Y intends to continue to develop through the delivery of the two strategic objectives (pre-seen page 3) to ensure the continued growth of the business. The two strategic objectives are:
- Strategic objective 1 (SO1): To engage with the widest range of customers through the development of Y's markets and products through a wide variety of sales channels. The focus of this is on the delivery of products the customer demands, where they are required and when they are wanted.
- Strategic objective 2 (SO2): To enhance the customer experience through strong and effective customer relationship management. The focus of this is on clear and consistent branding and marketing to encourage customer retention and loyalty all the year round.
Y currently operates its own retail stores and a number of franchise outlets on the high streets of towns and cities throughout Europe. Due to the continued challenges to the European economy, Y’s sales on the high street have been reducing annually for the last 5 years. Despite this, Y believes that its retail stores are a vital sales channel. Therefore, Y has decided that investment in its retail stores and employees must be made to improve the customer experience and the brand image.
This will be achieved through engaging better with customers in the retail stores and providing a wide range of high quality products. Y is proposing to close 30 to 40 of its own retail stores during the course of the 2015 financial year and focusing upon ensuring that the remaining stores are in the best locations to attract customers.
In the last two years, Y has seen a growth in the sales of its own label products to supermarkets. It is predicted that sales of Y’s own label products in supermarkets will have grown by 10% by the end of 2014, as a result of Y increasing its distribution network to a wider range of supermarket chains and through supplying a greater variety of its year-round products. Y anticipates further growth in its sales to supermarkets and intends to continue to invest in improving its expertise in managing its supermarket customer accounts.
Y operates a website, through which it sells a wide range of products. This has proved to be a very successful sales channel since its launch in 2012. Y is keen to develop its e-business sales channel and is considering using the website to sell an even wider product range including gift hampers. Y considers that its website will play an important role in the development of its international sales to individual customers.
Y’s international sales are anticipated to grow strongly in the next 2 years. Y aims to invest in a structured country-by-country approach and learn from its experience as it progresses. Over the past year, Y has been encouraged by the number of sales achieved in international markets, particularly from international supermarket sales.
In the last year, Y has started to manufacture luxury hand-made products for other external retail stores, some of which sell these products under their 'own brand' labels. This is an opportunity for Y to create innovative products but the Board realises that this is likely to require investment in staff training and facilities.
Y is planning to open 6 ‘Y Cafes’ in city centre locations within its home country within the first 3 months of 2015 with plans for further expansion later in the year. These will sell a range of Y’s products as well as offering food and refreshments and other gift items.
orders from new customer Z and customer Q
New customer Z
Y is currently in discussions with Z, an exclusive and world famous department store, located in the capital city of its home country. Z has built its reputation on selling only the highest quality products to its customers. Z is considering purchasing from Y, 3,000 boxes per month for the next 3 months of each of three types of luxury hand-made chocolate products. All three product types would not be sold under Y’s own label but would be sold as Z’s ‘own brand’ chocolates. The Divisional Director for corporate clients, retail stores and supermarkets within the MC Division, believes this to be an excellent opportunity to supply products to a highly prestigious corporate customer. Z has stated that it will consider purchasing more luxury hand-made chocolate products from Y in the future but it would be unlikely that these would be the same products as the three currently being considered.
Y is also currently in discussions with Q, the leading supermarket chain based in its home country, to supply the same three types of luxury hand-made chocolate products for the next 6 months. These would be sold in Q’s supermarkets under Y’s own label. Y already sells a range of its boxed chocolates to Q. This would be the first time Y has been asked to supply luxury hand-made products to Q. Y has a very good relationship with Q, having supplied it with a wide range of products for the last 3 years.
Q predicts that it could sell 6,000 boxes per month for the next 6 months of each of the three products. Initially, these would be sold in only a few of its largest supermarkets. Q is confident that these products will prove to be successful in the first 6 months, and expects that the products would then be rolled out to more of its supermarkets across Y’s home country as demand increases.
Details of the three types of luxury hand-made chocolate products are as follows:
Temporary shortage of Material C
The management of Y is aware that there will be a temporary shortage of Material C for the next 3 months, and that a maximum of 5,500 kgs will be available in each month. Material C is sourced from a South American country which has experienced adverse weather conditions recently and this has limited the amount of Material C available. There are no suitable alternative materials which could replace Material C in the next 3 months. Y does not hold inventories of raw materials A, B or C or the final product due to their perishable nature.
