Working Capital Management: Strategies and Techniques - Essay Example

?Table of Contents Chapter Page I Introduction --------------------------------------------------------------------------------- 3 I Sam’s Tailor ---------------------------------------------------------------------------- 3 II Situation Analysis ------------------------------------------------------------------------- 3 II.1 The Competition ---------------------------------------------------------------------- 4 II.2 The Situations ------------------------------------------------------------------------- 4 III Market Analysis -------------------------------------------------------------------------- 5 III.1 The Marketing Mix ------------------------------------------------------------------- 5 III.2 Porter’s Five Forces ------------------------------------------------------------------- 8 IV The Financial Plan ------------------------------------------------------------------------ 9 IV.1 Budgeting ------------------------------------------------------------------------------ 10 V Executing the Plan ------------------------------------------------------------------------- 11 VI Conclusions -------------------------------------------------------------------------------- 12 Bibliography ----------------------------------------------------------------------------------- 13 Summary The following is an integrative report on the function of marketing with reference to how factors outside of the marketing function impact upon marketing efforts. The report, takes the help of Sam’s Tailor, a fashion retailer in the Hong Kong market, to apply relevant methods of market analyses to the company’s marketing mix in order to determine the relationship between external market factors and other business units like finance, human resources and production, and their role in enforcing marketing efforts. The conclusions derived from the study are that all the above functions are interdependent, and marketing serves a major role in a company’s efforts to achieve competitive advantage, hence proving its strategic value. I. Introduction: The following is an integrative report on the function of strategic marketing with reference to the various actors and forces outside the realm of marketing, but those that have enough weight to impact how the marketing function operates in an organisation’s market environment. The report will attempt to investigate all the above factors in relation to a fashion retailer in the Hong Kong retail market. It has to be noted that since the report is based on analysis of a fabricated situation in said market, whilst relevant background information is provided on the chosen company, an assumptive format will be employed when applying theory to the situation(s) explored. I.1 The organisation, Sam’s Tailors: Known as a tourist’s must visit enterprise, whether the tourist is a celebrity or a common person visiting Hong Kong, Sam’s tailors has earned a great reputation since its establishment in 1957 for providing high quality tailored suits for men and women. The company operates on the core traditions of quality and value for money. Their concept of the 24 hour suit has traditionally drawn many famous names like Bill Clinton, and Michael Palin, who in fact had a suit made within 24 hours whilst he was shooting his BBC travel documentary, ‘Around the World in 80 Days’ (www.samstailor.biz; http://www.time.com/time/asia/2004/boa/boa_body_tailor.html). The current owner, Manu Melwani, son of the founder Sam Melwani, is very particular about maintaining strong relationships with past and present customers, as he thoroughly believes that a good tailor needs to know a lot about his customers. He travels extensively to Europe and America, where the majority of his clientele are, in order to understand more of their daily habits, personalities and public opinions about them to create suits tailor made for their image. The core competencies are the amount of research that goes into studying the behaviours of a considerably small but elite customer base, and a small corporate structure mainly made of family members, enabling effective communication and coordination of activities. The biggest strength, however, is the brand’s reputation amongst the world’s elite, which ensures a stable flow of income to keep the working capital cycle operational (www.samstailor.biz). II Situation Analysis: Hong Kong Economy and Retail Market The Hong Kong economy has seen a rise in 2010 after the current financial crisis hit the market towards the end of 2008. The island economy has seen a rise in employment figures alongside a stable and healthy growth in gross domestic product (GDP), which was made possible through overall growth in the retail value provided, especially in the non-grocery sector. Some reasons attributed for this growth are fewer goods sold at discounted prices during the crisis years, and a steady increase in incoming tourists especially from mainland China. All of this has resulted in an increasingly optimistic approach in terms of consumer spending, and the 2010 growth figures have considerably outperformed the figures from previous years. Also, during the crisis years property rentals had soared and pushed retailers to employ innovative methods to gain business, one of which were setting up ‘pop-up’ shops at places especially popular with tourists. These shops were make-shift and low in maintenance costs, and enabled retailers to generate additional sales to their main businesses (http://www.euromonitor.com/retailing-in-hong-kong-china/report). Whilst the grocery sector continued to offer products at discount process due to increased competition not only from others in the segment, but also from companies producing packaged foods, hence reducing the segment’s profit margins. The non-grocery retailers on the other hand reduced their discounting strategies, and instead worked on building up brand loyalty and enhance in-store features to attract customers (http://www.euromonitor.com/retailing-in-hong-kong-china/report). II.1 The Competition: Competitors for Sam’s Tailor come in the form of other fashion retailers employing similar