<![CDATA[Management Consultant - russell.davison@yahoo.com]]> <![CDATA[SWOT analysis]]>
SUMMARY

A case study by Nairn and Strickland (2003) of the Élan Boat Company is used to identify the strengths and weaknesses of the company and the opportunities and threats within the external environment of the company. According to Nairn and Strickland,

“Ben Favret, professional water-skier, World Champion, V.S. Champion, and Pro-Tour champion, was resting on the dock after a slalom training run one afternoon when a call came through on his cell phone. Jay Blossman, his high school tennis partner and now politician, was on the other end. Out of the blue, Jay announced to Ben that he was buying American Skier, the competition ski boat company owned by financially troubled American Performance Marine. Ben instantly knew that Jay had found himself a great boat and suspected that he was getting a great deal in buying the company, but he also realized that while Jay was an excellent tennis player, Jay lacked the necessary insider knowledge about building, marketing, and selling ski boats. Excited and eager to be involved in this rare opportunity, Ben was on the next flight to New Orleans to meet Jay and look into the situation.

As Ben took the tour of the American Performance Marine plant in Kentwood, Louisiana, he learned that the company had recently filed for bankruptcy. Ben concluded that with his firsthand knowledge of the waterskiing industry and the boatbuilding capabilities that lay before him in the Kentwood plant, he and Jay ought to be able to resurrect the ailing company. With all the enthusiasm and high hopes of an entrepreneur entering the industry of a sport he loves, Ben Favret dove headfirst into building ski boats. In keeping with this excitement and attitude, Ben renamed the company Élan Boats. The word Élan means ‘vigorous spirit and enthusiasm‘.”

The purpose of this report is to identify the firm's key capabilities and trends within the macro environment to develop a clear strategy for the Élan Boat Company.
]]> <![CDATA[Managerial control]]>
A group of my friends have what you believe to be the opportunity of a lifetime.

They graduate this year and the father of one of my friends has asked two of them if they would like to buy the air-conditioning business he founded and operated for thirty years. It has been a very lucrative business for him; today he is a millionaire several times over. They are aware his firm is the leader in its field in their area and they see the possibility of expanding because many new homes are being built locally.

My friend's father will finance the buyout through a loan, to be paid off over the next ten years. Both of my friends have some degree of expertise in the heating and air-conditioning field since they have both worked for my friend’s father during university vacation times. My friend’s father has also agreed to be a consultant to the two of them for the first year or so if they need his advice.

The business has almost 60 well-qualified employees, a large inventory, 40 service trucks in excellent condition and a well established list of clients. At the same time the return on investment has been lower than average for the past three years, labour costs are very high, and the company has attracted only a few new clients during the past two years. In addition they have some indication that the firm is not carrying the most up-to-date heating or air conditioning equipment and the four large structures used to house showrooms and service centres are in need of refurbishment.

My friends are discussing the possibility of buying the firm. In considering the situation I reviewed the control forms and processes that I would use to ensure effective control over the operation.

I outlined the control issues and potential problems that I considered relevant to this case. I recommended control processes to be put into place to ensure the continued success of the business. Using my knowledge of the concepts and classification of controls, I applied these concepts of control to their particular situation.

The proposed purchase, by my friends, of the air-conditioning business raises many issues that are discussed. I've identified ten potential problems with the acquisition. Half of the potential problems are controllable and I propose four control process models to reduce the risk of business failure.

Issues

Organizational control of the air-conditioning business is required if my friends are to be successful in this venture. Daft (2003, p. 654) defines organizational control as the 'systematic process through which managers regulate organizational activities to make them consistent with expectations established in plans, targets and standards of performance.' The importance of control is evidenced by the fact that it is one of the four basic management functions - planning, organizing, leading, controlling, as explained by Robbins, Bergman, Stagg and Coulter (2003). Controlling is required throughout the depth of the organization (strategic, tactical and operational) and the breadth of the organization (financial, operations, information and people).

As part of the control process, they need systems to measure and compare actual performance. This will allow them to take corrective action if performance deviations are found. They should only control processes which will contribute to the success of their business. One method of selecting these particular processes is by resource-dependency, as described by Bartol (1997). The standards of the existing air-conditioning business need to be reviewed, amended and supplemented, where necessary.

Having established which of the business process performances are to be measured, my friends need to determine if measurement is to be through observation or reporting, i.e. statistical, oral or written. If they find deviations in performance against their standards then they may; take action to change the performance, alter the standard or they may choose to take no action. Depending on the business process, they should use feedback, feed-forward, concurrent control or a combination to match the application. Additionally, the results may be simply mechanically processed or may require subjective judgment.

Up to four managerial approaches to implementing controls are described by various authors. All sources include bureaucratic and clan (decentralized) control. Robbins, Bergman, Stagg and Coulter (2003, p. 558) add a third approach, described as 'market control', which uses external market mechanisms to establish standards in the system. Mullins (2002, p. 774) further identifies a fourth approach which he labels personal centralized control. This approach is found in small owner-managed organizations where decision-making and initiative are centralized around a leadership figure.

My friends need to study the managerial control style used by my friend's father. They should determine if this style is most appropriate to the operations and to the new leadership. Existing control systems and new control systems should be assessed to ensure that they have the right qualities. They also need to consider how the control systems could be misused, manipulated or be negatively viewed.

Ten potential problems

I’ve identified ten potential problems with the management of the air-conditioning business. The first five problems do not lend themselves readily to the application of control processes and they are; their inexperience, business purchase price evaluation, role of the current owner, financial loan terms and nepotism. The remaining five potential problems may be monitored through control processes and they are; inventory turnover, asset turnover, return on investment, profit margin and sales growth.

My friends have some experience in the heating and air-conditioning field, since they both worked for my friend's father during university vacation times. Whilst there are advantages of an early entry strategy into the business, Hodgetts and Kuratko (2001, p. 61) identify a disadvantage that normal mistakes tend to be viewed as incompetence in the successor. The problem centres around the ability of them to gain credibility with the firm's sixty existing employees. This is in contrast to a delayed entry strategy which would involve my friends in gaining experience outside of the business, prior to takeover. This would have the advantages of; self-confidence development outside the firm, credibility and acceptance through outside successes and a broader business perspective.

Establishing a mutually agreeable and fair purchase price with my friend's father for the air conditioning business is a potential problem. Assuming that all of the current personnel will remain, the major concerns are the inventory condition, state of other assets and quantifying the contribution of goodwill. The inventory is large and I have noticed that the firm is not carrying the most up-to-date heating or air-conditioning equipment. Storage costs for this equipment need to be considered and if the products are obsolete then they contribute minimal or no value in the inventory portion of the purchase price. The four large structures used to house showrooms and service centres are in need of refurbishment. The condition of these assets attracts significant maintenance expenditure, required within the immediate future of operating the new business, and this cost needs to be factored into the price. Quantifying the goodwill contribution to the purchase price is complicated by the fact that the company has attracted only a few new clients during the past two years.

My friend's father has agreed to be a consultant to my friends for the first year or so, if they need his advice. Despite the obvious advantages of such an arrangement, there are potential problems. Although my friends will be the owners of the new business, the presence of my friend's father could lead to management conflicts when the sixty existing employees naturally still see him as still being in control of the business. This situation could be further complicated if my friend's father previously used a personal centralized control technique. As company founder, with thirty years of experience, it would not be possible for my friends to emulate his previous style.

The terms of the financial loan need to be thoroughly investigated. Whilst the interest rate could be readily agreed upon, there are other factors of great importance to be formalized. The payment frequency, principal and interest apportioning, payment default definition, contractual terms and security all need to be negotiated.

Nepotism between my friends and my friend’s father is a delicate issue and a potential problem one friend.

As stated previously, the firm has a large amount of stock, due to low inventory turnover, and is not carrying the most up-to-date heating or air-conditioning equipment. The obsolete inventory is a burden, incurring storage costs, and reflects badly in the financial ratios of the business - if it is not already written off. They may inherit this stock if my friend's father insists on compensation for it within the business purchase price.

The four large structures used to house showrooms and service centres are in need of refurbishment. It's possible that this is a result of poor building maintenance planning. Alternatively, short-term cost savings may have been sought by avoiding building maintenance.

Return on investment for the business has been lower than average for the past three years. Labour costs are very high and the firm uses forty service trucks.

The final two potential problems are associated with the fact that the company has attracted only a few new clients during the past two years. If sales revenues are flat or declining then the ability to retain the sixty well-qualified employees, who incur very high labour costs, is in question if the profit margin on sales is to be an acceptable value. Additionally, a certain level of sales are required to achieve total asset turnover to compensate for the forty service trucks and the four large structures used to house showrooms and service centres.

Four control processes

Four processes should be implemented to control the latter five potential problems. The first two processes have the objective of testing the operations and they control inventory turnover and total asset turnover. The remaining two processes have the objective of monitoring profitability and they are profit margin and return on investment. The model of Robbins, Bergman, Stagg and Coulter (2003, p.567) is used to explain the four control processes.

Inventory turnover control process

The inventory turnover control process model is designed to make sure that all warehoused inventory is saleable. This is accomplished by setting an acceptable standard average time period, measured monthly, for all inventory. The average time assumes a standard deviation and may be adjusted so that all inventory remains within their technically and commercially useful life. Price reductions, writing off and scrapping are possible courses of action for obsolete items. The acceptance criteria may be increased if newer models are slower to reach the market and if shelf life permits.

Total asset turnover control process

Robbins, Bergman, Stagg and Coulter (2003, p. 623) identify that 'the fewer assets used to achieve a given level of sales, the more efficiently management is using the organization's total assets'. The main assets of the air-conditioning business are the four large structures used to house showrooms, service centres and the forty service trucks in excellent condition. If the total asset turnover ratio falls below an acceptance criteria then asset re-financing or disposal should be carried out.

Profit margin on sales control process

I initially estimate that the overall gross profit for the air conditioning business should be 40 percent and that the net profit margin should be 7 percent. If the profit margin on sales ratio falls below this standard then they should attempt to increase sales through increased promotion and advertising. Additionally, they may reduce business costs for either labour, materials or overheads.

Return on investment control process

I noticed that the return on investment for my friend's father's business has been lower than average for the past three years. They need to establish the cause for this and to remedy the situation. I propose that they set a standard for their return on investment, identify the cause for any under performance and take action to correct the performance. The control process model shows that they should reduce labour, material or overhead costs if the acceptance criteria is not met for the month. Additionally, the total asset costs should be reduced through re-financing or disposal.

List of references

Bartol, K.M., Martin, D.C., Tein, M. & Matthews, G. 1997, Management: A Pacific Rim Focus, 2nd edn, Sydney: McGraw-HiII pp.6SS-6S8

Daft, R.L. 2003, Management, South-Western, Mason, Ohio, U.S.

Hodgetts, R.M. & Kuratko, D.F. 2001, Effective Small Business Management, Harcourt College Publishers, Orlando, Florida, U.S.

Mullins, L.J. 2002, Management and Organizational Behaviour, Pearson, U.K.

Robbins, S.P., Bergman, R., Stagg, I. & Coulter, M. 2003, Management, Pearson, Australia.I originally wrote this article, “Managerial control” in July 2003.

A group of my friends have what you believe to be the opportunity of a lifetime.

They graduate this year and the father of one of my friends has asked two of them if they would like to buy the air-conditioning business he founded and operated for thirty years. It has been a very lucrative business for him; today he is a millionaire several times over. They are aware his firm is the leader in its field in their area and they see the possibility of expanding because many new homes are being built locally.

My friend's father will finance the buyout through a loan, to be paid off over the next ten years. Both of my friends have some degree of expertise in the heating and air-conditioning field since they have both worked for my friend’s father during university vacation times. My friend’s father has also agreed to be a consultant to the two of them for the first year or so if they need his advice.

The business has almost 60 well-qualified employees, a large inventory, 40 service trucks in excellent condition and a well established list of clients. At the same time the return on investment has been lower than average for the past three years, labour costs are very high, and the company has attracted only a few new clients during the past two years. In addition they have some indication that the firm is not carrying the most up-to-date heating or air conditioning equipment and the four large structures used to house showrooms and service centres are in need of refurbishment.

My friends are discussing the possibility of buying the firm. In considering the situation I reviewed the control forms and processes that I would use to ensure effective control over the operation.

I outlined the control issues and potential problems that I considered relevant to this case. I recommended control processes to be put into place to ensure the continued success of the business. Using my knowledge of the concepts and classification of controls, I applied these concepts of control to their particular situation.

The proposed purchase, by my friends, of the air-conditioning business raises many issues that are discussed. I've identified ten potential problems with the acquisition. Half of the potential problems are controllable and I propose four control process models to reduce the risk of business failure.

Issues

Organizational control of the air-conditioning business is required if my friends are to be successful in this venture. Daft (2003, p. 654) defines organizational control as the 'systematic process through which managers regulate organizational activities to make them consistent with expectations established in plans, targets and standards of performance.' The importance of control is evidenced by the fact that it is one of the four basic management functions - planning, organizing, leading, controlling, as explained by Robbins, Bergman, Stagg and Coulter (2003). Controlling is required throughout the depth of the organization (strategic, tactical and operational) and the breadth of the organization (financial, operations, information and people).

As part of the control process, they need systems to measure and compare actual performance. This will allow them to take corrective action if performance deviations are found. They should only control processes which will contribute to the success of their business. One method of selecting these particular processes is by resource-dependency, as described by Bartol (1997). The standards of the existing air-conditioning business need to be reviewed, amended and supplemented, where necessary.

Having established which of the business process performances are to be measured, my friends need to determine if measurement is to be through observation or reporting, i.e. statistical, oral or written. If they find deviations in performance against their standards then they may; take action to change the performance, alter the standard or they may choose to take no action. Depending on the business process, they should use feedback, feed-forward, concurrent control or a combination to match the application. Additionally, the results may be simply mechanically processed or may require subjective judgment.

Up to four managerial approaches to implementing controls are described by various authors. All sources include bureaucratic and clan (decentralized) control. Robbins, Bergman, Stagg and Coulter (2003, p. 558) add a third approach, described as 'market control', which uses external market mechanisms to establish standards in the system. Mullins (2002, p. 774) further identifies a fourth approach which he labels personal centralized control. This approach is found in small owner-managed organizations where decision-making and initiative are centralized around a leadership figure.

My friends need to study the managerial control style used by my friend's father. They should determine if this style is most appropriate to the operations and to the new leadership. Existing control systems and new control systems should be assessed to ensure that they have the right qualities. They also need to consider how the control systems could be misused, manipulated or be negatively viewed.

Ten potential problems

I’ve identified ten potential problems with the management of the air-conditioning business. The first five problems do not lend themselves readily to the application of control processes and they are; their inexperience, business purchase price evaluation, role of the current owner, financial loan terms and nepotism. The remaining five potential problems may be monitored through control processes and they are; inventory turnover, asset turnover, return on investment, profit margin and sales growth.

My friends have some experience in the heating and air-conditioning field, since they both worked for my friend's father during university vacation times. Whilst there are advantages of an early entry strategy into the business, Hodgetts and Kuratko (2001, p. 61) identify a disadvantage that normal mistakes tend to be viewed as incompetence in the successor. The problem centres around the ability of them to gain credibility with the firm's sixty existing employees. This is in contrast to a delayed entry strategy which would involve my friends in gaining experience outside of the business, prior to takeover. This would have the advantages of; self-confidence development outside the firm, credibility and acceptance through outside successes and a broader business perspective.

Establishing a mutually agreeable and fair purchase price with my friend's father for the air conditioning business is a potential problem. Assuming that all of the current personnel will remain, the major concerns are the inventory condition, state of other assets and quantifying the contribution of goodwill. The inventory is large and I have noticed that the firm is not carrying the most up-to-date heating or air-conditioning equipment. Storage costs for this equipment need to be considered and if the products are obsolete then they contribute minimal or no value in the inventory portion of the purchase price. The four large structures used to house showrooms and service centres are in need of refurbishment. The condition of these assets attracts significant maintenance expenditure, required within the immediate future of operating the new business, and this cost needs to be factored into the price. Quantifying the goodwill contribution to the purchase price is complicated by the fact that the company has attracted only a few new clients during the past two years.

