Radio Shack Strategic Management - Research Paper Example

?Table of Contents Table of Contents 1.0.Introduction and overview 2 2.0.Strategic issues 3 3.0.SWOT analysis 4 3 Strengths 4 3.2.Weaknesses 5 3.3.Opportunities 5 3.4.Threats 6 4.0.Stakeholder Analysis 6 5.0.Discussion 8 5.1.Merchandise mix 8 5.1.1.Merchandise mix: the situation 8 5.1.2.Merchandise mix: the proposition 9 I.Countering customer power 9 II.Neutralizing supplier power 11 5.2.Growth Strategy 12 5.2.1.Growth strategy: current situation 13 5.2.2.Growth strategy: proposed direction 14 6.0.Recommendation 15 Works Cited 17 1.0. Introduction and overview RadioShack Corporation is a leading US retailer of consumer electronics goods and services which includes mobile technology products and services, as well as products related to personal and home technology and power supply needs. It was incorporated in Delaware in 1967 and is currently headquartered in Fort Worth, Texas. RadioShack is primarily focused on the US market where as at the end of 2011 it employed 34,000 people, and owned and operated 4,476 stores under its brand and an additional 1,496 stores under the Target Mobile centers brand. RadioShack’s products and services are categorized into four platforms: mobility, signature, consumer electronics and other sales. The mobility platform consists of prepaid and postpaid wireless handsets, commissions and residual income, tablets and e-readers. The signature platform includes home entertainment, wireless, computer, and music accessories; general purpose and special purpose power products; headphones; technical products; and services (RadioShack 3). The consumer electronics platform includes personal computing products, laptop computers, digital music players, residential telephones, GPS devices, cameras, digital televisions, and other consumer electronics products (RadioShack 3). Other sales include sales generated by the Target Mobile centers, sales to independent dealers, sales generated by RadioShack’s Mexican subsidiary, sales from www.radioshack.com website and sales to other third parties through the company’s global sourcing operations (RadioShack 22). The contribution of each of these product platforms in 2011 is displayed in Figure 1 below. In 2011, RadioShack net sales increased by 2.6%, to $4,378 million over its 2010 revenues. However, the company’s gross margin went down by 3.5% to 41.4% within the same period. This was largely attributed to change in the company’s sales mix within its largest product platform, the mobility platform, towards lower margin smartphones and tablets (RadioShack 20). The company has sound financial strength depicted by its quick ratio of 1.61 and current ratio of 2.73. Figure 1: RadioShack Product Platforms (RadioShack Corp 1) 2.0. Strategic issues There are two major strategic management problems facing RadioShack Corporation: merchandise mix and growth strategy. To begin with, RadioShack established its mobility platform as the more attractive unit and has continued to steer corporate resources towards it. Figure 1 above, shows mobility devices accounted for 51.4% of the company’s net sales in 2011, up from 46.1% in 2010 and 35.3% in 2009 (RadioShack 22). However, the high competitive rivalry in the retail consumer mobility industry, short product cycles, and its much lower margins has made the company vulnerable to weak consumer spending. For this reason, on March 2, 2012, Standard & Poor's Ratings Services lowered its corporate credit and senior unsecured debt ratings on RadioShack to ‘B+’ from ‘BB-’, with outlook also moved from stable to negative (FitzGerald Para 2). This downgrade lowers investor and creditor confidence on the organization. Ultimately, the lowered rating may affect RadioShack’s ability to raise financial capital for any major investments that it may seek in future. RadioShack’s senior management therefore has to figure out how to raise the company’s ratings to renew investor and lender confidence. With this downgrade RadioShack’s senior management are faced with the option of continuing with their increased focus on mobility or whether to make signature or consumer electronics or other sales to be their new investment priority. The second major strategic problem facing RadioShack involves the choice of growth strategy. The company has been pursuing a concentration strategy, specifically the product-market exploration option. This is demonstrated by attempts by firm to increase sales of its current offerings in its current markets by depending on its functional and competitive strategies such as opening and operating stores in convenient neighborhood locations and investing in staff so that they can offer knowledgeable, objective and friendly service (RadioShack 5). Here too the company has not fully succeeded as its partnership approach to sell phones with Target does not guarantee success given the failure of a previous similar partnership arrangement with Wal-Mart’s Sam’s clubs (Bustillo Para 13). The question facing RadioShack’s senior management is therefore whether to continue with this growth strategy or whether to adopt a different growth strategy. 