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1 Strategic Management I Professor Art Ilano July 5, 2011 Case Presentation: Basic Food Science Products Corporation I. Background
Company History Basic Food Science Products Corporation (BFSPC) was founded by Alexander Rosanes, a BS Food Technology graduate and MBA degree holder with substantial experience working in the area of research and product development for URC. In 2007, Alex quit his job and founded BFSPC. He then launched Go!Go! Extreme, a line of hard candy marketed as “the first energy candy in the Philippines.” According to the case article, Alex is a dynamic person who always searches for something to keep himself occupied. In developing his first product, he was busy searching for suppliers, dealing with sub-contractors, supervising employees, perfecting formulations, testing products, creating labels, balancing his books and developing a marketing plan. However, after the launch of the product, Alex found himself with too much idle time. It was this dynamism and entrepreneurial inclination that allowed him to embark on other businesses. In 2008, Alex established a water refilling business, IceWater, that caters to households. In 2009, he took over the management of their family business of reconditioning and trading second-hand offset printing equipment. In the same year he established Offset Solutions, an offset printing business that provides all-around printing services. His latest venture is a graphic design service created to complement his offset printing business. Challenges and Issues As Alex embarked on different businesses in the span of only a few years, he has faced several problems: non-remittance of revenues, non-payment of consigned products and pilferage. Another major issue at BFSPC is that although Go! Go! Extreme is different from other candies by being probably the only energy candy available, consumers do not differentiate it from other candies and already have a set price in mind. Thus, they could easily switch to other brands when the price of the energy candy is increased. This perception thus provides a constraint on the margins of the product line. Demand for the energy candy is also yet to pick up as it is still virtually unknown to their target market. II. Problem Statement
What strategies should BFSPC adopt so that it can take full advantage of its portfolio of businesses, improve revenues and profits, mitigate weaknesses and resolve operational issues? III. Framework for Analysis
To analyze this case and to find an answer to the problem statement, the group chose SWOT Analysis, Porter’s 5 Forces and the BCG Matrix to come up with recommendations for the company. Each model is discussed briefly below. The Resource Based Model: SWOT Analysis
SWOT Analysis or the Resource Based Model assumes all organizations are unique collections of resources and capabilities. It is used to analyze the how a particular firm’s internal and external advantages and disadvantages can be used to formulate strategies. In this case, we use SWOT analysis to come up with recommended strategies that will help the firm improve the performance of its products and operations. The I/O Model : Porter’s 5 Forces Model The group also used the Industrial Organization model of above average returns or Porter’s 5 Forces Model to determine how the firm’s external environment affects it. The I/O Model assumes that it is the external environment, the economy, that most affects firm performance. Thus, this analysis can help determine what strategies will be most suited to address issues as well as exploit opportunities brought about by its external environment. The Boston Consultancy Group Matrix Lastly, the BCG matrix was used to rank BFSPC’s business units or products on the basis of their relative market shares and growth rates. The BCG Chart has four quadrants called: Cash Cows, Dogs, Stars & Question Marks with each quadrant having corresponding suggested strategies. IV. Analysis A. SWOT Analysis Listed on the table below are the strengths, weaknesses, opportunities and threats of the company based on the information found on the case. Immediately following the table are the proposed SWOT strategies based on this table. STRENGTHS INTERNAL ADVANTAGES FOOD GROUP Go! Go! Extreme The owner himself is technically competent in NPD and QA Go! Go! Extreme is dubbed as “the Philippines’ first energy candy.” Mint flavor differentiates it from coffee candies – perhaps the closest competitor. ICEWATER Presently profitable NPD and QA capabilities of owner and business consulting arm WEAKNESSES INTERNAL DISADVANTAGES FOOD GROUP Go! Go! Extreme MANUFACTURING: Limited knowledge with regards to the manufacture of candies MARKETING: BFSPC utilizes inexpensive marketing channels like word-of-mouth and social networks such as Facebook. The company has yet to tap other media deeming these too expensive for the fledgling company. PRODUCT FAMILIARITY: Go! Go! Extreme Energy candy is still virtually unknown to their target market. Possibility of “TASTE FATIGUE”: There is also the possibility of “taste fatigue” which is a known phenomenon in the confectionery business. BFSPC has recently added a hint of lemon in their mint-flavored candies. Alex has yet to find out if this change in taste would be preferable to consumers. ICEWATER Pilferage Poor collection