My friend's father has agreed to be a consultant to my friends for the first year or so, if they need his advice. Despite the obvious advantages of such an arrangement, there are potential problems. Although my friends will be the owners of the new business, the presence of my friend's father could lead to management conflicts when the sixty existing employees naturally still see him as still being in control of the business. This situation could be further complicated if my friend's father previously used a personal centralized control technique. As company founder, with thirty years of experience, it would not be possible for my friends to emulate his previous style.

The terms of the financial loan need to be thoroughly investigated. Whilst the interest rate could be readily agreed upon, there are other factors of great importance to be formalized. The payment frequency, principal and interest apportioning, payment default definition, contractual terms and security all need to be negotiated.

Nepotism between my friends and my friend’s father is a delicate issue and a potential problem one friend.

As stated previously, the firm has a large amount of stock, due to low inventory turnover, and is not carrying the most up-to-date heating or air-conditioning equipment. The obsolete inventory is a burden, incurring storage costs, and reflects badly in the financial ratios of the business - if it is not already written off. They may inherit this stock if my friend's father insists on compensation for it within the business purchase price.

The four large structures used to house showrooms and service centres are in need of refurbishment. It's possible that this is a result of poor building maintenance planning. Alternatively, short-term cost savings may have been sought by avoiding building maintenance.

Return on investment for the business has been lower than average for the past three years. Labour costs are very high and the firm uses forty service trucks.

The final two potential problems are associated with the fact that the company has attracted only a few new clients during the past two years. If sales revenues are flat or declining then the ability to retain the sixty well-qualified employees, who incur very high labour costs, is in question if the profit margin on sales is to be an acceptable value. Additionally, a certain level of sales are required to achieve total asset turnover to compensate for the forty service trucks and the four large structures used to house showrooms and service centres.

Four control processes

Four processes should be implemented to control the latter five potential problems. The first two processes have the objective of testing the operations and they control inventory turnover and total asset turnover. The remaining two processes have the objective of monitoring profitability and they are profit margin and return on investment. The model of Robbins, Bergman, Stagg and Coulter (2003, p.567) is used to explain the four control processes.

Inventory turnover control process

The inventory turnover control process model is designed to make sure that all warehoused inventory is saleable. This is accomplished by setting an acceptable standard average time period, measured monthly, for all inventory. The average time assumes a standard deviation and may be adjusted so that all inventory remains within their technically and commercially useful life. Price reductions, writing off and scrapping are possible courses of action for obsolete items. The acceptance criteria may be increased if newer models are slower to reach the market and if shelf life permits.

Total asset turnover control process

Robbins, Bergman, Stagg and Coulter (2003, p. 623) identify that 'the fewer assets used to achieve a given level of sales, the more efficiently management is using the organization's total assets'. The main assets of the air-conditioning business are the four large structures used to house showrooms, service centres and the forty service trucks in excellent condition. If the total asset turnover ratio falls below an acceptance criteria then asset re-financing or disposal should be carried out.

Profit margin on sales control process

I initially estimate that the overall gross profit for the air conditioning business should be 40 percent and that the net profit margin should be 7 percent. If the profit margin on sales ratio falls below this standard then they should attempt to increase sales through increased promotion and advertising. Additionally, they may reduce business costs for either labour, materials or overheads.

Return on investment control process

I noticed that the return on investment for my friend's father's business has been lower than average for the past three years. They need to establish the cause for this and to remedy the situation. I propose that they set a standard for their return on investment, identify the cause for any under performance and take action to correct the performance. The control process model shows that they should reduce labour, material or overhead costs if the acceptance criteria is not met for the month. Additionally, the total asset costs should be reduced through re-financing or disposal.

List of references

Bartol, K.M., Martin, D.C., Tein, M. & Matthews, G. 1997, Management: A Pacific Rim Focus, 2nd edn, Sydney: McGraw-HiII pp.6SS-6S8

Daft, R.L. 2003, Management, South-Western, Mason, Ohio, U.S.

Hodgetts, R.M. & Kuratko, D.F. 2001, Effective Small Business Management, Harcourt College Publishers, Orlando, Florida, U.S.

Mullins, L.J. 2002, Management and Organizational Behaviour, Pearson, U.K.

Robbins, S.P., Bergman, R., Stagg, I. & Coulter, M. 2003, Management, Pearson, Australia.]]> <![CDATA[Virtual team working]]>
Robbins et al (2003, p.4) define an organisation as being "a deliberate arrangement of people to accomplish some specific purpose." If the people working together within the organisation are separated by distance and/or time then the organisation type can be described as being 'virtual’. It is uncommon to find a fully virtual organisation. Virtual teams however, operating within an organisation, are commonplace and their growth in numbers raises many management issues.

Organisation

The virtual workplace has the potential to allow team members to be more effective by matching work times to when people are likely to be at their best. Greater efficiency can be realized by removing time wasted commuting to, and from, a traditional workplace.

Mintzberg's interpersonal, informational and decisional management roles within the virtual workplace may be very different to that of a traditional organisation. Anderson and Shane (2002) report that some virtual teams use shared leadership. They also suggest that having only one team leader can slow decision making. Knowledge management, as an informational role, is a key component of management in virtual organisations according to Witzel (2002).

When evaluating the technical, interpersonal and conceptual skills required for a successful virtual team, Adres (2002) quotes various researchers as stating that interpersonal skills are most important. This is because the lack of physical proximity between team members reduces the number of communication channels available and can lead to an increase in 'noise'.

It could be argued that contributions from Peters (1992) could be considered as worthy of being added to the works of recognized general administrative theorists like Henri Fayol and Max Weber in predicting that "information networks will be decisive to relative future competitiveness”. However, no, universally accepted approach is yet available for the management of the virtual workplace.

Taylor (2001) describes the challenges faced by labour unions in coping with fragmented labour markets in virtual workplaces and introduces the concept of 'e-picketing' by virtual workers as a new form of protest.

Globalisation is seen by Hagen (1999) and many other authors as being a major force in the rise of numbers of virtual workplaces. Workforce diversity is created by the employment of minorities and mobility-impaired people who may otherwise experience difficulties in being accepted by certain traditional organisations. Additional diversity is provided by the fact that people of different countries, nationalities, religion or culture may be part of the same virtual team.

There are certain dimensions of the successful virtual organisational culture that have common characteristics. High team orientation, low aggressiveness and high innovation and risk taking are important. Conner (2003) suggests that organisations will no doubt have to foster proactive employee behaviour in terms of selection, socialization and policies that encourage individual initiative.

External and internal environments

The interface between the external environment and a virtual organisation can be quite different from that of a traditional organisation. Many virtual organisations extensively utilize outsourcing, strategic alliances and similar partnerships to realize their goals, according to Fitzpatrick and Burke (2001). Walters and Buchanan (2001) believe that more cooperation among competitors, suppliers and customers makes it harder to determine where one company ends and another begins.

The proportion of U.S. workers employed in manufacturing has halved in the last thirty years and Konrad and Deckop (2001) attribute this decline to globalization. Virtual teams are a natural choice for geocentric organisations that break down the barriers of time, distance and national borders to execute projects.

Social responsibility and ethics

The classical view that management's only social responsibility is to maximize profits is exemplified by the virtual organisation, according to Conner (2003), who states that [virtual] "organisations are cutting cost and streamlining operations by reducing or eliminating the need for facilities, levels of management and work sites. This contrasts with the socioeconomic view of Businessline (2002), which argues that virtual organisations offer flexible working practices to mobility-impaired talent, women and minorities.

A consideration of ethics within the virtual workplace raises the issues of collective bargaining, communication, security and trust.

Williams (2002) claims that outsourcing of workers affects wage bargaining and quotes Young as stating that, 'in outsourced businesses, the most important flexibility is that of employees in accepting lower wages and intensified work.' However, Taylor (2001) has an interesting notion that the web enables unions to communicate directly with workers in their homes, thus bypassing the employer.

A lack of courtesy may be experienced within the virtual workplace due to the use of e-mail over face-to-face communication. This may lead to assertive and hostile language as reported by Andres (2002) from research carried out by Siegel. Although e-mail has the convenience and casualness of conversation, it is a written record and the contents of some messages can be regretted at a later date.

The dispersed team members within the virtual workplace rely upon internet, satellite and telephone networks for communication and this gives rise to potential security problems. 'In the Net economy, organisations are forced to strike a delicate balance between accelerating their transformation to e-Business while still securing their networks and data. This balance is driving the rapid adoption of security services, a market which analyst firm IDC expects to reach US$21 billion by 2005', according to M2 Presswire (2001).

Staples (2001) has tested four hypotheses dealing with the role of trust in remote work. He suggests that trust between the manager and employee is an important factor for making remote work effective. His research found that four hypotheses
relating to trust were supported, and these were that higher levels of trust between the manager and employee will be associated with:

  • more positive perceptions of self-performance
  • higher levels of job satisfaction
  • more frequent communication
  • lower levels of job stress

Additionally, Anderson and Shane (2002) recognize that trust among the virtual team members is very important and they need to be confident in each other’s competency.

Decision making

Two aspects of the managerial decision making process have prominence within the virtual workplace. They are the availability of information and the empowerment of individual virtual team members.

Koch (2000) describes a decision support environment known as the 'management cockpit', which is an advanced information system. It's a special meeting room with walls covered with screens displaying data on internal and external processes. The vision is to control an entire organisation with one hand and this concept is already being used by companies such as ISS Europe, Citibank, Groupe Oburg and La Suisse Assurance. This type of organisational hub is also described by Fitzpatrick and Burke (2001), who state that it performs all the functions needed to maintain their core competitive competencies and coordinate the work process as it flows or is transmitted from one subcontractor to another within the virtual organisation.

The sharing of relevant information from management amongst virtual team members will become increasingly expected. Decentralised, and a higher degree of discretion in, decision-making will be sought by virtual staff members, according to Businessline (2002).

Experience

I worked for seven years as a Project Manager for Rolls-Royce plc leading virtual teams from 1996 to 2002 in Asia, Europe and the US on three separate projects.

The first project was a joint venture between the jet engine design bureau of Sukhoi and Rolls-Royce plc. The joint venture was created to utilise the energy systems experience of Rolls-Royce to modify Sukhoi jet engines to be used for generating electricity and to pump gas from Siberia to Europe. It was a two year project from 1996 to 1998. A virtual team was created with members in Liverpool, Moscow and Ohio. The team consisted of British engineers and drafters, American stress analysts and designers and Russian designers and production engineers.

The time difference was between three and eight hours for team members and English wasn't readily understood by the Russian designers and engineers. Knowledge was difficult to manage as much of the Rolls-Royce information was proprietary and all of the Sukhoi information was military and only available in the Russian language. Engineering design, equipment and materials were to American, British, Russian, military standards and imperial and metric sizes. I reduced the language barrier by ensuring that all designs, specifications, drawings and daily correspondence was produced in two languages using several interpreters.

The second project was the reconstruction of two, twenty year-old, Rolls-Royce gas turbines for the Oil and Natural Gas Corporation of India. The turbines were past their useful life but the oil rig, where they were located, was a hub and production time could not be lost for the installation of new turbines. Lasting for two years, the project ran from 1999 to 2001. The oil rig was in the Arabian Sea; parts and manpower came from the UK, US, Singapore and Bombay. I was based at hotels in Bombay and Singapore and visited the oil rig by helicopter. The virtual team consisted of designers, drafters, schedulers, technical authors and shippers in the US and the UK. Oil production engineers and construction workers were based in Bombay.

The time difference was between five and nine hours for team members. Communication networks are a problem in Bombay. The infrastructure is not designed for the level of internet traffic and drop-out is frequent during facsimile and e-mail transmissions. Additionally, the monsoon period from May to September creates periods of several days when communication is not possible, due to waterlogged communication hubs and distribution centres. Further, for security reasons, communication between the oil rigs and the outside world is severely restricted to public payphones only. Digital communication with ONGC's oil rigs, by third parties, is not allowed. Whilst onshore in Bombay, I utilised my Nokia 6150 mobile phone for most of the voice calls and was able to transmit and receive e-mails and facsimiles to the UK and the US via the infrared port, using a laptop computer.

My final project with Rolls-Royce plc was remote machinery diagnostics for seven gas turbines owned by bp Indonesia, Conoco and Shell Philippines. These three companies had signed multi-million dollar asset management agreements with Rolls-Royce to manage the maintenance of the machines and to remotely monitor their condition for a period of ten years. The seven turbines were all located offshore in the South China Sea. The virtual team consisted of members in Birmingham, Indianapolis, Jakarta, Manila, Melbourne, Ohio and Singapore. Monthly invoice payments to RolIs-Royce were performance related and penalties were to be applied if machinery efficiency fell below 98.5 percent.

I hired a team of five engineers to be based in the Singapore office of Rolls-Royce and installed several dedicated broadband internet lines for each customer. Using Microsoft SQL and Oracle databases, virtual team members throughout the global company were able to view 300 turbine parameters almost real-time, with only a delay of approximately three seconds. By this method, quality experts in Indianapolis liaised with field technicians from Melbourne and production operators in Jakarta to resolve problems during teleconference calls whilst simultaneously viewing real-time performance data via the internet. Based in Singapore, I was the customer's single point-of-contact for all technical and commercial issues. The global network of Rolls-Royce plc was used, via intranet, to obtain answers to questions beyond my capabilities and a customer response time of same-day or 24 hours was usually achieved. Monthly customer meetings in Jakarta and Manila enhanced the virtual teamwork.

List of references

Anderson, F.F. & Shane,H.M. 2002, 'The impact of netcentricity on virtual teams: The new performance challenge‘, Team Performance Management, 2002.

Andres, H. P. 2002, 'A comparison of face-te-face and virtual software development teams', Team Performance Management, 2002.

Conner, D.S. 2003, 'Social comparison in virtual work environments: An examination of contemporary referent selection', Journal of Occupational and Organizational Psychology, March 2003.

Fitzpatrick, W.M. & Burke, D.R. 2001 ,'Virtual venturing and entry barriers: Redefining the strategic landscape', S.A. M. Advanced Management Journal, Autumn 2001.

Hagen, M.R. 1999, 'Teams expand into cyberspace', Quality Progress, June 1999.

Koch, C. 2000, 'Collective influence on information technology in virtual organisations-emancipatory management of technology?', Technology Analysis & Strategic Management, September 2000.

Konrad, A.M. & Deckop, J. 2001, 'Human resource management trends in the USA Challenges in the midst of prosperity', International Journal of Manpower, 2001.

'NOVELL: Novell delivers iChain web security software - the gatekeeper to network and application resources', M2 Presswire, 18 October 2001.

Peters, T. 2003, Liberation Management, Macmillan, London

Robbins, S.P., Bergman, R., Stagg, I. & Coulter, M. 2003, Management, Prentice
Hall, Australia.

Staples, D.S. 2001, 'A study of remote workers and their differences from non-remote workers', Journal of End User Computing, April-June 2001.

'Surfing the virtual workplace', Businessline, 22 July 2002.

Taylor, R. 2001, 'Workers unite on the internet: TRADE UNIONS: They were as workplace relics quietly fading away. But information technology may offer labour organisations a new lease of life', Financial Times, 11 May 2001 .

'Technology: Substitute or complement?', Businessline, 2 September 2002.

Waiters, D. & Buchanan, J. 2001, 'The new economy, new opportunities and new structures', Management Decision, 2001

Williams, G. 2002, 'Virtual organisations? Union survival in the outsourced workplace', Management Research News, 2002

Witzel, M. 2002, 'lack of tangibles can be an asset MANAGEMENT A-Z: VIRTUAL ORGANISATION:', Financial Times, 29 August 2002.]]> <![CDATA[Customer relationship management]]>
I originally wrote this article, “Customer relationship management” in November 2003. A systematic process is used to prepare a comprehensive proposal to a sponsor for approval to implement a Customer Relationship Management (CRM) System in an organisation. The proposed system introduces a new information system and improves organisational productivity. The sponsor is a financial institution. The information system supports the strategic goals of the organisation where it will be implemented. A systematic approach was followed to identify the opportunity and the choice of proposed system is justified. A feasibility study for the system is proposed, including system investigation and the preparation of functional specifications for the intended system (from a managerial viewpoint) and a system implementation plan is given.

