWOT analysis in respect of RCC Inc. can be carried out with specific reference to external environmental factors such as government policies – fiscal and monetary policies, exchange rates policy and national minimum wages. These policies along with government regulations and environmental laws affect businesses in a manner that leads to organizational responses in keeping with its own competitive environment for long term survival. Strengths in this market environment are an internal organizational quality that enables the business to survive and compete against other competitors. A weakness is also an internal organizational problem that affects it negatively while giving an opportunity to rivals such as accumulating bad debt. An opportunity comes basically from the external environment such as a rival’s inability to meet demand. Finally a threat is also a basically external matter, e.g. a rival’s sales promotion campaigns. Political, economic, social and technological influences on organizations can be interpreted under various examples. RCC Inc. operates in the same external environment where these influences along with environmental and legal/regulatory regimes impact on the company’s performance. In the first instance in a highly competitive gourmet chocolate market, economic factors such as different price and income elasticities of demand and government policies, e.g. fiscal, monetary, national minimum wage and so on could have an impact on the organization. Strategic processes and systems within the organization involve all management functions and corporate decisions. The company would have to initiate its strategic functional processes and systems in keeping with its own strategic competitive environment as determined by SWOT analysis. For instance internal organizational arrangements for communication, quality management, internal value chain management, employee relations, HRM function, budgetary control, cash flow management, motivation and so on will have to be aligned with organizational goals. A gourmet chocolate manufacturer would have to take into consideration the competitive environment and available strategic choices. Godiva leads in the eating chocolates market and Van Leer is at the top of many ranking tables in the US chocolate market. Though their concentration is on the eating chocolates market, these products are effective substitutes for gourmet chocolates as well. Ferrero USA, Inc. and Merckens also lead in some segments. Strategic capabilities of baby stores partially or wholly depend on this link with MNCs which manufacture their products. While strategic market orientation is determined by its own internal strengths, strategic product orientation comes from selling branded and patented products. Strategic marketing capabilities coupled with brand loyalty of customers, help gourmet chocolate manufacturers to position themselves in the market at an advantageous level vis-à-vis their rivals who might lack such capabilities. Product dimensions like texture, colour and content give an added value to it in the eyes of the potential customer. Gourmet chocolate firms which have strategic marketing and overall corporate capabilities would be able to enhance those values through better customer relations. The health appeal of the product plays a very significant role here as consumers tend to associate brand with product quality. Brand dependency is probably the most inescapable outcome related to this strategic approach. This brand dependency as against Swiss brands is particularly marked by the company’s ability to renew its marketing strategy now and then. Competitive strength of the organization is determined by its corporate strategies including the marketing strategy. For example a chocolate manufacturer would have to initiate its corporate strategy of satisfying the consumer with a range of chocolates so that competitors would be compelled to match its own strength or adopt a different policy approach such as lower prices to attract customers. How best RCC Inc. would be able to match its competitors in this environment of stiffer competition depends on the inner organizational strengths such as leadership style and motivation of staff. Boston Matrix analysis would reveal how some products of RCC Inc. have been performing in the market. For instance most of its gourmet varieties have just become the cash cows. In fact they have reached the growth and maturity phases on the product life cycle. The company had been experiencing some steady and positive revenue flows over the years from 2005 to 2007. However some businesses have weaknesses which could be exposed by such regulations. For example chocolates can be subject to stiffer regulatory regimes that demand expensive product monitoring technologies. Such costs are passed onto sellers by manufacturers. The inability to stock such standardized products could mean loss of business for some. Especially when price elasticity of demand for a product is very high the outcome is quite predictable. Gourmet chocolates are highly price elastic in demand because imported chocolates are available at lower prices. While brand dependency is relatively marked in respect of some multinationals’ products, there are numerous substitutes for gourmet chocolates coming from low-cost firms. Efficient resource management techniques have to be adopted in order to face off competition in a highly competitive environment. A gourmet chocolate manufacturer has to face more threats on a day-to-day basis from its rivals so that efficient resource utilization and rationalization to enhance capacity would be much more desirable from the viewpoint of strategic competitive strength. Rivals depend on their brand image and promotion strategy to increase sales while much of their competitive edge consists of pricing and quality policies. For instance Consumers of eating chocolates in general and gourmet chocolates in particular are often influenced by exogenous variables like professional writing on current health care trends. In this backdrop RCC Inc. should be able to manage its resources more on line with a ratio perfect basis such as resources spent per sale. Labour resources matter here to a greater extent. Resource-based view of organizational success is determined by the internal strengths of the organization in controlling, rationalizing and utilizing the available resources to the maximum benefit of competitive advantage. RCC Inc’s own resources consist mostly of capital and networks in the form of