Optimal Development Strategy of Real Chocolate - Case Study Example

Real Chocolate Company Strategic Plan Index Introduction 3 External Analysis 3 Internal Analysis 4 Problem diagnosis 7 Generation of strategies 8 Evaluation of strategies 9 Description of selected strategy 10 Action plan and timelines 11 Conclusion 11 Appendix A 13 Appendix B 16 Appendix C 18 Appendix D 22 Introduction The vision statement of Real Chocolate is to become the premier chocalatier in the United States. Its mission would be to become the leader in retail sales through providing chocolate candy products that will give its customers an experience of best taste, freshness, fun and excitement. The company wishes to achieve this through a process of expanding its business through the franchisee model. The chocolate industry in US is highly fragmented with over four hundred players. Real chocolate operates in the niche market of Gourmet chocolates, which is a high growth product line in the industry. Apart from the usual stakeholders in the form of shareholders, financial institutions, employees, customers, it has another key stakeholder the franchisees, through whom all the growth and revenue for the company will accrue in the future. At the moment the company is comfortably placed in terms of overall performance. However the company has to ensure maintaining levels of profits and growth in the long term, through a strategy that will give it sustainable competitive advantage. Part 1 External Analysis Chocolate industry is highly fragmented industry with about four hundred companies accounting for 90% sales. Retail chocolate sales reached $16.3 billion for the year ended December 2006, out of which the Gourmet segment is about $ 1 billion. Real chocolate has about 10% of the market share in this segment. Competition is on the raise and the product differentiation, branding will be the key parameters by which sales will increase. The conclusions drawn from PESTEL and Five Forces analysis and the Threat/opportunities table would be as follows: 1) From Porters five force analyses it emerges that Rivalry among existing players will be the chief competitive force in the industry. Decline in profitability which often is the result of this will come from increase in promotion and branding cost. 2) Even though the analysis reveals that entry barriers for new players to enter are not very high, new entrants may not find it attractive to enter. Entry may occur by players creating separate niche which may affect demand for the product in which Real chocolate operates. (e.g. of artisan chocolates entry which has already happened) 3) Since almost all players derive competitive advantage from product differentiation, there will be scope for new entrants to enter the market with an entirely new differentiating factor. 3) Incumbents however have advantage over new entrants mainly because of the brand they have created. This will be the only barrier for entry for new players. 4) Sellers bargaining power is not a significant factor in the industry, as there are many producers and raw material is a commodity item. Industry incumbents do not have much threat from suppliers, buyers or new substitutes. Similarly there are no barriers for entry for new players because of suppliers. 5) Five forces analysis also reveals that buyers bargaining power is significant factor. Buyer’s loyalty has to be constantly maintained through branding, promotion and maintaining quality. Price is not a significant factor by which buyer will switch to other products. On this account this will be a significant barrier for entry for new entrants, which reiterates point no. 1, that rivalry is the chief force in the industry. 5) The company may face pressure on margins because of potential increase in raw material (sugar), new legal and regulatory acts (labeling, certification) and proposed introduction of taxes on candy by some states, as they may not be able to pass on the entire burden of increase on to the customers. 6) The company may have significant opportunity in entering organic products fair trade products, and the health chocolate markets (low sugar/no sugar, high cocoa). 7) The company has significant opportunities in increasing sales through use of mass market channels, where there is significant growth. There are also opportunities in increasing sales through selling other branded chocolates (strategic alliance) which the company has already doing in a limited way. Value addition to franchisees can also be considered through enabling them to sell items off stores-internet, corporate gift sale, mail order etc. Critical Success Factors (CSF). Constant innovation and introduction of new products is the key to success. 23% growth of sales for the product came from new products. The entire industry sells products in the industry through product differentiation, through branding and promotion. The critical success factors would be: 1) Continuously introducing new products in the market which are innovative which reflect the values of the company and live up to the image of the brand (quality, taste, purchase experience, freshness, no artificial preservatives, handmade etc.). 