Passion for Learning Helping Kids Become Amazing Students CASE SUBMISSION 3 Presented to Professor Ganesh N. Prabhu [pic] Indian Institute of Management, Bangalore On July 26, 2011 Submitted By Case Group – 2J: Arit Kumar Mondal 1011084 Rajarshi Sarma1011194 Nirupam Das 1011258 TOY DISTRIBUTION INDUSTRY IN USA The toy distribution industry in USA is dominated by top five retailers (50% market share). Sales are seasonal towards the last quarter of the calendar year. The industry is attractive and the per capita contribution to toys is increasing.
There has been a growing interest in the educational toys segment where educational value is the primary purchase driver. DIRECT MAIL INDUSTRY In 1993, over 40% of the Americans used mailed catalogs for purchases. Catalog consumers were well educated and had high incomes. Catalog sales were driven by mailing size, response rate & average order amount. Volume discounts, coupons & free gifts served as incentives. New products were extremely important in children’s catalog. CHALLENGES FOR PASSION FOR LEARNING (PFL) PFL’S market positioning is of a direct-mail company offering 100% educational products for 6-12 year old children.
Its first catalog mail in 1994 resulted in a disappointing response rate of 0. 77% which resulted in a loss of $145000 on revenues of $54000. There was also increasing competition from specialty chains focused on educational toys and big discount retailers. The firm also faces immediate challenge of designing its 1995 holiday catalog. Repositioning of the firm with the objective of breakeven in the short term and sustained profits in the long term is another major challenge. INDUSTRY ANALYSIS We briefly state the condition of five forces mentioned in Porter’s Framework for industry analysis here.
The toy industry has seen high competition due to presence of many medium and small players. Major players competing on price contributes to the intensity of competitive rivalry. Bargaining power of suppliers is moderate as there is mutual interdependence between manufacturers and mass merchandisers. Customer bargaining power is low as toys are low-cost and standardized or mass products. Threat of new entrants is high as often small players tend to come up with fad toys. Even PFL has also experienced several new entrants even in its differentiated product segment.
Threat of substitutes is low as there are no promising alternatives to toys. REPOSITIONING OPTIONS ON PORTER’S FRAMEWORK Three repositioning options have been analyzed using Porter’s generic strategy framework: i) Differentiation Strategy ii) Low-cost/High-volume Strategy iii) Focus Strategy ANALYSIS OF REPOSITIONING OPTIONS Advantages and disadvantages of each repositioning option are discussed below: REPOSITIONing Option 1: differentiate on service |Based on the Porter’s framework, this option can be regarded as an industry-wide differentiation strategy. |Advantages |Disadvantages | |More local knowledge to better customize product offerings according to |Additional expenditure would be required for design and | |local taste |production of catalogs | |Leveraging local relations helpful in opening specialty stores and |Additional expenses to procure the extended mailing list | |retail centres |Long term expenses could be as high as $80,000 per learning | |Good alignment with existing business and marketing strategy of being a |centre/ retail outlet | |niche player | | |Replacement of least popular products with new products categories | | |(Educational videos) | | |Expansion of customer base through word of mouth endorsements | | |Positive effect on brand-name by selling PFL products to raise money for| | |schools | | repositioning Option 2: high volume – low cost Diversify into “non educational toys and games” segment | |Advantages |Disadvantages | |Lower costs can be helpful in the current scenario |Change of business model | |when the firm is making losses due to lower than |Customers may not accept the new brand positioning resulting in decreasing brand | |expected response |loyalty | |Proven business model of industry leaders like Toys R|Competition with established and large players like Toys “R” Us | |Us |Risk of relatively low order amounts | |By reducing no. f suppliers and higher volume, PFL |No differentiation in its product offering | |may secure better negotiation terms |Investments for order-fulfilment centre and equipments (Approx $ 500,000) – A | |Higher economies of scale with cost of products sold |challenge for a cash strapped company like PFL | |reducing from 46% to 32% |Increase in the mailing expenses | |5% freight discount for increased volume purchases |High supplier bargaining power | |Larger consumer base leading to increased sales from | | |increased responses | | repositioning option 3: science, crafts and action focus |This is a focused differentiation strategy.
This category is basically a subset of the larger educational toy category. | |Advantages |Disadvantages | |Higher profit margins, focussed advantage |High supplier bargaining power | |Proven best selling items for PFL are from Science, Crafts and Action segment |Extra premium to be paid to obtain additional list of | |Opportunities of development of PFL brand through magazine advertisements, which|customers | |reach the appropriate target segment, i. e. high income parents willing to spend|Acquisition cost ($1,000,000) of a manufacturing company| |in PFL’s products |– A big challenge for PFL finances | |Better customer care & information dissemination through added touch points like|Additional expenses for setting up toll free call | |call centres etc |centres and action centres on a long term basis | |Better negotiation terms due to reduced number of suppliers by availing trade & | | |freight discounts | | |Greater coverage of niche customers who are relatively wealthy and willing to | | |spend more. | | FINANCIAL ANALYSIS OF REPOSITIONING OPTIONS From the data given in the case, following ratios are calculated for each of the options. ? Return on capital Employed (ROCE)=Earnings before interest and tax(EBIT)/capital employed ? Gross margin = Earnings before interest and tax(EBIT)/Total Revenue ? Net margin = Profit after Tax (PAT)/ Total Revenue Exhibit 1 shows the data on these ratios and a comparative study is shown in Exhibit2.