strategic intelligence of markets, finances, operations, techniques and resource management. Capacity building and enhancement strategies of the company have been well known and its core competencies have been built around this formulaic strength-weakness determination paradigm. Despite this strategic view of the organization as a pioneer of costly-to-copy resource development processes still there is the looming threat of competition coming from rivals who have been able to develop less costly copies of the originals, i.e. the so called argument “candy is candy”. Yet its internal value chain is particularly stronger in comparison to most of its rivals because RCC Inc. has created a strategic management culture that has both sustainability and transparency as two cornerstones. The resource-based view of the organization and the connected VRIO analytical framework depend on two assumptions – resource heterogeneity and resource immobility (Barney, 1997, pp.519-557). Resource heterogeneity presupposes that each firm would possess a distinctly unique set of resources and connected capabilities thus giving it an advantage in cost over the rest of its rivals. RCC Inc. has particularly invested in both the options by adopting a multi-prone strategy of Research & Development (R&D) and overseas expansion through franchise arrangements, thus effectively curtailing the degree of freedom enjoyed by rivals in copying its resources. This strategic initiative on internal resource development along with its formidable management culture has enabled RCC Inc. to evenly balance itself on the VRIO framework thus equipping itself with additional capacity to compete. 1.2. Internal analysis Porter’s Five Forces and Ansoff’s Growth Matrix are also of particular importance to understand RCC Inc’s own strategic imperatives. Porter’s Five Forces signify the contextual significance of supplier power, buyer power, competition, the threat of substitutes and the threat of new entrants into the market (Porter, 1980, p.344). Porter’s Generic Value Chain can be applied to examine the firm’s ability to connect primary value chain activities with support services (Porter, 1998, p.34). RCC Inc. has made use of both strategies to better advantage in marketing gourmet chocolates. Outlined below are the Porter’s Five Forces and their strategic weight on the RCC Inc.’s competition policy (Ibid Porter, 1980, p.344). • Supplier power • Buyer power • Competitive rivalry • Threat of substitutes • Threat of new entrants Supplier power refers to the degree of freedom that suppliers have over the firm which buys supplies from them. RCC Inc. in particular and the gourmet chocolate industry in general have to procure supplies from suppliers in the open market where rules of competition might threaten RCC Inc.’s own strategic objectives as well as others. For example cocoa, the main ingredient in chocolates, sugar, nuts and so on are subject to price fluctuations very often. How would RCC Inc. respond and how would the rest of the industry respond to all this, depend on a number of other variables such as the concentration ratios in the supplier industries, the availability of and the degree of dependency on credit, macro-economic variables such as interest and business tax rates and a host of other factors. Buyer power is perhaps the most effective force with far reaching consequences for the business that the company has to face. For instance customers of gourmet chocolates produced by RCC Inc., can drive prices down if they happen to boycott its products on the basis of environmental issues. Rivalry or competition in the gourmet chocolate market is almost intense because the conversion of capital, manufacturing processes and equipment from one use to the other involves insignificant costs for existing firms. Therefore RCC Inc. has to face a lot of competition from its competitors. As a corollary of the above there is an ever increasing tendency for fairly big firms in technology-centric industries to merge together to achieve quick cost and productivity benefits. In the gourmet chocolate markets, numerous substitutes exist in the form of price competition, i.e. X-firm’s product which is almost identical to the Y-firm’s product, is preferable if the former product’s price is lower than the latter’s. RCC Inc. is not altogether impervious to this rule. Its current operations are highly dependent on market regulations which seek to impose limits on divergent market behavior of firms. Finally Porter’s Fifth Force is about the threat of entry by new firms and it has a very negative impact on the existing firms in the industry. Here what matters is the cost of production. Those firms whose costs are higher will be compelled to shut down. RCC Inc.’s current efforts to cut costs would definitely a positive factor in contributing to its long term survival. Porter’s Generic Value Chain shows how support services can be connected with the sequence of value chain activities (Ibid Porter, 1998, p.34). Primary value chain activities are inbound logistics, operations, outbound logistics, marketing & sales and services. Support services include firm’s infrastructure, Human Resource Management, technology development and procurement. Business analysts and authors who have extensively written on value chain management and marketing connect both together to present a picture on an integrated value chain management process along with a sustained marketing strategy for survival of small firms in extremely competitive industries (Proctor, 2000, p.10). Gourmet industry comes under this conceptual framework. RCC Inc. has been doing business for just 3 decades and its relative newer position makes it vulnerable to predatory pricing strategies of much older firms. Value chain management, both internal and external, helps it to prioritize its marketing strategy with market penetration pricing as a focal point of competition. Similarly the Ansoff’s Growth Matrix identifies the correlations between existing or/and new products and existing or/and new markets. This enables the firm to obviate unseen mishaps such as the failure to identify the impact of new technology on new markets, i.e. misreading the signals coming from the new markets and persisting with the existing products. The mismatch could result in loss of markets. Here the rival firms play a crucial role by quickly responding to new developments. Ansoff’s growth matrix on product/market mix suggests that a business’s efforts to grow are determined by whether the