SUMMARY

An investment is proposed for the implementation of a customer relationship management (CRM) system within the client company over a six month period. It is the optimum solution to the client’s problem of how to achieve their sales revenue growth requirement for the next five years.

The proposed system has a good fit with the six strategic goals of their business. In particular, it meets the need to secure lifelong customers who buy the most profitable products using the client’s unique service.

The  problem of achieving sales revenue growth is solved using a systems approach. First, we established that the problem has the four components of; creating customer awareness, encouraging sales, maintaining repeat custom and deciding upon the marketing mix.

Six alternative solutions to the problem are appraised. Mass marketing, CRM, local distributors, local sales representatives, advertising and the internet are considered. These possible solutions are evaluated againstthe definedproblem, cost, time and the degree of fit in supporting the business goals.

The optimum solution is a CRM system to focus the marketing and sales efforts in the right direction. It is envisaged that the system will help to attract, retain and get customers to spend more with the company. Using a relational database, the system will be used to co-ordinate the direct mail and telemarketing campaigns.

A feasibility study is required during the systems analysis and conceptual design phase to ensure that it meets the requirements for data; warehousing,extraction, management, mining, analysis and query. Implementation of the project will proceed only upon a favourable outcome from the feasibility study.

Project implementation is in nine stages. The critical stage is that of training staff in system adoption, data mining, use of technology and in how to get system support.

INTRODUCTION

The client company is a new business venture formed to utilize an opportunity to satisfy a UK demand for Asian products exported from Singapore by air parcel. The target market is small British retailers who already sell antiques, clocks, gifts, handicrafts and home decor. They compete by having product variety, and very few currently sell handcrafted goods from Asia. Their present offerings are either locally made expensively machined products or poor quality imports from wholesale warehouses. The client company offers good quality, high value, low weight, hand-made Asian products by 7 day delivery air parcel for payment by credit card.

STRATEGIC GOALS OF THE ORGANIZATION

The client company has six strategic goals, and they are:

Annual export sales of S$2M in 5 years and 10% net profit after tax - The client company will acquire 500 lifelong European retail outlet customers. The average order value is S$800 per consignment and the client company will receive bi-monthly or quarterly orders from each customer. Gross margin for the cost of goods sold is 50% and the cost of doing business is such that net profit after tax is 10%.

The client company’s customers have high inventory turnover - The order quantity requirements are smaller than that of the client company’s competitors and reduce the amount of cash tied up in the customer's inventory. The customer's higher inventory turnover enables them to place smaller orders which are delivered more often. Their risk of holding low demand products is reduced.

The client company’s value chain is shorter than that of their competitors - The value chain is shorter than that of the competitors because UK wholesale warehouses are eliminated. The client company’s customer is the retailer, not the wholesaler, and deliveries are door-to-door from Singapore to Britain by air parcel - not container ship.

The client company’s goods have a money-back guarantee - Credit is not offered to customers and all order payments are made through Visa and Mastercard credit card companies. However, the credit card companies give 4 to 7 weeks free credit to customers and the client company is paid monthly by the credit card companies, who dictate the money-back guarantee.

The system of competing is unique, integrated and not easily imitated - The client company only sells products to the target market that fits their particular business model. The minimum order value is S$750 and each consignment weighs less than 15Kg. Goods within each consignment are high value, have a high price to weight ratio and are only sold to the target market of small UK retailers who sell antiques, clocks, gifts, handicrafts and home decor.

Competition with the small British retailer is not promoted - The Asian product mix is not readily available in Britain and there are very few competitive outlets already in existence which specialize in similar products. Administration costs are minimized by having a minimum order value of S$750 and, by this mechanism, not selling direct to British end-users. Additionally, substantial discounts are not offered for larger order quantities because this leads to lower retail prices and a perceived lowering of product quality.

SYSTEMS APPROACH TO PROBLEM SOLVING

An approach is used, as described by O'Brien (1999:p.80), to systematically solve the problem in 5 steps:

Recognize and define the problem using systems thinking
Develop and evaluate alternative system solutions
Select the system solution that best meets the requirements
Design the selected system solution
Implement and evaluate the success of the designed system

Problem definition

The problem of acquiring 500 lifelong customers is identified as having the four key components of; creating customer awareness, encouraging sales, maintaining repeat custom and having the right marketing mix.

Customer awareness - How does the client company make UK retailers aware that their company and marketing mix exist? The client company has just recently created their new business venture and, until they can reach their customers, nobody knows who they are, what we sell, where they are located and why they should do business with them.

Encourage sales - If the client company manages to reach their target market then what can they do to encourage customers to place orders with their company? Customers may be aware that their company exists but inertia, tradition or apprehension may influence their buying decision process and divert custom away from their company.

Maintain repeat custom - Having secured their first order from a customer, how do they achieve 'lock-on' and create a lifelong customer? If a customer doesn't enjoy a good experience with the company during the first transaction then the relationship may end after one sale.

Marketing mix - How does the client company know that the product mix is priced correctly through the right distribution channel and that the promotion tactics work? Is there a market demand for the initial offering? Is the end-user willing to pay the retailer the recommended price? Is the marketing campaign investment giving the required return? Are small UK retailers the best distribution channel?

Evaluation of alternative systems

Six alternative solutions have been developed to solve the problem:

Mass marketing
Customer Relations Management system
Local UK distributors
Local UK sales representatives
Advertising
Internet site only
Problem Mass marketing CRM system Local UK distributors Local UK sales representatives Advertising Internet site only
Customer awareness Very low response rate Low response rate Low incentive to promote client’s products High cost and time to establish contacts Very high cost and very low response rate Low cost but no response
Encourage sales Very low probability of obtaining orders Moderate probability of obtaining orders
 Moderate probability of obtaining orders High probability of obtaining orders Low probability of obtaining orders Very low probability of obtaining orders
Maintain repeat custom No relationship building High relationship building Moderate relationship building Very high relationship building No relationship building Very low relationship building
Marketing mix Very low customer feedback High customer feedback Moderate customer feedback High customer feedback No customer feedback Low customer feedback
Cost Moderate Moderate High Very high High Very low
Time Quick Moderate Slow Slow Quick Quick
Degree of fit in supporting business goals Low - not target market and could promote competition to small retailer High - meets all business goals Low - extra stage in value chain and not unique selling system Moderate - reduced profit Low - not target market and could promote competition to small retailer Low - not target market and sales goal not possible

The six alternatives solutions have been evaluated as to how they fit in supporting the business goals and solving the problem:

Our development and evaluation of the six alternatives gives the optimum solution to our problem of acquiring 500 lifelong customers profitably as being to implement a customer relationship management system.

PROPOSED SYSTEM

The proposed customer relationship management system has the benefit of facilitating the business goals at a reasonable cost. This represents a saving on the appointment of UK sales representatives to achieve comparative results.

The CRM system will focus the client company’s marketing and sales efforts in the right direction, allow statistical analyses of the marketing campaigns and fit the business goals.

The client company’s revenues will not be enhanced by selling more core items but by increasing the amount of spending customers do with the client company. The system will enable the client company to monitor and enhance the longevity, depth, breadth and diversity of spendingby their customers. It will identify customers with opportunities, as well as customers at risk. The system will allow the client company to understand the differences among customers, particularly the nature and intensity of the relationship they currently have with the client company, so the depth, breadth and the length of their relationship can be improved. By developing a multidimensional customer typology (segmentation scheme), the client company will select segmentation variables which show customer's preferences for products and the intensity (magnitude and frequency) of their relationship with the client company. It can be determined what the most profitable customers look like, who the high-risk customers are and describe customers who have a high propensity to buy certain products.

A proprietaryrelational database will be populated by client company staff with 10,000 to 30,000 small UK retailers who already sell antiques, clocks, gifts, handicrafts and home decor. Basic information for the target market is available from UK regional Chambers of Commerce, trade directories, Yellow Pages, etc. Commercially available data bases are avoided because they are notoriously unreliable and very expensive. Weekly regional direct mail campaigns will target London, followed by Birmingham, Leeds, Sheffield, Bradford, Liverpool and Manchester. Each batch of direct mail is to be followed by telemarketing calls from the single point-of-contact staff at the client company’s call centre.

The business goals of the client company will be supported by the CRM system. Their sales and profit goal will be made possible by getting direct mail I telemarketing response rates better than the 2 to 3% achievable by direct mail alone. This will assist the client company to get a critical mass of customers locked on and will create a platform from which to stretch their product range into the many areas of their end-users' lives. The customer benefits of a high inventory turnover, money-back guarantee and 'small retailer only' target market will be explained by the client company’s telemarketers to potential customers and their responses will be recorded into their database for analysis. High value to weight products, for low shipping costs, will be selected to match the particular requirements of individual groups of customers, from their database response records, to further focus on market niches.

FEASIBILITY STUDY

A feasibility study is required within the systems analysis and conceptual design phase of the client company’s implementation plan. The implementation of CRM within their company is a major undertaking and they need to make sure that they have sufficient resources and are able to integrate this system with their other management information systems. This will involve the development of many processes within their business model. Hardware, software and resource costs and the time taken to implement the CRM system need evaluating to verify that the project is feasible.  The implementation plan will proceed only if the results of the feasibility study are positive, thus enabling the project to be completed.

It needs to be determined if, within the business constraints, it is viable to implement:

Data warehouse information - customers calling the client company, their purchases, transaction history, complaint history, data archaeology, contact, customer business, group, history, promotion, product purchases, survey and customer response data, customer interaction data.

Data extraction and cleansing

Data management and storage - logical stores of information

OLAP or data mining applications

Data analysis and query tools - sliced and diced system reports

These are the main features required of the CRM if implementation is to proceed and the project is practical.

IMPLEMENTATION

Implementation of the CRM system is in the eight stages of strategic planning, research, system analysis and conceptual design, design, construction, implementation, maintenance and documentation, adaptation.

Strategic planning - complete business process analysis, identification of  customer interaction points and decision support requirements.

Research - assessment of market conditions, business resources and possible technological means of meeting business needs.

System analysis and conceptual design - user interaction, software and hardware vendor assessment, data design, scalability and feasibility study.

Design - detailed specification, selection of specific software packages and core technologies.

Construction - execution of design plan

Implementation - training program for staff in; system adoption, support     seeking, technology, data mining techniques.

Maintenance and documentation - system performance evaluation, data quality, data quantity, confirmation of meeting DSS needs.

Adaptation - modifications to the system to match changes in the market and business.

A phased roll-out is planned, commencing with a pilot program.

CONCLUSIONS

The client company’s first strategic business goal of annual export sales of S$2M in 5 years is achievable with the proper management tools. The proposed CRM system is one of those tools. It’s not pretended that use of this technology will solve all of the problems. It is the people within the company, using this technology, that will determine the success of the venture.

List of references

Q'Brien, J.A. 1999, Management information systems: managing information technology in the inter-worked enterprise, 4th ed., Boston, Irwin McGraw Hill.]]> <![CDATA[Enterprise resource planning]]> I originally wrote this article, “Enterprise Resource Planning” in October 2003 when I analysed the Fast Food Industry’s business models using the competitive forces and value chain analysis models.  I explained that an Enterprise Resource Planning System would provide a good solution to McDonald’s challenges.  The critical success factors driving technological were identified and reasons for the failure of information systems, within the fast food industry, were given.  The managerial, organisational and technology factors that caused these problems were explained.  The role and impact of alternative information systems development projects were evaluated in terms of the future strategic directions to be taken by McDonald’s and Burger King.  The undertaking of risk evaluations are recommended with each project.  Finally, I recommended an approach to prevent the negative impact of technology upon the people concerned, including the financial performance of the stock.

BUSINESS MODEL ANALYSIS

Competitive forces model

The competitive forces within the fast food Industry can be analyzed using Michael Porter's competitive forces model, described by O'Brien (2003:p.42). These forces are the bargaining powers of customers and suppliers, competitor rivalry, new entrant threats and the threat of substitutes.

Customer bargaining power is high and created by fast food outlets being located in close proximity to each other. Prices are readily displayed, giving the customer a real choice of which outlet to buy from.

Supplier bargaining power is low because of the concentration of suppliers and the availability of substitute suppliers.

Competitor rivalry is high because it is difficult for fast food companies to distinguish themselves from their competitors, so the challenge has intensified.

The threat of new entrants is caused by the relatively low entry barriers into the fast food business. MOS Burger and Wendy's are examples of new entrants.

The threat of substitute fast food products is affected by trends, such as increased health consciousness, and cost changes.

Using Michael Porter's above model; competitive strategies of cost leadership, differentiation, innovation, growth, alliances and other tactics are used in the fast food industry to counter the actions of the above competitive forces.

A cost leadership strategy used by fast food companies requires efficient facilities, cost reduction programs and tight cost control by a structured organization with defined responsibilities.

An example of a differentiation strategy is that used by McDonald's to distinguish it's products and services from Burger King, etc. by introducing wholesome foods, re-introducing hostesses to carry trays and exploiting the Ronald McDonald mascot for the brand experience.

Innovative strategies employed by fast food companies include; operating units in non-traditional markets, dual branding, food science experimentation and test marketing of new products to adjust to the consumer's changing food tastes. For example, on 8th October 2003, McDonald's appointed a Director of Worldwide Nutrition to help guide McDonald's nutrition and active lifestyle initiatives, McDonald's (2003c).

The growth strategies of a fast food business expand the company's ability benefit from the economies of scale, product integration and global expansion. Both McDonald's and Burger King see the Eastern Hemisphere as a place to expand and compensate for the more saturated market in America and Europe.

Alliance strategies are becoming more prevalent in the fast food industry. Competitors like KFC and Pizza Hut share common locations and home delivery services. McDonald's have more than 800 restaurants in Wal-Mart stores.

Another strategy used by McDonald's to counter competitive forces is sponsorship. For the first time, the company became the exclusive worldwide sponsor of the Olympic Day Run, in addition to being committed to the International Olympic Movement for more than 30 years, McDonald's (2003b)

Value chain analysis model

The business model within the fast food Industry can also be analyzed using Michael Porter's value chain analysis model, described by Kotler (2003:p.70), as a tool for identifying ways to create more customer value. The primary activities in the generic value chain are in bound logistics, operations, outbound logistics, marketing, sales and service. The support activities are firm infrastructure, human resource management, technology development and procurement.

Using McDonald's as an example of a fast food business, the primary activities of logistics and operations are decentralized whereas sales, marketing and service are centralized, according to Lorentzen (2000). Each region of restaurants manages its own supply of materials and operational efficiency to create customer value, but sales, marketing and service are centralized.

The fast food business support activities are usually centralized, with the exception of procurement. McDonald's implements a centralized Supplier Social Accountability Program and Supplier Product Quality Program, reports Beurskens (2002), as a condition of doing business with the company. However, whilst a supplier is in compliance with these procurement programs, buying from these suppliers is controlled regionally.

An ERP as a good solution to McDonald's challenges

McDonald's has 10 challenges:

  • Customer satisfaction - McDonald's has been ranked the worst company for customer satisfaction in America for a decade.
  • Franchisee monitoring standards - The company has no system for monitoring standards, so as to avoid trouble with the franchisees.
  • Investor relations - McD's share price has underperformed the S&P500 for several years. Investors want a tighter, more centralized McDonald's.    Instead of aggressive expansion, investors want the company to concentrate on the profitability of existing stores, The Economist (2001).
  • Threat of substitutes - The future of fast food may be congee, tofu and roast duck as Chinese will displace the burger and pizza, says The Economist (2002a). The Economist (2002b) reports that sales at McDonald's and Burger King are declining and 'fast casual' gourmet sandwich, salad and soup chains are taking market share. McDonald's offering looks increasingly outdated.
  • Changing customer eating habits - “The world has changed. Our customers have changed. We have to change too", says McDonald's CEO, Jim Cantalupo, in The Economist (2003). There are too many confusing meal choices and variety will be reduced and salads, yoghurts and sliced fruit introduced.
  • Growth - The company no longer aims to be bigger than everybody else in the fast food industry, just better. A decade of stagnant US store sales was followed by declining sales in 2002. like Coca-Cola or Disney, McDonald's is in the maturity stage of it's life cycle and, as a cash cow, needs milking.
  • Capital investment - The company massively misallocated capital for decades, according to The Economist (2003), and slashed capital spending by a third, to USD1.2 billion, for 2003.
  • Out-of-date strategies - The Economist (2003) quotes an analyst as saying that McDonald's top management, shaped by previous out-of-date strategies, lacks the vision or stomach to make the necessary changes."
  • Decentralization - The company decentralized operations in 1998 to rebuild tattered relationships with franchisees. However, this caused reduced service, quality and cleanliness standards. McDonald's new CEO promises improvements in franchisee restaurant management.
  • Franchisee alienation - The poorly executed and imposed 'Made For You' kitchen initiative had an adverse effect upon franchisee revenue growth and profits.