concepts of suit designs. One of them, W.W. Chan’s Tailors, has their shop in the same building as Sam’s Tailor and provides custom made suits which are almost twenty percent more expensive than those of Sam’s. The high prices are attributed to best quality cloths used and a history of tailoring that started almost a decade before Sam’s Tailor came into existence. The company is well known in the richer circles of Hong Kong and mainland China, and also amongst some of the big spenders from the rest of the world, although Sam’s Tailor has so far maintained a competitive edge over them through more reasonable prices for similar quality (http://www.wwchan.com/). II.2 The Situation(s): The scenarios concerning this report are firstly that W.W. Chan has cut down their prices by 15% at the start of the New Year, while the Hong Kong authorities have introduced a state wide minimum wage law in July 2010. This has created undue pressure upon Sam’s Tailor to reform existing practices concerning pricing their products, and to implement new measures for promoting their brand, and also regarding changes in the working capital to enable payment of the new minimum wage to concerned staffs, and for any other expenses related to employing marketing personnel, either internally or externally, for promotion of their products, and/or for any other expenses incurred due to loss of sales to W.W. Chan. III Market Analysis and Proposed Strategies: Many different forms of market analysis have been introduced over the years by leading researchers, some of which are the popular PESTEL and SWOT analyses, and Porter’s Five Forces model (Kotler, 2003). PESTEL refers to the political, economical, socio-cultural, technological, environmental and legal issues in any given geographical area where a business operates or wants to start up operations, whilst SWOT refers to the internal strengths and weaknesses within an organisation, and opportunities and threats that the organisation is open to on the outside(Kotler, 2003). Porter’s five forces model also deals with the threats and different forces in a market that drive companies into reformation to sustain the all important competitive advantage (Johnson et al, 2008; Kotler, 2003). III.1 The Marketing Mix: All of the above factors and methods of analysis can be used in relation to the different elements of the marketing mix namely: Product, according to Neil Borden, the designer of the marketing mix, is either a physical object produced in masses, or an intangible service, like tourism. Tangible products are produced or manufactured in specific volumes of units in order to meet demands from consumers, and they have a life cycle at the end of which their value deteriorates due to market saturation. Companies have come up with the concept of product differentiation to contend with this limited life cycle, where a product’s features are extended or new products are introduced according to market demand (Kotler, 2003; Drummond et al, 2001). Sam’s Tailor currently seems to operate on the basis of a very narrow product-domain, which has been segmented on two piece suits to a largely elite market segment. An analysis of W.W. Chan’s products reveals that the competitor also operates on similar lines as far as the product is concerned. There may hence be an opportunity for Sam’s Tailor to diversify its product-domain to other areas of fashion clothing that may appeal to a wider market segment and perhaps generate sales in these areas to compensate for any loss of sales to W.W. Chan in the original market segment. Such diversification may prove to be a strength for Sam’s Tailor in relation to its competitor(s). Price refers to the money consumers pay for a product or service. There are many different strategies companies use to price their products depending upon competition, market demand, uniqueness of the product, etc. Some of these strategies include penetration pricing, where a company lowers its prices to gain market share, and once this is achieved, the company is free to increase said prices; value-based pricing, where products are priced dependent on the value they offer customers rather than on the actual cost of the product or other factors like competitors’ prices; psychological pricing, where prices reflect upon the consumer on a psychological level rather than on the empirical, etc (Kotler, 2003; Drummond et al, 2001). The price element clearly indicates a threat from W.W. Chan’s move of reducing their prices. Sam’s Tailor still holds an edge over Chan as their prices are still a good five percent lower than the competitor, although, consumer psychology may incline towards W.W. Chan’s products as more favourable especially if consumers have been purchasing from Sam’s Tailor as a substitute for Chan’s products due to the affordability factor. This also poses the threat of losing customer loyalty to W.W. Chan. Sam’s Tailor could use the penetration pricing strategy to gain initial competitive advantage over W.W. Chan by gaining enough market shares, then increase prices again. The company would then be free to employ value-based pricing, banking on customer loyalty in spite of the increased prices. Sam’s Tailor can also overcome the above threats through innovative promotion of their products and brand name to both existing and potential customer bases. As mentioned above, product diversification may add value to the Sam’s Tailor brand name, and effective communication of these added products and their added value through advertisements, loyalty schemes, discounts etc can certainly add to the strengths of the company’s marketing strategy. By increasing their product range, Sam’s Tailor would also be diversifying their price range, hence expanding their target market segment through strong promotional efforts. Promotion is simply the act of promoting a product in a given market. It includes elements like advertising, sales promotions, public relations and personal selling. This is basically the process of communicating the products’ features and the value they may add to consumers through visual aids, and written or personal communication (Kotler, 2003). Place and people are intertwined