The Real Chocolate Company's Strategy - Case Study Example

Case Analysis Report The Real Chocolate Company Table of Contents 1.0 Introduction 1.1 Overview of Real Chocolate Company 1.2 Analysis of real Chocolate Company Environment with the PESTLE matrix 1.3 Analysis Using Porters Five Forces Framework 2.0 1.0Introduction Andrews (1997: p. 52) defines corporate strategy as “the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organisation it is or intends to be and the nature of the economic and non-economic contribution it intends to make to its shareholders, employees, customers, and communities”. Corporate strategy in effect maps out the businesses in which an organisation intends to compete in a way that focuses resources to convert distinctive capabilities into competitive advantage. (Andrews, 1997). Real Chocolate Company Strategy Real Chocolate Company strategy has been expansion through franchising. The parent company owns the distribution and supply chain. The company uses one of porters competitive strategy of product differentiation was emphasis is on quality. Because of the perceived differentiation and quality consumers are charged a premium price. The Real Chocolate Company also uses an umbrella branding strategy, and the problem today with the CEO had to be whether they could maintain this level of growth in the years to come in the highly competitive, fragmented chocolate and confectionary industry. Their philosophy centers on the use of finest, highest quality ingredients and no artificial preservatives with the goal “goal is to build the Company into the premier retail chocolatier in the United States”. Forman & Camponovo (2004:1) referred to mission statement “as the most basic embodiment of business strategy….. for mission statement is often at the heart of strategy formulation for successful organisation. Raynor (1998) further outlined the role of vision and mission statement which include Mission and vision statements are pivotal in defining and communicating an organisation’s “enduring core purpose” (Raynor 1998:2). Against this background, this paper analyses and discusses the real chocolate company using specific management models. The real Chocolate Company exhibits an entrepreneur form of a business which today has grown into a multinational company through franchising. Wit its emphasis on quality of hand made Gourmet Real Chocolate Company today has 235 workers, owned five branches and 316 franchised stores serving the United States and Canada. Real Chocolate Company today is noted for its perfection in hand made gourmet chocolate made from finest quality ingredients with no artificial preservatives added. The market for gourmet chocolate is a growing market, with segment expected to reach $1.8billion by 2010. 1.1External Analysis of Real Chocolate Company From the PESTLE framework outline in appendix one below, Real Chocolate Company (RCC) is affected by all the factors outlined in the framework. However, because this paper requires us to focus on the factors at the time of the case, three these factors are examined below. In the past eight years the United States have been a threat to global peace under president Bush’s administration. The war in Iraq and the global war against terrorists and their activities all created a risky environment for mankind. This must have affected the company franchising opportunities and expansion into other neighboring countries with market potential. The war in Iraq and Afghanistan, the increase expenditure on military items, the famous dollar without tears policy of the regime, today is affecting the demand of hand made gourmet chocolate. Consumers are skeptical of the future and are afraid to spend. Under economic factor, the market for gourmet chocolate is a growing one with sales expected to jump to $1.8billion by 2010. Presently, gourmet chocolate has 10% of the chocolate market share. Raw materials are sourced from developing countries. Economic factors that affected real chocolate companies from the case also include, price variation due to monetary fluctuations, raw materials are sources from other countries, the trade between US and Canada were the stores are based are liable to exchange rate fluctuations. Social factors include the rising population due to immigration, that can be used to the organization advantage, competition on the rise from related and unrelated companies such as Nestle. The economic and social environment prevailing at the United States created a good opportunity for franchising. Also, from the case, environmental and social factors such as growth in population, the black pod, frosty pod, and witches’ broom diseases could adversely affect the cacao beans if these plant diseases in the event are not controlled. With the fact that, there have been increasing health concern towards obesity means that, gourmet demand will be affected negatively if attention is not placed on controlling the fat content. In addition, like in any legal entity, the chocolate and confectionery industry must comply with numerous regulations that cover health, sanitation, safety, and franchise operations (relating to registration and disclosure of information). In 2005 for example, the NCA was actively involved in supporting or fighting numerous legislative proposals. These laws affected the activities of real chocolate company. Under environmental factors, cocoa is the raw material for chocolate sourced from the farmland, and consumers are increasingly concern about environmental friendly product. 