Humber College
BMGT 265 – Managing Strategically
Fall 2020 Final Exam
CASE: Happy Socks
Instructions:
• Read the Case
• Answer the questions in the template below.
• You have 2 hours and 15 minutes to complete and submit.
Early in October 2020, Happy Socks received an opportunity to bid on a new order from a major Canadian retailer chain, requiring a response in 5 business days. Komalpreet Kaur and Carlos Gonzalez, the firm’s owners, believed that this order represented a unique opportunity for Happy Socks. The company had been slowly improving its financial performance over the past few years, and were looking for strategic opportunities to expand their business. Historically, the firm had been producing standard colour, casual socks for men and women, a steady (but not significant) growth product. The request for bid however, was the production of trendy multicolour, intense pattern fancy colour socks that can be worn with either casual or dress attire. Before accepting the request for bid, both Komalpreet and Carlos wanted to assure themselves that pursuing this potential order was in the best interests for the company’s growth and development.
COMPANY BACKGROUND
Happy Socks (HS) was a small manufacturer of casual socks since 2010. The company was located in a small town in Southwestern Ontario, Canada. HS produced standard colour casual socks successfully in Canada. The socks stood apart from inferior quality imports based on the products ability to not lose its elastic ‘stay-up’ power on a customer’s leg (ie. the socks stayed up, not falling and bunching around the customers ankle) and its durability after many washes. HS has considered diversifying its product portfolio into other types of socks (and even other clothing articles) but has not taken the chance on producing anything different due to concerns of their ability to take on new challenges outside of their core offering that they have been expert at for 10 years. Currently, HS’s socks were sold to distributors, who serviced a variety of small independent retailers, in Canada and the Eastern United States.
THE NEW OPPORTUNITY TO BID
A buyer for a major Canadian retail store chain had been impressed with the quality and durability of HS’s socks and approached Carlos. The buyer requested that HS provide a bid on producing and selling direct to the retailer multi-colour fancy socks which are on trend currently and look to be experiencing unit growth sales. Carlos and Komalpreet strongly believed that slight changes in production methods and minor production equipment purchases only would be needed due to differences in the sock fabric. The operations company that HS worked with could make these adjustments for an estimated cost of $10,000. The operations company would also need to provide equipment maintenance on a contract basis at a rate of $1,000 per visit. After this potential customer initially approached HS, both Carlos and Komalpreet travelled to Toronto to meet with the retail chain’s purchasing department team. The meeting had been very successful, and one week later a the retail chain indicated that they wanted to place the order with HS. Client entertainment costs from the visit in soliciting the order amounted to $750. After the initial jubilation of working to solicit the order had subsided, Carlos began to have second thoughts about the whether or not HS should take on this new order. Carlos had estimated that the wholesale price for the new multi-colour fancy socks would be $3.90 per pair, whereas the special order was contingent upon a firm price quote of $3.60 per pair. Obtaining the order would certainly be a major step forward for HS and could lead to large future orders from this customer or other major retailers. The company’s profit margins were already “squeezed” severely and both Carlos and Komalpreet thought that a pair of these socks could not be produced for less than $3.15. Exhibit 2 shows the company’s budgeted costs for the current fiscal year, including budgeted dollars for this special order. Based on this data, Carlos concluded that the company’s net profit margin was only about 7.4% per cent at the existing $3.60 selling price. See Exhibit 1 showing the type of socks required to be manufactured for the bid.
