Comprehensive Strategic Analysis of Real Chocolate - Case Study Example

Comprehensive Strategic Case Analysis of Real Chocolate February, 2009 Table of Contents 0 Introduction 1 Real Chocolate Company and the PESTLE Framework 1.1.1 Real Chocolate Company and Porter's Five Forces Framework 1.2 Real Chocolate company Financial Analysis 1.2.1 Real Chocolate Company SWOT Analysis 1.3 Real Chocolates Company and Porter's generic strategy 1.3.1 Real Chocolate Company and the TOWS Matrix 2.0 Real Chocolate Company and the balance scorecard 3.0 Conclusion 1.0 Introduction The real chocolate company case presents a company that specializes in the production of gourmet chocolate. The gourmet chocolate segment is 10% of overall chocolate sales which stood at $1.3billion in 2005 with the segment expected to heat $1.8billion by 2010. The real chocolate company was founded by Sarah Smith the present CEO. The company employs 235 workers, owned five branches and 316 franchised stores. The stores are located in the United States and Canada. In 2005, real chocolate company had sales of $31.6million system sales and those of the franchised stores stood at $108million. The company is noted for its perfection in hand made gourmet chocolate made from finest quality ingredients with no artificial preservatives added. This paper presents a strategic analysis of the case real chocolate company using some analytical tools such as the PESTLE framework, Porter's five forces and competitive advantage etc. The paper is structured as follows, in part one using the PESTLE framework the paper analyses the environment in which the company is operating based on the case, the Five forces framework of Porter also help us to beef our analysis. Part two of the paper carries out an internal analysis of the real chocolate company, by using basic financial ratios, the SWOT matrix, to identify its competitive advantage and resources capabilities while part three of the paper now uses Porters generic strategy and the TOWS matrix. In the concluding part of the paper, using the balance scorecard some recommendation are made. 1.1 Real Chocolate Company and the PESTLE Framework PESTEL framework is used here because the analysis is concerned with the Macro-environmental influences which can better be analysed by use of the PESTEL framework. Johnson et al (2006) states that the PESTEL framework is a framework that can be used to categorise the factors that influence the business environment of an organisation into six main types including: Political Influences, Economic influences, Technological influences, Social Influences, Environmental influences, and Legal influences. (See appendix 1). The political environment of the United States was unstable following the period of the case with the then Republican government loosing popularity because of the war in Iraq the tooth for tat with Iran, its neglect of Russian on key international issues. The situation was further made worst by its war for peace captioned "war against terror". Thus, at the time of the case, the poor political climate of the States must have affected the operations of real chocolate company international expansion. In 2006, the political situation of the countries was the beans are grown affected production negatively. Economic factors that affected real chocolate companies from the case, prices vary 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 growth in population. It was reported in June 2006, that the black pod, frosty pod, and witches' broom diseases could adversely affect the cacao beans if these plant diseases are not controlled. Obesity is becoming a major concern in the USA. In 1986, the Centers for Disease Control reported that just eight states had 10 to 14 percent of the residents obese. Technological factor offers real chocolate company an opportunity of automated production without affecting quality. A new technology to process the cocoa bean more efficiently and effectively will mean lower cost for real chocolate company. Under the legal factors, 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). Product labels must comply with the Nutrition Labeling and Education Act of 1990 and the Food Allergen Labeling and Consumer Protection Act of 2004. During 2005, the NCA was actively involved in supporting or fighting numerous legislative proposals. These laws and subsequent laws affect 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. 1.1.2 Real Chocolate Company and Porters Five Forces Porter (1985:4) contends that the Five Forces define the rules of competition in any industry and at the same time marks the bases for understanding a company's success. Porter (1985) went further and argues that, competitive strategy must grow out of a sophisticated understanding of the rules of competition that determine an industry's attractiveness. The researcher further claims that, "The ultimate aim of competitive strategy is to cope with and, ideally, to change those rules in the firm's behavior." (1985: 4) and through their own strategy a firm can take hold of these five forces. Porters Five Forces Approach Application to the Real Chocolate Company Relationship with suppliers The suppliers constitute purchases from third parties, suppliers of major ingredients such as corn syrup, cream, butter sugar, chocolates nuts with a contract entered for a period of 6-18months. In addition , for major ingredients an alternative source is maintained to minimized the cost associated with the loss of supplier Bargaining power of buyers High switching costs due to limited number of available hand made gourmet of high quality is unique this is reflected in its motto of Perfection in Handmade Gourmet Chocolates. It has an extensive line of chocolate products, and an individual tailored made products that offers buyers a one stop shop experience. Threats of new entrants Low threats of new entrants because of the human, time, material and financial resources necessary to set up a hand made chocolate gourmet that will compete with real chocolate company. How ever, However, and entry of a new entrant from other continent like Asia remain a big threat. With individual niche players increasing everyday. Threats of substitutes products or services 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 dove promises, Lindt Lindt Lindor, confeteria Raffaello. New line recently introduced include Rivalry amongst established firms Fierce competition with flat cost. No major player able to dominate the market. How ever with continuous innovation and design ofand introduction of new product Real chocolate company has taken the lead. Figure:1 Real Chocolate Company has created a competitive strategy be discovering new and better ways of doing hand made quality gourmet. In real chocolate company. By over emphasizing freshness and quality, real chocolate company has create a position of cost effectiveness and product differentiation. 