3.0. SWOT analysis 3.1. Strengths First strength is that RadioShack has a very wide network. It owns and operates 4,476 stores, has 1,058 dealer outlets and 1,496 Target Mobile centers spread in every corner of the American heartland (Bustillo Para 15; RadioShack 3). This wide network makes purchasing from the company’s network convenient to most Americans. Secondly, from its extensive network and decades of operation RadioShack has positioned itself as a reputable brand within the American consumer electronics retail sector. The company’s offerings are therefore trusted by consumers. In line with this, the company has enhanced its brand further through tie-ups with major mobile phone providers such as Sprint, AT&T, Verizon Wireless and renowned device manufacturers and software providers such as HTC, Microsoft, Apple, Casio and Research In Motion (RIM). From these relationships, RadioShack has the opportunity to transfer to customers additional savings through bundling, offers and so on. Thirdly, RadioShack’s specially trained sales staff is particularly attractive to the do-it-yourself electronics consumer micro-segment. They also enhance the shopping experience at the company stores, an attribute that directly limits competition posed by online consumer electronics retailers. 3.2. Weaknesses The main weakness the RadioShack faces is its limited diversity of goods in comparison to its chief rivals such as Wal-Mart, Best Buy and Amazon. This lack of diversity lowers customer loyalty since customers are forced to buy certain goods from competitors. 3.3. Opportunities RadioShack is renowned for its well-trained, knowledgeable employees who offer excellent customer service. The company could improve its customer service if it exploits the following two opportunities: store refurbishment and development and by offering services and repair. Store refurbishment and development would enable the company to enrich its customers’ shopping experience and also to ward off competition from rivals such as Apple stores. On the other hand, offering customers a comprehensive help, repair, support and service infrastructure for consumer electronics will enable the company to build switching costs for its consumers in this hypercompetitive market environment. 3.4. Threats The first major threat to RadioShack’s business is the effect of economic slowdown on its revenues. RadioShack operates in a discretionary industry where customers are very sensitive to economic cycles. The current slow economy therefore compels RadioShack to lower its margins in order to offer its customers the best values possible. The second threat to RadioShack’s business is caused by the intense competition that it faces from big box retailers such as Wal-Mart and Internet retailers such as Amazon.com. The two players mentioned are particularly adept at executing their low-cost leadership strategies which allows them to offer competitive prices that customers find appealing particularly with the current state of the US economy. Also, the forward integration of telecommunications companies such as Verizon into retailing and Apple’s expansion of its retail stores especially, seriously challenges RadioShack’s competitiveness in its key mobility platform. 4.0. Stakeholder Analysis The key internal stakeholders at RadioShack are: its Board of Directors, senior management, and other staff. The Board has to approve the overall direction that the company hopes to follow as represented by its corporate strategy. On the other hand, senior management is important for the implementation and management of competitive and functional strategies that lead to the overall achievement of the company’s goals. These two groups therefore need to be fully engaged and satisfied. Other staff members are vital for the execution of operational strategies but they have limited power with regards to influencing the direction that the organization needs to take. The key external stakeholders are numerous, namely: analysts, lenders, shareholders, government, customers, the press, trade associations, suppliers and the public. Analysts influence how lenders, customers and the press view an organization thus they are key players. Lenders also play a key role with regards to supplying finance for the company to make important investments. Here, shareholders have been categorized as external stakeholders because they are not involved in the day to day running of the business. Also given that RadioShack is a large public company, the power of shareholders individually is lowered to the level of stakeholders that are to be shown consideration. A diagrammatic summary of all stakeholders is shown in Table 1 below. Table 1: Power/Interest Grid for Stakeholder Prioritization adapted from (Eden and Ackermann 121–125, 344–346) High POWER Low Keep satisfied -Government -The press -Customers -Shareholders Manage closely -Board of Directors -Senior / Corporate management -Analysts -Lenders Monitor -The public Keep informed -Other staff / employees -Suppliers -Trade Associations Low INTEREST High 5.0. Discussion 5.1. Merchandise mix 5.1.1. Merchandise mix: the situation Figure 2 below clearly shows that RadioShack has continued to increase its dependence on