Exhibit 1
Multi-Colour Fancy Socks
COMPETITION
Competition in the sock production industry is quite intense. 2 competitors specifically were always the main challengers against Happy Socks over the past 5 years
Competitor Main Competitive Advantage Potential Weaknesses Estimated Average Selling Price Per Pair Estimated Average Variable Cost Per Pair Estimated Fixed Costs
Rainbow Designs Inc. Being On Trend and Designs Product does not last as long compared to Happy Socks
Costs incurred regularly to upgrade designs in order to be On Trend 3.45
$1.25$345,000
Feet Coverings Inc. Low Cost of Production on Standard Offering Product quality is medium-low
Design appeal is low 3.25 $1.15 $290,000
OPERATIONS
HS’s factory was currently operating at its one-shift capacity of 13,000 pairs of socks per month and had a small backlog of orders. The special order under consideration was for 20,000 pairs of socks as a test in a number of the retailer stores, to be delivered within two months, in time for the Christmas season. If the test went well, orders could increase with significant volumes estimated to be about 50,000 pairs for the entire retailer chain annually. Komalpreet believed that test quantity could be handled by having employees work some overtime each week for the next 2 months. The total utilities costs varied directly with production activity. A production supervisor was paid a monthly salary of $5,000 (including benefits). Both Carlos and Komalpreet believed that the production supervisor should be paid a bonus of $500 per month if extended overtime work was needed for this order. The 4 factory workers (non-unionized) were paid hourly and worked 35 hours each week. They also received time-and-one-half for any overtime work.
FUTURE EXPANSION
As Carlos and Komalpreet mulled over whether to move forward with this order, they knew that their response to this order would have a major impact on the company’s future. Expansion was a desirable strategy, if the financial rewards compensated for the increased risks and additional work involved; however, neither owner was totally comfortable dealing with large retail chains who could wield a great deal of bargaining power. Komalpreet was also not convinced that HS was even efficient enough to compete successfully in the larger, more aggressive retail chain store market. Yet, both Carlos and Komalpreet realized that something should be done to improve HS’s marginal profitability and, if they were to reject this order, it would be unlikely that this retail store chain would solicit further orders from HS.
Exhibit 2
HAPPY SOCKS
BUDGETED COSTS FOR CURRENT FISCAL YEAR (INCLUDING SPECIAL ORDER ESTIMATES)
Raw Materials $223,479
Wages $81,656
Owners’ Salaries $101,473
Rent $22,384
Utilities $11,938
Supervision $57,302
Production Equipment Maintenance $13,430
Production Equipment Depreciation $12,893
Design Cost Amortization $5,611
Office Equipment Depreciation $2,567
Selling Expenses $8,953
Interest $7,163
Office Supplies $776
Other Expenses $4,775
Total Costs $554,400
Estimated Units Sold 176,000
Answer the following questions (use as much space as required):
Case Questions Answer Column: Provide Your Answers In The Cells Below Marks
1.Environment Analysis:
Prepare a SWOT analysis for HS.
Strengths:
• Quality of socks – ‘stay up’ feature
• Really focused on a narrow offering, making them very customer targeted with likely a loyal customer following 10
Weaknesses:
• Company is not experienced at taking on new challenges (ie. not risk takers)
• Product offering is narrow
•Being ‘on trend’ hasn’t been an area of strength for this company historically
Opportunities:
• Develop a new product manufacturing capability
• Diversify future risk by entering a new product space
• Take a chance on a (slightly) new product variation which could lead to other future opportunities in a new product space (‘on trend’ product space) not explored by HS
•Selling direct to retail chains diversifies distribution strategy, opening up avenues to other sources of revenue in future
Threats:
• Some competition is more broadly focused in their production
• Some competition is more design trend focused which could be argued that this opportunity might be a better fit
• COVID-19 could reduce sales due to people not going out for work/recreationally (you have to make the assumption that this case takes place in a ‘COVID world’ for this Threat)
•Wholesalers could negatively react to HS selling direct, and find other manufacturers to partner with
2. Business Strategy
a. Based on our discussions early in the term regarding Generic Business Strategies (Module 4), which strategy do you believe that Happy Socks is currently pursuing with the production of their standard casual socks?
b. Do you agree with their strategy?
c. Why or why not? a. Differentiation – Focus => product is high quality, unique feature (stay-up power) sock that is not design/trend focused, but focused on the sock purchaser who wants their socks to stay up and last long
b. Yes!