company is operating in new or existing markets and selling new or existing products. The relevance of Ansoff’s growth matrix to RCC Inc. can be seen in respect of its strategic marketing efforts to increase sales to new customers who wish to buy a healthy product. It’s also a strategy to penetrate the market and defeat competition in the face of ever rising costs (Davis, 2007, p.82). Given the highly competitive environment, a market penetration strategy based on brand penetration can be of greater significance right now for IMB. Brand penetration requires a well liaised marketing plan which serves as a conduit for capturing and retaining market share. It does not serve a purpose if what is captured is not retained. Yet, what’s retained should not involve greater cost. Though as mentioned above product or brand dependency might not be possible due to homogeneity, market penetration need not depend on brand loyalty. Loyalties tend to be switched when a product is nearly homogeneous. Product diversification is an essential element of the program. “The key to successful growth and development of small firms lies in their flexibility and ability to respond rapidly to market change and customer needs” (Butler, 2001, p.46). Market segmentation on the basis of customer preferences is possible in the gourmet chocolate industry. It’s imperative for the average firm to define and identify customer requirements, followed by targeting a segment with an appropriate marketing strategy (McDonald and Dunbar, 2004, p.444). RCC Inc. has a broader range of distinct market segments on the basis of customer preferences. Firstly there is the healthy chocolate products segment where the customer prefers to keep his expenditure under a known minimum. Next there is the segment where the customer buys only that type of product when he feels the need for it. The appropriateness of the strategic competitive approach depends on the firm’s own capacity for the functional integration of all its strategically important functions from marketing to delivery so that competitive advantage will be achieved (Bloomfield et al, 2000, p.168). Lateral integration of functions across an organization to achieve competitive advantage against other similar gourmet chocolate organizations in the industry is a well known business tactic. Integration means controlling new bundles of resources in addition to controlling costs (Chatterjee, 2005, p.195). Tactical strategies adopted by organizations to avoid risk are common in every industry. Such strategies have been criticized by many writers due to their escapist element (Ibid Chatterjee, 2005). Diversification or product differentiation is practiced by firms when the existing products have reached their maturity or decline phase in the product life cycle. Product diversification has been at the very heart of gourmet chocolate industry. While most of the other small PLCs in the industry have been engaged in the eating chocolates market, RCC Inc. has been adopting some innovative strategies in its internal operations including quality management. Critical success factors at both industry level and the individual gourmet chocolate manufacturing firm level include such things as the role of the top management, quality improvement standards and techniques, employee relations, motivation, leadership style, internal value chain creation, external supply chain management and so on. This analysis of RCC Inc’s internal environment is never complete without a detailed reference to its financial performance in the immediate past. In the year 2007 the company had a total revenue figure of approximately $ 31.5 million while in 2005 it was just little over $ 24.5 million. Indeed its total costs also have been rising. In the year 2007 it stood at $ 24 million while in 2005 it was $ 19.1 million. Its balance sheet for 2007 puts total current assets at $ 10.7 million and liabilities at $ 3.2 million. Finally the cash flow for the year 2007 shows a net income of $ 4.7 million against $ 3.3 million for 2005 (These are approximations). Conclusion RCC Inc. has been a steadily successful gourmet chocolate company with a sizeable market share in the US and Canadian markets. Its success story has been defined and underlined by its desire to capture and retain niche market segments on the strength of product diversification and quality management. This effort is reinforced by its internal strengths such as labor force motivation, sound financial management, supply chain management, internal value chain management and good husbanding of critical success factors outlined above. RCC Inc.’s strategic production, marketing and quality management initiatives have had a directional thrust in achieving both corporate and strategic functional goals. These positive outcomes have enabled the management of the company to partially or wholly overcome some of the negative external environmental influences arising from the strategic competitive environment. Especially the pricing factor has had a negative impact on its competitive edge due to some rivals’ ability to reduce prices despite rising costs. Finally despite a sharp increase in its operational costs RCC Inc. has been able to achieve some remarkable growth in its P.R.O.F.I.T and other metrics of the firm level critical success factors. This is particularly due to the strategic vision and direction of the management which concentrated on a holistic customer satisfaction paradigm rather than a purely competitive approach to gourmet chocolate market in the USA. This policy has paid off well in the context of a new strategic orientation in policy. There has been a very critical period of competition in the gourmet chocolate market with the industry going through a health-conscious phase of transition. REFERENCES 1. Barney, J. 1997, Gaining and Sustaining Competitive Advantage Reading, Addison- Wesley, Massachusetts 2. Bloomfield, et al. 2000, Nucleic Acids: Structures, Properties, and Functions, University Science Books, California. 3. Butler, D. 2001, Business Development: A Guide to Small Business Strategy, Butterworth-Heinemann, Oxford. 4. Chatterjee, S. 2005, Failsafe Strategies: Profit and Grow from Risks that Others Avoid, Pearson Education, Inc, New Jersey. 5. Davis, J. 2007, Magic Numbers for Sales Management: Key Measures to Evaluate Sales Success, John Wiley & Sons, Inc, New Jersey 6. Johnson, G. and Scholes, K. 2002, Exploring Corporate Strategy, from, www.ciao.co.uk 7. 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