the mobility platform for its net sales and operating revenue. In 2011, mobility products accounted for over half of the company’s sales. In January 2012, the company’s Executive Vice-President and Chief Marketing Officer stated that to the organization mobile represented not only a commercial opportunity but also a branding imperative (Gutman Para 4). Also one cannot ignore the disruptive effect of the growth of smartphone adoption in the United States. Smartphones typically combine wireless handset capabilities with capabilities previously found on separate devices such as camera capabilities, GPS (global positioning system) navigation and digital music players. This convergence of capabilities into smartphones has contributed to a decline in sales in several product categories and as such RadioShack could not avoid taking part in this new product category. That said; the rapid growth of the mobility market has attracted numerous competitors from new entrants to other players in the value chain such as telecommunications providers and device manufacturers who have integrated forwards. Typically, mobility products offer low margins and with the increased competition and weak consumer spending in the key US market due to limited discretionary income, margin pressure on these products has been compounded. In the near future Henage (Para 3) believes that RadioShack and other mobility products retailers will find it challenging to improve their margins. He further states that this has contributed to the company missing its earnings estimates in four straight quarters by a significant 28.98%. Worse still, the company itself acknowledges that the concentration of revenue in its mobility platform implies that its revenue is to a significant degree dependent upon a limited number of service providers specifically AT&T, Sprint, Verizon, Apple, HTC and Samsung (RadioShack 7). Figure 2: Summary of RadioShack’s consolidated net sales and operating revenues by platform and as a percentage of net sales and operating revenues (RadioShack 21) 5.1.2. Merchandise mix: the proposition Industry structure drives competition and profitability which is why Porter (3) advocated for first understanding the five competitive forces and their underlying causes before selecting an effective strategic positioning. In RadioShack’s case, all the five competitive forces – buyer power, supplier power, threat of entrants, industry rivalry and threat of substitutes – are high. Nevertheless, RadioShack could use its merchandise mix to enhance its future survival, long-term profitability and growth. Looking at the company’s strengths, weaknesses, opportunities and threats discussed under the SWOT analysis section, RadioShack could particularly leverage its strengths to change two competitive forces, buyer power and supplier power, to its favor. I. Countering customer power The SWOT analysis section explains RadioShack’s major weakness to be its limited product assortment. The breadth and depth of the assortment are the most commonly used criteria for structuring the merchandise mix (J. R. Ogden and D. T. Ogden 264). Breadth refers to the number of categories or product lines offered by the retailer. In comparison to competitors such as Wal-Mart and Best Buy, RadioShack offers a narrower product line. On the other hand, depth refers to the number of stock-keeping units (SKU) within a particular category. RadioShack offers deep assortments of its SKUs. From this description RadioShack can be categorized as a specialist store as shown in Figure 3 below. Figure 3: The merchandise mix adapted from (J. R. Ogden and D. T. Ogden 264) To mitigate the power of its buyers RadioShack should consider offering new categories and services that are closely related to their core product assortment. This way the company will have increased the breadth of its product assortment. From Figure 3, this implies heading towards becoming a departmental store. This move would increase the width of the company’s customer segment and possibly increase customer loyalty as a one-stop-shop. Most of all, if RadioShack can pursue this product line expansion while sustaining its high customer service levels; it is highly likely to build substantive switching costs that will make it harder for customers to move for a rival. However, with this approach the company risks diluting its image (Varley 10) as well as increasing inventory costs and rental costs to cater for bigger stores since there will be more merchandise to display. The financial implication of product line expansion is especially critical considering the general squeeze on margins across the entire consumer electronics industry. This portends lower revenues and possibly lower free cash flows. The company’s free cash flows have generally been on a downward trend over past five years as shown in Table 2 below. According to its 2011 annual report RadioShack intends to spend on information systems projects, store remodeling and store relocations this year (RadioShack 28). RadioShack does not have sufficient free cash flows to finance the above plus store expansion and additional inventory costs which will result in any product line expansion strategy. To successfully pursue this approach the company will therefore have to seek additional financing from external sources.  