2) Brand management sustaining the image and enhancing it. 3) Cost effective promotion strategies. Part 2 Internal Analysis The company’s entire sales and its growth has come from exclusive sales outlets, which were originally owned by the company, but now largely franchised, which is its chief strategy of reaching its customers. The company has perfected its technique of selling through this channel. It has built all its other strategies like branding, promotion around this. This has also resulted in higher profitability. The average sales per franchise store has gone up from $69,000 in 2006 to $71,900, which indicates that growth in overall sales can be achieved significantly through increasing franchisees. The promotion policy of customisation of all promotional activities to suit local needs also is cost effective. The company also sells products through wholesaling, fund raising, corporate sales, internet and mail order. Whether it is a sole effort of the company owned stores or is it an enablement for franchisees is not clear, as the break-up of revenues of the company (72% to franchise sales and 8% through company owned stores sale) do not reflect this. This is taken to be as small insignificant percentage of its income. However because of this strategy adopted to grow, it has meant foregoing growth opportunities by selling through other channels (deduced from Strength/ Weakness analysis). The company has developed expertise in implementing this model and has developed internal capability in identifying and nurturing franchisees. It has developed fine branding skills and skills to customise promotion to suit regional needs. This has also proved to be cost effective and has resulted in higher profitability. (VRIO analysis) The VRIO analysis of its resources and capabilities, and the resource analysis of its functional areas, do not reveal any extraordinary performance of these functional divisions. The company company’s special competitive skills listed as producing products of quality and taste, variety, manufacturing and merchandising skills, providing unique retail purchase experience to customers, customer service and other capabilities are considered under VRIO. None of these capabilities score in all the 3 variables, namely valuable, rare and non-imitable. At the most they are valuable and rare. Therefore none of the capabilities of the company will yield sustained competitive advantage. Its capability of developing and nurturing franchise network, though not available e with others can be imitated by others in the long run and hence will not provide long term competitive advantage. The financial analysis gives impressive improvement in performance. Decreasing current ratio may mean working capital problems and put constraints on growth through only internal funds. However since its debt to assets ratio is very low, it will be possible for it to access the debt market. The average sales per franchise store has gone up from $69,000 in 2006 to $71,900, which indicates that growth in overall sales can be achieved significantly through increasing franchisees. The company has also started selling products of other companies. The details of this is not available (is it from company owned/franchisee owned outlet or both). The company’s growth policy of growing through franchisee seems sound. However this is not being followed aggressively. There seems to be scope for creating providing enablements to franchisees to increase sales through better exploiting internet, corporate sales, mail order etc. The company’s competitive advantage seems to be the expertise and success in selling through franchisees, but at the present level does not seem to be enough to give them a sustainable competitive advantage. Problem diagnosis The company has been following a specific strategy of growth in the industry, namely exclusive sales through carefully selected and nurtured franchisees. It has acquired expertise in this and this strategy seems to be currently providing the results. Currently there seems to be an advantage in focussing on growth only through this channel. Another issue seems to be whether the company is following the expansion of its business aggressively enough. The company is still not adequately represented in all states of USA. It has done only lukewarm efforts to develop in Canada. As noted earlier, such expansion may also mean opening multiple manufacturing facilities as one plant in Colorado cannot cover the entire country. This strategy of growth may not create competitive advantage in the long run, as it can be imitated. One solution could be to enhance this ability, (e.g. developing internet business model, and increasing franchisee sales), so that it creates a lasting competitive advantage for the company. Another important industry information is the decreasing trend in allocation of space in retail for candy products. With growth in sales it means higher efficiency of use of space by retail for candy in mass market channel. This will mean a challenge to franchise retailers, to more effectively use their space. Enablement strategy mentioned above would address this issue also. The company has no presence in mass market channel, where according to industry reports high growth is happening. If Real chocolate decides to go in for sales through this channel to cash in on growth opportunities here, then it will mean several things. It will mean higher outlays for product promotion. Secondly it will mean repositioning its brand as