1.1The Market for Chocolate and Porters Five Forces Porters five forces was initially develop as a means of looking at the attractiveness of an industry. The market for gourmet chocolate is a growing market with sales expected to top $1.8billion by 2010. The market constitutes key players and other niche players supplying the ingredients necessary for the production of hand made chocolate. Within the context of today’s global competition, businesses and firms no-longer compete as individual companies but try to corporate with other businesses in their activities (Wu & Chien 2007:2). Kanter (1995:71) on his work of “Mastering Change” argues that success in the present day business is not for those companies that re-engineer the way they do things, or for those fixing the past. According to Kanter (1995) such an action will not constitute an adequate response. Relationship with suppliers The market for hand made gourmet and substitutes is made up of many independent suppliers. Real Chocolate Company strives at maintaining a long term contract with the suppliers of between 6-18months and for very important ingredients a backup supplier is maintained to mitigate disappointment. Other key ingredients are sourced independently with finish gourmet being transported by their own trucking system. Bargaining Power of Buyers Although, there are numerous chocolate companies offering different chocolates products such as NESTLE, Master food, Campbell, hand made gourmet chocolate companies are limited. Thus because suppliers for hand made gourmet chocolate are limited, buyers bargaining power is low as they have a very high switching costs. Threats of New Entrants Huge money time material and technical expertise are necessary to start up a hand made chocolate gourmet. Because of this, threats of new entrants are very low. However, a key player from Asia remains a big threats as the Chinese demand and appetite for the product is quite high. Threats of Substitute The industry is characterized with many niche players. Major players in the sector include See’s Candies, Master Foods USA, Lindt & Springli A.G. Ferrero USA, Herseys; competing brands include dove promises, Lindt Lindt Lindor, cafeteria Raffaello. What real chocolate company should do here is try and introduced different items. Competition Competition is very fierce in the chocolate market with key players like Nestle having a greater market share. However, with it emphasis on quality and products differentiation the company has secluded itself from the current competition. 1.3Financial Situation of Real Chocolate Company The solvency ratio for RCC shows that the company is highly geared. And the situation of 2007 when compared to 2006 is better off. This shows that the company uses more equity than debt as there are still potential for the company to take advantage of debt financing that is cheaper as compared to equity financing. Profitability Ratio Ratio Formula 2007 2006 Profit margin 11.4% 11.1% Return on Capital Employed 15.6% 13.0% Return on Equity 19.9% 16% Return on Investment 15.6 13% As deduced from the case, “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.” This also is being reflected in the profit and loss account as the is a constant growth between 2006 and 2007. All the profit ratios increased with at least three percentage point. Liquidity Ratio Ratio Formula 2007 2006 Current Ratio 3.3times 3.6times Quick Ratio 0.86times 1.2times Cash Ratio 0.96times 1.6times While the liquidity ratio for 2006 is better than 2007, in 2007 cash was diverted towards some short term investment as a lot was spent in new franchise stores and location. The SWOT and RCC RCC and the SWOT Analysis Strengths Premium location, centre of primary target market catchments. High exposure to foot and vehicular traffic. Unique service offering to this market, the brand is a household name is highly recognized. High level of qualified resources and their professional capabilities to provide quality service to customers and business and marketing management. Exclusive environment with all services for customers under one roof. Strong investment capital. Physical environment is high quality, contemporary and safe designed. A cool environment that customers can be proud of. Multisensory experience design (audio/aroma/visual) Haven for families. Providing the highest quality leisure environment and services for our customers: quality standards, passion for service Satisfying and delighting our customers through, relaxation, meaningful value, innovation of free time usage. Supporting team excellence and happiness Empowering Work Environments Sustainable Supply/ Wise Environmental Practices/ Community Citizenship 365/days business/ Celebrity endorsement Weaknesses Depends highly on weather condition Rely on government and Community support Reach is limited –limited in primary target market catchments. Highly dependent on partners/alliances rather than employees to deliver the services. Risk of reduced focus by third party Potential loss of continuity from third parties if not perceived as part of the invisible team. Danger of third party seeing alliance as incremental rather than core particularly in more popular services. Opportunities Falling cost of capital Extra Increase immigration to the States Highest population growth in with auxiliary services Niche target market opportunities for affluent new and young families. Horizontal market Strategic alliances/business partners & associations. Ability to build strong membership base. Ongoing market research to database to innovate, refine, test. Greater differentiation to the target segment Threats New entrants and investors from Asia, threats of a buy out Global economy, The risks surrounding the world economy are creating uncertainty for the domestic outlook Current pressures on food and fuel prices, the recent interest rate rise, combined with the possible impact of increased credit market spreads on household borrowing costs, will have a moderating effect on consumption. Competition, local government and community services. Change in legislation Porters Value chain and the RCC Primary Activities Secondary Activities Thus, an analysis of the RCC value chain will show that at the level of the secondary activities, RCC lean manufacturing technology, internet marketing technology, production technology, the just in time production line, customer relationship management (CRM) represents a big source of the RCC competitive advantage. This is because it will cost time and money for a competitor to replicate this. At the level of the primary activities, the relationship existing between the RCC and its suppliers is a strategic and competitive advantage. They ARE IN A LONG TERM CONTRACT with the suppliers thus given room for just in time production manufacturing method, Total quality management etc. they have cost advantage, exhibited in the form of lower prices. Thus a key advantage is source by the inbound and outbound logistics and the marketing information technology. 