It is observed from all the three analyses that returns from option-1 and option-2 are expected to break even in the year 1998, whereas option-3 is expected to break even in the year 1999. Thus, from this ratio analysis, option-3 can be eliminated straight away. Of the remaining two options, expected values of ROCE, gross margin and net margin are higher for option-1 as compared to option-2 (Exhibit-2). Also, from the data given in the case, net present value of investment in option-1 is $4,753,000 and for option-2 it is $951,000. Hence, option-1, to differentiate on service, is financially more promising as compared to other two options. SCORING MODEL A scoring model comparing the 3 options on different relevant criteria is shown in Exhibit 3.
A 5-point scale is being used of very weak on the criterion, weak on the criterion; meet the criterion, strong on the criterion and very strong on the criterion. Option 1 scores the highest among on the criteria. The parameters we have considered include: Cost of implementation: Based on data from Exhibit 1, we can say that option 1 will have highest cost of implementation and option 3 the lowest, with option 1 lying in between. So option 1 scores lowest and option 3highest with option 1 lying in between. Overall fit with organization strategy: Option 1 scores highest in this criteria as its perfectly in sync with PFL’s differentiation strategy. The high volume/low cost model scores lowest as its diametrically opposite to the initial strategy of the firm.
Size of Potential Market:Option 2 has highest market as PFL has to adopt high volume strategy here. Option 3 has lowest market because its a specialized segment. Option 1 has intermediate market size. Capital Investment required: The high volume/low cost model is most expensive requiring high capital investment and so scores lowest in this area. Differentiation strategy requires relatively lowest investment whereas option 3 requires moderate investment. Return on Capital Employed: From Exhibit 1 and 2 it can be seen that ROCE is highest for differentiation strategy and lowest for focus strategy with high-volume/low-cost strategy scoring moderately in this respect.
Gross & Net Margin: From Exhibit 1&2 we can clearly see that option 1 is most favourable and scores highest here whereas option 2 is lowest with focus strategy scoring in between. Net Present Value: NPV calculation shows differentiation strategy to be most favourable and option 2 to be least favourable with focus strategy moderately favourable. Revenue Generation: Due to high volume, option 2 scores highly in this respect and narrow focus strategy (option 3) scores lowest due to lowest volume. Differentiation strategy, i. e. , option 1 scores moderately here. RECOMMENDATIONS AND CONCLUSION Our recommendation is that PFL should adopt a differentiations strategy for achieving maximum success in its endeavour. Some suggestions in the same are: 1.
Continue offering new differentiating service in alignment with existing Business Strategy: PFL retains its core positioning as a distributor of educational toys, so there is no erosion of existing customer base. At the same time, including newer services ensures newer customers and higher retention among existing ones which also which increases probability of responses. 2. Collaboration with Children Associations: PFL is cash strapped as of now. So PFL may try collaborating with children welfare associations for coming up with innovative products and offerings on a cost-share basis. 3. Catering to Special Segments: PFL must also look into coming up with products and offering for the special children such as blind and disabled ones.
Partnering with institutions catering to such children and collaborating with manufacturers to come up with products specialized for this segment can be promising in gaining brand recognition. Moreover adequate financing for this can be obtained from social funds which makes it all the more worthwhile to pursue in order to increase brand awareness and penetration of PFL among its target customers. 4. Opening up specialty stores to enhance mindshare: PFL may look into the concept of coming up with specialty toy-centres in major cities where it may showcase other brands’ products along with its own. It must try to attract the entire toy-loving crowd and try generating interest among them for educational toys by providing an enjoyable and wholesome experience in the same. Also PFL brand visibility will increase as a result. 5.
Exploring alternate avenues for sourcing: PFL may want to explore opportunities of sourcing raw materials at cheap prices from suppliers eastern countries like China renowned for their cost-efficiency. 6. Backward Integration: If PFL ventures into backward integration, it may explore opportunities of manufacturing overseas in countries with cheap labour supply such as China, India, etc. Where labour wages are very low. This would help it maintain low-cost operations being in such a cash-constrained condition. 7. Partnering with Other Firms: In extreme circumstances, as a survival measure, PFL may look into partnering with some cash-rich firm that may be willing to jointly foray into the segment that PFL is trying to address. Exhibits
Exhibit 1: Financial analysis of different options Option-1: Differentiate on service [pic] Option-2: High volume/Low cost [pic] Option-3: Science, crafts and Action focus [pic] Exhibit2. Comparison of financial ratios Return on capital employed (ROCE) [pic] Gross margin [pic] Net margin [pic] Exhibit 3: scoring model |CRITERION |OPTION 1 |OPTION 2 |OPTION 3 | |Cost involved – |4 |2 |5 | |(Based on calculations in Exhibit 1) | | | |Size of potential market # |3 |5 |1 | |Fit with overall business strategy ## |5 |3 |4 | |Capital investment required (From Exhibit 1, 2) |5 |3 |4 | |Return on Capital employed (From Exhibit 1&2) |5 |4 |2 | |Gross Margin (From Exhibit 1 & 2) |5 |3 |4 | |Net Margin (From Exhibit 1 & 2) |5 |3 |4 | |Net Present Value (NPV) – (From Exhibit 1&2) |5 |2 |4 | |Expected Revenue (From Case Exhibits) |3 |5 |1 | |Total |40 |30 |29 | # Option 2 has been given the highest score in this criterion as it involves high volume and targeting both the educational and non educational toy market. Option 3 has been given the least score as it is focussed on niche segment of science, craft and action toys. ## Option 1 has been given the highest score as it is strongly aligned with the present business and marketing strategy of PFL. Option 3 scores the least as this involves diversifying into non educational toy segment.