Y’s customer relationship management
Customer retention and loyalty are critical to Y. The Board recognises that one of the most important determinants of its future growth is encouraging customers to buy more frequently and to buy its products all year round. It believes that the best way to achieve this is through strong and effective Customer Relationship Management (CRM), as it has set out in Y’s Strategic Objective 2 (SO2).
Y considers that a key factor in building and managing strong customer relationships will be the continued development and use of Y’s website. Y strongly believes that e-business will be a key feature of strengthening and building strong customer relationships, ensuring customer retention and strengthening its reputation as a year-round confectionery retailer.
Y’s two strategic objectives which it wishes to achieve, through its sales development strategies are as follows:
1. Engage with the widest range of customers through the development of Y’s markets and products through a wide variety of sales channels. The focus of this is on the delivery of what products the customer demands, where they are required and when they are wanted (SO1).
2. Enhance the customer experience through strong and effective customer relationship management. The focus of this is on clear and consistent branding and marketing to encourage customer retention and loyalty all the year round (SO2).
It is possible to use the Ansoff product market directional growth model to assess the sales development strategies proposed by Y.
Market Penetration/ Consolidation (Existing products to Existing customers)
Market penetration is where organisations attempt to increase their market share in the existing market using the existing products. This addresses Y’s strategic objective 2, which is to “enhance the customer experience” and “to encourage customer retention and loyalty all the year round”.
Y believes that its retail stores should be a continuing outlet for its products and that greater effort needs to be made in improving the customer experience, through engaging better with customers and providing them with a wide range of high quality products. Therefore it must ensure that it continues to strengthen its product range and give its existing customers incentives to buy more of Y’s products, such as 2 for 1 offers or tasting sessions in store. This should help to increase sales to its existing customers.
Y clearly sees its current retail stores and franchises as a critical part of its growth of the business but that there must be a better emphasis upon creating a better relationship with the customer in these locations. Y must focus upon customer service and customer relationship management to make sure customers return frequently throughout the year.
Y clearly states that it must invest more in customer relationship development in the retail stores and this should be through staff training and in the layout and facilities of each shop. In addition the optimisation of location is important for Y, ensuring that it retains the best performing retail stores in the most popular locations. The image and branding of the
Y store is also important and that the Y brand is clearly recognised in every location and Y must invest in this. This should help in achieving SO2.
Y also plans to sell more own label products to supermarkets, which is predicting an annual growth of 10% for 2014.This could be a highly successful strategy which could overcome the potential fall in sales due to closure of retail stores.
The closure of the retail stores is a form of consolidation and could be an effective way of improving the customer perception of Y, if it is carried out effectively. Y needs to make sure that it only closes those retail stores which are under performing or those which do not enhance the image of the Y brand, either because of poor location or poor performance.
Market penetration and consolidation strategies should help to achieve Strategic Objective 1, providing that it gets the right products in its retail stores and the retail stores are in the optimum location. The retail stores and franchises are also the best place to assist in achieving Strategic Objective 2, as it is here that its customers will experience the Y brand and where effective marketing and customer relationships must be built.
Product Development (New products to Existing customers)
This quadrant of Ansoff’s matrix is concerned with the development of a wider range of products in order to increase sales. This meets with Y’s Strategic Objective 1 to produce “products the customers demand”. The confectionery market has changed considerably in recent years and Y may need to conduct more market research to identify exactly what its customers want, or what they think they want. Y will also need to look at the ranges and quality of products that its many competitors offer. Y should try to be innovative and develop new, different products rather than simply copying its competitors. Y needs to try to lead the market, rather than follow the market.
It would appear that the website is being considered as a means to achieve product development, through the sale of new products such as hampers. Y must ensure that these products are complementary and do not detract from the chocolate product sales and that they do not reduce the quality image of Y. This could help to achieve Strategic Objective 1 if these new products are in fact demanded by the customers. However, Y needs to undertake research to establish the extent to which customers are interested in buying these complementary products through its website.