2007 2008 2009 2010 2011 Free Cash Flow 300,900.00 157,700.00 133,500.00 48,400.00 86,200.00 Free Cash Flow Growth (0.48) (0.15) (0.64) 0.78  II. Neutralizing supplier power RadioShack’s mobility platform is vulnerable to a few key service providers. For example, where any of the wireless service providers AT&T, Sprint or Verizon have made operational changes such as on customer credit plans or service agreements they have adversely affected RadioShack’s business (RadioShack 7). Unfortunately, these key service providers that include device manufacturers such as Apple, Samsung, and others are also the major players within their industries which imply that even broadening RadioShack’s product line would most likely involve them. As a retailer, RadioShack has one big advantage over its suppliers. It has greater knowledge of customer behavior across the different categories. The company should leverage this knowledge to develop store brands that give it an advantage over manufacturer brands. Store brands are product brands owned, managed and marketed by retailers. Store brands provide an opportunity for differentiation and also better margins than manufacturer brands. Moreover, it is easier to build customer loyalty using store brands than manufacturer brands (Zentes, Morschett, and Schramm-Klein 169). For example when a customer is satisfied with a store brand and she wants to repurchase the product she has to visit the retailer. In contrast, manufacturer brands are available at other retailers and therefore if customer wants to repurchase the product she can easily go to another retailer. RadioShack’s long-time selling strength has been accessories that typically have higher margins than the core consumer electronics. To mitigate the power of its suppliers the company should consider developing and selling store brands that standardize accessories across the different product categories. This way RadioShack will make its accessories attractive to all customers across the different product categories. Most of all it will lower the strength of suppliers by limiting their influence to only the low-margin core product and not the high-margin accessories. 5.2. Growth Strategy This section looks at RadioShack’s organizational development directions in terms of strategic options concerned with market coverage and product features. The direction that the organization takes is driven by three pressures: environmental-based, capabilities-based and expectations-based (Johnson and Scholes 340). Environmental-based pressures refer to the ability to respond to the competing pressures from the business environment. Capabilities-based pressures refer to strategic capability. Expectations-based pressures refer to the organization’s cultural and political context (Johnson and Scholes 340). The section uses an adaptation of Ansoff’s product / market matrix to identify directions for RadioShack’s strategic development as depicted in Figure 4 below. Figure 4: Ansoff's Growth Matrix 5.2.1. Growth strategy: current situation RadioShack’s current growth strategy has largely been concerned with protecting, or building on, its current position. This is manifested through the company’s goal of gaining market share in its mobility platform. RadioShack’s rollout of over 1,400 Target Mobile stores despite failure of similar stores at Wal-Mart’s Sam’s clubs strongly suggests this. Moreover, the company’s increased reliance on mobility for its net sales and operating revenue (as shown in Figure 1) demonstrates long-term desirability of obtaining a dominant market share. The challenge however is that in spite of increased revenues from its mobility platform, the low margins and intense competition have prevented RadioShack from meeting its earnings estimates for four consecutive quarters (Henage Para 3). Additionally, Standard & Poor's Ratings Services is not convinced that this strategic direction portends future success for RadioShack and gives its outlook as negative (FitzGerald Para 2). This implies that RadioShack has to re-strategize its growth strategy to reverse its decreasing earnings trend as well as to boost investor confidence. 5.2.2. Growth strategy: proposed direction The consumer electronics industry in general is typified by short product lifecycles. Naturally, RadioShack’s suppliers and service providers have incorporated product development within their strategies. RadioShack itself also pursues product development to some extent with its store brands. However, we are not convinced that the organization’s core competencies are in market analysis, which is the main driver behind product development. Also, product development may require a commitment to high levels of spending on Research and Development (R&D) which may further depress RadioShack’s profitability. Market development presents an interesting strategic direction for RadioShack. The company has been selective in their geographic market coverage with a focus on the US market. It has only recently increased its participation in Canada and Mexico and a