An enterprise resource planning (ERP) system would provide a good solution for McDonald's 10 challenges.  The company's internal businesses would be integrated and improved through a framework. This would enable monitoring of franchisee standards and increase customer satisfaction. An ERP would increase efficiency, thereby reducing costs and improving investor relations. Quick access to sales information would allow the company to develop menus to match the changing eating habits of customers, counter the threat of substitutes and make informed capital investment decisions. The decision support from an ERP would also enable strategies to be adjusted and brought up-to-date. Centralization of the many regional and departmental existing information systems would give greater agility to McDonald's.

Burger King's ERP system, reports Malcom (2003), enables the company to analyze sales trends and track food costs on a daily basis and is also used by marketing to analyze the product mix. A growing number of fast food companies, like Burger King, are standardizing their systems on packaged ERP systems, according to Songini (2002). Burger King uses Microsoft's “Business Solutions” says iStart (2003)

CRITICAL SUCCESS FACTORS

Critical success factors driving technological change

The 'Investor Fact Sheet, McDonald's (2003a) defines the company's critical success factors as being those of McCarthy's Four P Components of the Marketing Mix, Kotler (2003:p.16), plus people - Product, Price, Promotion, Place and People.

The product variety needs to match changing customer tastes and swift fast food outlet feedback is necessary to drive the changing product mix. Product quality requires controlling and customer service needs improving.

The food price is determined by market forces, so costs need reducing through greater operational efficiency. Operating profits and returns on investment call for improvements.

Promotion of McDonald's brands needs re-building to differentiate its products and service from competitor offerings.

The place where customers dine, the McDonald's restaurant, has lost it's status as the gold standard for clean restaurants. It needs re-imaging, rebuilding and renovating.

The people who produce the restaurant food require training to deliver better customer service and educating in the use of technology for logistics, production and sales.

Reasons for failure of IS within the fast food industry
The 6 reasons for failure of IS within the fast food industry are; project cancellation, user resistance to IS, system crashes, user lack of understanding IS, bad system performance and IS not meeting expectations.

Management, organizational, and technology factors

Poor management can cause IS project cancellation. McDonald's wrote off $170 million already spent on a project in 2002 when they unexpectedly realized that the final cost would exceed $1 billion.  Taylor (2000) identifies scope management as the leading management activity leading to IS project failure. Companies tend to underestimate the planning complexity, development and training required to change business processes. Compressing new IS roll-out periods, an over reliance upon expensive and external ERP consultants and overstated expectations also contribute to IS failure.

Organizational factors in the fast food industry contribute to IS failure, especially if corporate IT systems are linked to individual stores or franchises that have workers who are relatively unfamiliar with technology, according to Computer Weekly (2002). The non-involvement of affected workers in development and insufficient employee training in ERP can also cause IS project failure.

Technology factors are the least cause of IS failures. Technology problems are only responsible for between 12 and 15 percent of projects that don't work, says Everett (2002).

ALTERNATIVE IS DEVELOPMENT PROJECTS

Role and impact of alternative IS development projects

The role of alternative IS development projects in the fast food industry is to increase revenues and reduce costs.

McDonald's has tested automated order taking machines, using paper money only, says Belilos (1999).

The VISA quarterly report (2002) describes how Burger King and VISA are developing cashless payment.

Contact-less, cashless payment, according to Longini (2002) and Kuykendall (2003), is accepted at certain fast food outlets, e.g. McDonald's in Chicago in the form of a car key fob.

Centralized management of HVAC, lighting and food processing energy conservation systems, reports Sheehan (2001), is being tested by McDonald's at their restaurants in Atlanta, Chicago, Colorado springs and San Francisco.

Ewalt (2002) and Hamblen (2002) say that Burger King uses Palm-100 PDA programmed warming bins in 500 company-owned restaurants and is transitioning to all of it's 8,000 outlets.

McDonald's is looking at putting in an electronic invoicing system that will be integrated into it's network, reports Newman (2002).

Singer (2003a), Black (2003) and Krane (2003) report that McDonald's unveiled wireless hotspots at 10 restaurants in New York and plan to "unwire” 300 restaurants by the end of the year. The New York launch was followed by a similar launch in San Francisco, according to Singer (2003b), and subsequent openings in Chicago, Canada and Australia, reports Kaye (2003).

Burger King, according to Hulme (2003), uses identity and access management systems at a cost of $5 to $25 per employee to protect access to it's systems because of rapid staff turnover.

The impact of automated order taking and cashless payment is to reduce order processing times and cash handling costs. Energy conservation, programmed warming bins and electronic invoicing all reduce operational costs. The impact of WiFi is to increase sales revenue by attracting new customers or retaining existing customers who might be tempted to use the facility elsewhere.

If McDonald's and Burger King choose the strategic directions of cashless payment to reduce costs and WiFi to increase sales revenues then substantial capital investment is required.

Risk associated with each project

Risk evaluation is required at the beginning of each project to evaluate the risk probability and magnitude of effect of the occurrence of the risk associated with each project.

The risks associated with ERP and operational efficiency systems implementation vary according to whether the project has a piloted, phased or 'big bang' roll-out. Risks connected with existing legacy systems, crash contingency plans, stoppages etc. need evaluating. Floyd (2000) says that "the obvious places to start a phased migration are with the 'easy' modules, like Fixed Assets and General Ledger.

Cashless payment IS project risks include system crashes, software and hardware bugs, card theft, communication problems and employee training.

Prevention of negative impact of technology

Technology is prevented from having a negative impact on the people concerned by involving them from conception to completion of each project. Users need to be involved in project development and they need to be trained. Pilot programs require assessing and investors should be kept informed of the hefty financial commitment before the first cheque is written.

McDonald's have introduced e-Ieaming tools in restaurants to bridge the technology skill gap of franchisee employees required to use new information systems. Jones (2001) quotes McDonald's as saying, "This is not a white collar tool. This is a business tool”.

Customer and employee acceptance of new technology can be assessed using pilot programs. For example, a new POS contact-less smart card has been tested by McDonald's and Mastercard in Orlando, says Lingblom (2003).

The financial performance of the stock can be protected by making provisions in several years of accounts for investment in IS. The total costs must be realistic and must include all costs for data conversion, employee training, software, hardware, implementation, maintenance and a risk contingency

List of references

Belilos, C. 1999, 'Technology enhancing service at MacDonald's', CHIC Hospitality Consulting Services, 16th August 1999. Retrieved: from http://www.easytraining.com on 1 th October 2003.

Beurskens, F. 2002, 'Value of Supply Chain Management Issues from the Customer's Perspective', Corn Utilization and Technology Conference 2002, 3rd June 2002. Retrieved: from www.agribiz.com on 1ih October 2003.
Black, J. 2003, ~The Magic of Wi-Fi', Businessweek, 18th March 2003. Retrieved: from www.businessweek.com on 17th October 2003.

'Burger King standardizes ERP menu', Computer Weekly, 9th July 2002. Retrieved: from www.computerweekly.com on 17th October 2003.

Cantalupo, J. 2003, 'McDonaJd's eMac Digital News', McDonald's Corporate Press Release, 20th May 2003.
'Did somebody say a loss?', The Economist, 10th April 2003.

Everett, C. 2002, 'Special Report - The slings and arrows of CRM', Akibia, 18th July 2002.

Ewalt. D. M. 2002, 'PDAs get more innovative, from food-service to life-saving functions', Informationweek, 9th September 2002. Retrieved: from www.informationweek.com on 17th October 2003.

Floyd, T.H. 2000, 'Phased ERP Implementation instead of "The Big Bang"', ERP World West, Anaheim 2000. Retrieved: from www.supgrp.com on 17th October 2003.
Hamblen, M. 2002, 'Field Report: Want Fries With Your PDA?, ComputelWorfd, 29th July 2002. Retrieved: from www.computerworld.com on 17th October 2003.

Hulme, G. V. 2003, 'Companies can cut costs significantly by implementing software that manages users' access to applications', Informationweek, 20th January 2003. Retrieved: from www.informationweek.com on 17th October 2003.

'Investor Fact Sheet', McDonald's, May 2003a. Retrieved from www.mcdonalds.com on 1th October 2003.

Jones, M. 2001, 'Comdex E-Ieaming experts call for knowledge management rethink', Infoworld, 15th November 2001. Retrieved: from www.infoworld.com on 17th October 2003.
'Junk food?', The Economist, 5th December 2002a.

Kaye, T. 2003, 'Will you be having a McWiFi with that, sir?', Australian IT News, 26th August 2003. Retrieved: from www.australianitnews.com.au on 17th October 2003.

Kotler, P. 2003, Marketing Management, 11th ed., Prentice Hall, New Jersey, USA.
Krane, J. 2003, 'Burgers, Fries, And Wi-Fi', Informationweek, 11th March 2003. Retrieved:
from www.informationweek.com on 17th October 2003.

Kuykendall, L. 2003, 'Will Contactless Payments Prove Sticky?' I American Banker, 9th June 2003. Retrieved: from http://aO-gateway.proquest.com.ezproxy.scu.edu.au on 17th October 2003.

Lingblom, M. 2003, 'Mastercard puts contactless smart card to the test', CRN.Jericho, 3rd March 2003, Iss. 1035; p. 55. Retrieved: from http://80-gateway.proquest.com.ezproxy.scu .edu.au on 1ih October 2003.

Longini, P. 2002, 'Models for Internet Success and Failure', Techyvent, 7th January 2002. Retrieved from www.imakenews.com/techyvent on 17th October 2003.

Lorentzen, 1.2000, tlmplementing multi-site ERP projects: centralization and decentralization revisited', Department of Sociology, NTNU Inform. Science, Norway.
Malcolm, A. 2003, 'Aussie burger chain gains Kiwi smarts', IDG Communications Ltd, 24th January 2003. Retrieved: from www.idg.co.nz on 1 ih October 2003.

'McDonald's Announces Worldwide Sponsorship of Olympic Day Run', McDonald's Corporate Press Release, McDonald's 16th June 2003b.

'McDonald's Corporation Announces Worldwide Nutrition Director' I McDonald's Corporate Press Release, McDonald's ath October 2oo3c.

'Microsoft Business Solutions delivers for Burger King', iStart Limited, February 2003. Retrieved: from www.istart.co.nz on 17th October 2003.

Newman, K. 2002, 'McDonald's seeks closer electronic relations', iStart Limited, August 2002. Retrieved from www.istart.co.nz on 1ih October 2003.

'Not so fast', The Economist, 5th December 2002b.

O'Brien, J. A. 2003, Management Information Systems, McGraw Hill, New York, USA.

Sheehan, M. 2001, '10 Ways to Cut The Cost of Energy', H T Magazine, March 2001. Retrieved from www.htmagazine.com on 1ih October 2003.
Singer, M. 2003a, W-Fi Gets 'Super Sized", IT Management, 11th March 2003. Retrieved: from www.itmanagement.earthweb.com/erp/article.php/2107771 on 17th October 2003.

Singer, M. 2003b, 'McDonald's Serves Up Wi-Fi in SF', Jupitermedia Corporation, ath July 2003. Retrieved: from www.cioupdate.com on 17th October 2003.
Songini, M. L. 2002, 'Burger King Upgrades to mySAP.com', Computerworld, 15th July 2002. Retrieved: from www.computerworld.com on 17th October 2003.

'Spotlight: Burger King Pilot', Visa Quarterly Report, Visa, August 2002. Retrieved: from www.visa.com/usnewsroom on 17th October 2003.

Taylor, A. 2000, 'IT Projects: Sink or Swim', The Computer Bulletin, January 24-26. 'Where's the beef, The Economist, 1st November 2001.

]]> <![CDATA[Online retail]]>

I originally wrote this article, “Online retail“ in April 2003.  The effectiveness of the marketing and operations management of Amazon.com are discussed and changes are suggested to improve the management of these functions.

Introduction

Amazon.com is an international business with operations in Asia, Europe and the US.  Using the latest internet technology, the company trades in goods online and provides services to other companies. Amazon.com owns several patents based upon internet technology.  'Amazon.com Reports Second Profit Ever' (2003) describes how the company's revenue for 2002 was $1.43 billion, up 28% from 2001's figures and annual sales for 2003 are expected to increase by 15 percent upon sales for 2002. Net income for the company in the last quarter of 2002 was $2.7 million, down 48 per cent from the same period in 2001. A $40.6 million exchange rate loss in the euro contributed to this fall as Amazon's $2.15 million borrowings are in this currency.  However, euro fluctuations in 2001 gained the company $16.3 million.

International sites in Japan, Germany, France, UK and Canada provided the company with the largest growth during 2002.  The annual revenue for each international site increased by more than 60% in 2002. This created a 76 per cent annual increase for the international business, outside the US, to $461.4 million.

The company was founded in 1995 by Jeff Bezos and Schepp (2002) describes how Jeff attributes continuous improvements in computer and internet technology as being key to the success of his operations. According to Moore's Law, a doubling of speed in computing technology takes place every year. Lower prices, faster delivery and new web-site features have been achieved by Amazon as a result of this.

International marketing business strategies

Amazon's SEC report ‘Annual Report Persuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31,2002' (2003) includes their mission statement, “We seek to offer Earth's Biggest Selection and to be Earth's most customer-centric company, where customers can find and discover anything they might want to buy online. We have designed our Web sites to allow millions of new, used and collectible products to be sold by us and by other businesses and individuals worldwide. A product on our Web sites may be listed for sale simultaneously by several different sellers. For instance, a product may be offered by us, by a participant in our Merchants@ program and by a business or individual selling a new, used or collectible version of the product through Amazon Marketplace, zShops or Auctions. We also offer certain e-commerce services to other businesses through our Merchant.com and Syndicated Stores programs." The expansion of Amazon's product and service range appears to be getting to a stage where either the company should consolidate its position within the market or split up the company. There is a danger that customers and management will find it hard to focus and identify with the aims of a company with such a diverse product I services mix.

Cost leadership is the international business strategy adopted by Amazon.  Additionally, the company also adopts a strategy which attempts to differentiate its products and services from that of its competitors. The product range is greater than that of high street book sellers. Promotion of Amazon's products is online rather than in-store and distribution is centralized via courier, rather than personal pick up of the product from the retailer. However, with such a variety of products, its competitors are not now just the booksellers. It is any company that sells any of its products either offline or online.

To attain synergy and competitive advantage, Amazon has strategic alliance partner networks with other retailers. Jeff Bezos' goal is to provide customers with a single source of supply. "Our vision is to become a one-stop shopping place for anyone to buy anything. It will be done not exclusively by us alone but in conjunction with what will ultimately be thousands of partners. The benefit of which is lower prices and better selection for Amazon customers“. I would recommend that the book sales business be separated from the 'one-stop shopping place'. Amazon have good experience with book sales but could jeopardize the success of this portion of Amazon by diluted efforts.

Last year, Amazon opened its fifth international business operation and expanded into the Canadian market. Amazon saw it as a natural choice as Canada was served by only one major online retailer, Heather Reisman's Chapters - Indigo. I consider that the choice of Canada for the latest international site was a mistake. Canadian law prohibits direct management of the operations and the company is in danger of losing control of its operations which are entirely subcontracted to third parties.  Additionally, the total population and population density of Canada isn't amenable to providing a wide variety of products with a quick delivery service.

Think global, act local

Amazon's marketers had to decide between an ethnocentric, polycentric or geocentric approach to their international operations.  They chose geocentric marketing and operations management. To the international consumer, it appears to be a polycentric company. Each website, for countries whose first language is not English, is available in that country's language and English.  However, Amazon achieves this "think global, act locally" approach through the clever use of software.  They have developed a single piece of global software which can handle any language. This reduces their entry costs into further international markets.

