an approach to a mktg problem

8/4/2019 An Approach to a Mktg Problem

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Perspectives&

Problem solving


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Your client is a manufacturer of bicycles and have been in

business for 25 years. They manufacturer and sell three

categories of bicycles:

Racing bikes: High end, high performance bikes for

sophisticated cyclists

Mainstream bikes: Durable, but not overly complicated

bikes for everyday riders

Childrens bikes: Smaller, simpler versions of their

mainstream bikes for children

Problem:

Profits at your client have decreased over the past five years

How do you approach the problem as a Marketing

consultatnt?


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Understand the business

What has caused overall profits to decrease.

Look at product categories over the past fiveyears during which profitability has slipped.

Normally a portfilio analysis.

Look at the recent changes in the external

scenario.


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What are the clients margins for a bicycle in each of the threesegments?

Racing: Cost= 600/unit Profit=300/unit Mainstream: Cost=250/unit Profit = 75/unit

Childrens: Cost=200/unit Profit = 50/unit

What has happened to the market size of each of the threesegments over the past five years?

Racing: Has remained constant at its present size of 300 million

Mainstream: Has increased at 2% growth rate per year to itspresent size of 1.0B

Childrens: Has increased at 3% growth rate per year to its presentsize of 400 million


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What has happened to our clients market share in each ofthese segments?

Racing:Market share has decreased from 60% to 30%

Mainstream: Market share has increased from 0% to 5%

Childrens: Market share has increased from 0% to 3%

Who are the clients major competitors in each market

segment? What has happened to their market share ineach segment over the past five years?

Racing: There is one main competitor and a host of smallfirms. Your main competitor has increased market sharefrom 30% to 50%

Mainstream: There exist many, large competitors, none ofwhich holds more than 10% of the market

Childrens: As in the mainstream segment, there are manycompetitors, none with more than 10% of the market


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The above information provides enough information toput together a picture of why profits have decreased

over the past five years : Your client, with a commanding position in a market

segment (racing), expanded into new segments(mainstream and childrens). As this occurred, market

share decreased dramatically in the most lucrativesegment (racing), creating an unfavorable mix.

The extent to which profits have decreased can bededuced from some quick math : profits have slipped

from 60M five years ago (=60% x 300MM x 33% racingmargin) to 44M today ( = (30% x 300MM x 33% racingmargin) + (5% x 1B x 23% mainstream margin) + (3% x$400M x 20% childrens margin)).


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The dramatic decrease in market sharein the racing segment is at this point

still unexplained


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Look at the changes in 4Ps

Have there been any major changes in

product quality in your clients racingproduct? Or in its main competitors racing

product?

NoHave there been any major price changes in

your clients racing product? Or in its main

competitors racing product?

No

Is there any changes in Promotion

No


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Have there been any major changes in distribution

outlets for your clients racing product? Or for its

main competitors racing product?

Yes.

Previously the client and its main competitor in the

racing segment sold exclusively through small,specialty dealers. This remains unchanged for the

competition.

Your client, however, began to sell its racing bikes

through mass distributors and discount stores (thedistribution outlets for mainstream and childrens

bikes) as it entered the mainstream and childrens

segment.


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Possible explanation

Previously the client and its main competitor in the

racing segment sold exclusively through small,

specialty dealers. This remains unchanged for the

competition.

Your client, however, began to sell its racing bikes

through mass distributors and discount stores (thedistribution outlets for mainstream and childrens

bikes) as it entered the mainstream and childrens

segment.


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How do the mass distributors and discountstores price the racing bikes relative to thespecialty stores?

Prices at these stores tend to be 15 to 20%less.

What percent of your clients racing salesoccur in mass distributors and discountstores?

Effectively none. This attempt to sell throughthese distributors has failed


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How has the decision to sell through mass

distributors and discount stores affected theimage of the clients racing product?

No studies have been done.

How has the decision to sell through mass

distributors and discount stores affected

your clients relationsh

ip with

th

e specialtyoutlets?

Again, no formal analysis has been performed.


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Some analysis and/or survey should beperformed to answer more conclusively the last

two questions,

From the available information there has been noappreciable change in either quality or price (or

any other tangible factor) of clients racingproduct relative to its competition.