elements as place primarily refers to the location where the purchase of a product takes place. It also includes important factors like distribution channels, and physical, or virtual stores on the internet (Kotler, 2003), whilst people refer to all the people that are involved in the marketing process. This includes most importantly the consumers, and then the marketing managers and staff that are instrumental in the marketing effort. It also involves market segmentation in terms of demographics, which helps companies to produce goods according to the preferences and demands of a given market (Kotler, 2003; Drummond et al, 2001). In the case of Sam’s Tailor, the location is the shop where the place and people come together and purchase is made. The marketing effort must be evident through enthusiasm and passion for the product in the staff part of the people element, in instilling a desire for the product in the consumer part. The place element takes the form of in-store features, enhancements and additional possibilities like refreshments for customers, which may all provide customers with a complete shopping experience. This of course requires Sam’s Tailor to conduct a competitor analysis of W.W. Chan’s in-store activities to create a position of strength by introducing better techniques to satisfy customers. The company can also add value to their business by investing in virtual stores on the internet, thus opening their products to a much wider market and creating further opportunities. Process is the entire procedure through which a product is manufactured, advertised, distributed and finally sold to the end user (Kotler, 2003). This element, in relation to Sam’s Tailor, will be discussed in later sections related to financing the company’s operations. The focus will be on Sam’s Tailor’s working capital cycle and how changes in the cycle may affect the process element, and how a healthy working capital may indeed work as strength for the company. Physical evidence refers to evidence that the product and the entire marketing effort is a success by means of feedback from customers, which, in turn can be used for further marketing efforts to reach potential customers, thus increasing the customer base. (see Kotler, 2003; Drummond et al, 2001; Wilson and Gilligan, 2005; Moutinho and Southern, 2010). This element can be employed in conjunction with all the above elements as customers can be surveyed on product quality and value, prices, shopping experience, staff behaviour, and impact of promotions, and the acquired information can be used for further improvements in Sam’s Tailor’s marketing efforts, and also to understand consumer preferences and behaviour. These efforts can also be used as strengths against competitors. The Traditional Marketing Mix (http://courseware.finntrack.eu/images/330px-Marketing-Mix_(en).png) All of the above elements provide a clear direction with each element acting as a milestone in the entire marketing effort. Marketing managers may need to assess each of these in their market analyses as the ultimate aim of the effort is to place the organisation in a position of competitive advantage (Dowling et al, 2008; Johnson et al, 2008). As with strategic management, the marketing function is to work towards achieving a strategic fit between organisations and the environments they operate in (Johnson et al, 2008). III.2 Porter’s Five Forces: Michael Porter introduced his five forces model to highlight threats and market forces similar to the ones discussed above in terms of competition and market share, but with the addition of the element of supplier power (Kotler, 2003; Johnson et al, 2008). Any organisation involved in producing end products, as in Sam’s Tailor and W.W. Chan with suits as the end products, will have to buy their raw materials from suppliers. This creates a buyer-supplier relationship that becomes a very important component in the process element of the marketing mix. Porter suggests that the fewer suppliers there are for an organisation, the higher the supplier power, as the supplier has the option of charging high prices for their materials, labour and other resources. Higher supplier power may also mean that switching suppliers may be an expensive venture for companies (Kotler, 2003; Johnson et al, 2008; Dowling et al, 2008). Porter’s Five Forces (http://alfrancobakerhughes.files.wordpress.com/2010/02/porters-five-forces2.jpg) If, as discussed in previous sections, Sam’s Tailor diversify their product range, it is inevitable for the company to either change existing supplier(s) or invest in additional ones to meet the new demands. This either becomes a threat due to additional percentage of the working capital being invested in suppliers, or strength if the company successfully generates additional sales due to product diversification. This means the company gains an upper hand by determining what segment of their product range has generated profits and consequently chooses suppliers more relevant to this segment. IV The Financial Plan – Budgeting and Minimum Wage: Financial planning typically includes forming a budgetary plan for the future with reference to past performance(s). The allocated budget then becomes the working capital required for the processes of purchasing raw materials, manufacturing, cost of labour, and finally leading to sale of the end product. IV.1 Budgeting: According to Gowthorpe (2005), “a budget is a plan, expressed in financial and/or more general quantitative terms, which extends forward for a period into the future”. Gowthorpe also suggests that traditional budgeting refers to a list of all planned expenses and revenues that focuses on what managers tend to spend rather than on what resources they need (2005). Traditional budgeting is still the most widely used performance management process and the primary tool for controlling expenditure and setting up performance targets (Gowthorpe, 2005; Cassell and Symon, 2004). The approach is especially functional in organisations where there is a narrow product-domain, and very less demand for innovation, not many changes are required in terms of investments in new