satisfying a mass market than one of serving customised regional needs, fresh from the kitchen. Thirdly it may also mean hurting the sales of its own franchisee, by creating alternative outlets for its products in the same area. It may upset its relations with franchisees and erode overall sales. Another problem would then be how to cash in on this channel without affecting the growth in the present channel. Part 4 Generation of Strategic Options From the TOWS analysis we can arrive at strategy options which will look as follows: 1) Aggressively pursue present policy of sales only through franchisee to reach out to areas not covered earlier. Increase franchisee network. Develop platform to market through internet, corporate gifts, mail orders and offer as value added to franchisee. This will add to increase in internal capabilities and therefore become sustainable competitive advantage for Real Chocolate. Setting up more number of manufacturing plants to improve logistics will also be part of this strategy. 2) This will be same as above, but manufacturing will be outsourced (similar to franchising sales outlets), so as to overcome logistics and growth needs that will come with more outlets. 3) This is same as 1,2, but will mean considering acquisition of manufacturing plants for same reason. 4) In areas not present today, consider mix of franchisee and mass market channels. 5) Consider strategic alliance with another company to mutually exchange sales outlets (Real chocolate offers its sales outlets and other company sells products of Real chocolate in mass market channel). 6) Consider exclusive product range for marketing through mass markets. This will circumvent problems of conflict with present franchisees. 7) Same as 1, 2, 3 but enter into strategic alliance with manufacturers of artisan chocolates to sell their products through network. 8) Consider merger with a company that has well developed mass market sales. 9) Minor strategies related to product, markets: Creation of new products to consider emerging market preferences like health needs (sugar free, dark chocolates), organic and fair trade practice certified products, as well as pre-empting emerging competition from Artisan segments by producing products which are similar. Manufacturing and catering to the needs of special market needs in non traditional holiday demands is another strategy to increase sales. Part 5 Evaluation of Strategic Options For Real Chocolate to achieve its goal of become premier chocalatier in the US, it has to grow and reach to every part of the country. The identified strategy for this is through developing franchise model. Analysis also reveals that Real Chocolate has a competitive advantage while pursuing this strategy, but this may not be sustainable in the long run. Strategy 1,2 and 3 outlined above are ones that will mean company following unchanged the sales strategy currently followed. However these strategies will allow company to grow faster and also move in a direction of establishing capabilities that will give it sustainable competitive advantage. Strategy number 1 identifies new avenues to be explored to augment sales of its franchise partners, through internet, mail orders etc., which Real Chocolate is already doing in a small way currently. This will mean building platform for doing this on the web., an enablement and value add it will give to all its franchisee. Real Chocolate will benefit by moving its competency in franchise management towards “not imitable”. 1,2, and 3 recognise the need for having more manufacturing plants located suitably, so as to be able to service franchise retail outlets efficiently and cost effectively. Strategy 2 has a variant that it will explore option of outsourcing manufacturing initially, to avoid investment cost. Strategy 3 suggests outright acquisition. This will have an investment costs but will mean getting into expansion much more quickly. Real Chocolate will quickly have to evaluate and choose one of the alternatives. Strategies 4, 5, 6 and 8 have draw backs as revealed by both Johnson and Schole’s and Rumult’s analysis. Though the mass marketing channel may be attractive, the additional product development, branding and more importantly promotion cost will be much higher, and likely to more than offset the profitability that may come while selling through these channels. They are not being considered further. Strategy 7 is about strategic alliance with new emerging artisan chocolate segment players wherever possible. It seems a sound strategy and will also enhance capability of Real Chocolate to forge alliance and derive advantage out of it. It can be easily dovetailed into the selected strategy. Part 6 Description of Selected Strategy The selected strategy for Real Chocolate is to rapidly expand its franchise network. It envisages enhancing the value offered to franchisees by providing them with additional features that will add to their sales with very little additional investment. The additional features/enablements are developing a solid platform for retail sales through the internet, an investment which Real Chocolate incur. It will also help franchisee in developing corporate order business. The strategy envisages developing sales outlets in geographical areas not previously covered by Real Chocolate. It recognises the limitation of