limited number of franchised stores in the rest of the world. Market development is especially attractive given that the world of retailing looks most promising in the emerging markets that have strong growth prospects and good demographics (Deloitte G7). RadioShack has core competencies in setting up stores at convenient neighborhood locations and at training its staff to offer knowledgeable and objective customer service. These core competencies are relatively transferable to other regions in the global consumer electronics market. The downside to market development is that it does not provide a long-term solution to the problem of margin pressure. Diversification is a strategy that takes the organization into both new markets and products or services (Johnson and Scholes 282). Above, both the pros and cons of product and market development have been discussed. There are three potentially value-creating reasons for diversification. First, there may be efficiency gains realized from RadioShack’s economies of scope. Secondly, there may also be gains from applying corporate managerial capabilities to new markets, products and services. Thirdly, having a diverse range of products or services enables RadioShack to more effectively tackle the margin pressure issue as well as to build customer switching costs. Table 2: Summary of Discussion Strategic issue Approach Advantages Disadvantages Merchandise mix – countering high customer power Increasing breadth of product assortment -One-stop shop -Builds switching costs -May weaken retailers image -Increases retailing costs Merchandise mix – neutralizing high supplier power Develop store brands that standardize accessories across the different product categories. -Store brands reduce margins pressure -Reduces supplier strength in the high-margin accessories category -R&D costs, branding costs Growth strategy Product development -Store brands lower margin pressure -Improves brand image -Costly R&D expenditure Market development -Increases net sales -Reduces vulnerability to the US economy -Does not effectively tackle margin pressure Diversification -Reduces vulnerability to US economy -Increases net revenue -Tackles margin pressure -Increases business risk 6.0. Recommendation To compete in the future Hamel and Prahalad (251) state that organizations must shift their thinking from competing for product or market leadership to competing for core competencies, from competing as individual entities to competing as coalitions. For this reason, we believe that RadioShack should seriously consider entering into a strategic alliance or other form of strong collaboration that would enable it build new core competencies. Big-box retailers such as Best Buy and Wal-Mart learned how RadioShack made most of its money in accessories and have ventured there. Other competitors such as Amazon and Apple learned how RadioShack created a unique market positioning through its customer service and have developed similar competencies. This means that RadioShack has to craft new competencies if it is to survive in this hypercompetitive industry. Secondly, Hamel, Doz, and Prahalad (133) research found that it takes so much money to develop new products and to penetrate new markets that few companies can afford to go it alone in every situation. Having a strategic alliance with a strong partner will reduce the investment burden for each organization as they both pursue mutual gain. For RadioShack the objective would be to support its diversification strategy and to develop new core competencies. Diversification is the best strategic direction for RadioShack to follow. It shall enable the company to overcome its three major challenges: limited merchandise mix, low-margins of the mobility platform and vulnerability to the US economy. Finally, the core competencies that the company would acquire and develop through the strategic alliance offer RadioShack capabilities to improve its own store brands and make them more competitive in the consumer electronics market space. With strong store brands, RadioShack can then pursue both differentiation and low-cost leadership simultaneously, which is the hallmark for creating blue oceans. Blue oceans are defined by untapped market space, demand creation, and the opportunity for highly profitable growth (Kim and Mauborgne 4). Works Cited Bustillo, Miguel. “RadioShack’s Mobile Hurdle.” WSJ.com. 29 Mar. 2012. Web. 31 Mar. 2012. Deloitte. “Leaving Home: Global Powers of Retailing 2011.” 2011 : n. pag. Print. Eden, Colin, and Fran Ackermann. Making Strategy: The Journey of Strategic Management. London: Sage Publications, 1998. Print. FitzGerald, Drew. “S&P Cuts RadioShack A Notch, Citing Margin Pressure.” WSJ.com. 2 Mar. 2012. Web. 31 Mar. 2012. Gutman, Brandon. “CMO Predictions for 2012 -- Part 1: Dominos, Motorola, Progressive, RadioShack Say It’s Mobile, Mobile, Mobile!” Forbes. 5 Jan. 2012. Web. 1 Apr. 2012. Hamel, Gary, Yves L Doz, and C. 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New York: Routledge, 2006. Print. Zentes, Joachim, Dirk Morschett, and Hanna Schramm-Klein. Strategic Retail Management: Text and International Cases. Wiesbaden: Gabler, 2007. Print.  Read More