It is not the product that is the problem, but

rather its image. As the client came out withlower end, mainstream and childrens productsand began to push their racing segment throughmass distributors and discount outlets, theirreputation was compromised.


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Additionally, the presence of the racing

products in the discount outlets has put yourhistoric racing distributor (the specialty shops)

in a precarious position. The specialty shops

must now lower price to compete, thereby

cutting their own profits. Instead, they arelikely to push the competitions product.

Remember, your client has no direct salesforceat the retail outlets. The specialty shops

essentially serve as your clients sales force.


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The above analysis offers an explanation of what hasaffected the top side of the profitability problem. Stillto be examined is the cost, or bottom side, of theprofitability issue.

Possible questions to uncover cost issues wouldinclude:

How does the client account for its costs?

The client has a single manufacturing and assembly

plant. They have separate lines in this facility toproduce racing, mainstream and childrens products.They divide their costs into the following categories:labor, material and overhead. Overall costs have beenincreasing at a fairly hefty rate of 10% per year.


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What is t

he current breakdown of costs along

these categories for each product segment?

Labour Material Overhead

Racing: 30% 40% 30%

Mainstream 25% 40% 35%

Children 25% 40% 35%


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How has this mix of expenses changed over the past five

years?

In all segments, labor is an increasing percentage of the costs.

Does the basic approach to manufacturing (i.e. the mix of

labor and technology) reflect that of its competition?

Your client tells you that there is a continuing movement to

automate and utilize technology to improve efficiency

throughout the industry, but it is his/her opinion that their

approach, maintaining the human touch, is what

differentiates them from the competition.

Is the workforce unionized?

Yes


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What is the average age of the work force?

52 and climbing. There is very little turnover inthe workforce.

What is the present throughput rating? How hasit changed over the past five years?

Presently the plant is producing at about 80% ofcapacity. This has been decreasing steadily overthe last several years.

What is the typical reason for equipmentshutdown?

Emergency repair


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Describe the preventive maintenance programin effect at the clients facility?

Preventive maintenance is performed informallybased on the knowledge of senior technicians.

How often has equipment been replaced? Is thisconsistent with the original equipmentmanufacturers recommendations?

The client feels that most OEM recommendationsare very conservative. They have followed a

philosophy of maximizing the life of theirequipment and have generally doubled OEMrecommendations.


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Client has an aging workforce and plant that is

behind the times in terms of technology and

innovation.

This has contributed to excessive breakdowns,

decreased throughput, increased labor rates

(wages increase with seniority) and greater

labor hours (overtime to fix broken machines).

Some conclusions


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OptionsAbandon the mainstream and childrens segment torecover leadership in the racing segment

Issues to consider in this approach:

How much of the racing segment is recoverable?

What are the expected growth rates of eachsegment?

How badly damaged is the relationship with thespecialty outlets?

Are there alternative outlets to the specialty shopssuch as internet sales?

How will this move affect overall utilization of theoperating facilities?


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OptionsM

aintain th

e mainstream and ch

ildrens segment, butsell under a different name

Issues to consider in this approach:

Is there demand among the mass and discountdistributors for bicycles under their name?

What additional advertising and promotions costsmight be incurred?

What are the expected growth rates of each

segment? What is driving the buying habits of the mainstream

and childrens market?


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OptionsReduce costs through automation and innovation

Issues to be considered:

What technological improvements are to be made?

What are the required investments?

What are the expected returns on those investments?

How will these investments affect throughput?

To which lines are these investments appropriate?

Are the mainstream and childrens segmentspotentially over-engineered?

What impact will this have on the required workforcelevels?

If layoffs are required to achieve the benefits, whatimpact will this have on labor relations?


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Options

Reduce costs through establishing a formalpreventive maintenance program

Issues to be considered:

What organizational changes will be required?

What analysis will be performed to determine theappropriate amount of PM?

What training is required of the workforce? What technical or system changes are required?

How will the unionized workforce respond?


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Take aways

A Marketing problem cannot be viewed inisolation

A holistic systems approach is required

Cost is a very important criteria

Competition is the driving factor and hencepricing is important

Health and resources of the organisation and

ability to match the market requirement is animportant consideration

The marketing team needs to appreciate theissues in other functional areas.

an approach to a mktg problem

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