Business Resource Software, Inc.

Summary Example of Strategy Analysis

1.0 Marketing Strategy
1.1 Options
1.2 Environment
1.3 Prospect
1.4 Competition
1.5 Product
1.6 Success Analysis
2.0 Operational Factors
2.1 Your Business
2.2 Management Considerations
2.3 Ratios
3.0 Financials
3.1 History
3.2 Capitalization
3.3 ASP
3.4 P & L
3.5 Objectives vs Projections
3.6 IRR
4.0 Strengths
5.0 Weaknesses
6.0 Conclusion

Strategy Analysis

1.0 Marketing Strategy

This report analyzes the potential for HiLight Inc to implement any of three generic strategies: cost leadership, differentiation or focus. Within those it then considers more specific strategies such as pricing, promotion and distribution strategies.

A COST LEADERSHIP STRATEGY is based on the enterprise's ability to control their operating costs so well that they are able to price their products or services very competitively and still generate high profit margins, thus having a significant competitive edge.

A DIFFERENTIATION STRATEGY involves the offering of a product or service that is clearly unique when compared to alternatives. Uniqueness can take many forms such as brand image, technology, functionality, customer service, dealer networks and many others. It is likely that differentiation will involve a combination of two or more of these forms.

A FOCUS STRATEGY may be the most sophisticated of the generic strategies, in that it is a more 'intense' form of either the cost leadership or differentiation strategy. It is designed to address a "focused" segment of the marketplace, product form or cost management process and is usually employed when it isn't appropriate to attempt an 'across the board' application of cost leadership or differentiation. It is based on the concept of serving a particular target in such an exceptional manner, that others cannot compete. Usually this means addressing a substantially smaller market segment than others in the industry, but because of minimal competition profit margins can be very high.

1.1 Options

HiLight Inc is entering the market with Smart-Lite in the introductory stage of the product type's market life cycle. The intent is to use an aggressive market penetration pricing strategy. This is consistent with Smart-Lite being priced below the average of the competitive product prices during the first year of the analysis period.

HiLight Inc will do their own manufacturing of Smart-Lite while pursuing some vertical integration within the enterprise.

A push promotion strategy is planned with minimal advertising effort and minimal publicity.

The distribution strategy will be to market Smart-Lite by using external distribution channels and also using an in-house sales organization.

The market for Smart-Lite is expected to be regional and slightly concentrated with about 25% of the prospects being existing customers of HiLight Inc.

Channels of distribution will include:

ChannelSales Volume
Year 1Year 5
Direct to Customer20%5%
Full service60%45%
Self service20%15%
Wholesale 0%35%

1.2 Environment

The analysis indicates that environmental factors are positive for the introduction and market penetration of your products.

The evaluation of demographic factors, which is positive, considers changes in the average prospect's age, geographic location, income and education.

The evaluation of cultural factors, which is positive, considers emerging fashion or life-style trends. The term "fashion" can relate to any product, from clothes to cars to computer programs. If the product is 'the thing you shouldn't be caught without' in your industry, then it is in fashion. Examples of life-style trends might be a public that is more health conscious or more pro-environment.

The evaluation of government controls, which is no better than fair, considers factors such as the availability of subsidies, imposition of safety and operational regulations, licensing requirements, restricted access to materials and price controls.

The evaluation of the impact of technological change on your strategy, which is positive, considers factors such as the extent to which competitive product performance has reached its limit, the direction in which competitive R&D is moving, the emergence of new technologies and the time competitors have to react to changes in technology.

1.3 Prospect

The market segment(s) that you have described are analyzed to be questionably suited to your strategy and the strengths of your product(s). This was determined by evaluating the probable length of the typical prospect's purchase decision cycle, the probability that marketplace factors favor the acquisition of your product(s) in substantial volume, the probability that the prospect will pay a high price for your product(s), the extent to which price influences the prospect's purchase decision and the propensity of the prospect to exert comparison energy prior to making the purchase decision.

In addition, an analysis of the marketplace characteristics that are vital to the acceptance and success of your product offerings was determined to be reasonably good.

Even if you have well defined market segments with positive characteristics it is still essential that your prospects have a positive perception of the benefits your product(s) will provide. The analysis indicates that the market has a neutral perception of your product benefits.

And, finally, it appears that the prospect's bargaining position, which can affect price and the time it takes to make a purchase decision, is average.

1.4 Competition

The analysis indicates that the competitors you have described have considerable experience and are in a strong position to market their product(s). They appear to have a very strong commiitment to the marketplace while current conditions place them in a position such that abandoning the market is not an acceptable alternative. They would appear to have some of the basic attributes to successfully compete in the market and if history is any indicator, they will respond to your market entry efforts in an ethical and businesslike manner. This group of competitors should present an extreme challenge to HiLight Inc.