Foreign pricing laws

Amazon's international pricing policy is influenced by the laws and regulations of host countries. For example, there is no law against price fixing in Japan. Publishers in Japan do not allow retailers to discount prices on their books. This means that Amazon's strategy is modified for the Japanese market.  Only books in non-Japanese language and other products are discounted.  List price is used for Japanese books. I recommend that Amazon focus on the product, promotion and place in countries where laws dictate list price. A larger product collection, online promotion and same day delivery would differentiate Amazon from its competitors in densely populated cities of certain countries.

Cultural differences

Soto (2002) describes how mobile phones are heavily used by the Japanese for online purchases. They spent $19.2 million for online purchase of books and music, via mobile phone in early 2002. Amazon lags behind its Japanese competitors, such as Kinokuniya, in the use of mobile technology for online purchases.  However, Amazon state that they expect only a small proportion of their sales income growth through mobile devices, compared with internet access through computers.

American culture and products are popular in Japan. Amazon bought 9% of the shares of a US company that specializes in assisting companies to expand into international markets using multi-lingual software.

Japanese preferences for payment methods has also affected another of Amazon's strategies in this country. The payment method to Amazon for goods, used internationally, is by credit card. However, the Japanese don't normally use credit cards for payment of goods. Amazon has changed its payment policy in Japan and offers cash on delivery, to suit the local market.

Branding

Amazon expects growth in its international markets to exceed growth in its domestic market. High international brand recognition is assisting this growth. For example, the market in Japan was developed prior to the company starting operations there.  Tens of thousands of Japanese customers were already patronising Amazon's other international sites, based upon the high brand recognition.  After commencing operations in that country, the Japanese web site now has revenues in excess of $100 million.

Yamada (2000) reports that three years ago, complaints started to be made about Amazon's alleged practice of dumping liquidated, discontinued, damaged, returned or overstocked products on its auction sites. Questions were asked as to whether this strategy conflicted with Amazon's quality branding image. In response to this criticism however, the company gave 'money back' guarantees for purchased items to a value of $2,500. I'd recommend that Amazon separate these business activities from its core business an operate them under a different company name to preserve their brand image in online book sales.

Pricing

Amazon's sales volumes increase yearly. The sales are driven by lower prices and Jeff Bezos claims that Amazon is lower in price because it can afford to be. 'Chewing the Sashami with Jeff Bezos' (2002) reports that although one of Amazon's long standing goals had been to reduce prices, it was only in 2002 that they were able to do so. A re-arranged cost structure from years 2000 to 2002 allowed the company to achieve this goal. Price reductions were achieved in three stages. Firstly, a 30 percent discount was offered on all books over $20. This was followed by free or discounted shipping. Most recently, the 30 percent discount was extended to books over $15.

Retail prices are discounted by 20 per cent to 80 per cent for liquidated products sold online by Amazon. This compares to 40 per cent to 80 per cent discounts offered by traditional liquidators. Amazon receives 5% sales commission for these products and the company's aim is to provide a better return than traditional liquidators can achieve. I'd recommend that liquidated products be sold by the company under a name other than 'Amazon' to preserve brand image.

Market pricing

Amazon's Canadian operations, which began last year, has adopted market pricing.  It discounts its top 40 bestsellers in Canada by 40%. Amazon's Canadian competitor, Indigo, was forced to adopt the same strategy. This form of geographic market pricing is necessary to compete in local markets.

Product prices can be adjusted to match changing geographic, demographic or economic market conditions using web-based systems. In 2001, Amazon tested market pricing but had to abandon the test after five days because of customer resentment.  I'd recommend that the company only use market pricing geographically.

Advertising

Amazon's expenditure to retain existing customers and to acquire new customers is very large. Advertising costs in 2003 will exceed $100 million.

The company has developed software that analyses the purchasing patterns of individual customers. It then recommends complimentary products based upon that particular buyer's previous buying history. According to Jeff Bezos, “The goal here is not rampant consumerism. The idea is to use technology to capture information about customers and their interests and match individuals with other products they might like, including products they don't know even exist."  I'd recommend that Amazon spend more effort in re-assuring the customer of how this information is exactly used to prevent mistrust.

Sales promotions

Soto (2003) reports that Amazon's free shipping promotion will cost the company $100 million in 2003.  Free shipping commenced at the end of 2002 and the campaign has proved to be so successful that the promotion will continue throughout 2003 for orders above $25 in the US and £39 in the UK.  Amazon attributes a 28 percent sales increase as being a result of the free shipping promotion. Free shipping is also offered at its international sites in Japan and Europe throughout 2003.  Sales volumes in the UK rose 32 percent for the end of 2002 as the British operations shipped 6.2 million products. The free shipping promotion contributed to a sales growth of 76 percent for its international operations at the end of 2002.  I'd recommend that Amazon use quantitative analytic techniques on a regular basis to match sales promotion expenditure with increase in sales revenue and make sure that it is a profitable activity.

‘Jeffrey P. Bezos' (2002) describes how Amazon offers a 15 percent commission to other companies whose web sites link a customer to Amazon, resulting in a sale. The web sites can recommend Amazon books and tens of thousands of these affiliate sites are linked to international Amazon sites.  I'd recommend that Amazon be selective in the frequency of payments to affiliates. Only a few hundred affiliates with large commissions due should be reimbursed monthly, the remainder being paid yearly.

International operations management

The international operations management is now organised on a geocentric basis.  The company merged the management of its US home country business with its international business operations in November 2001.

Supply chain management

Jeff Bezos states that the distribution philosophy at Amazon is different from traditional retailers. Amazon uses a centralized distribution system. The inventory is much reduced when compared to that of high street retailers. Jeff Bezos expects that this business decision will ultimately lead to a very high return upon the capital investment.

International couriers, international and national postal services are used by the company for distribution of its products to customers. Urban property identification is very different in Japan, when compared to Europe and the US. Many streets don't have names and there is often no sequence to property numbers. Amazon aligned with Nippon Express for customer deliveries to benefit from their 'in country' knowledge.

Amazon was taught a lesson from its distribution centre mistakes in the US and applied its learned experience in Europe. The company had previously constructed too much warehouse capacity in the US and was forced to close one warehouse. They built five automated warehouses but only actually required four.  After this, international depots were designed more efficiently.

International business accounts for one-quarter of Amazon's sales. However, much of this business doesn't involve products crossing borders.  For example, the business operation in Germany deals mainly in books produced in the German language. These books are published and distributed within the same country.

Supply problems have created difficulties for Amazon in Canada. The relatively small population leads to smaller stocks of fewer titles being held by the publishers.  It’s not economically viable to maintain huge stocks in Canada and this has lead to customer complaints of late deliveries. The business in Canada was created to alleviate the problems experienced by Canadians when they orders goods from the US.  High shipping costs and adverse exchange rates are avoided.  However, low warehouse stocks levels in Canada create the situation whereby it’s still quicker and cheaper for Canadians to order from Amazon's US operations. "It’s hard to come out of the gate perfect," acknowledges Amazon spokesperson Kristin Schaefer. "It’s difficult to know how to accurately manage and stock inventory until you know what customers are buying."

International logistics

Amazon ships products to 220 countries. Products are shipped to customers entirely domestically within international operations or via international inter-company transfers. Shipping times have been reduced by two-thirds and growth has been achieved in both international internal markets and export markets.

International distribution is offered to customers in three tiers. Customs clearance charges and import duties are the responsibility of the customer. Firstly, using DHL Worldwide Priority Express, products can be shipped in one to four business days.  Secondly, using DHL World Mail, products may be shipped in 7 to 21 days. The slowest shipping method is by surface mail and the shipping times are; 3 weeks to Canada, 6 weeks to the UK, 8 weeks to Australasia and 12 weeks to Brazil. Tracking of shipments from Amazon is available over the internet. I'd recommend that Amazon consider undertaking delivery to densely populated cities within the world through their own organisation, without subcontracting to third parties. This would provide a complete service to millions of customers and customs clearance would be facilitated.

International service operations

Amazon has international service operations where it derives income from partnerships.  Retailers use the international Amazon web sites as portals for purchase of their products. Borders, CDNow and Toys"R"Us are some of Amazon's partners. This exploits the benefits that Amazon receives from internet traffic.

The role of government

As well as crossing national borders, Amazon's business also crosses national laws.  Two interesting cases have arisen due to differences in US law and UK law.  Courts in the UK issued an injunction against the distribution of a book defaming the founder of a religious sect. The book was removed from all of Amazon's international websites. A huge protest ensued by the global public who criticized Amazon for globally applying UK law. The book was returned to Amazon's selection, except for the UK web site. Courts in the UK also issued another injunction against the distribution of a book defaming a political activist in the Northern Ireland dispute. The book was withdrawn from the UK website and sales from the US website are not allowed to residents of the UK. I'd recommend that Amazon pay more attention to the consequences of their actions with regard to the differences between the laws of different countries.

Europe is a large market for online shoppers but it is a collection of many individual countries, each having their own laws. There are common EU directives on e-commerce but irregular execution of these laws in member countries may splinter Europe into several different markets. Asbo (2003) reports Amazon as noticing that the value of transactions within the EU is growing alongside the increase in online trade. The company would like to see legislation keep pace with the technological advances being made. I'd recommend that Amazon continue to be involved, along with other e-commerce companies, in the harmonization of national laws.

Wolverton (2002) states that two of Amazon's technology patents were published by the US Patent and Trademark office last year. They were related to their particular system for online payment. Previous patents from Amazon were for its purchasing process, affiliates programme and recommendation service.  The company has lodged these patents for a particular reason. The techniques described within the patents are not particular technological breakthroughs. However, the processes are critical to the business of the company. Having the patents in the name of Amazon prevents any other company from suing Amazon or from threatening the core operations of the business.  Indeed, many other companies utilize the same techniques patented by the company. Amazon choose not to litigate against these other companies as evidence of their intention to use the patents purely in a defensive manner. This was a good tactic by Amazon to counter any potential legal threat to the operation of its core business.

Canadian law requires book retailing companies in Canada to have a minority of foreign ownership. Amazon expanded into the Canadian market, with books in the English and French languages, last year but had to adjust the operation to comply with Canadian law. It has accomplished this by using Canadian registered companies to provide supply and distribution services. However, a similar previous arrangement tried by Borders was disallowed by the Canadian Booksellers Association. Borders challenged the legality of Amazon's operations in the Canadian courts but lost.  As Amazon doesn't have an office in Canada, it works through partner companies and the Canadian government ruled that the Investment Canada Act did not apply.

References

'Amazon. corn Reports Second Profit Ever', Associated Press, January 24,2003. Retrieved: April 3, 2003 from http://www.tallahassee.com/mld/tallahassee/news/

'Annual Report Persuant to Section 13 or 15( d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31,2002' United States Securities and Exchange Commission, February 19,2003. Retrieved: April 3, 2003 from http://phx.corporate-ir.net

Asbo. P. 2003, 'Amazon exec warns that legal uncertainties hinders Eurpoean ecommerce', europemedia.net, February 20, 2003. Retrieved: April 3, 2003 from http://www.europemedia.net

'Chewing the Sashimi with Jeft Bezos', BusinessWeek online, July 15, 2002. Retrieved: April 3, 2003 from http://www.businessweek.com

'Jeffrey P. Bezos', METU Industrial Engineering Department, Ankara, Turkey, 2002

Schepp, D. 2002, 'Amazon's Bezos pushes growth', BBC News, June 3,2002. Retrieved: April 3, 2003 from http://news.bbc.co.uk/1/hi/business/

Soto, M. 2002, 'Amazon faces big test in international markets', The 8eaftle Times, April 22, 2002. Retrieved: April 3, 2003 from http://seattletimes.nwsource.com /htmllbusinesstechnology/

Soto, M. 2003, 'Earnings: Amazon posts second net profit', The 8eaftle Times,
January 24,2003. Retrieved: April 3, 2003 from http://seattletimes.nwsource.com
. /html/businesstechnology/

Wolverton, T. 2002, 'Amazon seeks patent for payment system', CNET Networks, Inc., September 23, 2002. Retrieved April 3, 2003 from http://news.com.com

Yamada, K. 2000, 'Shop Talk: Amazon.com's junkyard strategy', RHC Media, Inc., June 2, 2000. Retrieved: April 3, 2003 from http://www.redherring.com/insider/
]]> <![CDATA[International business]]>  I originally wrote this article, “International business” in March 2003.

Reasons for international business growth

'Marriott to double Wi-Fi coverage' by Junnarkar (2003) is a good example of the reasons for international business growth.  The article reports upon a strategic alliance between Intel and Marriott to provide high speed internet wireless access in the US, Canada and Europe.  It shows how market expansion, competitive forces, technological changes and social changes create international business growth needs for both Intel and Marriott.

Junnarker (2003) quotes a Marriott vice president as saying, 'High speed internet access is one of the most common requests at our worldwide reservations department.' The article notes that 'many hotspots offer free access, but security concerns often keep business travellers from tapping into the network.' Marriott, with Intel, will expand into the market of providing secure high speed internet access for business travellers. The article also describes how Intel is working with companies such as Marriott to 'verify wireless compatibility.' This approach is essential. The service is being tested in a smaller market to identify product improvements, prior to further market expansion.

Competitive forces influence Marriott's decision to enter this new market because, according to the article, 'customers are selecting hotels based on it's [high speed internet access] availability.' Junnarker (2003) also reports on competition to Intel from T-mobile, Cisco and Connexion. The Intel and Marriott strategic alliance will combat these competitive forces. Additionally, the article reports that 'as hot spots proliferate in cafes, hotels, airport lounges and city neighbourhoods, companies from various industries have been seeking ways to provide Wi-Fi services to business travellers. This could mean a drop in Marriott's revenues derived from business communications unless the company also provides the same service.

This particular international business growth has only been made possible because of technological changes. Commercially available equipment that utilise wireless network services have only been on the market in the last few years.  Telecommunication advancements have made broadband hubs more readily available in diverse locations. Portable computers and hand held devices are now produced, or easily be adapted, to utilise wireless network technology. Business e-mail security systems, once reliant upon land based telephone line country hubs, are now adapted to provide security with web based systems.

Social changes also create the need for wireless networks to be made available to the business traveller. The businessman replaced office to hotel communication by fax with e-mail through hotel room telephone lines. A disadvantage of this technique is that large documents and files can take a long time to download. Additionally, the businessman has to conduct all communications in his personal room so that call charges can be billed. This compromises business discussions between travellers in hotel conference rooms and lounges.  This change of attitude is reported by Junnarker (2003), 'High-speed access is increasingly available at work and at home, and business travellers aren't willing to compromise a fast connection when they travel. '

The timing for this strategic alliance between Intel and Marriott is explained by the accelerating competitive forces at the moment, together with social and technological changes.

Foreign direct investment

'Cadence to invest $50m' (2003) is a good example of foreign direct investment. The article reports on international investment of $50 million in the customer call centre and IT support service business.

India currently enjoys comparative advantages in the CCC and IT support service businesses. The availability of skilled workers at low cost entice companies like Cadence to continue their foreign direct investment which, according to the article, is $100 million since 1987. India has a large pool of well educated graduates and their good command of the English language is a legacy from colonial times. Whilst western countries also have workforces skilled in the CCC and IT support service industries, India is able to offer workers at a relatively much lower cost.

The article quotes the Cadence CEO as saying "We will approximately invest $50 million in India in three years for research and development and for scaling up capabilities to outsource customer support and high-end call centre jobs to India."  It's interesting to note that the Cadence CEO is focusing on the 'high-end' of call centre jobs. Although not stated in the article, it follows that the Cadence CEO recognizes that innovative Indian CCC and IT support service companies are in the maturity stage of their life cycle and that this focus on high-end jobs is due to competitive, socio-economic and technological factors and a need to differentiate.

Low entry costs into the CCC market have created a glut of Indian service providers, some well organised but others being more speculative and lacking a good business model. These companies provide insufficient CCC agent training and attract the attention of labour unions from countries whose workers are displaced by foreign direct investment. The quality of customer relations in these companies could be better and bad international publicity is creating a backlash. Firms in countries with large numbers of redundant CCC agents are improving working conditions and training to compete on the quality of service.