A further product development strategy is the manufacture of exclusive hand-made chocolates. This is highly innovative and could complement sales of other Y chocolates currently sold in supermarkets. This should help to achieve Strategic Objective 1 in providing a wide range of Y products in locations where they are required.
Market Development (Existing products in New Markets)
This quadrant concerns ways to develop and enhance the company’s current markets, by selling more of its existing products through new or enhanced sales channels and to new customer segments. This reflects Y’s Strategic Objective 1, which states “through the development of Y’s markets and products”.
A form of market development is the continued development of sales of Y’s own label products to new supermarket customers, as it is offering its products to supermarket customers who may not necessarily be customers of Y elsewhere. The most significant opportunity in this area is in the development of international supermarket sales.
This will require careful management of relationship with the supermarket customers to ensure Y’s sales are optimised and that Y maintains strong working relationships with the supermarkets, who are likely to be very large organisations.
The sale of Y products in supermarkets should encourage a wider range of customers to buy Y’s products (Strategic Objective 1) and it should also allow Y to promote its brand in more locations and encourage year round sales (Strategic Objective 2). Y must try to achieve market development by improving its expertise in managing the large supermarket customers. It could do this by appointing a dedicated manager to be the point of contact for each supermarket chain. As supermarkets are key large bulk-buying customers, they may require immediate responses on availability and delivery of products. They may also demand that their IT systems are linked to Y’s IT systems for the exchange of data for ordering, invoicing and delivery
information. If Y is serious about expanding this area of sales, it may require changes and investment in its IT systems to meet the sophisticated needs of the supermarket customers’ requirements for order placement, delivery advice and invoicing.
Furthermore, Y will need to negotiate payment terms with these new supermarket customers, as supermarkets often demand that payment will only be made to its suppliers 60 days after delivery. This may severely impact Y’s cash flows, as retail customers pay exactly on delivery of the products within the retail stores.
The Y website sales is also a form of market development for Y, as it can sell its whole range of existing products to a wide range of customers. This particularly applies to the potential international sales which could be exploited.
Clearly there is a large potential for growth of sales of its chocolate products internationally through the website, helping to achieve Strategic Objective 1. However, it is important that the website is managed carefully to ensure that it enhances and complements the overall image and brand of Y and that it operates effectively and efficiently to ensure optimum customer satisfaction. The brand must be managed consistently across the website and customer management and communication must be effective.
However, if managed and developed effectively, Y’s website has a huge potential to assist in achieving both strategic objectives.
Diversification (New products to New markets)
Diversification concerns expansion into new markets with new products and is a way companies choose to expand in order to spread the risk of reliance on just one market sector. However, expanding into a new unknown type of market is very risky and many companies fail, often due to poor market research or lack of marketing. Another reason for failing in a diversification strategy is that some companies do not have adequate financial resources to bear losses in the early months, or even years, until the new business venture is established. A company that chooses to diversify needs to have the financial commitment to see the expansion settled and start to generate profits and cash flows, which takes time.
This diversification strategy would help Y to achieve Strategic Objective 1 which is “through the development of Y’s markets and products through a wide variety of sales channels”.
Y is planning to open 6 Y cafés early in 2015. These will be offering new and existing products to a wide customer base. However, this will require significant investment in city centre stores and staff recruitment and training. Clearly, this will certainly increase the potential range of customers and thus assist in achieving Strategic Objective 1. It should also help to achieve Strategic Objective 2 as these café’s would attract customers all year round and should help to enhance and build the Y brand.
Performance measures will need to be set and monitored for the “Y cafes” such as revenue per day, average revenue per customer, percentage of food waste and café utilisation levels at different times of the day. It will also be important to identify popular products and slow moving products and gifts, to reduce inventory write-offs.