present single manufacturing unit catering to these far away geographical areas and envisages setting up additional manufacturing plants. Outsourcing manufacturing and acquisitions are options to company in setting up its own plant. The strategy envisages a quick assessment by the company of the three options and selecting one of them. The strategy also envisages adding to its product line through entering into strategic alliance with new emerging artisan chocolate segment players wherever possible. The strategy also envisages following up with minor product/market strategies enumerated in no.9 above. Real Chocolate will have to identify a vendor partner which will help it to develop the internet retail platform. The strategy will mean investment in plant and machinery, if strategy number 1 is adopted. The exact investment that will be required will be dictated by the quick assessment proposed. Finance and manpower will be the chief resources required by the company. The company will have to quickly gear up in terms of manpower to manage the expansion plan. It will require additional manpower if it goes in for additional manufacturing plants. Part 7 Action Plan for Implementation The action plan for implementation will have the following components 1) Identification of Consultant to do an evaluation of best way of adding to production capacity, selection and providing the brief and execution of assignment. 2) Selection of vendor for development of developing internet based sales platform, selection and providing the brief and completion of assignment 3) Additional training to franchisee to use enhancements 4) Formation of project team to assess and finalise manufacturing new franchise locations 5) Locating potential strategic alliance partners, starting negotiation and concluding deal. A timeline chart is added to give an indication of the total time frame to launch and implement the strategy Part 8 Conclusion Recent financial performance of Real Chocolate has been extremely good but there is no guarantee that the same will continue in the future. On the contrary because of the fierce competition in the industry, there is every possibility that it may start sliding in the future. Real Chocolate is at the right time to make a strategic plan to ensure long term sustainability of growth and profits. With its current financial position being sound it will be at an advantage when it goes for sourcing of its funds for its expansion activities, which will follow when it finalises its strategic plan. 􀂃 Appendix A PESTLE Analysis-Real Chocolates external environment Description Level of impact Political CAFTA treaty, choice of import of sugar may increase production cost Political conditions in countries producing raw material Candy taxes Moderate Low, Moderate (may increase cost of end product) Economic Monetary fluctuation, Economic growth in countries where raw material is produced Downswing in economy in consuming markets Low Low Social Demographic trends, Asians, young people Health factors Consumers choice to purchase fair trade items Consumers choice towards organic and natural chocolate Moderate High moderate Technological Economies of scale in favour of others who produce centralised large plants Low, not a significant factor for cost advantage Legal Laws on Labelling, Certification Laws banning vending machines High Low, Gourmet chocolate is not sold through vending machines Environmental Organic and natural chocolate Weather extremes affecting coco production Moderate Low Porters Five force analysis-Forces that shape and Influence competition of Real chocolate Porters forces Industry characteristics Level of Influence Rivalry among firms Large number of equal sized players Not high capital intensive-Lower need to work at full capacity, no pressure to cut price Product differentiation high, branded products Exit barriers low High Low Low Low Threat of new entrants Barriers due to supply side constraints low, raw material available in plenty from different sources Barriers due to Buyer switching cost (customers can easily migrate to other products) Barriers due to high investment, (Distribution, brand building costs are high) Incumbent advantages (Incumbents have one advantage factor only-the brand advantage) Unequal access to supply chain, entrants will have no difficulty in building supply chain Government Policy, same for all, Retaliation from existing players will be high, so entrant will have extra difficulty in getting a foot-hold High High Medium Medium High High Low Threat of Buyers Consumer product, fun product, differentiated product Differentiated product, not price sensitive item Buyers more bound by brand experience Low Low Low Threat of Suppliers Commodity product, several sources (though users have no substitutes) Suppliers going for forward integration Low Low Threat of Substitutes Consumer product with enduring demand Low Opportunities and threats Opportunities Threats High growth (6.4%) in market segment where company operates, means opportunity to grow Latent market for organic, fair trade products, health, sugar free -demand can be exploited successfully Potential for additional sales in non-traditional holidays Opportunities in cross selling Potential to increase in slaes through presence in mass market channel market, till now not attempted Proposed introduction