c. Based on case content, it doesn’t appear that in their geographic region, that there is a direct competitor (ie. some other competitor that produces high quality product with a unique feature, and positions their pricing according to that quality. As such, they likely have a strong position in selling to their targeted customer segment. They have very likely well differentiated their offering from their other direct competitors 5
3. Marketing Strategy / Positioning:
a. From our discussion on positioning earlier in the term, what positioning strategy do you believe that Happy Socks is using?
b. Do you believe that this positioning represents a sustainable competitive advantage for the HS over the long term?
c. Why/Why not? a. Product Attributes
b. This positioning strategy could be built on a unique, even proprietary manufacturing process or fabric materials that its competitors do not have access to. Or, competitors have chosen not to pursue this type of product build and focus on other positioning strategies such as value (low cost) and perhaps lifestyle (competitor that focuses on having on-trend sock designs). So it is definitely sustainable over the short-to-medium term at a minimum.
c. The challenge that HS faces is trying to determine whether or not to grow their business. Given their current business model ‘footprint’, they have to take their existing positioning strategies to new geographic regions if they want to grow OR they need to consider pursuing this multi-colour fancy sock opportunity. This would lead them to evolve their positioning strategy, and look at more image/lifestyle based positioning since they are now entering the design world. Over the long term, it is likely that a competitor would determine how to copy HS’s existing ‘stay up’ technology if they believed that this market segment was profitable and growing at the same time. This would make HS vulnerable if they would not consider other growth opportunities 5
4. Growth Strategies:
a. Using the supplied BCG Matrix to the right, plot the current strategy of standard casual socks (SCS) and the growth strategy of producing the multi-colour fancy socks (MCF) in the appropriate quadrant. Should HS consider other opportunities to grow their business based on the plotting the above strategies on the BCG matrix? Provide your rationale
BCG Growth MatrixHigh Market ShareLow Market Share
High Market Growth
MCF
Low Market Growth
SCS
Should HS pursue other opportunities? Yes or No?
Yes
Rationale:
• “Historically, the firm had been producing standard colour, casual socks for men and women, a steady (but not significant) growth product.”
• “The buyer requested that HS provide a bid on producing and selling direct to the retailer multi-colour fancy socks which are on trend currently and look to be experiencing unit growth sales”
• Based on above plotted businesses in the BCG matrix, I would recommend that HS pursue other opportunities.
• Their current product offering (SCS) is identified as a Cash Cow, implying that is generating profit, but room for growth may be limited as this business does not look like a growth category.
• Given that the multi-colour fancy sock (MCF) would be a Question Mark opportunity at this point, but with the strong potential to be a Star in coming years, this would be an improved business portfolio scenario for HS as it potentially would have a Star that could be supported with cash flow from the stardard colour socks (SCS) that they are producing.
• The biggest risk for HS is their lack of previous pursuit of growth opportunities, making the MCF opportunity higher risk than they are used to taking.
• But, given that the opportunity has similarity to what they are currently doing, the risk is somewhat muted
5
4. Growth Strategies:
b. Regardless of your decision above to grow your business, make an assumption that the company decides to pursue a growth strategy by …
i. Manufacturing and selling multi-colour fancy socks outside of currently sold markets
ii. Export their current standard colour product into overseas markets
iii. Launch a new dress sock targeted at business clientele
iv. Start offering consumer incentives with your retail partners to encourage purchases
v. Begin manufacturing fancy design t-shirts
vi. Purchase a sock manufacturer that also produces shirts and ties
Place the roman numeral (eg. i., ii., iii.) in the Ansoff matrix quadrant of your choice for all of the above growth strategy options and provide your rationale
Ansoff Growth MatrixExisting ProductsNew Products
Existing Markets iv iii
New Markets ii i
v
vi
Rationale:
i. HS does not currently manufacture these socks, and would be entering a new geographic market, therefore a Diversification strategy
ii. Existing product being sold into a new market, therefore a Market Development opportunity
iii. New product (with assumption) sold in existing markets, therefore a product development opportunity. You could also argue that this opportunity is a new product-new market opportunity as selling dress socks would be targeting new customer segment and potentially new distribution channels
iv. Encouraging growth of existing products in existing markets using incentives is definitely Market Penetration
v. Totally new product that has not been manufactured by HS before, therefore a Diversification strategy. Most likely, the target market will be potentially different as well BUT you can argue that the overlap in target market for casual socks would be high with t-shirt sales, aligning with Product Development strategy
vi. With the acquisition, there are new products (shirts and ties) that HS has not had involvement in previously. This would likely lead to selling to new customer targets so Diversification strategy
5
4. Growth Strategies:
c. Given your work in question 4b above which one of the following Ansoff growth strategies do you believe would work best? Provide your rationale. Which growth strategy would you choose?