A further example of diversification is the production of luxury hand made products sold as own label products to other retailers. Y will be using its reputation and expertise as a chocolate manufacturer to develop innovative products on behalf of new customers. This could open up a whole new market for Y but will require some investment in staff development. Again, this should assist in the achievement of Strategic Objective 1 by selling to a wide range of customers but the quality must be acceptable and satisfy customers’ demands which is likely to require higher quality than Y currently produces
Undertaking an order to supply Z in full, taking into account the effect this could have on Q
If Y supplies in full the order agreed with Z then it will achieve Strategic Objective 1 through the development of both its markets and its products. This would be achieved by the sale of a newly developed luxury product to Z’s customers. There is clearly a market for the luxury handmade chocolate products and this could be an excellent way for Y to exploit this market potential through the use of an established and prestigious brand name. Therefore it is a significant opportunity for future sales growth for Y.
However, these products will be sold as Z’s own brand label, meaning that the Y brand will not be featured as part of the product. Therefore Strategic Objective 2 will not be achieved, as there will be no association of these products with the Y brand. Y will in fact be producing chocolates in order to enhance the Z brand. However, Y management believe this to be a significant opportunity to work with a very prestigious customer which could be highly lucrative in the future, if Z were to place future orders with Y.
A risk in this is that although Z has also stated that it would be interested in further orders of luxury hand made products from Y it has not made an agreement to this and this order is very short term i.e. only 3 months, amounting to only 9,000 boxes. The order value is relatively small.
These new products would be highly labour intensive and will require 15,000 hours of labour per month to be made available for this order. As these are luxury hand-made products, this may require additional overheads such as training costs and management supervision costs but there is no guarantee that Z will place any orders past the first 3 months. Z may have to spend a significant amount of money in set up costs and training yet there may be no long term benefit for Y in relation to customer Z.
Therefore, before agreeing to this, Y must try to ensure from Z a long term relationship and some form of guarantee of a longer term contract for other products in the future, if not with Z then with other customers for Y’s luxury chocolate products. Z may not wish for Y to continue to supply luxury hand made products if these are not successful in the first three months of sales. For Y, there is a high degree of investment for a potentially short term gain with Z.
Clearly it is a significant opportunity for Y to work with Z and develop a new market opportunity, but it would not assist in developing Y’s own label. However, one of Y’s strategic growth opportunities is to produce a wider range of products through production of chocolates for other retailers and therefore it is a viable opportunity with a highly prestigious customer.
Considering the results of the calculations in part b(i) of the answer it is evident that by accepting this order Y will earn a contribution of EUR 72,000 per month from the order with Z (totalling EUR 216,000 for 3 months) and if Y could also optimise its production mix with sales to Q then it could earn an additional EUR 92,000 per month resulting in a total contribution of EUR 164,000 per month for 3 months (totalling EUR 492,000). This is through the optimisation of the limiting factor of Material C, which results in the need for Y to optimise the production of Product 1 due to it having the highest contribution per unit of Material C.
However, this would result in Y being unable to produce all of the units predicted by customer Q, the leading supermarket chain. There would be a shortfall in Product 3, as there would only be sufficient levels of Material C to make 800 boxes instead of 6,000 required of Product 3. A potential risk for Y is that because of this Q could refuse to accept an order of only 800 units of Product 3 and cancel the whole order.
Therefore, undertaking a contract with Z may have implications for Y’s relationship with Q. Y currently has a very good relationship with Q, to which Y has supplied its chocolate products for 3 years and therefore is an established customer. Y should not allow this contract with Z to damage its relationship with Q. The current relationship with Q allows Y to sell its own label products through Q’s supermarkets which achieves both Strategic Objectives 1 and 2. If the contract with Z is agreed in full then it is clear from the calculations that Q will not receive its full requirement of Product 3, as Material C is a limiting factor which does not allow for full production of required products for both Z and Q.
Y must maintain open and honest communication with Q about future prospects for the products it requires from Y. It would appear that customer Z will not want to order these three luxury hand made products past the first 3 months and therefore Y may be able to supply product 3 in full after 3 months, depending upon the continued availability of Material C. Therefore, Y may wish to negotiate with Q an order for product 3 after 3 months, possibly offering some form of discount incentive to Q for delay of the order. The contract with supermarket Q has not been signed and therefore there is room for negotiation in terms of timing and quantity of products.