OPPORTUNITIES EXTERNAL ADVANTAGES FOOD GROUP Go! Go! Extreme MARKET GROWTH: Market growth is generally increasing which provides a steady profit for manufacturers (net importation of hard candies from the years 2000 to 2005) ENERGY CANDY DEMAND: Demand for the energy candy is also yet to pick up ICEWATER Possibility of expansion of beverage line DIVERSITY and NETWORK The diversified profile of BFSPC’s businesses. This gives the company several possible revenue streams and diversifies risks as well. This, however, slightly complicates organizational structure and management control
THREATS EXTERNAL DISADVANTAGES FOOD GROUP Go! Go! Extreme HEAVY COMPETITION: heavy competition both from established and new brands AVAILABILITY OF ALTERNATIVES: diverse array of product categories in the candy business, some of which are hard candies, chewable candies and gummy or jelly candies ICEWATER Increasing saturation and nondifferentiation of the water refilling business High level of competition in beverage industry
S-O Strategies Go! Go! Extreme • The food technology know-how may be maximized to create o new flavors and texture (chewy or soft candies or jelly forms) o new concepts/products (ei. Vitamin candies, dieting candies with L-carnitine, etc) The business diversity opens opportunities to improve marketing (sample candies to clients to spread the brand awareness) Graphics group maybe utilized to help in advertising/marketing
ICEWATER • • Study feasibility of development of new products Consider less complicated products first like ice candies, fruit juices
S-T Strategies Go! Go! Extreme • Be true to the brands identity. Promote its differentiation from other caffeinated candies. In NPD, besides new concepts as mentioned in the S-O strategy, the taste must be given importance. If people don’t like it, it may not sell despite of value-added If you can’t beat them, join them. Develop product concept in forms similar to the alternatives (soft candies, jellies, etc)
ICEWATER • • Study feasibility of development of new products Consider less complicated products first like ice candies, fruit juices
W-O Strategies Go! Go! Extreme • Despite fairly limited marketing and production capacity, there still much room for increasing market volume. They could consider joint ventures with existing distributors trading margins with improved volume. If they have already confidence with the product, maybe external financing may be considered to engage in large volume production and distribution
ICEWATER • We could assume that sales is doing well for the moment except for many problems with workforce. Consider the possibility of hiring people from 3rd party agencies. Agencies today offer pilferage guarantees for collectors. Leaving them with a more efficient sales and collection team.
W-T Strategies Go! Go! Extreme • Improve marketing and differentiation: o o Presentation of the product as an up-and-coming trend maybe is a way to overcome poor popularity. Consider lower cost adds like print adds in stores Identify a target market. Most likely the CD working class looking for cheaper, on-the-go alternatives to energy drinks would fit
ICEWATER • One weakness is the unregulated selling of tap water refills; they can use this as some sort of propaganda vs competitors. Since they have discovered and learned from past mistakes, They could give assurance on the delivery of high quality purified water unlike other competitors B. Porter’s 5 Forces Model For this part of the analysis, Porter’s 5 Forces is used to analyze the performance of Go! Go! Extreme Energy Candy in particular, primarily because BFSPC still considers Go! Go! Extreme Energy Candy to be their main product or the brand that carries the company. In addition, most of the other businesses that they have are simply off-shoots of this initial business. The goal of using this model is to show whether BFSPC’s candy business can stand as a single business unit or not. Porter’s 5 Forces is illustrated below:
Threat of Potential Entrants Barriers to entry into the candy industry are quite high since a significant amount of capital is needed to procure machineries and equipment to process raw materials into candies Another barrier to entry is the access to distribution networks. Major channels of distribution for candies are supermarkets and groceries. Other significant channels are sari-sari stores and food stalls along roads. Bargaining Power of Suppliers Local sub-contractors are hired to manufacture candies for candy manufacturers but have low bargaining power Threat of Substitutes Diverse array of product categories in the candy business, some of which are hard candies, chewable candies and gummy or jelly candies. Consumers do not differentiate it from