1.5 Product

You will be selling a physically small, technically unique, low maintenance product that is viewed with little interest by the scientific community. Your prospects perceive that the product pricing is competitively comparable if it satisfies their needs. The benefits to be derived from the product are clearly visible, easily understood and easily described.

The product, considering product benefits, complexity and differentiation, ease of customer utilization, potential for obsolescence, proprietary technology and the potential for production and marketing problems is analyzed to be a fair contributor to the success of your strategy.

1.6 Success Analysis

The probability of your successful entry into the defined market is evaluated by considering a variety of factors. These include your overall management capabilities, the strength and viability of the product development team, the adequacy of your production process, the methods available for product distribution, the marketing and sales organization's strengths and current activities, your experience versus that of your competitors plus your ability to differentiate your product from those of the competition, the problems you may encounter in your efforts to penetrate the market, the potential difficulties you may encounter due to insufficient infrastructure and the availability of adequate operating capital.

Your potential to achieve significant market penetration has been evaluated as no better than fair.

Given a successful entry into the market you must then evaluate the potential for generating and maintaining profits over an extended period. This requires the analysis of your ability to construct barriers that might prevent competitors from entering the market, whether competitors are likely to retaliate when your products are introduced, how vigorously the competition will compete with you and with each other in the marketplace, the probability that your products will encounter competitive products or alternative solutions in the marketplace, the strength of the prospect in the buying negotiation process, your ability to purchase materials at a reasonable price and your ability to sustain a competitive advantage.

Your long-term profit potential is evaluated to be negative.

2.0 Operational Factors

Implementation of your strategy is as important as its definition. The strength of your enterprise, which includes structural and legal organization, management experience, management style, freedom to act and staying power is critical to successful implementation. Appropriate functional capabilities in development, production, marketing and sales, and customer service are also crucial.

Understanding ratios such as expense to revenue, management to employee, revenue per employee and unit costs will also help to insure your success.

Finally, at a detailed level, reviewing administrative practices, operating methodologies, marketing and sales techniques and product development activities can provide important insights into appropriate methods for strategy implementation.

2.1 Your Business

As an enterprise, HiLight Inc appears to have a reasonable number of the attributes necessary for success. On a scale of 1 to 100, the functional aspects of HiLight Inc rate as follows:

57Key Management
70Engineering/Development
47Production
52Marketing/Sales
54Customer Service

HiLight Inc will be selling its products, in particular Smart-Lite, to a market segment defined to include prospects that are mostly new to HiLight Inc, composed mostly of medium size to large organizations, who are more value instead of price sensitive and who have an indifferent attitude about purchasing the product. The economic, business and cultural climate supporting sales to this market segment appears to be strong.

Smart-Lite, rated on technology, image, user benefit, ease of use and competitive differentiation is considered excellent and will be competing with some products or alternatives in the marketplace.

2.2 Management Considerations

The process of managing your business will determine whether you can effectively implement your strategy. This begins with administrative concerns such as the legal considerations that will inevitably arise and the problems of recruiting, hiring and nurturing your work force. You must effectively integrate the various operational functions within the enterprise, insuring good communications, well-defined interfaces, efficient production processes, excellent research and development capabilities and unrelenting quality control.

However, an efficiently managed organization is only a part of the key to success. Even though you produce the best quality, most cost effective product on the market, you must still convince the marketplace to purchase it. This involves the creation of a good market image, understanding your prospect's needs, care and consideration of your customer base and the ability to "sell".

2.3 Ratios

Just as there are ratios that help you evaluate your financial performance there are ratios that help to evaluate your operational performance. For each ratio you should be familiar with what the best in your industry are doing as a comparison. For example, you are projecting that;

Marketing expenses will be 7% of your total expense and 8% of your total revenue in the first year going to 2% and 2% respectively in the fifth year

In the first year your management personnel will represent 27% of your total work force changing to 14% in the fifth year

Your revenue per employee will be $30,333 in year 1 growing to $40,761 in year 5

Your revenue per salesperson will be $455,000 in year 1 growing to $3,138,625 in year 5

Unit production cost will be $28 in year 1 improving to $20 in year 5

If you can operate such that these ratios are better than your competition, you will probably be a leader in your industry.

3.0 Financials

This section is a very high level review of some of the financial factors that will influence your strategy.

It begins with your financial history and then reviews the investment you are planning for this strategy. You can then look at the average selling price you can expect your product(s) to sell for in the open market which leads to the projected income and expense statement. This allows you to compare the projected results against your objectives and finally to determine whether the strategy is going to give you an acceptable return for your investment.

