Managing Strategy: Case Study of Thornton plc Essay

1.0 Thornton Plc – an Overview: Occupying 8 percent market share of the UK boxed chocolate market in the year 2002 the company Thornton had witnessed a decline in its profits even from the year 1998. The turnover of the company and the operating profits of the company for the years 1994 to 2003 are presented below: The company was largely depending on its in house manufacturing facility and also adopted the marketing strategy of distributing the products through its own retail units established throughout the country. To some extent the company also adopted the franchising route also. Though the company was rich in its internal resources and good in the new product developments, the manufacturing and marketing strategy adopted by the company posed difficulties in meeting the seasonal demands which constituted a major percentage of the sales of the company. This part of the paper analyses the strength of the internal resources of the company. 1.1 Internal Resources: The success of any business depends on the strength of its internal resources which greatly facilitates sustaining the growth achieved by the firm. It is equally important for the company not only to achieve reasonable growth in the profits and sales but also to sustain the growth established by it. The internal resources of the company come in handy to help the company to retain the level of growth being achieved by the company. The internal resources of the company Thornton Plc can be detailed as below: A Complete Value Chain: The strategy of the company in having in house manufacturing facility coupled with its own retail outlets represented a complete value chain which is a distinct internal resource the company possessed. Even though the company resorted to external sources for non-core products and the basic liquid chocolate, the company retained the core manufacturing activity and the recipes. This enabled the company to ensure the quality of the ingredients to the chocolates and maintain its exclusivity in the market. Assets and Competencies of the Company: The distinct advantage the company was carrying was its capability to manufacture its requirements with its own facilities. This had enabled the company to maintain the freshness of its chocolates which became a distinguishing feature for Thornton’s products. This represents the internal resources of the company in the form of its ‘physical assets’. The other ‘physical assets’ that helped the company in maintain its market position is the number of the company’s own retail shops spread throughout the country. A graphical representation of the total number of retail outlets owned and franchised by the company is produced below: Intangible Assets: The goodwill earned by the company by maintaining the quality of its products and the quality of its service to the customers account for the intangible asset the company holding as an important internal resource of the company. Product Differentiation: Another feature that distinguished the chocolates of Thornton is the finishing. While competitors like Cadburys’ products are moulded, Thornton used a handmade appearance to the products by enrobing them in chocolates. In this way Thornton could make a marked ‘product differentiation’ that can be counted as a valuable internal resource that the company could use for improving its brand image. Quality of Service to the Customers: By having most of its sales done by its own shops, the company was able to provide a quality service to the customers. Through services like writing personalized messages on chocolates by icing on the top on important occasions, providing specialised gift wrappers etc the company could get to the fifth place by customers’ choice in the high-street vendors. Product Innovations: Developing new products was a passion for Thornton. This is evident from the fact that in the year the company could add 27 new ‘countlines’ and 132 new and updated products in the year 1998.       Unique and Core Assets and Competencies: The Unique assets of the company can be found in its in house manufacturing facilities that contributed largely for the quality of the products. However with the available manufacturing facility the company was unable to meet the peak seasonal demand which represented the threshold limit with respect to this unique asset. Similarly the core competency represented the company’s ability to innovate as many number of new products to cater to the market. But the threshold limit for this competency was the failure of the company to concentrate on the retailing and the poor locations of the shops that could not give the true advantage of this core competency of new product innovation. 1.2 Strengths and Weaknesses of Thornton Plc: While commenting on the internal resources of any firm it is customary to do an analysis of the firm’s relative strengths and weaknesses. An analysis of the strengths and weaknesses of Thornton is detailed below: Strengths: In house manufacturing facility: The availability of in house manufacturing facility enabled Thornton to ensure the quality of ingredient and thereby ensure the quality of its products. It was also possible to maintain the freshness f the products.   Own retail outlets: The establishment of the company’s own retails shops gave the strength of meeting a higher level of customer service and also an effective distribution of the products among own retail units. Capability to innovate new products: The distinct capability of the company to involve itself in innovative products with new recipes had resulted in increasing its sales at some point of time. Several attempts by the company to promote the sales on this strength had proved successful. Strong brand image: The quality of the Thornton’s products coupled with its freshness had created a set of loyal customers to the company and resulted in the creation of a very strong brand image for the company Sound technical knowledge in terms of recipes: This strength has helped the company to plunge in to the creation of many new products that finally proved successful in the market. Added marketing strength through franchisee stores: In addition to the own retail units, the company also adopted the policy of giving franchise rights to more retailers which proved a distinct strength for the company in terms of marketing of its products. Unique product differentiation: The Company had clearly excelled itself in the segment of boxed chocolates which has proved to be the company’s core strength. Strong market presence in the boxed chocolate segment: Having specialized in the boxed chocolate segment the company made its presence felt in the segment. Weaknesses: Heavy Seasonal Demand: More than 50 percent of the sales of the company resulted from the sales during Christmas, Easter, Valentine’s Day and Easter Sunday. This led to pressure on sales at shorter periods and at times poor sales if there were disturbances in the seasonal sales due to some reason. Dependence on one key product: Excessive dependence on a single product like boxed chocolates had always proved a cause for the failure in sales. Similarly the company depended on the sale of innovative Easter Eggs for the year 2000 that proved an expensive lesson in that more than 300,000 chocolate eggs were left in stock