1.2Real Chocolate Company Financial Analysis a) Profitability Ratios 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% The profitability ratios show that though the company is doing well, when compared to the industry average, the situation has greatly deteriorated when compared to the previous years that are 2007 against 2006. There has been an improvement from 2006 in almost all the ratios. However, the situation is not all that alarming as during the year 2007, emphasis was placed on non-sales items. This is so because within these same periods, loss from discontinuing operations was decreased by 91 %.( See 2006/2007 income statement, section under discontinued operations. Liquidity Ratio Ratio Formula 2007 2006 Current Ratio 3.3times 3.6times Quick Ratio 0.86times 1.2times Cash Ratio 0.96times 1.6times The current ratios have also witnessed improvements from 2006. The current ratio and quick ratio show that Real chocolate company has more than enough current assets to cover its short-term liabilities without facing business risk that is the risk that it might not meet its short-term commitments. However, the present situation calls for immediate rectification as it is illogical to be keeping cash, and paying interest on outstanding debts. Solvency Ratio From above, it can be observed that the company uses more equity than debt in financing its activities. This is evidenced by the debt-t-equity ratio of 27.2% are therefore no minimal effects of financial risk. That is, the risk that the firm might not meet its long-term debt obligations. In such a scenario, management could easily diversify funds for empire building, and act out of the shareholders value creation concept. 1.2.1 Real Chocolate Company SWOT Analysis Strengths Better Value, in the form of lower prices. Fresher merchandise and wider assortments. Superior Locations Better physical appearance of the stores themselves. Good will, exclusive rights with some of their suppliers. Maximisation of the four Ps of Marketing at all front. High capital and a pool of reserves, and cheap credit facility offered to some items. The Employees 235 and more tha 300 stores. More than 300 confectionary chocolate brand cheaper, better products and providing more choice High emphasis on quality and fine ingredients Good customers service Greater control over the suppliers 316 franchised stores 45stores in tourist location Best overall benefits package in the industry charitable giving and community-based education programmes Opportunities A pool of cheap credit facilities The US is an open economy welcoming all sorts of businesses. Is still the land of opportunity China is a big trading partner of the US, an alternative and better source of cheaper items. Many small groceries stores are closing down. The growing pool of technology. The heavy investment on Research and Development (R&D) by the US government Fall of the US Dollars, will mean cheaper operational cost within the US. Threats Anti Grocery stores campaign Loyalty of some consumers to old established merchant and grocery stores. The likelihood of terror attack of some Real Chocolate locations Natural disaster such as the hurricanes, tornadoes, tsunamis, are now on the rise Difficulties finding their own suppliers, or owning their own farms. Current global warming is a threat for future cocoa production. E Weaknesses P/E ratio is less than the industry benchmark Sole right to some products by competitors Key Niche players The lack and absence of unique product with total differentiation from those of competitors. The lack of ownership of exclusive patents. Limited number of suppliers 1.3 Real Chocolate Company and Porter's Competitive Advantage Competitive advantage can be referred to as a situation whereby a firm is able to provide a particular service in an industry better than its competitors will do thereby increasing its market share and profit potential (Blocher 2005). Competitive advantage is determined by the core competencies of the firm, which are the particular skills and techniques as well as staff and suppliers achieved by the firm which are otherwise not available to other firms in the industry. Cost Differentiation Cost leadership Low product system Low life cycle cost for Real Chocolate products Tasty nature, freshness of Real chocolate unique resources and trademark unique resources, trademarks, proprietary know-how, uninstalled and installed customer base Differentiation Adequate advanced functionality Aesthetic product features Integration capabilities and upgradeability, convenient product availability in terms of quantity, location acquisition and installation. Confidence in the product Equity of the real chocolate brand Cost focus Differentiation focus 1.3.1 Real Chocolate Company and the TOWS Matrix The Real Chocolate Company connotes freshness. The brands are noted for freshness fun and excitement. The stores are strategically located in superior, cheap and busy outlet of the major street of the city with great potentials for sales. The Real Chocolate Company has about 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. 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. Falling trade barriers and the world getting towards a global village is another opportunity. Franchises operations could 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. 2.0 The Balance Scorecard 2.0 Easy Jet Balance Score Card The next step is to determine the causal linkages between the strategies and develop a strategy map to visually portray how your strategies support your mission and vision. One of the primary reasons for developing a strategy map is that it should clearly communicate the connection between strategies and mission and is an excellent communication tool. This is explain inline with the short, medium and long term plan. 3.0Conclusion Real Chocolate Company places great emphasis on Porters three generic strategies to improve its competitiveness in the international market place. In addition, through a co-operative focus on its suppliers and customers, its own trucking fleets, it has improved its value-chain. The firm emphasizes quality freshness with its motto "Perfection in hand made chocolate". One important finding of this study quite useful in explaining Real Chocolate Company success when compared to it competitors is the use of franchising. Majority of the company's sales take place through the franchise network. In order to maintain service, quality and logistic standards, individual franchisees are periodically audited and compared to overall corporate performance. Extensive training and operational support is provided from headquarters. All franchisees pay franchise fees. All catalogues and promotional advertising is the responsibility of the headquarters. Thus the company's success lay on its product differentiation, assorted brands quality and freshness of products. References Johnson, G. and Scholes, K., (2007). Exploring Corporate Strategy, Prentice-Hall, Europe Porter, M.E. (1985). Competitive advantage: Creating and sustaining superior performance. New York, NY: Free Press. Porter, M.E. (1990). Competitive advantage of nations. New York, NY: Free Press. Appendix 1 LAYOUT OF THE PESTEL FRAMEWORK Appendix 2 mean the death of at least one of the chains". Read More