of taxes will mean squeeze in profits-company may not be able to pass on entire hike on to consumer. Certification, compliance laws will increase costs to the company Commodity market price fluctuations likely because of production variation (weather, climate) Treaties like CAFTA will mean increase in raw material cost Artisans chocolates may well eat into gourmet market segment Appendix B Analysis of internal Resources of Real Chocolate P.R.O.F.I.T Physical Resources (tangible assets) Network of 336 Network retail space: has own delivery fleet; Centralised manufacturing plant Reputation Good reputation with customers through brand building; good reputation with investors through continuously increasing returns; good reputation with franchise partners through offering better than industry opportunity to them Organisation Structure Lean organisation, well developed training system of developing partners (franchisee) Financial Company has sound financial base. Does not need much finance for expansion. No external long term debt. Sound profit making company. Intellectual property, HR, knowledge Has an in-house know how of recipes which drives sales Manufacturing of chocolate candy which gives the unique flavour of fresh, handmade products. Technology Has adapted to mechanisation wherever necessary. Has MRP system to jointly monitor all aspects of supply chain requirement through this. Has installed all enhanced point-of-sale system in all company-owned stores and 162 of the franchised stores. Internal Capabilities of Real Chocolate and VRIO value rareness Imitability (easiness of imitation) (Exploited by) Organisation Expertise to manufacture and merchandise candy products Yes No Yes No (other channels not developed) Expertise to produce products of variety, taste Yes No No Yes Building franchise network Yes Yes Yes Yes Constantly Coming out with innovative new products (chocolate recipes) Yes No Yes Yes Building and nurturing brand Yes No Yes Yes Availability and use of IT Yes No Yes Yes Customer service Yes No Yes Yes Key features of value provided by Real chocolate’s Primary and secondary Activities Inbound Logistics Cost effective timely collection of raw material Integration of supply collection with delivery schedules to optimise cost Operations Maintaining quality and supplies to sales outlet Development and sustaining franchise operations New products development Output logistics Delivery of products to all sales network Marketing sales and service Brand building Cost effective regionalised promotions Firm infrastructure Manufacturing facility HRD Training of selected franchisee New Technology development IT tools like MRP, point of sales Processes and equipment appropriate to scale of operations and philosophy of company Financial ratios Description 2006 2005 comments Return on assets 26% 21% Increasing return on assets –positive aspect Return on Equity 32% 26% Increasing-positive aspect Gross profit margin 36% 28% Increasing-positive sign Asset Turn over 1.37 times 1.16 times Positive, but still very low Debt to assets ratio 17% 15% Debts increasing inspite of no LT debt, negative Current ratio 3.3 3.58 Again declining CR, negative sign Quick ratio 2.2 2.6 Means decreasing inventory, better management Strengths Weakness Well developed franchise model which is seen as rewarding partnership for franchisee Growing network of successful franchisees Operating in a segment which has high growth Strong brand (unique products, fresh, large portions, convenience and ambience of stores, no preservatives, handmade) Good and increasing return on investment Knowhow and expertise in manufacturing and merchandising candy products Ability to introduce new products which live up to its brand and values Totally dependent on owned /franchised retail outlet. Franchise model prevents exploiting drug and mass market channel where there is high growth. Market confined mainly to US, has not made any major expansion in neighbouring countries Still does not have presence in several states in USA Supplying from one single plant only (affects turnaround time of trucks, larger inventory, loss of freshness, costs to reach longer distance markets higher) Has no presence in mass market channels Has not fully explored sales other than from retails stores (through internet, Corporate gift sales) One factory location will mean not being able to cover all the states in US Strengths and Weakness Appendix C TOWS Strategy Clock The products of Real Chocolate are at position five. Their strategy is to offer a product which is differentiated from others which the customer values and willing to place a higher price for the value that they perceive that the product offers Johnson and Scholes’ Criteria to evaluating strategic Strategy Description Suitability* Acceptability** Feasibility*** Aggressively pursue present policy of sales only through franchisee to reach out to areas not covered earlier. Increase franchisee network. Develop platform to market through internet, corporate gifts, mail orders and offer as value added to franchisee. This will add to increase in internal capabilities and therefore become sustainable competitive advantage for Real Chocolate. Set up more number of manufacturing plants to improve logistics. a) Yes b) Yes c) Yes Investors to be convinced on returns Will have to develop the