3.1 History

FINANCIAL HISTORY (000's)
19931994199519961997
Revenue$0$0$0$200$350
Profit Before Tax$0$0$0$5$57
PBT %0%0%0%3%16%
Cumulative PBT$0$0$0$5$62

3.2 Capitalization

Start-up Capitalization
Initial advertising expenses$75,000
Research and development expenses$0
Startup facilities expenses$25,000
Initial product inventory expenses$20,000
Initial operating expenses$150,000
Emergency/Other funds$0
Initial capital investment requirements$270,000

3.3 ASP

Average Selling Price
19981999200020012002
Retail Price$80.00$80.00$75.00$75.00$70.00
Sales Volume17,50032,00048,00065,00085,000
Calculated ASP$52.00$48.00$42.19$41.63$36.93
ChannelDisc.% of Total Volume
Retail0%20%10%5%5%5%
Full service45%60%60%55%50%45%
Self service40%20%25%25%25%15%
Wholesale60%0%5%15%20%35%

3.4 P & L

INCOME STATEMENT (000)
19981999200020012002
Revenue$910$1,536$2,025$2,706$3,139
Expenses:
Mkt/Sales 77 46 51 5662
Customer Service 76 131 162 194 256
Manufacturing 484 832 1185 1502 1742
Development 155 86 91 86 86
G&A 332 388 480 500 576
Other Expenses 0 0 0 0 0
Total Expense $1,123 $1,483 $1,969 $2,338 $2,722
Pre-Tax $ ($213) $53 $56 $367 $416
Pre-Tax % -23% 3% 3% 14% 13%

3.5 Objectives vs Projections

Revenue & Expenses (000's)
19981999200020012002
Objectives
Revenue $750 $1,125 $1,688 $2,531 $3,797
Expenses $600 $900 $1,350 $2,025 $3,038
Pre-tax $225 $225 $338 $506 $759
Pre-Tax % 20% 20% 20% 20% 20%
Projections
Revenue $910 $1,536 $2,025 $2,706 $3,139
Expense $1,123 $1,483 $1,969 $2,338 $2,722
Pre-Tax ($213) $53 $56 $367 $416
Pre-Tax % -23% 3% 3% 14% 13%

3.6 IRR

Projected Return on Investment (000's)
Initial Capital$270,000
Discount Rate 5%
19981999200020012002
Revenue $910 $1,536 $2,025 $2,706 $3,139
Expense $1,123 $1,483 $1,969 $2,338 $2,722
Profit % -23% 3% 3% 14% 13%
Profit ($213) $53 $56 $367 $416
Disc. Profit ($213) $50 $51 $315$339
Cum. Profit($213)($160)($104)$263$679
Annualized IRR 0% 0% 0% 0%18%

4.0 Strengths

Every enterprise has some unique operational strengths, business relationships, product capabilities or market segment characteristics that they can rely on as they implement their strategy. The analysis indicates that the following aspects of your business can be used in support of your strategy.
Pricing constraints
Cost for customer to introduce and switch to your product
Prospect's buying knowledge
Advantage's of purchasing your product
Impact of cultural trends
Strength of enterprise's channels of distribution
Cost benefits profile of product
Adequacy of distribution network
Development personnel capabilities
Legal Considerations & Issues

5.0 Weaknesses

Likewise, every enterprise has some operational processes, business relationships, and lack of product capabilities or market segment characteristics that make the implementation of their strategy more difficult. The analysis indicates that the following aspects of your business should be improved or compensated for in some way to minimize their negative impact on your strategy.
Publicity campaign experience
Availability of promotional information
Publicity campaign activity
Probability of publicity campaign success
Potential for economies of scale
Enterprise's publicity campaign effort
Experience level of all competitors
Evaluation of product promotion efforts
Potential for reducing production costs over time
Protection of proprietary technology

6.0 Conclusion

To summarize, at the highest strategic level you are pursuing a focused differentiation strategy.

You will be selling a physically small, technically unique, low maintenance product that is viewed with little interest by the scientific community.

HiLight Inc has targeted a regional prospect base that is is lightly dispersed with the following composition.

10%Individuals
20%Small companies
30%Mid-size companies
0%Religious or philanthropic orgs.
30%Large companies
0%State/Federal government agencies
5%Other

Less than 50% of the prospect base are expected to be past customers, which implies high marketing costs. In general, the prospect has acceptable financial resources with all currently having the physical resources to install and use Smart-Lite. The purchase of a product like Smart-Lite is considered to be of some, but not essential, benefit to the prospect's business.

In concert, you plan to implement an an aggressive market penetration pricing strategy, a push promotion strategy and a distribution strategy that uses external distribution channels and also uses an in-house sales organization.

On a scale of zero to one hundred, the analysis assigns a probability of 56 that you can successfully implement this strategy. This conclusion has been reached by evaluating the following factors:

FactorRating
The Prospect54
The Product62
The Competition46
The Environment75
The Enterprise53
Marketing & Sales52
Engineering & Development70
Production47
Customer Service54
Market Penetration Potential66
Long Term Profit Potential50


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