1.3.1 2.0 Real Chocolate Company and the TOWS Matrix The Real Chocolate Company is a house hold name today in the States. It emphasis on quality today has earn it numerous awards in the States. The brands are noted for freshness fun and excitement. The stores are located in busy outlet of the cities where customers are easily attracted. The Company 65malls in 25 states of the United States. One of its strength is it is technical know how in juicy tasty and fresh hand made gourmet. The company also sourced a competitive advantage from its supply chain management through its trucking of goods and services. It advertisement and sales promotion are done in stores with emphasis on the use of coupons, flyers and mail catalog. Real Chocolate Company also does community sponsorship and embarks on charitable causes. The market is relatively still broad with projected sales of the gourmet chocolate estimated at $1.8bilion for 2010. An issue that remains to be solved today by the CEO is whether the growing trend will be maintained. Opportunities abound for the gourmet chocolate; the United States remains a very broad market for the brand to be extended further. Opportunities abound for the purchase of small but vital niche players of the market. The gourmet chocolate market is still at the growth stage, with the European and Chinese market representing a market that can be taken advantage of. Today, the increase cry for a global village is enough evidence for weakening trade barriers. Franchising as an initial market entry strategy can be extended into other markets and areas. Expansion of distribution through food drugs and mass market channels is another important area for competitive advantage. Threats for the Real Chocolate Company include the global financial crisis, global warming that will probably affect the global sales and production of cocoa, the increasing quest for nuclear weapons by some rogue states such as Iran and North Korea, the growing influence of alqaida network and the likely hood of terror attacks of some real chocolate company’s stores location. Today, natural disaster is common in the United States and Canada, in the situation were this happens in their location, the company suffers a loss. The absence of a product with total differentiation is a big weakness of real chocolate company. Also, it lacks its own farm and because all the cocoa beans are grown in developing countries, ethical concern for fair trade might affect their activities. 3.0Real Chocolate Company and the way forward Like the manufacturing industry where product advantage has been found to be the most important factor in determining the competitive position of a firm in the industry, the case of RCC requires a mix of strategy. The competitors in the former industry can easily replicate the important elements of a firm’s new service (Storey and Easingwood (1998: pp. 335-336). It is against this backdrop that RCC’s manager’s inorder to find the key to new service success must look to factors other than sustainable product advantage (Storey and Easingwood (1998: pp. 335-336)). Storey and Easingwood assert that the totality of the service offering must be understood from the perspective of the customer. Thus, I will recommend RCC to pay greater attention on this. The ASO model is made up of three elements which include: the service product; the service augmentation; and marketing support (Storey and Easingwood (1998: pp. 335-336). RCC, incorporate and carry this three models out together in order for its product to meet the overall expectations of the customer. The impact of the service product on competitive advantage is determined by five factors which include: product quality which is measured by the reliability, accuracy and consistency of the product, product distinctiveness, perceived risk, physical evidence and product adaptability (Storey and Easingwood 1998: pp. 335-336). The impact of service augmentation is determined by distribution strength, effective communication, staff/customer interaction and customer experience while the impact of marketing support is determined by marketing knowledge, staff training and skills, investment in systems and the launch strategy (Storey and Easingwood 1998: pp. 335-336). The more unique and distinct the product is the more attractive it will be to customers and thus the higher will be the competitive advantage of the firm in the industry. Perceived risk measures customers’ expectations on how the product will meet their needs, that is, whether the product will perform above or below expectations. The higher the perceived risk, the lower will be the customer’s purchase intentions and thus the competitiveness of the product. If customers perceive a lower risk, the higher will be their purchase intentions and thus the competitive advantage of the firm. Perceive risk is highly dependent on the reputation of the firm. A firm with a high reputation is likely to witness a low perceived risk than a firm with a low reputation. The firm must therefore try to maintain a high reputation so that its products will not be perceived as high risk products by consumers. The management of RCC must be able to maintain this within it strategic fit in the US market. 4.0Conclusion The aim of this paper was to analyze the business case of RCC environment. Priority was paid to key change drivers. In the course of the analysis there is evidence that RCC is affected by almost all the factors outlined in the PESTEL framework and the supporting models with particular emphasis on Taxation, Demographics, and Environment, socio-cultural and technological developments. However, given the strategic capabilities, and core competencies of RCC, one will not hesitate to say, RCC remains a key player in the gourmet chocolate market. It emphasis on quality and freshness should remain its driving force. References Andrews K. (1997). Resources and Strategy: A Reader, edited by Nicolai J. Foss. Oxford University Press, ISBN 0198781792, 9780198781790 Forman, P.H., & Componovo, J. E. (2004). The business Radiology and the Mission Statement. 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