platform for internet etc with outside help. Internal Financial resources may not be adequate Same as above, but outsource (same franchise model) manufacturing, so as to overcome logistics and growth needs that will come with more outlets. a) Yes, b) May require effort to align outsource agent with company c)Yes Yes as this involves no additional capital investment Yes, managing outsourced production will be a competency company has to learn Same as above, but consider acquisition of manufacturing plants for same reason. a) Yes, b) May require effort to align company acquired c)Yes Investors concern on returns to be addressed Managing mergers, funds procurement for acquisition will be issues In areas not present today, consider mix of franchisee and mass market channel a) yes b) yes d) company needs to develop competency to manage mass market promotion, branding Issues of conflict with franchisee, revenue expenditure for promotion will be of concern to investors Has to develop competency to manage sales through this network strategic alliance with another company to mutually exchange sales outlets (Real chocolate offers its sales outlets and other company sells in mass market channel. A) yes b) may be difficult to find a company that fits c) managing alliance is a new competency Outcome will depend on complex set of factors, may not find favour with investors Yes Consider exclusive product range for marketing through mass markets. This will circumvent problems of conflict with present franchisees. Will mean separate promotion branding strategies, will mean 2 products, increase cost Outcomes are doubtful Will mean acquiring separate set of competencies and resources Same as 1, 2, 3 but enter into strategic alliance with manufacturers of artisan chocolates to sell their products through network. 1) yes b)yes c) new competency of managing partnership to be acquired Acceptable to all stake holders Yes, help in building acquisitions/alliances management skills. Consider merger with a company that has well developed mass market sales. No No No * Suitability: a) Does the strategy address the circumstances in which the organisation is operating? b) Is the strategy viable? c) Does the strategy exploit core competences? ** Acceptability: What are the expected performance outcomes and are they consistent with stakeholder expectations? *** Feasibility: Has the organisation got the resources and capabilities to deliver the strategy? Rumelt’s Criteria to evaluating strategic options Strategy Description Consistency* Advantage** Consonance*** Feasibility**** Aggressively pursue present policy of sales only through franchisee to reach out to areas not covered earlier. Increase franchisee network. Develop platform to market through internet, corporate gifts, mail orders and offer as value added to franchisee. This will add to increase in internal capabilities and therefore become sustainable competitive advantage for Real Chocolate. Set up more number of manufacturing plants to improve logistics. Yes Yes Yes Will have to develop the platform for internet etc with outside help. Internal Financial resources may not be adequate Same as above, but outsource (same franchise model) manufacturing, so as to overcome logistics and growth needs that will come with more outlets. Yes Yes Yes Yes, managing outsourced production will be a competency company has to learn Same as above, but consider acquisition of manufacturing plants for same reason. Yes Yes Yes Managing mergers, funds procurement for acquisition will be resource issues In areas not present today, consider mix of franchisee and mass market channel No Yes Yes Has to develop competency to manage sales through this network Strategic alliance with another company to mutually exchange sales outlets (Real chocolate offers its sales outlets and other company sells in mass market channel. No Yes Yes Yes Consider exclusive product range for marketing through mass markets. This will circumvent problems of conflict with present franchisees. No Yes Yes Will mean acquiring separate set of competencies and resources Same as 1, 2, 3 but enter into strategic alliance with manufacturers of artisan chocolates to sell their products through network. Yes Yes Yes Yes, help in building acquisitions/alliances management skills. Consider merger with a company that has well developed mass market sales. No Yes Yes No *Consistency Are goals and policies mutually consistent **Advantage Does the strategy create/maintain competitive advantage in the selected area of activity? ***Consonance Does the strategy address the external environment? ****Feasibility Can the strategy be attempted within the physical, human and financial resources available Appendix D Timelines Month- 1 2 3 4 5 6 7 8 9 10 11 12 Identification of Consultant to do an evaluation of best way of adding to production capacity, selection and providing the brief and execution of assignment Selection of vendor for development of developing internet based sales platform, selection and providing the brief and completion of assignment Additional training to Franchisee to use enhancements Formation of project team to assess and finalise manufacturing new franchise locations Locating potential strategic alliance partners, starting negotiation and concluding deal. 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