Ireland lost market share in the CCC industry when it's low labour cost comparative advantage was reduced. Wages were increased to workers due to demand and this appears to be also now happening in India.

Technological changes in natural speech recognition within the next five years will automate such low-end call centre activities as telephone directory enquiries. The internet is already the preferred method for parcel tracking, train times, airline bookings and on-line shopping.

According to the article, the Cadence CEO states, "India offers Cadence tremendous opportunities to grow and expand it's scope of activities..." However, political instability and infrastructure factors may influence this growth.

Historically, Indian governments have opposed foreign direct investment.  The current ruling coalition party encourages FDI. This policy may be reversed with a change in government.

Privatisation of the Indian telecom companies is proceeding at a slow pace because of government bureaucracy. The telecom infrastructure needs rapid improvement if the CCC and IT support service companies are to maintain current growth rates.

The role of culture

‘Bickering is something of a habit' by Oon (2003) is a good example of the role of culture.  The article discusses the many unresolved bilateral issues between Malaysia and Singapore. Oon (2003) identifies the water issue as being the most important.  The role of culture plays a significant role in the majority of these unresolved issues. It is well understood that Malaysia's additional income from a water price increase wouldn't have a noticeable effect on the country's wealth and Singapore has more than enough financial reserves to pay whatever price Malaysia demands. The problem could be solved tomorrow were it not for one cultural factor common to both - saving ‘face'.

Although Oon (2003) attributes today's problems to the acrimonious split in 1965, it is evident that the cultures of Malaysia and Singapore have been very adaptive since 1965.  Unfortunately, they have been diverging.  Singapore's culture is being influenced by the European and U.S. continents whilst that of Malaysia is being influenced more by the Arab nations. The Singapore government has actively sought to maintain a status quo between all nationalities since 1965 whereas Malaysia has internally promoted the interests of the Malay businesses at the expense of the Chinese.

In negotiations between the two nations, Malaysia often accuses Singapore of being too legalistic and the Malaysian PM refers to water agreements of 1961 and 1962 as 'special prices on ancient pieces of paper.' This difference in importance attached to written contracts is another example of divergent cultures.

Religion or social conduct is also an important factor. Confucianism and effective business practices by the Chinese majority in Singapore have been significant in the State's success since 1965. The independent success of Singapore was unforeseen by Malaysia.' To associate itself with some of Singapore's glory, according to Oon (2003), 'Malaysia has tended to regard Singapore as the little brother which needs to show the big brother more respect and deference.' Obviously, statements like this are not well received in Singapore.  They give rise to what Malaysia sees as 'arrogant' counter statements. Singapore is well aware of it's secular minority status in the region of mainland Malaysia, Sumatra, Kalimantan and Java. This is why it maintains an independent armed force strength which is disproportionately greater than that of Malaysia and sometimes displaying a siege mentality. According to Oon (2003), religious differences also created problems in 1986 during a meeting when Israeli diplomats visited Singapore, 'it's relationship with Malaysia was soured for some time after that.'  The current Malaysian PM is replaced this year by Mr Bawadi and the article states that, 'many political observers say there will be great pressure on him to stand tough against Singapore.' This shows how the malevolent behaviour aspect of Malaysia's culture is transmitted intragenerationally, due to peer pressure.

The role of culture in bilateral relations between neighbouring counties is not unique to Malaysia and Singapore.  Cultural differences are usually the catalyst for the formation of two or more new nations from an existing country.

National trade policy

'Businesses Say Reforms Must Start at Top' by Lavrentieva and Clark (2003) is a good example of national trade policy. It reports upon an interesting export demotion strategy in the energy sector. Russia is the world's largest producer of natural gas.  The country has an oil reserve of fifty years in comparison to the world's average of ten to twelve years and a gas reserve of seventy years. Russian companies achieve margins six times greater for exporting gas when compared to domestic gas sales.

Russian Deputy Prime Minister Alexei Kudrin proposes a change in the national trade and investment policy. The article states that 'export duties on oil and petroleum products are likely to be increased to $39 to $40 per metric ton as of March 1, which would provide an additional $500 million in the following two months and contribute as much as $$4.6 billion to a stabilization fund by the end of the year.' Many countries are removing barriers to international trade and most remaining tariffs are collected only on imported goods or services. The aim of this particular Russian government policy revision is to diversify the economy away from it's heavy reliance upon energy sector exports.

The article quotes Kudrin as saying, 'The government is optimistic about the diversification, which he said would allow for the modernisation of the economy and give a much-needed jump start to domestic production.' Although not stated in the article, the increase in export duty would also tend to prolong the life that petroleum products, as a natural resource in Russia, would give the country a comparative advantage in the energy sector.

The article states that additional revenues gained from the energy export tariff increase will 'contribute as much as $4.6 billion to a stabilisation fund by the end of the year.'  This will shift the current tax burden away from the manufacturing industries, allow for increased spending in the country's infrastructure and could enable export promotion of manufactured goods.

Russia already has trade agreements with countries such as Kazakhstan, Belarus and Ukraine which share their borders and with whom a common heritage exists since soviet times.  Russia's President Vladimir Putin is keen for the remaining members of the eiS, currently outside of the free economic space, to participate in trade agreements. Putin's plan is for co-ordinated efforts to join the World Trade Organisation in the future.

Whilst the change to Russia's trade and investment policy to encourage diversity is good, two factors may prevent $4.6 billion being realised for the stabilisation fund.

Firstly, as quoted by Kudrin in the article, 'If oil prices drop to $16 to $17 per barrel, due to the situation in Iraq, we could fall into a trap where we don't get those taxes.'

Secondly, as stated in the article, is the 'more amorphous and persuasive problem of corruption.' Will the government's stabilisation fund actually receive monies due by the large oil and gas corporations for the export tariff increase?

References

'Cadence to invest $50m', Business Standard, February 25,2003. Retrieved: March 7, 2003, from http://www.business-standard.com/archives/2003/feb/50250203 .015.asp

Junnarker,S. 2003, 'Marriott to double Wi-Fi coverage', CNET Networks, February 27, 2003. Retrieved: March 7, 2003, from http://news.zdnet.co.uklstory/O,,t269S2131173,00.html

Lavrentieva,V. & Clark,T. 2003, 'Businesses Say Reform Must Start at Top', The Moscow Times, February 27,2003. Retrieved: March 7,2003, from http://www. Themoscowtimes. co m/stories/2003/02/27/002. html

Oon, Y. 2003, 'Bickering is something of a habit', Bangkok Post, January 21, 2003. Retrieved: March 7,2003, from http://www.bangkokpost.com/210103_News /21 Jan2003 - opin33. html

]]> <![CDATA[New product launch]]>
Summary

There is a customer need for an effective household lizard destroyer. An innovative electrostatic device has been developed and will be launched on 1st July at five retail outlets in Singapore. The company has low fixed costs, low market exit costs and a positive cash flow forecast after product introduction. As the company is new, it has no reputation and promotion is limited to passing trade at five store locations. Opportunities exist for product diversification for the extermination of other household pests. Threats remain from a depressed market caused by economic downturn and raw material supply from China is a concern. A market-penetration pricing objective is chosen. Cost estimation, competitor's prices and the company's ROI objective dictate a selling price of S$28.99 per unit. An action programme of pre-launch tasks has been produced. The marketing budget clearly forecasts that the product should be deleted after 2 years when it is in the decline period of its life cycle and demand has fallen. Sales, financial and personnel controls procedures will be adopted.

Product life cycle

The four stages of the product life cycle for the LizaKillaTM in Singapore’s home country market are estimated to be 3 months introduction, 6 months growth, 2 years maturity and 4 years of decline. Although risky and expensive, we choose to gain a pioneer advantage by being first into the market with our electrostatic lizard terminator. Our quality product uses new technology and our company will benefit from the brand awareness of being first to enter the market. We expect to add new design features to the existing product at the latter end of the growth stage to sustain market growth. Our advertising, promotion and pricing will be modified during the maturity stage and the product will be deleted from our range at the latter end of the decline stage.

Market evaluation

The market for the LizaKillaTM is currently latent. Customers need an efficient method of ridding their premises of house lizards but no highly effective product is currently available. Two surveys of 100 home owners each in Jurong, Holland Village and 20 business owners throughout the island show that 70% would be interested in buying our new product if it was economic to buy, maintenance free and was more successful that current methods. We expect competitors to enter the market as it grows and we will defend our share of the market through introducing product innovations. As competition becomes more fierce during the maturity stage of the market, our modified advertising, promotion and pricing will maintain our position as market leader. As the market becomes saturated and demand declines, we will dispose of the product when profits become unattractive.

Challenges

We face many challenges with our launch of LizaKillaTM but we have taken steps to mitigate our risks associated with bad market information, product performance, costs and competition.

Ideas

Our idea for this new product came from the need of customers who were dismayed with the ineffective traditional method of house lizard extermination. We used several creativity techniques to provide a short list of six alternative product designs. The electrostatic device was chosen in preference to our other alternatives of ultrasonic, mechanical, electrical and chemical device ideas.

Concept to strategy

Over the last few months, we've developed several LizaKillaTM prototypes and tested them at various locations throughout Singapore. Prototype MKT01 was the most effective but was not economic to manufacture. Prototype MKT02 suffered from spurious discharges which reduced battery life. The most economic prototype was MKT04, but the structure of this model was not rigid enough for commercial use. Eventually, from development tests, we chose Prototype MKT03 as being economic to manufacture, effective and robust for commercial use. Our marketing strategy for pricing, distribution, market size, structure, share, positioning and financials are given in our marketing plan.

Development to commercialisation

We negotiated the supply of raw materials which arrive from China every month. Our fist batch arrived last month and our staff of four contract employees are assembling 100 units per day to build up stock for the product launch and market testing next month. We've secured contracts with Cold Storage at their Centrepoint, China Square, Holland Village, Novena and Takashimaya locations. We'll be market testing for the first month at these stores. If the trial results prove favourable then we'll commence negotiations to expand our manufacturing operations by moving to larger premises at the start of the growth phase in three months.

Consumer adoption

Cold storage have agreed to locate our LizaKillaTM product displays at end-of aisle positions at it's five stores for a an initial one month period to create customer awareness. Each display stand has an enlarged lizard at it's top to stimulate interest and customers can evaluate the product by reading the technical and commercial information at the display stand. We expect that our marketing mix will encourage customers to buy LizaKillaTM and to recommend the product to others, after effective trials at their home.

Product mix

The LizaKillaTM provides benefits to the customer at various levels. The core benefit is the elimination of lizard faeces on ceilings, walls, floors and eradication of any bacteria, virus or disease spread by the reptile. Our basic product consists of a 15 cm plastic oblong, internally housing an electro statically charged foil mat powered by a battery operated capacitance circuit with automatic discharge. The product expected by our customers, we estimate, has a battery life of six months, is safe to humans, 95% effective, robust, easy to operate, can be moved around the premises and retains the dead lizard as evidence of a kill. An augmented product will be introduced at the start of the growth stage. We will continually develop the LizaKillaTM, using customer feedback, to produce the potential product during the growth stage.

Branding

The trade name of our LizaKillaTM product has been registered and our strategies instil the idea of affordable effectiveness in the customer's mind. The product represents the values of our company being a quality manufacturer of an effective, economical product. The identity of theLizaKillaTM is readily identified by it's name and our logo of a green lizard inside a yellow circle with a line through, signifies the absence of lizards. We will build brand loyalty through reputation so that our brand equity differentiates our product from competitors' offerings during the growth stage. Customer feedback and complaints will be efficiently dealt with to retain our brand equity.

Packaging

The packaging takes advantage of the rectangular shape of the product. The external surfaces are flat, as all the functional parts are contained within the oblong housing. The product name, logo and instructions are all printed on the external surfaces to allow simple and cost effective clear cellophane to package the product.

Preface - organisation, mission, corporate objectives

Lizakilla (Singapore) Pte Ltd was incorporated on 1st April 2003 with registered offices at Shopping Block 445, Clementi Avenue 3. There are currently two full time employees (directors) and four contract workers based at the 500 sq. feet ground floor facility. Each company director has provided S$10,000 of share capital and S$40,000 of investment capital in Lizakilla (Singapore) Pte Ltd. The company mission statement of Lizakilla is "We serve our customers with quality products which keep their homes free of household pests. Our customers benefit from receiving the latest technology in pest extermination devices at affordable prices.”

The company has financial, marketing, operational and personnel corporate objectives. A return upon investment of greater than 85 percent per year will be achieved through market leadership in all of our product offerings. We will efficiently execute our operations, matching scale with demand. We will provide a stable work environment to attract and retain staff.

Current marketing situation

The total market size for LizaKillaTM is that of all homeowners in Singapore (approx. 800,000). Our market surveys show that the potential market of Singaporeans with a sufficient level of interest in an electrostatic lizard terminator is approximately 500,000. Out of this, it's estimated that the available market of people with income, access and interest is approx. 200,000. To curtail promotion costs, the target market size of 100,000 relies upon available market customers patronising the five Cold Storage locations, during introduction. The potential, available and target market sizes will grow as the number of people interested in the offer expands, due to the stores promotions and referrals. The penetrated market is expected to grow quarterly from 1 % to 4% of the target market during growth, reaching a saturation level of 6% before decline, as shown in the table below :


 Introduction Growth Maturity



2003
2004


2005

Q3 Q4 Q1 Q2 Q3 Q4
Market 800k 800k 800k 800k 800k 800k 800k
Potential market 500k 510k 520k 530k 540k 540k 540k
Available market 200k 204k 208k 212k 216k 216k 216k
Target market 100k 102k 104k 106k 108k 108k 108k
Penetrated market 1k 2k 4k 5k 6k 6k 12k

Strengths and weaknesses

An evaluation of LizaKillaTM and Lizakilla (Singapore) pte Ltd's internal strengths and weaknesses gives:

Strengths

  • The quality of the product is tested during assembly, prior to distribution
  • Delivery of the product to each stores location takes place every day by a dedicated employee
  • The product is innovative and uses the latest technology
  • The finance of the product launch is entirely by way of share capital and personal investment by company directors
  • The cash flow forecast, after introduction, is favourable
  • The company is currently financially stable
  • The fixed cost for the small assembly facility is low
  • All of the workforce are on six month renewable contracts
  • Assembly efficiency within the small company is high
  • The business premises are on a short term lease
  • The directors are proven good leaders and have a financial interest in the success of the company
  • The company directors have an entrepreneurial orientation
  • The company has the flexibility to cease trading with low exit costs and the ability to expand with minimum relocation loss

Weaknesses

  • The company is new and has no track record
  • Promotion of the product is through passing trade in Cold Storage outlets only
  • Only five retail stores locations are used during the product launch
  • The current workshop has a limited output capacity
  • The workforce is contract labour

Threats and opportunities

An analysis of LizaKillaTM and Lizakilla (Singapore) pte Ltd's opportunities and environmental threats gives:

Opportunities

  • Stimulation and retention of the interest of passing trade, within the five stores, through regular change of the end-of-aisle displays
  • Expansion in the number of sales places to include all of the Cold Storage store locations
  • Expansion in categories of sales places to include all grocery and hardware locations for a variety of companies
  • Accreditation to ISO 9000 and Singapore PSB domestic product testing to display conformance to standards by the product
  • Product diversification for the extermination of other household pests
  • Cost effectiveness through the economies of scale
  • Promotion through internet based companies
  • Developments in attributing disease to household lizards

Threats

  • Economic downturn reduces the available market size
  • Government legislation protecting certain species of reptile
  • Adverse publicity from animal rights campaigners
  • Premature entry into the market of competitors
  • Withdrawal of sales place by retailers
  • Disruption to supply of raw materials from China

Marketing strategies

The company has considered options in selecting the objective of market penetration pricing. Survival pricing was not chosen because it is short term and just covering costs would not assist in company expansion. Maximum current profit pricing was excluded because market demand for is not known with certainty. The product does not lend itself to market-skimming pricing as their insufficient buyers with a high demand. Market-penetration pricing will stimulate the market growth required, lower costs and discourage competition.

Although customers are expected to buy the LizaKillaTM infrequently, the maximum price that may be charged has to be set to provide a minimum demand. As the product is new, there is no history to estimate the relationship between price and demand. The price may be adjusted once the elasticity of demand has been established during the introduction phase of the product.

