Using Strategic analysis and strategic management

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This paper will focus on the gourmet chocolate company 'The Real Chocolate Company Inc.', it will analyse the business from both internal and external environments from a business perspective the aim is to highlight the strategic management options available to the company and to provide a description of the current strategies selected.

The Real Chocolate Company is a market leader within the gourmet chocolate and confectionary industry. The company was originally established in Kingstown, Colorado in 1981 by Sarah Smith, by June 2005 the company was reported to be one of Americas fastest growing SME's.

Chocolate has a long-established foothold in society and it has been confirmed to have been consumed since before 1300 B.C (Penn, 2007).

It has been argued that chocolate is an addictive substance and this would indicate why chocolate is so highly desired. Research into the addictive qualities of chocolate suggest that chocolate is actually not addictive (University of Bristol, 2007). However it contains psychoactive ingredients such as serotonin, tryptophan, phenylethylamine, tyramine and cannabinoids all which contribute to enhancing the edible experience by the release of endorphins and would explain why some consumers perceive themselves as 'chocoholics' or addicted to chocolate and why the chocolate industry is such a thriving market..

1.0 Strategic Management

To understand the following external and internal analysis methodologies it is important to recognise what strategy and strategic management is.

Scholes defines strategy as "The direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations" (Johnson, G Scholes, K (2008). I interpret this as understanding an organisation's interaction with its internal and external environment thus significantly improving an organisations efficiency and effectiveness by increasing an organisation's capacity to deploy and redeploy its resources intelligently.

Strategic analysis is a critical component of the strategic planning process. Strategic analysis is an integral part of a company's evaluation and control program as it provides managers with a comprehensive assessment of the organisation's capabilities and market factors; revealing growth opportunities and vulnerabilities (Beany, 2003).

2.0 External Analysis

All organisations operate in a changing world and are subject to forces both internally and externally which are more powerful than they are. No business can survive without continued interaction with the external environment; organisations are influenced by forces in their external business environment as shown in appendix A.

The external environment of The Real Chocolate Company includes economic factors, changes in technology, environmental issues, change in laws and legislation, social factors, national and international politics. The market environment is also included in the external environment this incorporates customers, suppliers, financial sector, general public, competitors, media, wholesalers, retailers and trade unions.

Analysing The Real Chocolate Company using Bowman's Strategic Clock indicates the company to be situated in position 5 "focused differentiation" as shown in Appendix C. This is evident as the company focuses predominantly on products that are perceived as high quality, are sold for a premium price and target niche segments of the confectionary market.

Five Forces Analysis

The Five forces framework was developed by Michael Porter in 1979. The framework has been used to identify the five forces that determine competitive rivalry within 'The Real Chocolate Company Inc.' industry. A graphical representation of these five forces has been included in appendix B.

New Entrants

The threat of potential new entrants to the gourmet chocolate industry is medium as chocolate is easy to produce at a low cost and very little training is required to produce to a high standard however producing gourmet chocolate is not as simple to manufacture due to high initial investment outlay in manufacturing equipment and advertising.

The barriers to entry for new stores are low so the risk is high for The Real Chocolate Company in regards to local competition. This encroaches on The Real Chocolate Company's unique selling point which is in store production as this is easily replicated and is not patentable.

Buyer Power

Evidence suggests that the power of buyers is very high and this dictates the company as a whole. It is shown that a majority of revenue is from The Real Chocolate Company's franchises. The report shows us that consumers come from a wide range of groups such as Asians, college students and the elderly, not just from high income groups as originally expected, thus the threat of sales to rival companies due to lower price products exist.

Sales to health conscious consumer groups are still a developing segment and The Real Chocolate Company has currently not made a significant impact towards this consumer market. Competitors already have a strong foothold in this market with their products. Lead …

Supplier Power

Suppliers have a large influence on the chocolate industry in terms of profit as the cost of raw materials can affect the company's production and base product cost. The report shows that there is an oligopoly of raw material suppliers however a significant amount of cocoa production comes from developing countries such as the Ivory Coast with 38% of total coca production almost double that of Ghana the second highest cocoa producer. Crop diseases such as black pod, frosty pod and witches broom can adversely affect the cost of raw materials resulting in a high risk for The Real Chocolate Company.

Substitutes

According to the National Confectioners Association (NCA) retail sales peaked at $28.9 billion. Rivalry within the gourmet confectionary industry is high with 11 direct competitors all with products that focus directly on the gourmet chocolate sector.

Substitute products such as health orientated chocolates for example fat free products, sugar free products, candy bars and high protein power bars all pose a significant risk to The Real Chocolate Company as the global awareness of healthy and ethical foods progresses.

3.0 Internal Analysis

This study will analyse The Real Chocolate Company using the conceptual resource based view VRIO to identify sustainable competitive advantage.

The internal environment is the shape and fitness of the organisation. Internal analysis tries to identify potential inhibitors that diminish organisational effectiveness such as resources. An inhibitor is a mismatch between the structure or activities of the organisation and its direction.

Barney and Hesterly (2006), describes the VRIO framework as a worthy tool to examine the internal environment of a firm. VRIO is an acronym that stands for the four questions that must be asked about a resource or capability to determine its competitive potential which are Value, Rarity, Imitability and Organisation.

The Internal environment of the Real Chocolate Company consists of elements such as the company structure, the internal business culture, company finances, resources, internal politics, trading status, business skills, management technique and style and staff skills.

Tangible resources

Tangible assets within The Real Chocolate Company are those that have a physical substance and can be touched as shown in Fig 1.