Q is a large and prestigious customer itself, as the leading supermarket chain in the country. It already has an established relationship which it must attempt to build upon through the sale of new and innovative product offerings. Q has a high bargaining power and therefore Y must carefully manage its relationship with Q to ensure that it does not lose Q’s trust. This is an important opportunity for Y to enter the luxury chocolate market under its own brand name which could open up further opportunities with other supermarkets. Therefore, it must ensure that if it is to undertake the order with Z then it must maintain and continue its strong relationships with Q during this period.
Undertaking an order to supply only Q
From the calculations it can be seen that should the order by Z not be placed, then Y would be able to supply an order to Q in full, as there would be sufficient material C to do so. This would result in a contribution earned of EUR 144,000 per month, totalling EUR 864,000 for 6 months if the initial order as requested by Q is undertaken. However, this is less that the contribution of EUR 924,000 that could be earned over 6 months from optimising production for customer Z for the first 3 months followed by a three month order for Q only (EUR 492,000 plus EUR 432,000).
Y has a successful and long term relationship with Q and Q has stated that it predicts that these luxury products would be sold in its supermarkets for 6 months and beyond. This is an excellent opportunity for Y to develop its product range and to improve its brand image, thus achieving Strategic Objectives 1 and 2. Developing strong long term relationships with such a high profile customer would be a considerable competitive advantage for Y.
The contract is financially viable in that it could contribute EUR 144,000 per month for 6 months and potentially more if sales grow as predicted by Q. It is assumed that the shortage of Material C is only temporary, as stated in the scenario and therefore increased production levels could be achieved should predicted demand be achieved by Q.
An operational consideration for Y would be the labour required to undertake this contract. It is predicted that this would require 30,000 labour hours per month to meet Q’s contract (which is likely to equate to approximately an extra 190 staff, based on 40 hours per week). This is a significant number of staff and in addition more supervision and investment in training and equipment will also be required. However, if it is considered that this is a viable and long term contract, then this level of investment is likely to be considered acceptable by Y.
Note: Candidates are only required to provide two examples of functions of Y’s website.
In order for Y to retain its online customers it is necessary to build a relationship with them and create brand loyalty. Customer relationship management requires a company to keep customers loyal by demonstrating ongoing support, contact and making its customers feel valued.
Customer retention is clearly considered to be a critical factor for Y. Therefore Y must focus upon building long term relationships with its customers through its website, in order to develop loyalty to the Y brand. This will require Y to build effective customer contact and ensure a high quality of service.
The unseen material states that Y considers that a key factor in developing strong customer relationships will be the continued development and use of the Y website. The management of Y strongly believes that e-business will be a key feature of strengthening and building strong customer relationships. The features of Y’s website could include the following:
• For individual customers, implement a customer login system for existing customers where address, card details and important information such as birthdays and a range of delivery addresses can be stored. This will assist in making the customer ordering process easier and makes customers not want to switch once they have set up their log in details. This should make customers reluctant to use other retailers once they have set up a customer account with Y. This should assist in customer retention and loyalty and should allow Y the opportunity to communicate with customers more effectively.
• The website can be used effectively as a promotional and marketing tool to encourage customers to buy more frequently. Once Y has individual customers’ emails and personal details, Y can send them electronic promotional codes via email or through the website, linked to previous purchases and can send reminders via email of special dates. Discount offers can also be awarded to customers through the websites
• This feature could also be used for corporate customers. Discounts on multiple product purchases through the website could be offered to corporate clients buying multiple client gifts.
• Y could use its website technology to monitor customer activity and website searches and also to record customer buying habits. Information stored through the website could be used to send out direct and relevant promotional offers and discounts tailored directly to the buying behaviour of individual customers. Promotional activities, tailored directly to the buying behaviour of individual customers will make them feel special and unique and this should encourage increased purchasing activity.
• It would also be useful to have a customer feedback form on the website and an email support service through the Y website. Customer feedback forms allow the facility for two way communication and should provide Y with valuable information upon its products and its level of service provided. Building strong customer relationships is obviously key to Y’s growth strategies and therefore customers must be allowed and encouraged to provide their opinions. The website is an excellent medium to achieve this as customers are likely to be reluctant to provide opinions in the shops but are more likely to do so via the website feedback forms.
It is important that the website supports the other sales channels, that branding is consistent and that customers feel that they are merely stepping inside an on-line shop. Therefore, there must be product consistency and also brand consistency.