Identification of the Problem

Classic Knitwear, which is the 2nd largest player in the unbranded non-fashion casual knitwear
segment in the US with a market share of 16.5% is faced with a problem of lower sales margin of
18% in comparison to that of other branded manufacturers who enjoy a massive 30-40% margin.
This was mainly because it did not have the freedom to differentiate its products in the market.
In an effort to tackle this problem, Brandon Miller, the Chief Marketing Officer of the company
went through a number of proposed product innovations and identified that the consumers have
started to become more cognizant of the insect-borne diseases in the recent times and he sensed a
marketing opportunity there and wanted to introduce a new segment - insect repellent clothing . He
then proposed that Classic partner with the chemical firm Guardian Inc., which is one of the
leading manufacturers of insect repellents after performing a preliminary consumer research which
showed a positive notion in the minds of the consumers about Guardian’s products. Then Classic
performed another survey which garnered a positive response from consumers about the insect-
repellent shirts. Given the costs involved in marketing the new product and uncertainty associated
with such an unproven technology, Classic wanted to launch the product only if the demand was
such that breakeven could be crossed. They are in a dilemma whether or not to go ahead with the
product launch considering the long-term qualitative prospects 

Analysis of the situation and problem

Quantitative Analysis
Qualitative Analysis:

Pros of going ahead with the Guardian Project:

  Customers weren’t satisfied with the scarcity of the prevention products available in the
market (only liquid insect repellents). Insect repellent clothing had a niche market and
therefore there was market demand for the product which is why it makes sense for Classic
to enter the market with this product.
 The agreement reached with Guardian reduced marketing costs from a projected $8-10
million to around $3 million. 
 If all goes according to Miller’s plan, the problem of low margins for Classic will be
remedied to some extent, as margins will rise from 18 percent to well over 20 percent.

Cons of going ahead with the project:

 The licencing deal contains various disadvantages for Classic, such as the necessity that
shirts satisfy certain quality requirements, steadily increasing annual net sales over four
years, written approval from Guardian for advertising expenses, termination of contract at
the will of Guardian, etc. This does not bode well for long-term prospects
  The licence arrangement assures a short-term profit for Classic in the form of a large
reduction in marketing expenses from $8-10 million to $3 million, but a long-term benefit is
not guaranteed. 
 The market research is limited, it should not be totally depended upon to determine retail
prices or product types. Given that the clothing featured the Guardian logo, it would make
reasonable for Guardian to cover some marketing costs.
 The product will be launched entirely under the name "Guardian" by the corporation.
Classic will continue to have no brand recognition which is the ultimate reason behind its
low margins.
 The company enjoys moderate cost advantage over its competitors because of its high
volume, low SKU production runs. Launch of the product will add 16 more SKUs which
may erode its cost advantage.

Recommendations:

Even though quantitative analysis supports going forward clearly indicating that over the two-year
horizon there is sufficient demand for the company to break even, it is highly based on
assumptions. Even a minor change in one of the assumptions can suggest a completely different
outlook. Also, there is no data to make projections beyond two years. Hence, quantitative analysis
should not be relied upon too much while making a decision to tie up with Guardian. Rather, sound
qualitative analysis should guide us in our decision making. Major cons of the project like
unfavourable terms of the agreement with Guardian, Classic relying on Guardian’s brand name
rather than building its own, limited market research, etc. far outweigh the pros of the project and
hence we recommend not to go ahead with the project keeping in mind the long-term prospects.