other candies and already have a set price in mind Bargaining Power of Buyers Distribution of Go! Go! Extreme is limited to sari-sari stores in Metro Manila. The strategy is to be able to sell Go! Go! Extreme just as the stores have sold most of its stock of other candies. Salespersons have reported the difficulty in convincing new stores to sell their candy since the brand is virtually unknown. BFSPC also deals with wholesalers to further its geographic reach and sell it in “more established” stores like groceries and supermarkets Consumers could easily switch to other brands when the price of the energy candy is increased Industry Competitors Competition is heavy. There are simply a lot of established brands in the market. Based on the factors highlighted above, it seems that the company should stop its candy business due to heavy competition. Each of the five forces seem to have a strong influence that will affect the company negatively. The current environment simply seems to be very hostile for a new candy concept. However, it must be noted that together with the company’s other businesses or ventures, it might be on the best interests of the company, if it does not let go of its candy business. For
example, revenues from the other businesses may be used to grow BFSPC’s candy business eventually and vice versa. To examine suggestion this further, the group decided to use The BCG Matrix to analyze the performance of the company’s other businesses and how each may affect each other. In doing so, the goal is to develop strategies that will be most profitable for the company. C. BCG Matrix
Above is an illustration of the BCG Matrix. Using this model, we are able to determine the stars, cash cows, dogs and question marks. These are listed below. BCG STARS (“HOLD”) Stars are units with a high market share in a fast-growing industry. The hope is that stars become the next cash cows. Sustaining the business unit’s market leadership may require extra cash, but this is worthwhile if that’s what it takes for the unit to remain a leader. When growth slows, stars become cash cows if they have been able to maintain their category leadership, or they move from brief stardom to dogdom. The businesses below are the BCG stars: 1. Offset Solutions Offset Solutions caters to the printing needs of several well known establishments such as cartons for soaps and paper bags for clothes stores If its customer base, i.e., well known establishments is kept, it will continue to have a high market share in a growing market
2. Graphic & Print Solutions A family business of reconditioning and trading second-hand offset printing equipment There is a high growth for offset printing equipment market and since this is a family business that has been operating for a long time, it is assumed that it generates revenues BCG QUESTION MARKS (“BUILD”) Question marks (also known as problem child) are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is a large net cash consumption. A question mark has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share. Go! Go! Extreme is a BCG question mark. 1. Go! Go! Extreme Go! Go! Extreme is essentially a new product which buyers have yet to discover. This product is in growing markets but have low market share. The marketing strategy is to get markets to adopt these products. Obviously there is a high demand for energy booster products as evidenced by increase in sales of energy drinks such as Red Bull and Bacchus not to mention coffee shops which are almost everywhere in the streets. Go! Go! Extreme needs to increase its market share quickly, that is, change its marketing strategy, or it becomes a dog. BCG CASH COWS (“HARVEST”) Cash cows are units with high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as staid and boring, in a “mature” market, and every corporation would be thrilled to own as many as possible. They are to be “milked” continuously with as little investment as possible, since such investment would be wasted in an industry with low growth. Below are the BCG cash cows. 1. Ice Water Ice Water generates a lot of cash flow for BFSPC 2. Consultancy Service Consultancy Service has low growth; promotion and investments are low. Cash outflow is small for this product since it is Alex who is mainly involved and projects are on “as needed” basis only. Moreover, Alex can refuse to do the project if he thinks it will not generate cash
BCG DOGS (“DIVEST”) Dogs, or more charitably called pets, are units with low market share in a mature, slowgrowing industry. These units typically “break even”, generating barely enough cash to maintain the business’s market share. Though owning a break-even unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting point of view such a unit is worthless, not generating cash for the company. They depress a profitable company’s return on assets ratio, used by many investors to judge how well a company is being managed. Dogs, it is thought, should be sold off. 1. Bright Light/Ideas Bright Light/Ideas may generate enough cash to maintain itself, but it does not promise to be large source of cash Company’s full-time graphic designer should focus more on Offset Solutions which has a high growth potential V. Recommendations