Tangible Resources

Financial

Reserves and assets from sales and franchise fees

Company overheads such as staff costs, support and equipment

Logistical overheads and materials,

Physical

Staff

Manufacturing plants and facilities

Buildings and real estate

Machinery and equipment

Vehicles

Inventories

Technological

Information technology systems (IMS)

Production processes

Patents, copyrights and trademarks

Organisational

Strategic planning processes

Evaluation and control systems (BSC)

(Fig 1.)

The Real Chocolate Company derives its income from sales to franchisees, sales at company owned stores and franchise fees as shown in Fig 1. A large percentage of this income is spent on raw materials and company overheads such as staff costs and utilities. The Real Chocolate Company gains over 7/10ths of its revenue from sales of its products to its franchise stores.

The motto of The Real Chocolate Company is 'Perfection in Handmade Gourmet Chocolate'. This motto demonstrates the company's commitment to providing quality products and service through their skilled workforce. The company recruits employees on skill base and provides consistent support and training via the franchise support scheme to maintain a high quality of service.

Intangible resources

Intangible assets within The Real Chocolate Company are assets that are not physical in nature such as Intellectual property and reputation.

Intangible Resources

Human

Experience and capabilities of employees

Trust

Managerial skills

Firm-specific practices and procedures

Innovation and Creativity

Technical and scientific skills

Innovation capacities

Reputation

Brand name

Reputation with customers for quality and reliability

Reputation with suppliers for fairness, non-zero-sum relationships

(Fig 2.)

The intangible resources include technological resources which indicate the Real Chocolate Company's ability to innovate, this is demonstrated by the product range and consistent growth of the company with its market share and product placement as shown in appendix C of the strategic clock.

Competencies and core capabilities

The efficient structure of resources provide The Real Chocolate Company with its competencies and distinctive capabilities resulting in competitive advantage. These competencies and distinct capabilities are apparent to see from the skill of employees, in store production including the vast range and variety of chocolates that they provide.

4.0 Current problem diagnosis

Direct competitors to The Real Chocolate Company as shown below in the competitive analysis checklist (Fig 3.) already have higher annual sales.

Competitive analysis checklist

Competitors

High

Medium

Low

See's Candies

Russell stover

Godiver Chocolatiers

Buyer power

Consumers

Franchises

Supplier power

Cocoa producers

Sugar producers

Ease of entry for competitors

Overall evaluation

High Risk

(Fig 3.)

Overheads on products due to franchise fees and logistics costs such as increasing fuel prices transporting materials to franchises from the company warehouse dictate higher overall product cost to consumers.

Every organisation worldwide is affected by globalisation and the ease of access to consumers directly via internet sales creating many new opportunities for The Real Chocolate Company, assuming that direct competitors have not already embraced this emerging market.

With the new opportunities created by globalisation there are the downsides which negatively affect the company such as the global financial crisis. This effect will be most apparent from the sales by franchise stores which are The Real Chocolate Company main source of revenue shown in Fig 3. The result of the global financial crisis will affect the cost of raw materials from developing countries which have a higher risk of crop damage due to disease unless correct pesticides are used.

Health benefits of chocolate and new niche markets such as artisan chocolate are areas that require more exploration by The Real Chocolate Company as competitors such as Botticelli are already beginning to exploit.

5.0 Generation and evaluation of strategic options

Cost leadership option

The company should choose to vertically integrate by acquiring the raw materials suppliers to maintain an exclusive relationship and TQM programme within its main raw materials suppliers to ensure product quality and consistent long-term low price resulting in maximising profits, minimising risk in the global financial crisis as exposed in the problem diagnosis, managing supplier power.

More products and advertising targeting a larger segment of the Asian market, allow discount for students and make arrangements with franchises and colleges/universities for student training within the stores and parent company resulting in lower staff costs, brand awareness and higher volume of sales.

Differentiation option

The product differentiation strategic option for The Real Chocolate Company focuses on maintaining the skill levels of staff within the franchisees as not only is this the company's main source of income but also the brands unique selling point, it is an experience you cannot buy online thus sustaining competitive advantage locally retaining the company's core competency.

Focus option

Research and development should be done on developing new products focusing on the emerging artisan and health niche markets, as consumers are becoming more ethically aware this will result in increasing the company's product line as research already shown that over 20% of sales are attributed to new product sales consequently reducing the threat of substitution.

Selected strategy and action plan for implementation

The initial cost leadership option will be used to solve The Real Chocolate Company's business problem. This strategic option will financially feasible and according to research the company has sufficient revenue to accomplish this task.

The implementation of this option will ensure the base costs of materials for products to franchisees remains low maximising company profits and retaining long term product quality for any future strategic options to be implemented such as encouraging new franchisees and new products. This option will be acceptable to internal and external stakeholders and will not be the basis of any conflicts.

The implementation process of this strategic option will be as follows:

Investigate appropriate raw materials suppliers for acquisition.

Valuate assets of target company

Approach suppliers and negotiate acquisition price.

Document processes, controls equipment and staff costs.

Agree non - disclosure

Notify federal government of proposed acquisition

Instruct integration team to proceed with acquisition process

Ensure acquisition completes within timescale

Introduce TQM staff and processes

Ensure completion of acquisition completes in time

6.0 Conclusion

The Real Chocolate Company is a leading producer of quality gourmet chocolate as the company motto states 'Perfection in Handmade Gourmet Chocolate'. The company goal is to become the premier retail gourmet chocolatier in the United States, this goal can be achieved , however initially it is apparent that the company needs to ensure its long term future through vertical integration by expanding and controlling the supplier power of its raw materials. Once the cost leadership phase is complete my recommendation is to implement the mentioned focus strategic option as this will allow for growth and higher profits.

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