Strategy to Senior Management of ABN Company - Case Study Example

Executive Summary ABN should buy a new equipment to help the production of Herbi-GEL toothpaste, a highly differentiated market offering which will use the mix of evergreen-forest herbs with the traditional ingredients. With an initial investment of $1,50,000, the expected ROI will be 49.50%, and the increase in brand equity will be of $25,0001. Market Research indicates increasing demand of consumer non-durables market. The market for tooth-pastes will increase by 75% over the next five years. Currently, ABN has 35% of the $10m share, while the leading competitor, Atlas, has 52%. Market will grow by 75% to become $ 17.5m over the next 5 years. With the new strategy implementation, ABN is expected to capture 59% of the market at $10.325m. In addition to the increase in sales of the toothpaste, ABN is going to become a ‘top of mind’ brand for green products. The present government’s attitude towards patent policies, the consumer’s demand for herbal products, and the distributors’ eagerness to carry the new product, make this an appropriate time to implement the new project. Also, the competitors will not be able to emulate the product in the near future due to ABN’s process patent, and the organization’s core-competency in pharmacy production. Organizational Profile ABN Ltd. is a leading manufacturer of consumer products – including soaps, oils, toothpaste, toiletries, cosmetics and OTC drugs. Currently the ABN Ltd. has divided its business into Strategic Business Units, and does strategic marketing at the unit level. Its toiletries division, especially the toothpaste section is facing immense competition from the rivals who are either continuously differentiating, or lowering their prices. As the company’s basic revenues are derived from FMCGs, it becomes imperative that this product line performs well. Also the market trends predict a three-fold increase in the industry sales over the next 5 years. ABN Ltd. currently has 35% of market share of the existing market of $10m. The market leader is Atlas Consumer Products Ltd., which commands the market with a share of 52%, while other major player, DASchaR Inc., has 10%. The rest of the market is proliferated with low price-low quality products, which target the basic needs of the lower-middle income group. Atlas, being a market leader, has products catering for all price sections, and also has a rich product line for its toothpaste division. Atlas spends overwhelmingly upon advertising and brand building activities. The problem faced by ABN Ltd. is retaining its position under the onslaught of Atlas. The opportunity is that trends indicate the market to grow tremendously, and ABN needs a plan to capture a substantial piece of the pie. The Proposal ABN should buy a new equipment to help the production of Herbi-GEL toothpaste, a highly differentiated market offering which will use the mix of evergreen-forest herbs with the traditional ingredients. With an initial investment of $1,50,000, the expected ROI will be 49.50 %, and the increase in brand equity will be of $25,000. The Opportunity Market Research data show that the consumer non-durables market is on the rise, especially the market for tooth-pastes will increase by 75% over the next five years. Currently as the market stands, ABN has 35% of the $10m share. The market is expected to grow, but past trends of the sales of ABN do not point towards a similar optimism. If the existing trends continue, Atlas is expected to capture a large chunk of ABN’s FMCG market share, leaving the division as a Question Mark on the BCG Growth-Share Matrix. The market looks attractive, especially with the reduction on taxes on consumer non-durables, and ABN has numerous Business Strengths to depend upon. An alternative strategy could be to invest the resources in advertising based upon ABN’s existing range of products. Data on past spending of advertising have shown that as the resource allocation to the media PR and advertising has grown from a 3% to 21% of the revenues, the sales growth has not been complementing, especially in the past 2 years, when there has been an actual slowdown in sales despite increase in the overall market. It is required that ABN, position its product as a differentiated offering, a product that gives a unique set of values for a slightly higher price. Banking upon this uniqueness, market penetration can be achieved and not only the existing turf retained, but ABN can also bid for capturing the market over the next 7 years as predicted by the projections of revenue generated with the inclusion of the new product. The relaxation in patent procedures, and ABN’s access to the vast herbal resources, makes it easy for the organization to produce a toothpaste that combines the benefits of providing strong gums and fresh breath, along with the traditional cleaning requirements. This can be achieved by utilizing the organization’s core-competency in manufacturing and the existing strong dealer network. Consumer Researches have repeatedly pointed out the consumers growing interest in clean, environmentally safe products. Products which have a legacy of ‘old wisdom’, and which boasts of vegetable origins, are gaining prominence in consumers mind. There are numerous case studies to illustrate the fact that products based on herbs and plants, and marketed as such, are widely accepted in the market. From slimming products to dietary supplements, and from no-preservative added foods to earth-cosmetics, everybody has ridden the green bandwagon; and with success. Till date, toothpaste manufacturers have targeted either the teeth whitening, or freshness proposition. Marketing strategies have varied, (from day-long freshness to freedom from germs) but the key ingredients used by almost all the players have been the same. ABN can create a niche’ by adding its patented herb F1 (extracts of which