The fixed cost for Lizakilla (Singapore) Pte Ltd are S$20,000.00 per month for the business unit rent, utilities, salaries and transport. The variable cost of the LizaKillaTM is S$5.00 per unit for the raw materials from China and for the cost of packaging each item. From these fixed and variable costs, the average cost per unit is :

Monthly production Fixed cost Variable cost


Total cost

Average cost per unit
1000 S$20,000 S$5,000


S$25,000

S$25.00
2000 S$20,000 S$10,000


S$30,000

S$15.00
3000 S$20,000 S$15,000


S$35,000

S$11.67
4000 S$20,000 S$20,000


S$40,000

S$10.00
5000 S$20,000 S$25,000


S$45,000

S$9.00
6000 S$20,000 S$30,000


S$50,000

S$8.33
7000 S$20,000 S$35,000


S$55,000

S$7.86
8000 S$20,000 S$40,000


S$60,000

S$7.50

There are currently three competing products in the market for getting rid of house lizards :

Competitor’s product Selling price Characteristics Estimated monthly demand
Ultrasonic repeller S$80.00 Plugs into electricity supply. Emits repelling high frequency sound with 80% claimed success. No evidence of kill. 100
“Wet Feet” S$30.00 White chemical painted onto walls and ceilings. 200
Lizard paper S$3.50 Paper with adhesive on one side to catch prey. Ineffective. 400

Lizakilla (8ingapore) Pte Ltd estimates that a price position below the ultrasonic repeller and “Wet Feet” but above lizard paper is correct.

The lowest price, given a customer monthly demand of 2000 to 4000 units is S$10.00 to S$15.00. At this price the company would make no profit. The highest price is dictated by positioning within the current product offerings of competitors and is S$30.00. Additionally, the company's financial objective dictates a target rate of 85% minimum return on investment per year. Target-return pricing dictates a unit selling price of S$28.99, as shown in the cash flow forecast. It is estimated that the customer would have a reference price of $20.00 to $30.00 for the product, based upon competitive products and the application of the device. Additionally, the company is anxious to encourage Cold Storage to promote the product and has agreed to offer S$5.00 commission to the retailer on the sale of each unit. Taking into account the psychological benefit of '.99', a sales price of S$28.99 is chosen.

Action programme


 Action plan for product launch on 1st July 2003


Item Description Person responsible Date required Date completed
01 Meet Cold Storage to sign sales contract Tan M H 01 May
02 Buy stands for product in store displays Wong B 15 May
03 Stock control procedure with Cold Storage Tan M H 13 May
04 Create workshop inventory system Tsee M 20 May
05 Define daily stocking store procedure Tsee M 23 May
06 Process April letter of credit letter with supplier Wong B 26 Apr
07 Expedite supplier for May delivery Tsee M 26 Apr
08 Process May letter of credit with supplier Wong B 26 May
09 Expedite supplier for June delivery Tsee M 26 May
10 Commence discussions with new premises landlord Tan M H 15 Jun
11 Process June letter of credit with supplier Wong B 26 Jun
12 Meet Cold Storage for display locations Wong B 23 Jun
13 Deliver product to 5 Cold Storage sores Tsee M 30 Jun

Marketing budget

Sales Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03
Units sold 300 300 400 500 700 800
Sales @ S$23.99/unit 8,697 8,697 11,596 14,495 20,293 23,192
Cost of sales





Retailer commission 1,500 1,500 2,000 2,500 3,500 4,000
Fixed costs 20,000 20,000 20,000 20,000 20,000 20,000
Variable cost 1,500 1,500 2,000 2,500 3,500 4,000
Total cost 23,000 23,000 24,000 25,000 27,000 28,000
Opening balance 80,000 65,697 51,394 38,990 28,485 21,778
Contribution (14,303) (14,303) (12,404) (10,505) (6,707) (4,808)
Closing balance 65,697 51,394 38,990 28,485 21,778 16,970

Sales Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04
Units sold 1200 1300 1500 1600 1700 1700
Sales @ S$23.99/unit 34,788 37,687 43,485 46,384 49,283 49,283
Cost of sales





Retailer commission 6,000 6,500 7,500 8,000 8,500 8,500
Fixed costs 20,000 20,000 20,000 20,000 20,000 20,000
Variable cost 6,000 6,500 7,500 8,000 8,500 8,500
Total cost 32,000 33,000 35,000 36,000 37,000 37,000
Opening balance 16,970 19,758 24,445 32,930 43,314 55,597
Contribution 2,788 4,687 8,485 10,384 12,283 12,283
Closing balance 19,758 24,445 32,930 43,314 55,597 67,880

Sales Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04
Units sold 1900 2000 2100 2100 2000 1900
Sales @ S$23.99/unit 55,081 57,980 60,879 60,879 57,980 55,081
Cost of sales





Retailer commission 9,500 10,000 10,500 10,500 10,000 9,500
Fixed costs 20,000 20,000 20,000 20,000 20,000 20,000
Variable cost 9,500 10,000 10,500 10,500 10,000 9,500
Total cost 39,000 40,000 41,000 41,000 40,000 39,000
Opening balance 67,880 83,961 101,941 121,820 141,699 159,679
Contribution 16,081 17,980 19,879 19,879 17,980 16,081
Closing balance 83,961 101,941 121,820 141,699 159,679 175,760

Sales Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05
Units sold 1900 1700 1500 1300 1100 900
Sales @ S$23.99/unit 55,081 49,283 43,485 37,687 31,889 26,091
Cost of sales





Retailer commission 9,500 8,500 7,500 6,500 5,500 4,500
Fixed costs 20,000 20,000 20,000 20,000 20,000 20,000
Variable cost 9,500 8,500 7,500 6,500 5,500 4,500
Total cost 39,000 37,000 35,000 33,000 31,000 29,000
Opening balance 175,760 191,841 204,124 212,609 217,296 218,185
Contribution 16,081 12,283 8,485 4,687 889 (2909)
Closing balance 191,841 204,124 212,609 217,296 218,185 215,276

Sales Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05
Units sold 800 700 600 500 500 500
Sales @ S$23.99/unit 23,192 20,293 17,394 14,495 14,495 14,495
Cost of sales





Retailer commission 4,000 3,500 3,000 2,500 2,500 2,500
Fixed costs 20,000 20,000 20,000 20,000 20,000 20,000
Variable cost 4,000 3,500 3,000 2,500 2,500 2,500
Total cost 28,000 27,000 26,000 25,000 25,000 25,000
Opening balance 215,276 210,468 203,761 195,155 184,650 174,145
Contribution (4,808) (6,707) (8,606) (10,505) (10,505) 10,505)
Closing balance 191,841 204,124 212,609 217,296 218,185 215,276

Controls

The marketing plan has sales, financial and personnel controls procedures to keep the programme on track and to identify any changes that may be required.

Sales figures are received daily when stock is taken and replenished by the dedicated distribution worker for Lizakilla (Singapore) pte Ltd. Additionally, this information is verified in the weekly account statement from Cold Storage. Production volumes and raw material purchases are adjusted during the demand forecast for the next four weeks.

Payments received, and expenditure made, are reconciled with bank statements every month and audited company accounts are produced every six months. Deviations from cash flow forecasts are analysed and corrective action is taken, where required.

Personnel are informed every Friday afternoon of next week’s production target and contract workers are advised every month of the security of their tenure.]]> <![CDATA[Marketing management]]>
I originally wrote this article, “Marketing management” in March 2003 when Mickey Bakshi, the owner of Hide & Chic Luggage sought my advice.

September 2001:

Mickey Bakshi was planning the opening of his new store in Parramatta, Sydney, for October 4, 2001. Mickey had worked in the luggage business for over 10 years; he had started with a stall at the Sydney Markets and over the years had established good contacts with suppliers and wholesalers. When he heard about the new Riverbank Shopping Centre being developed in Parramatta he decided the time was right to open his own store.

Mickey's vision was for a specialised luggage store offering good quality at value-for-money prices. Apart from Grace Bros and David Jones there was no specialised luggage store in the west of Sydney. The concept of a store specialising in luggage and briefcases had been successful in Sydney city. Mickey checked out other shopping centres in the Sydney metropolitan area, before settling on the Riverbank, Parramatta.

He chose the catchy name "Hide & Chic Luggage" for his store. His luggage range included well-known brands: Samsonite, Antler, Paklite and Hedgrain as well as some cheaper unbranded lines. He also offered complementary products: leather briefcases, and small leather goods such as wallets and purses.

Parramatta was the third largest CBD in Australia. The Riverside Centre was close to the CBD and would house 50 stores. Around 30% of the stores were already trading, the rest would open over the next 3 to 4 months. Mickey selected his location carefully, finally settling on a site close to Country Road, Bed BathNTable, and David Jones Foodchain, which he believed would ensure passing customers.

Riverside was being marketed by the developers as an 'up-market' shopping centre, supported by a $2 million promotional spend spread over the next 12 months. Mickey had placed advertisements in the local paper to create awareness of his new store.

October 2001:

Reviewing performance week by week following the opening, Mickey was becoming increasingly concerned. His worst fears were being realised; world events through September and the collapse of Ansett Airlines in Australia were having a serious impact on sales. Luggage sales were virtually non-existent, wallets had been his main seller but these alone would not bring in enough turnover or profit.

Asmorestores in thecentre opened, customertraffic was beginning to build up; the lunchtime period was especially busy with workers from nearby offices. Mickey believed his prime target market was women aged 25-39 but men were also visiting the store.

Mickey decided to extend his product line to include sports bags and other casual bags to counter the falling demand for luggage, and with the Christmas trading season looming. He found he was often having to give a discount to attract customers; he couldn't afford to spend any more on promotion.

October 2002:

Mickey's business had survived - just. Luggage sales had slowly picked up but were still well below his forecast, and he had continued to stock the sports bags and casual bags to boost sales. He was breaking even, mainly because the landlord had agreed to reduce his rent.

Occupancy of the shopping centre had not achieved forecast levels and David Jones had announced the Parramatta Foodchain would close in the next few months. David Jones launched its first Foodchain outlet in Brighton, Melbourne in November 2000, and followed with stores at Hawthorn and St Kilda in Melbourne, and Parramatta, 'Sydney. At Foodchain you could find fresh foods and prepared meals, an extensive range of everyday grocery lines at competitive prices, as well as speciality products from Australia and around the globe.

According to David Jones, an operational review had highlighted operational issues for Foodchain's failure to meet key targets. Whilst some locations were expected to achieve targets this year, Parramatta did not meet their revised site selection criteria and they had approached the Parramatta landlord regarding assigning the lease.

The departure of Foodchain was a blow to the shopping centre, although centre management were confident they would attract one of the major supermarkets (Woolworths or Coles) to take over the Foodchain site.

Mickey was worried about the future direction for his business. Hearing that I was business consultant, he had sought my advice.

Summary

Marketing is of growing importance to Hide & Chic. Marketing focuses on the needs of the buyer, as opposed to the sellers needs. Hide & Chic can obtain a differential advantage using the tools of the marketing mix, ie. product, price, promotion and place. A marketing plan is required to implement the marketing concept through SMART goals.Primary and secondary market research information may be obtained at low cost by Hide & Chic. The company needs to be aware of; what triggers the need for luggage, where buyers search for information, evaluation of alternatives, purchase decision influences and customer satisfaction. Hide & Chic can position their luggage to attract target customers within a market segment.

The Marketing concept

An understanding of the concept of marketing to Hide & Chic Luggage could create the difference between the success or failure of the company. Marketing is a separate and different activity to selling. The two terms are often wrongly used synonymously.

The selling concept focuses on the needs of the seller. The organisation has stock of a product and sells it, without much knowledge or research into the needs of the customer.

The marketing concept focuses on the needs of the buyer. Emphasis is given to providing value to the customer. Companies using the marketing concept get to know who their customers are, what they actually value and strive to give better value than their competitors.

Implementing the marketing concept

The marketing concept involves providing a product or service that meets the value requirements of the customer. Hide & Chic can use four marketing tools to categorize their current and to implement their desired position in the luggage retail market. These are to consider the product, price, place and promotion for Hide & Chic Luggage to obtain a differential advantage over the competition. These four 'P's are known as the marketing mix.

The product can be considered in terms of Hide & Chic's luggage design features, branding, quality and other attributes.

The price component of the marketing mix considers the pricing strategy to be adopted by Hide & Chic and determines the selling price, credit allowed or discounting.

Promotion of Hide & Chic Luggage may be through several avenues, which may include magazine slots, newspaper adverts, sales promotions, etc.

Hide & Chic's place of conducting the business involves a study of the store's physical location, stock capacity and stock variety.

Implementation of the marketing concept also needs to take into account microenvironmental forces and macroenvironmental forces that are affecting Hide & Chic's business. Competitors, suppliers and customers are exmples of microenvironmental forces. Macroenvironmental forces such as recession, terrorism and bush fires also affect the business.

Marketing planning

Hide & Chic Luggage need a marketing plan to implement the marketing concept. All businesses have a finance plan to control cash flow. Large companies may also have a mission statement, business objectives, business plan, production plan, etc. Small companies like Hide & Chic need a separate marketing plan, in addition to their business I finance plan. Hide & Chic would aIso benefit from the creation of business objectives derived from a mission satement to avoid the creation of a narrow marketing plan or one focused in the wrong direction.

The marketing plan should consist of an audit of the current situation, goals for the desired outcome and a breakdown of tasks to achieve the goals. Most importantly, constant feedback is required throughout the execution to control and adjust the plan.

Information for marketing

Hide & Chic need information on their market and would benefit from low cost market research methods.

Market research of competitor performance at Grace Bros. and David Jones can be done by relatives or friends staking out stores over given periods to obtain primary data.

Research of market size and fluctuation can be obtained from published secondary data at no cost. For example; government economy statements and forecasts, airline traveller numbers and Sydney demography can be obtained from the internet.

Knowing your customer

It's important that Hide & Chic are aware of the buying decision-making process of their customers. This impacts upon the company's current strategy to offer different quality levels of luggage at the same location. The buying decision process can be chronologically divided into the five processes of trigger, search, evaluation, decision and satisfaction.

What triggers a need in the customer to buy luggage?

Where does the buyer search for information on what luggage to buy?

How does the buyer evaluate the alternatives in luggage available to him?

Who and what influences the buyer to decide to complete the purchase?

How does Mickey retain satisfied customers and minimize dissonance?

The above processes are influenced by psychological, personal, cultural and social factors.

Segmentation, targeting and positioning

Hide & Chic can position their luggage to attract target customers within a market segment.

Market segmentation for Hide & Chic involves recognizing and profiling the customer group for it's luggage sales. The segment can be described in demographic, geographic, psychographic and behavioural terms. Within the market segment, Hide & Chic may identify niches of buyers who want to purchase quality luggage. Additionally, this niche will consist of several people from the local area of Sydney or individuals willing to travel to the store to make a purchase.

Hide & Chic may target customers through concentration, specialisation or even full market coverage.

Concentration on a single segment of the market would be aimed at people in the same location within a certain age group exhibiting similar behaviour and holding the same values.

Specialization in market segmenting could be selective, product or market specialized. The abovementioned single segment market may be too volatile. Selective marketing chooses several, single segments to spread the risk. Product specialization focuses on one product within several segments and market specialization targets one segment with many products.

Full market coverage isn't viable for Hide & Chic. It requires mass-advertising for undifferentiated marketing or a large inventory for differentiated marketing

The timing of Mickey's entry into the sale of specialised, good quality luggage at value-for-money prices is unfortunate. The recent national economy slowdown was exasperated by the further effects of 911 in the travel industry and, consequently, demand for his company's products was lower that anticipated. It's recommended that his company vacates the Riverside Centre because of low occupancy and an uncertain future. The available market passing trade at Riverside doesn't exist. Mickey should re-locate to a large CBD with a proven available market passing trade within his segment for quality luggage. Unbranded luggage should be dropped from his offering. Economic market information is required by Hide & Chic and, when above break even, promotion should commence to increase market share.

Evaluation of Hide & Chic's marketing strategy to date

Hide & Chic's current marketing position can be analysed by investigating the company's internal strengths and weaknesses and considering external opportunities and threats.