iii. Launch a new, dress sock targeted at business clientele
Rationale:
Opportunities that would be considered riskier given HS’s current strengths and weaknesses …..
i. Manufacturing and selling multi-colour fancy socks outside of currently sold markets. HS doesn’t currently manufacture fancy socks. Asking them to manufacture AND sell these socks into new markets may be a bit of a stretch for a company that is risk averse
v. Begin manufacturing fancy design t-shirts. This would be a stretch (no pun intended!) for HS as they would most likely need mostly new manufacturing equipment, and they have no experience in the t-shirt market. There would be some similarities (clothing, fashion), but we don’t have any information in the case what the competition would be for HS in the t-shirt market
vi. Purchase a sock manufacturer that also produces shirts and ties. This would be slightly less risky (compared to above 2 growth opportunities) for HS as they would have good business acumen in the purchase of he sock manufacturing portion of the business. If they
Opportunities that would be considered to be of more reasonable risk …..
ii. Export their product into overseas markets. This would be slightly lower risk as the manufacturing expertise is in their current skillset. Exporting the finished product overseas would be something new, but they might be able to leverage the skillset of one its current distributors to help in marketing/selling the product to overseas retailers that would be good target market
iii. Launch a new, dress sock targeted at business clientele. New product, but probably into its existing customer/geographic markets so the risk would lie in HS’s ability to manufacture a dress sock (which they currently do not make). Potentially, they could leverage the ‘stay up’ technology for the production of dress socks which could potentially give them a competitive advantage
Opportunities that are easy, low risk …..
iv. Start offering consumer incentives with your retail partners to encourage purchases. This is a simple and virtually no risk growth approach to growing revenues within their current product portfolio. This approach would likely involve taking market share from its competitors. The only risk of this strategy, which would have to be monitored closely, is the impact of product discounting (a perceived higher quality, higher value product) is diluting the perceived higher quality level of the brand. Once you start discounting with regularity, customers come to expect it
5
5.Operations:
a. What would be Happy Socks annual breakeven volume in units assuming that the average price per pair of socks sold = $3.60
b. How does their breakeven units compare to the 2 competitors?
c. Based on the 3 competitors, who is best positioned to make the most profit in the short term? Why?
Show any calculations and state any assumptions.
a.Breakeven = fixed costs / (selling price per unit – variable cost per unit)
Happy SocksCost Type
Raw Materials $223,479 vc
Wages $81,656 fc
Owners’ Salaries $101,473 fc
Rent $22,384 fc
Utilities $11,938 vc
Supervision $57,302 fc
Production Equipment Maintenance $13,430 fc
Production Equipment Depreciation $12,893 fc
Design Cost Amortization $5,611 fc
Office Equipment Depreciation $2,567 fc
Selling Expenses $8,953 fc
Interest $7,163 fc
Office Supplies $776 fc
Other Expenses $4,775 fc
Total Costs $554,400
Breakeven Units Formula = Fixed Costs / (Selling PricePer Unit – Variable Cost Per Unit)
Estimated Selling Price Per PairEstimated Average Variable Cost Per PairEstimated Fixed CostsBreakeven Units
Happy Socks $3.60 $1.34 $330,921 146,270
Rainbow Designs Inc. $3.45 $1.25 $345,000 156,818
Feet Coverings Inc. $3.25 $1.15 $290,000 138,095
$1.34 variable cost per unit for Happy Socks determined as follows:
• Total variable costs = $223,479 (raw materials) + $11,938 (utilities) = $235,417
• Variable cost per unit = $235,417 / 176,000 (units expected to be sold by Happy Socks taken from Exhibit 2 in the case)
• = $1.34 per unit variable cost
b. Feet Coverings has the lowest breakeven production units requirement, Happy Socks 2nd best, and Rainbow Designs has the highest breakeven requirements
c. Based on this limited data, it looks like Happy Socks has the best looking contribution margin number of the 3 competitors …..