technologies, products, or even markets (Gowthorpe, 2005). This approach, however, has come under increasing criticism with regards to application in the modern organisation. Present market conditions are constantly changing, and more and more businesses are seeing the need to change accordingly and invest in product differentiation, enter new markets, provide new services etc. Such organisations are becoming increasingly frustrated with traditional budgeting tools as they do not meet today’s business needs (see Cassell and Symon, 2004; Gowthorpe, 2005; Mullins, 2003). Sam’s Tailor has also joined the organisations needing to change with external forces, firstly due to the introduction of minimum wage in Hong Kong, requiring the company to allot sufficient funds towards paying appropriate labour costs, and secondly the threats from competitors, which may force the company to invest in additional marketing services and personnel, products, and raw materials. The traditional budgeting model may therefore not be appropriate for the company but a process-based approach, where each function within the business is given an allocated budget depending upon the plans for the function (Cassell and Symon, 2004). So for Sam’s Tailor, higher percentage of the budget needs to be allocated for the production, marketing, and human resources functions due to the new demands for market research and promotion, product diversification and additional personnel. Higher allocation may also be needed for purchasing raw materials. V. Executing the Plan - Working Capital Cycle: The working capital cycle refers to the, “period of time which elapses between the point at which cash begins to be expended on the production of a product and the collection of cash from a customer” (Correia et al, 2007, Pg 11), where the working capital itself refers to the final amount of current assets (mainly cash) available to carry out the cycle (Correia et al, 2007; Longnecker et al, 2006). Managing the working capital includes the administration of current assets and liabilities whilst adhering to policy where decisions are made on the “optimal level of investments and the optimal financing of current assets (Correia et al, 2007). The following is a simplified pictorial description of a typical working life cycle. Source: http://www.accaglobal.com/images/studentaccountant/aug01_dunn As evident from the above picture, the typical cycle consists of various elements involved in the process from inflow of cash (current assets) to distribution of the cash to the different role players until cash is received at the end in the form of customers, as the above definition implies. Once the cash is supplied, the process involves buying raw materials from suppliers, hence creating creditors; expenditures on employing labour for converting the raw materials into end products; the production stage, where the actual manufacturing process takes place involving costs related to usage of machinery, intangible resources like electricity, gas and water etc; the products are then sold to the customers, generating debtors who eventually pay the revenue, which in turn is used to pay the creditors (Correia et al, 2007). Thus the cycle continues. Research suggests that a healthy working capital reduces risks of disruption in the cycle, which suggests Sam’s Tailors should initially play it safe by inducing a healthy amount of cash into the budget, which eventually becomes the working capital. This may prove useful for the additional costs associated with extra labour, raw materials and the marketing effort in reaching the objective of competitive advantage over W.W. Chan. The marketing effort may then be instrumental in generating enough sales to provide for the continuation of the working capital cycle, hence carrying out the process element of the marketing mix. VI Conclusions: The above application of marketing and financial tools to the marketing mix in relation to Sam’s Tailor, and the issues the company faces due to the external changes taking place in the market environment, has revealed that the marketing function is not independent of other functions within a business and its environment. Every function from financing, human resources, general management etc either have an impact on, or are impacted by the marketing effort, as the aim of the marketing managers is to try and align the company and its product with the demands of the market. Such an alignment is supposed to facilitate brand reputation, and ultimately generates sales, which is essential for the continuation of the working capital cycle. A company has truly achieved competitive advantage if all of these elements come together, and if the company’s strategic objective is this advantage, then marketing is of strategic importance to the company as it facilitates the advantage (see Johnson et al, 2008; Dowling et al, 2008). Bibliography Bhattacharya, H. (2006). Working Capital Management: Strategies and Techniques. Prentice Hall: India Cassell, C., Symon, G. (2004). Essential Guide to Qualitative Methods in Organisational Research. SAGEL London Correia, C., Flynn, D., Uliana, E., Wormald, M. (2007). Financial Management. Juta & Co: Cape Town Dowling, P.J., Festing, M., and Engle, SR, A.D. (2008) International Human Resource Management. Thomas Learning: London Drummond, G., Ensor, J., and Ashford, R. (2001). Strategic Marketing. Butterworth-Heinemann: Oxford Gowthorpe, C. (2005). Business Accounting and Finance. Thomson Learning: London Johnson, G., Scholes, K., Whittington, R. (2008). Exploring Corporate Strategy: Text and Cases. Pearson: England Kotler, P. (2003). Marketing Insights. John Wiley & Sons, Inc: New Jersey Lester, A. (2007). Project Management: Planning and Control. Butterworth-Heinemann: Oxford Longnecker, J.G., Moore, C.W., Petty, J.W, Palich, L.E. (2006). Small Business Management: An Entrepreneurial Emphasis. Thompson: USA Moutinho, L. Southern, G. (2010). Strategic Marketing Management, A Business Approach. Cengage: UK Mullins, L.J. (2003). Management and Organisational Behaviour. Pitman Publishing, London Wilson, R.M.S, Gilligan, C. (2005). 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