INTERNAL FORCES
STRENGTHS
 WEAKNESSES
10 years luggage sales experience
 No marketing skills
Good supplier & wholesaler contacts
 No store sales experience
Vision for good quality luggage store
 No profits to re-invest
Proven successful product concept
 Riverside store location decision
Offering complimentary products
 Mix of branded and unbranded product in same store
Good passing trade demography
 Wrong choice of advertising

Wrong identification of target market

Product extension to casual bags

Discounting to attract trade

No promotional budget left


EXTERNAL FORCES
OPPORTUNITIES
 THREATS
Economic upturn in 2004?
 Store opened just after 911
Only two competitors in West Sydney
 Collapse of Ansett Airlines
Riverside marketed as 'up-market'
 Lower demand for air travel luggage
$2 million Riverside promotion
 Economic downturn till 2004
Workers from nearby offices
 Low Riverside Centre occupancy
Lower rent to reduce fixed costs
 Low passing trade for Country Road
Woolworths or Coles at Riverside
 David Jones Foodchain closing

Definition of the problem faced by Hide & Chic

Hide and Chic's problem is that the potential and available markets for it's product have collapsed. The potential and available markets for quality luggage customers contracted in 2001 and will not recover till 2004. The problem can be sub-divided into the three external factors of national economy, travel decline and passing trade.

National economy

The national economy is in a downturn till 2004. Retrenched consumers have left the available market and returned to the potential market till they have income. Additionally, the interest of consumers still within the available market has reduced. Quality luggage purchases are delayed by the available market till the return of the 'feel good' factor.

Travel decline

Travel by air attracts less people now than compared to two years ago. Less people have an interest innew travel luggage and have left the potential market.

Passing trade

The ability to attract the interest of the available market through passing trade is less than Hide & Chic envisaged because of transient and long term factors.

Transient passing trade

Hide and Chic are located adjacent to Country Road, Bed BathNTable and David Jones Foodchain. They share a common market segment. The transient increase in passing trade from the correct market segment during a good national economy benefits all adjacent stores. However, the decrease in passing trade during economic downturns is caused by the temporary loss of a whole market segment.

Long term passing trade

Occupancy of the shopping centre has not achieved forecast levels. The overall size of the available market of interested consumers is lower than anticipated by Hide & Chic. Compounded with the transient lower available market, there is effectively no commercially viable available market for Hide & Chic's quality luggage in it's current location through passing trade.

Alternatives for a future marketing strategy

Ansoff's Matrix

Ansoffs Matrix can be used as a tool to analyse market penetration, market extension, product development and diversification possibilities.
PRODUCT


Existing
 New
MARKET
 Existing
 Market penetration
Increase market share for luggage
 Product development
Introduce travel, leather and hand carried related products

New
 Market extension
Introduce luggage for additional market segments
 Diversification
Diversify into differtent markets with different products


Marketing Mix

The available marketing mix to Hide & Chic is :


 MARKETING MIX

PRODUCT
 PRICE
 PROMOTION
 PLACE
Product variety
 List price
 Sales promotion
 Channels
Quality
 Discounts
 Advertising
 Coverage
Design
 Allowances
 Sales force
 Assortments
Features
 Payment period
 Public relations
 Locations
Brand name
 Credit terms
 Direct marketing
 Inventory
Packaging

Transport
Sizes


Services


Warranties


Returns




Evaluation of alternative marketing strategies

Ansoff's Matrix and the marketing mix can be combined to produce several alternative marketing strategies. Certain permutations are not worthy of consideration and, additionally, basic assumptions have to be made about the personal preferences of Mickey Bakshi. It's assumed that:
Product and market diversification is too risky for Hide & Chic
Mickey has no profits to re-invest, i.e. 'breaking even' from the case study
Mickey can't afford to spend any more on promotion
Upturn in the national economy and air travel increase occurs in June 2004

Strategy 1 - Market penetration

Market penetration requires Hide & Chic to capture more of the available market from Grace Bros. and David Jones for the quality luggage and from the Sydney Markets for unbranded luggage.

Market penetration of quality luggage

Hide & Chic would need to make the available market aware of their presence to capture market sharefrom Grace Bros. and David Jones. Mickey has no capital to invest in sales promotion. Passing trade from the current market segment is negligible. Moving to a location with more passing trade would be desirable if Mickey is unable to survive with no profit for the next year. Additionally, offering quality branded products alongside unbranded products at the samestore location depresses sales of the branded products as consumers receive mixed signals and procure the cheaper product or make no purchase at all.

Market penetration of unbranded luggage

Mickey has 10 years of experience at the Sydney Markets selling unbranded luggage. According to the case study, 'he is breaking even ... and has continued to stock the sports bags and casual bags to boost sales'. Riverside Centre is the wrong place to sell sports bags and casual bags alongside Country Road, BedNtable and David Jones Foodchain. The relatively high fixed cost of the store, low return per square foot for unbranded luggage and low available market make this a strategy with a limited life span.

Strategy 2 - Product development

Hide & Chic could extend their product range to serve the same two market segments that they serve now. However, with two market segments for branded and unbranded luggage, sports bags and casual bags, the cost of stock holding and return per square footage would create further problems for Hide & Chic.

Strategy 3 - Market extensions

Market extension would involve Hide & Chic in catering for additional demographic, geographic, psychographic and behavioural market segments and increased stock levels. Do Hide & Chic have the financial reserves to support this strategy?

Specific recommendations for future marketing strategy

Based upon strategy 1 - Market penetration, the following five point plan is proposed for Mickey and Hide & Chic Luggage:

1) Focus on Mickey's vision for a specialized luggage store offering good quality at value-for-money prices. Drop the sale of unbranded luggage and get Mickey to, when economically possible, visit the factories of Samsonite, Antler,paklite and Hedgrain to obtain product and marketing knowledge.

2) Negotiate lease termination with the Riverside Centre on the basis that occupancy of the shopping centre has not achieved forecast levels.

3) Carry out a no cost market research information surveyusing primary data from friends and relatives for a demographic profile of Grace Bros. and David Jones customers. Obtain secondarymarket information for the West Sydney luggage industry from the internet. Invest in a sales promotion in 2004 to take market share from Grace Bros. and David Jonesand take advantage of the growth inthe available marketfor quality luggage.

4) Determine the location for a new quality luggage store and negotiate a lease for a location which has a proven track record of available market within Hide & Chic's target segment for quality luggage.

5) Time the transition from Riverside to the new location to coincide with the expected upturn in the national economy in 2004. Rely upon break even sales for the next twelve months.]]> <![CDATA[Entrepreneur's web site]]>  I originally wrote this article, “Entrepreneur’s web site” in June 2003.

A group of three Australian friends were thinking about forming a small business partnership to be called "Books 'R' Us." The idea for the name came from the store Toys 'R' Us, which carried a wide assortment of toys. This new company would do the same for books. In fact, the friends were planning to offer as many books as possible at a 20 percent discount off the list price. Once they had set up their small bookstore, they would create a Web page on the Internet and offer to sell any book in their listing at a discount. Since the partners could order books at a significant discount from publishers, their only major problem, as they see it, would be to have these books available. They had very little working capital, so they couldn’t afford to buy the books and store them at their facility. However, they intended to sidestep this problem by playing the role of book broker merely to bring buyers and sellers together. When someone visited the Books 'R' Us Web site and ordered a book, the store would take this order, place it with the respective publisher, have the latter send the book directly to the customer, and then remit payment to the publisher. And since the customer would pay for the book in advance using a credit card, the bookstore would avoid a cash outlay.

The basic idea for this business had been presented to a number of knowledgeable people, and they all agreed that it could work well if “Books 'R' Us” could generate sufficient orders from its Web page. This is why the potential partners were determined to create a page that was attractive and kept people coming back to see what was new. One of the features was to be a random drawing every day to send one winner a free book from the current New York Times best-seller list. The winner's name and his or her book choice would be displayed on the page for a week so that everyone who visited the site would know who the latest winners were and would be encouraged to enter the drawing. Every entry would be eligible for a period of seven days. So people who return to the site every week to enter could participate in the contest every day.

The group also intended to make available as many of the publishers' titles as possible. Since publishers often distributed their book lists on CD-ROMs, this was not a problem. However, the group wanted to list the titles by subject (mystery, drama, history, humour, cooking, general interest, and so on) and author and not just by publisher. So Books 'R' Us may need to modify the material from the publishers.

Finally, the group had considered that publishers have their own Web pages, so someone who wanted to buy a  book from a major publisher did not have to visit the Books 'R' Us Web site or any other on-line bookstore to buy this book. Nevertheless, these publisher Web pages carried only the publisher's titles, while the group would carry as many of these publisher offerings as possible in one site.

I advised the group on its business plan. I told them what I thought of a Books 'R' Us Web page.  I made recommendations for improvement.  I gave reasons why someone would buy from the partners rather than visit a publisher's Internet site and purchase directly. Of these reasons, I recommend one that the group should emphasize most heavily. I suggested how the friends could do this through their Web page. Finally, I identified and offered additional recommendations to the three potential partners.  Two of these are described.

An evaluation of the introduction of a “Books 'R' Us” website is best done by looking at the opportunities and threats  faced by the group of three friends thinking about the small business partnership. Opportunities exist with a growing economy, government support, a product easily marketed using the internet and an established market of Australian online book buyers.  However, global and local competition needs to be considered.

Opportunities

The Australian GDP growth is forecasted to increase from 3.0 percent this year to 3.5 percent in 2004 and unemployment has fallen slightly from 6.3 percent last year to 6.1 percent this year, according to The Economist (2003).

An article in Financial Review (2003) reports that the Small Business Minister for Australia, Joe Hockey, was present at the launch of the e-businessguide in Melbourne, last week. This is part of a $6.5 million federal government package to encourage small businesses to go online. At the same launch, it was stated that 'almost half of Australia's present economic growth was caused by communication technology' by Communications Minister, Richard Alston.

Spector (2000, p. 29) gives a major reason why Jeff Bezos of Amazon chose to sell books on the internet as his first product is that 'everybody understands what a book is. You didn't have to explain product specifications; the book you would buy on the internet would be the same book you could buy at a bricks-and-mortar store. By contrast, if Bezos wanted to sell electronics on the internet, he would have to show side-by-side comparisons of the models, product reviews...'.

Australian online book retailer Ozbooks claims in Internet Business News (2002) that Australians spent more than AUD 120 million in 2001 ordering books online from U.S. sites Amazon.com and Barnes and Noble. The company also states that many of the books ordered internationally could have been purchased from www.ozbooks.com at a lower cost and with faster delivery.

Threats

The world's largest online book retailer, Amazon, has operations located in Austria, Canada, France, Germany, Japan, U.K. and U.S. but not in Australia. Books ordered by Australians, from Amazon take two to six weeks to arrive.

There are many online book retailers already operating in Australia and a search for the word 'book' at the Australian site of Google gives 1,140,000 entries. A search for the words 'books on line' gives 291,000 entries. These figures are not surprising, given the low market entry cost of online book retailing.

Several Australian online book retailers pay a regular fee to internet search engine companies to be located on the first page of search results connected with buying a book on line. Sites such as www.buyaustralian.com, www.readersrefuge.com.au, www.getonce.com.au, qbdthebookshop.com.au are examples of these web sites.

From the above analysis, it is evident that a market exists for the online service being considered by the three friends. Competition from already established companies has to be taken into account  when they create a marketing plan to diversify their service offering from that of the competition.

Three reasons why someone would buy from the “Books 'R' Us” web site rather than the publisher's internet site

The group of three friends have identified three features for their web site to differentiate it from that of the publisher's internet site and to create a reason for someone to buy from the “Books 'R' Us” website, rather than the publisher's internet site. Two of the features are based upon the two selling rules described by Hodgetts and Kuratko (2001, p.32). The third feature is that of differentiation, as recommended by Kotler (2003, p. 315).

The first selling rule is that the internet company should make it easy for people to find the site. By choosing the name "Books 'R' Us", the group of three friends have managed to include the category of product they sell within their company name and web site. The name is short, easily remembered and identifies the product sold in either a category search or an alphabetical search.

The second selling rule is to keep potential customers coming back. According to the case study in Hodgetts and Kuratko (2001, p.50), one of the “Books 'R' Us” features on the web site is to be a random drawing everyday to send one winner a free book from the current New York Times best-seller list.

The winner's name and his or her book choice will be displayed on the page for a week so that everyone who visits the site will know who the latest winners are and will be encouraged to enter the drawing. Every entry will be eligible for seven days. So people who return to the same site every week to enter can participate every day.

The third feature of differentiation is provided by the pricing policy, breadth of product range and breadth of product information to be provided by “Books 'R' Us“. The case study states that 'the friends are planning to offer as many books as possible at a 20 percent discount off the list price.' This provides a comparative advantage against the publisher's internet site, where books are sold at list price. The product range at the publisher's internet site is limited to those books sold by the publisher whereas the Books 'R' Us web site will feature books from many publishers. The case study also states that 'the group wants to list the titles [sold at the “Books 'R 'Us” web site] by subject (mystery, drama, history, humour, cooking, general interest, and so on) and author and not just by publisher.' These features give further reasons why someone would buy from the “Books 'R' Us” web site rather than the publisher's internet site.

Recommendations in relation to launching the web site

Seven recommendations are made to “Books 'R' Us” in relation to launching their web site. They are associated with the market, segmentation, book variety, returns policy, supplier agreements, pricing and promotion.

The group of friends need to determine who their target or served market will be. Assuming that they will not, at this stage, receive orders internationally then they are restricted to the Australian population of approximately 20 million. Of this population, a market of (say) two million actual and potential customers exists. The available market of consumers who will be aware of Books 'R' Us, read books and buy online may only be (say) 100,000 people. The group of friends need to decide upon a strategy of marketing to the whole available market or a target market within the available market.    Their penetrated market needs to be at least several thousand consumers to provide sufficient income for the group of three friends to pay for salaries, shop rent, utilities, financing, inventory, advertising, etc. If the group are able to segment their market geographically then they may achieve a larger market share in their city of operations to counterweight a lower national market share.

Assuming that the group of friends takes advantage of their shop location for geographic segmentation then demographic, psychographic and behavioural segmentation can be done to further create the target market. Market surveys using secondary information can be used to determine the reading preferences of major segments. This would form the basis of choice of segmentation to create the inventory stocked within the premises and listed online.

Based upon the above target market, the variety of books to be listed can be chosen. Additional factors to be considered in creating the listed variety of books are profit margins per book and promotions for books having an unusually high appeal, e.g. Harry Potter.

The group of friends need to formulate and publish a returns policy. As they receive the purchase order, yet the publisher distributes the books, responsibilities need to be clearly defined.

Agreements need to be signed with each book publisher that they choose to represent. The case study states that 'the friends are planning to offer as many books as possible at a 20 percent discount off the list price.' Each publisher will have a different discount structure for retailers ranging from 10 percent to 50 percent and the discount amount will be related to sales volume figures and monetary value by “Books 'R' Us“. Additionally, payment terms of net monthly account, upon invoice, etc. need to be agreed with each book publisher.

The implications of the fixed 20 percent discount pricing policy need to be determined by “Books 'R' Us“. Although simple to administer and advertise, the group of friends may find themselves selling below cost if demand is high for books having a low retail discount from the publisher.  Alternatively, customers may be lost if books having a high retail discount are priced above their competition. Alternative pricing methods of mark-up pricing, target-return pricing, perceived value pricing, etc. should be considered.

Considering the promotion of “Books 'R' Us“, the decision of the group of friends to set up a small physical bookstore is a good one. It provides further differentiation from other local virtual online book retailers and increases customer confidence in the anticipated level of service. The bookstore also acts as free advertising for the web site to passing trade. This would be enhanced by placing advertisements in local journals, magazines and newspapers to get around the problem of letting the target market easily know the web site address.

List of references

'Australians order books from U.S. web sites', Internet Business News, 20 May 2002

'Economic and financial indicators', The Economist, 31 May - 6 June 2003.

Hodgetts, R.M. & Kuratko, D.F. 2001, Effective Small Business Management, Harcourt, Florida

Kotler, P. 2003, Marketing Management, Pearson, New Jersey

'Small business told to find productivity online', Financial Review, 24 June 2003.

Spector, R. 2000, Amazon.com: get big fast, HarperCollins, New York.

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