Below is a list of recommended actions in order for BFSCP to improve profit margins and demand for their products. General 1. BFSCP needs to be structured as an Investment Center. As an investment center, Alex as the CEO will be responsible for allocating capital to each of the businesses. His goal would be to maximize ROI and as such would have to be very careful on where and on how much to allocate/invest in each unit. His outlook would be longterm and he would be sensitive as to which businesses hold promise for the long term, which ones generate quick revenues and which ones are underperforming (and therefore are prime candidates for re-structuring or even divestitures). On top of being the CEO, Alex can also assume the role of R&D head. This way any proprietary information related to the products or processes can be safeguarded. 2. Organize business units as Profit Centers with trained business unit coordinators assigned to each one. Each BUC reports directly to Alex. A major part of the BUC's compensation/incentive plan will be tied to the performance of their respective business units. To ensure that the BUCs would still have the best interest of BFSCP at heart, a part of their incentive plan will reflect the overall performance of BFSCP. 3. Clear guidelines for transfer pricing. For example, in case the Design and Printing group are called on to provide services for the Food Group businesses in their marketing campaigns, , transfer pricing policies should be structured such that it also enables the Design and Printing group to be profitable while rendering service to its sister units. Business – Specific 4. Management control of build businesses should be designed such that managers are encouraged to focus on the long term. This way they have the leeway to actually "build" the business by investing for the long-term. Marketing campaigns, especially brand-building are generally long term activities. 5. Managers should maximize revenue and minimize cost on harvest businesses to generate more cash to support the Build businesses.
6. Divest Bright Lights which is the business that can be found in the dog quadrant. Proceeds from the divestiture, can be invested on the marketing activities of build businesses, which in this case, is Go! Go! Extreme Energy Candy.
7. The marketing strategy for Go! Go! Extreme can be changed; instead of positioning it in the Candy Line and battling large candy manufacturers head on, it can be positioned as an energy product. To achieve this, they can differentiate it from a candy by changing its packaging. From pillow pack that gives consumers an image of a “candy” to Strepsils-like packaging which gives an impression of offering something more than just a candy. They can also change their distribution strategy by using large pharmacies and grocery stores as channels instead of Sari-sari store. By changing its image, they can maintain a competitive price position for Go! Go! Extreme. Product/Operations - Specific 8. Also for Go! Go! Extreme, on top of marketing, they can also focus on the product quality, taste, and efficacy of energy boost. The company can tie up with independent researchers (collegiate, or private) to test products energy boosting capabilities, taste and maybe form (as jelly candy, as soft candy, as gum or whichever other form). When the product is ready, contract production and relay distribution to established commercial distributors. This way capitalization would not be very extensive. A little will go to product development since the owner probably understands the process. Much financing will go to the increase in production,that will happen only when capable sub-dealers and distributors are able to commit to sales. At least capitalization for sustaining receivables will be less of a burden, as this will be the partner distributors expense. Ideally, is the product is deemed marketable, they would have to finance and market all by themselves. Because of limitations, this would be a suitable alternative at the expense of lower margins. 9. For Ice Water, it is suggested for them to get collectors from independent agencies. If they are paying lower than minimum wage, this will be an issue of increased payroll. bit if they are paying correctly, they can purposely fire and replace troublesome employees. At the very least, they should have trusted collectors. 10. Another recommendation is to strengthen operational controls. It seems that inventory is not taken care of very well. This is evident in the amount of containers that went missing. They can charge the sales/delivery people for lost items, provided that BFSPC ensures that their inventory system is efficient. Having business unit coordinators that are directly responsible for the performance of each business unit can improve operational controls.
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