Competitor Cont’n Margin
Happy Socks $3.60 – $1.34 = 2.26 per unit produced
Rainbow Designs Inc $3.45 – $1.25 = 2.20 per unit produced
Feet Coverings Inc $3.25 – $1.15 = 2.10 per unit produced
• Based on looking solely at breakeven units, Feet Coverings has the lowest breakeven units of the 3 competitors. As such, without considering other variables, they should be able to achieve positive profit contribution at a lower level of production than their competitors
15
6.HR / Ethics:
Could the expenditure of $750 on entertaining the retailer be constituted as a conflict of interest by the buyer? Explain why / why not.
•In the purest sense of ‘business ethics’, the entertainment expenditure on the retail chain buyer could be viewed as a conflict of interest which should be avoided.
• However, being a conflict of interest is a ‘sliding scale’ meaning that some forms of conflict of interest are perceived as bribes, others are not
• How do you determine the difference?
o Entertainment expenses are generally accepted globally, but the amount in question spent is usually a good measure
o Bribes are totally acceptable in many countries globally. In Canada however, they are illegal
o Many companies use the rule that when the expenditure is low relative to the benefit of the business transaction that occurs, then conflict of interest is also diminished.
o In this case, $750 spent on an initial order that would be approximately $72,000 (~ 1%) seems relatively low and entertainment costs are a normal part of many business interactions.
o However, if we use Walmart as an example, a buyer is not permitted to accept a cup of coffee from a vendor.
o So – answer for this question – could be the expenditure is OK based on the small expenditure amount relative the business transaction amount OR you could say that this is a conflict of interest for both the retailer and HS – BUT JUSTIFY YOUR POSITION IN YOUR ANSWER 5
7.Leadership:
As the owners of HS, will you fulfil the order? Why or Why not?
•The answer to this question should have alignment with the analysis that has been done in the previous questions
ANSWER:
• From a SWOT perspective, there are some potential ‘headwinds’ facing HS if the decide to pursue this strategy
o Competitors seem to potentially be better suited from a ‘design on-trend’ perspective
o Risk of some of the wholesalers that they currently deal with not working with them anymore due to excluding them from the value chain for this order
o HS does not seem to have expertise in the ‘trendy’ clothing apparel space
• SWOT positives …
o HS has a unique product proposition, not just trendy apparel
o The distribution channel opportunity
• They already are pursuing a differentiation- focus strategy – this opportunity would represent another ‘niche’ market offering for them, just in a different customer space than they currently operate in
• They seem to be motivated to grow their business but they don’t have a track record of being risk takers
o this opportunity represents a reasonable risk – I would classify this as a new product (just barely!) in an existing marketplace (even though the customer segment that would be buying this product may look somewhat different than their current customer segment base)
o product category (socks) is the same, just a potentially different end user
o if the unique product feature of current socks can be ported to the fancy socks, then they could have a competitive advantage, at least in the short-to-mid term
• The retail chain appears to really like their existing product, likely due to the ‘stay-up’ power
• Recommendation:
o as long as the fixed cost expense of running the test with the retail chain is not significant (and the case indicates that it is not) then HS should definitely pursue this opportunity
o partner (contract) with an existing apparel consultant/design firm to help HS build a sound marketing communications and positioning plan for this new product launch at HS
HS cannot launch this product with the same approach as their standard product offering as the new opportunity needs to appeal to customers who are focused on being ‘on trend’ 10
TOTAL 70
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