ABN is already using in its hand-and foot cream) as the major ingredient which can give strong-gums, fresh breath and white gloss to teeth. A survey with the existing distributors of ABN’s FMCG products revealed that they were open to the idea of herbal toothpaste. Random sampling of consumers showed that a potential market existed for the proposed offering. As the primary buyers for the toothpaste are mothers, a sample survey revealed that most mothers are hard pressed to select the right toothpaste and they end up buying the most advertised one. HerbiGeL could well make an impact on the buyers’ mind-share – they’ll remember it due to its different provenance as well its benefits. ABN has trusted equipment suppliers who have been issuing material for the organizations’ diverse divisions. The desired equipment can be delivered within the next month as the need to search for and shortlist the vendors is eliminated. It can be seen from the above discussion that the key stake-holders, especially the consumers and the distributors are open to this product. With the return on Investment of 49.50%, and the prospect of becoming the market leader in the very near future (from the threat of being cornered into a small market share by Atlas), it makes good sense for the organization’s investors to give the green signal for the proposal. The Value Proposition The new strategy hopes to elevate ABN to the rank of market leader with a market share of 59%. In addition to the increase in sales of the toothpaste, ABN is going to become a ‘top of mind’ brand for green products; a proposition highly beneficiary for its cosmetics and toiletries division. There will be considerable gain in brand-equity and consumer awareness. And as already revealed by preliminary distributor chain survey, the retailers will be eager to provide the prominent shelf-space thus aiding in purchase behavior. This is clearly the value to be created with the current proposal. For this to be realized, a lump sum amount of $ 1,50,000 has to be expended towards the purchase of the new equipment. Also, another $30,000 has to be utilized for distributor chain management and support. A total advertising budget of $ 50,000 has to be sanctioned for the current year, and subsequently based on the success of the campaign, appropriate annual allocations have to be made. Once the new product begins being manufactured, approximately 500 man-hrs per week have to be expended towards it. For this it is recommended that workers from the existing products be deployed on a rotational basis. ABN has gone through an expansion of capacity plant 3 years back, with approximately similar claims of ROI. However, the plan was followed through, but after creating excess capacity, the past years saw little or no growth in the sales. It was not realized at the time that it is not ‘more’, but a ‘better’ or differentiated product that is the need of the hour. With ABN’s core competence with medicines and processes, acceptance of this strategic proposal will lead to very concrete and measurable value creation. The Timing With the increasing awareness and acceptance of herbal products among the consumers, this appears to be the right time to present them with an offering that fills this need. As ABN already is in the production of OTC drugs, any product branded by ABN and sold as a healthy option to the existing replacements, would make sound sense to the consumers. ABN is already in possession of the process patent for such a toothpaste (as it is already using an adaptation in its hand and foot cream) and the government’s requirement that the patent could be held for the next 20 years, will ensure that competitors will not be able to produce a worthy alternate. Others dealing in consumer non-durables don’t have core competency in the drug division, which ABN can utilize to its advantage. Atlas, the leading competitor, too depends on hard selling and advertising, and not on product features. Till now, Atlas was winning as they had more spending power vis-à-vis media spending, but with ABN’s herbal brand, the war will shift to product quality and features. This again will be a point gained by ABN, as the organization has strict quality control systems (thanks again to its drugs division) in place. Though capacity expansion has already been tried before, it didn’t work; for the obvious reason that it was not strategically sound. In the present case the biggest block is the reluctance to commit resources for the purchase of the new equipment – rationale being the opportunity cost of the commitment. However, it can be realized that over the past several years, there has been an attempt at increasing the media budget and a costly expansion bid, but without delivering the much-required turnaround in sales. On the other hand, the present proposal is prompted by hard facts, research reports and personal surveys, and is based on sound premise. As the promoters of this proposal, we have resorted to intensive research, both at the consumer level and the distributor level, to arrive at the potential opportunity. We have marshaled the idea after inspiring the confidence of the distributors, and their support for any such initiative that ABN takes. Once the equipment is purchased, ABN can transfer some of the personnel from it Drug division to take over the production, quality control, and management of the new product. Also, a new product manager (who has experience in handling the retail channels) will have to be transferred from the drugs department. The first batch can be available in the market within the next month, and at the same time ABN would have formulated a media strategy for the release of the new product. Initial sales data can be compiled for a period of next 6 months, and will be available to compare with the forecast. Depending upon the returns, ABN can base the next level of planning on expansion, or consolidation of the market share. ROI For the calculation of return on investment, we’ll follow the NPV method. This will provide transparency about the costs involved and the returns attained over the next 7 years (a period considered relevant for determining the impact of the investment). These returns will be used to calculate the ROI. The Sales Forecast over the next 7 years are presented in Appendix 1a. The present value of the Sales inflows, based on a discount rate of 5% is $3,46,521.10. (Appendix 1b). To this can be added an estimated increase in the Brand Value by an amount of $ 25,000. Hence the total gains are $3,46,521.10+ $ 25,000 = $3,71,521.10 In addition to the increase in sales of the toothpaste, ABN is going to become a ‘top of mind’ brand for green products; a proposition highly beneficiary for its cosmetics and toiletries division. For this to be realized, a lump sum amount of $ 1,50,000 has to be expended towards the purchase of the new equipment. Also, another $30,000 has to be utilized for distributor chain management and support. A total advertising budget of $ 50,000 has to be sanctioned for the current year, and subsequently based on the success of the campaign, appropriate annual allocations have to be made. We’ll set it as average of $700 per year (over and above the advertising budget that ABN does for its other products). Simultaneously, arrangements should be made to shift personnel from the drug division facilitate the production of the new toothpaste. The cost of this move is estimated at $ 11,0001 .(Appendix 2a). In addition to the above, $ 700 per year for media follow-up, and $ 600 per year maintenance costs will be encountered. The present value of the above costs will amount to $ 7,523, calculated at a discounted rate of 5%.(Appendix 2b). Total Investment = 2,48,523 Appendix 2a. Total Inflow = 3,71,521.10 Net Present Value = PV of inflows- PVs of investments = 3,71,521.10 - 2,48,523 = 1,22,998 ROT = NPV/ Total Investment =1,22,998/2,48,523 = 49.50% 2nd and 3rd Order Effects It is only pertinent to enquire how ABN’s loyal customers, those who are accustomed to the existing product, will respond. This is a crucial point as an outright rejection will not only shelve the future market-leader ship plans, but also plummet the existing sales. However, the chances of such an outcome are extremely small, as this proposal is based on exhaustive research and survey feed back that pointed towards the acceptability of the new product. Secondly, it is obvious that other divisions, especially the drug unit of ABN might view this proposal as a threat to its integrity and see the move as a potential source of human resource and raw material problems for it. This division can be assured that the strategic advantage gained by committing some of the resources to the new product will only further the sales of the overall brand ABN, and the medicine unit too will become the end beneficiary. Finally, the opportunity cost of this strategy proposal is kept at the barest minimum. There is hardly any other alternative that will yield similar, or even near results, to what the requested investment will generate, as has already been seen by the capacity expansion fiasco, and failure of the plan for media budget increase. Conclusion The strategic proposal that is presented is based on intensive surveys conducted by both in-house and external agencies, and depends upon data collected from consumers and distributors alike. The projections and estimated cash-flows vis-à-vis the investment, show that a commendable ROI of 49.50% can be expected from its implementation. The proposal also stands out against alternate plans - like any further expansion of capacity or increase in media budget – due to its grounding in hands-on data, and the unique proposition that it puts forward. ABN would do well to make use of the proposal is it has to grow with the market. Footnotes 1. Increase in Brand Equity as estimated by Mckinsey 2. $ 11,000 is the expected cost of induction, training and orientation of the personnel to work on the new product. 1. Appendix 1a: Expected Cash Flow With Different Probabilities P1: with Success P2: With Moderate Success P3: With Failure 2. Appendix 1a: Table: Sales Forecast with different probabilities Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 P1=0.25 50000 60000 70000 90000 110000 130000 150000 P2=0.65 25000 30000 35000 50000 70000 90000 110000 P3=0.10 5000 6000 7000 9000 11000 13000 15000 Appendix 1b: Calculation of the NPV of the Expected Cash Inflow over the next 7-year. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 P1=0.25 50000 60000 70000 90000 110000 130000 150000 P2=0.65 2500 30000 35000 50000 70000 90000 110000 P3=0.10 500 6000 7000 9000 11000 13000 15000 Expected Value 29250 35100 40950 55900 74100 92300 110500 PV* 27857.4 31836.0 35374.2 45989.0 58059.3 68875.0 78530.3 *The present value of the above inflows, based on a discount rate of 5%. PV = 29,250/1.05 + 35,100/1.052 + 40,950/1.053 + 55,900/1.054 + 74,100/1.055 + 92,300/1.056 + 1,10,501/1.057 Total PV = $ 3,46,521.10 Total Increase : $3,46,521.0 + $25,000 = $3,71,521.1 3. Appendix 2a: Investments/costs Investment $ Spent Initially Equipment 1,50,000 Distributor-Chain Management & Support 30,000 Media Budget 50,000 Personnel 11,000 Present Value of the Cash Flows towards Media and maintenance* 7,523 Total 2,48,523 Appendix 2b: Calculation of the NPV of the annual cost on media and equipment maintenance. Year 1 2 3 4 5 6 7 Cash ($ 700 + $ 600)Outflow 1,300 1,300 1,300 1,300 1,300 1,300 1,300 PV 1238 1179 1123 1070 1019 970 924 PV=1,300/1.05 + 1,300/1.052 + 1,300/1.053 + 1,300/1.054 + 1,300/1.055 + 1,300/1.056 + 1,300/1.057 PV =7,522.88 Total Investment = 2,48,523 Appendix 2a. Total Inflow = 3,71,521.10 Appendix 1a and 1b Net Present Value = PV of inflows- PVs of investments = 3,71,521.10 - 2,48,523 = 1,22,998 ROI = NPV/ Total Investment =1,22,998/2,48,523 = 49.50% Read More