unsold, making the company to sell at half the price. Low quality products and service from franchisee and associated companies: Many a times the associate companies with whom the company had selling arrangements sold products of lower quality. The franchisees, their core product not being chocolates could not provide a quality service to the customers Poor automation capabilities leading to higher labour intensiveness: The finishing of the products with chocolate enrobing made the automation impossible and also due to seasonal sales the company had to employ additional labourers for manufacture as well as for sales during season times which proved expensive. Frequent changes in the marketing strategies: Due to some reason or other the company faced failures successively which made the company change in the marketing strategies. Also changes in the Chief Executives also brought new strategies into practice. Being impulsive purchase unpredictable demand: The chocolate being an impulsive purchase made the demand for the products unpredictable leading to manufacture of the products without a planned approach. Weather conditions affecting seasonal demands: Since the sales of the company were heavily seasonal, any weather conditions that affect the festivals also affected the sales of the company. This was evidenced in the Christmas for the year 1998, when the sales went down by 3.8 percent for the same period last year due to extended summer that affected the buying of customers. Shorter shelf life of the products: One of the major weaknesses of the company was the short shelf life of the products. As against the use of the vegetable fat as the base by the competitors which gave them longer shelf life, Thornton used cocoa base to keep the authentic quality of the products which made the shelf life shorter for the products. Product lines demanding own manufacture: Several products of the company were fit to be manufactured by the companies own manufacturing facilities only. On a research the management of Thornton identified that at least 70 percent of their products need their own manufacturing facility. Higher manufacturing costs: Since most of the products are being manufactured by its own facilities the company could not have a closer control in the manufacturing costs. Moreover the employment of additional workers on peak seasons also increases the manufacturing cost. 1.3 Product Market Research: The Company’s core product range included the boxed chocolates, where it has to meet the competition from major players like Cadburys and Nestle. The company had to compete with high street specialist retailers such as ‘Body Shop’ in  £ 5-10 price range. The percentage of market share of different companies in the boxed chocolate market is graphically represented below: It may be noted that Thornton was able to retain the market share of 8 percent from the year 1999 to 2002 sheer by the product quality against the stiff competition of not only other chocolate retailers but also form others selling postal gifts of wine and flowers. The introduction of 27 new products in ‘countlines’ in the year 1997 and 132 varieties in the year 1998 witnessed an increase in sales of up to  £ 133 million for 1998 and also brought new male, children and teenage customers lowering the average age of the customers. The company planned to increase the new products and re-launch of old products up to 92 percent for Valentines Day, 100 percent for Mothers day and 91 percent for Easter Sunday for the year 2000. New product development with a focus on day-to-day sales rather than for meeting the seasonal demand was taken up to reduce the excessive dependence on the seasonal sales. 1.4 Internal Resources and the Firm’s Competitive Advantage: The competitive position of a firm is determined by its product superiority and the relative market position. These aspects are enhanced by the internal resources and capabilities possessed by the company that adds the competitive edge of the organization In the case of Thornton, the company was clearly placed in more competitive position as compared to other players in the market. The better quality of its products that could be achieved as a result of its own manufacturing facilities is a distinct competitive edge the company possessed. Similarly the positive effects of other internal resources like the establishment of its own retail outlets and the product innovation capabilities had contributed much to the improvement in the marketing ability of the company.                Question 2: Marketing Strategy of Thornton Plc: The marketing strategy of Thornton can be analysed on the basis of the available marketing strategy models. 2.1 Porter’s Generic Strategies: As perceived by Michael Porter in his book ‘Competitive Strategy: Techniques for Analysing Industries and Competitors’ the competition in any business can be reduced to three broad strategies. These strategies are known as ‘Porter’s Generic Strategies’ and are: Cost Leadership Product Differentiation and Market segmentation The competitive strategy of Thornton can be identified with Product differentiation and market segmentation but not with the cost leadership as the company was never able to have a comfortable cost position because of its high packing costs and heavy seasonal demand for the products. 2.2 Bowman’s Clock: As compared to the Porter’s Generic Strategies Cliff Bowman had developed competitive advantages in relation to cost advantage or differentiation advantage. Bowman identified eight core strategies in any business based on the firm’s competitive advantages. They are: Low price/Low added Value: signifying segment specific strategy Low price: being adopted by a cost leader as a result of price wars and low margin on the products Hybrid Option: Represents low cost base and reinvestment in low price and product differentiation. Product Differentiation: This option is being exercised with a price premium and without a price premium. Focused Differentiation: Involving perceived added value to a ‘particular segment’ that needs a premium. Increased Price/Standard: higher margins if competitors do not value follow/risk of losing market share. Marketing Teacher Increased Price/Low Values: This option can be exercised only in a monopoly situation Low Value/Standard Price: This strategy will result in a loss of market share.    Out of these eight strategic options developed by Bowman, Thornton had been following the Product differentiation Strategy originally and later on shifted to ‘focused differentiation’   to capitalize on their product strength. In the case of Boxed chocolates the firm had adopted the   product differentiation with a price premium.          2.3 Ansoff’s Matrix: Developed by Igor Ansoff, this model uses two basic components of marketing namely Products and markets to identify four generic growth strategies namely Market Penetration, Market Development, Product Development and Diversification. Ansoff’s Matrix is â€Å"a framework for identifying the corporate growth opportunities† (Tutor2u) Market Penetration involves more of the same product to the same customers Market Development uses new customers for existing products Product Development uses new products for existing customers and Diversification involves new products and new customers. Ansoff’s Matrix: Example of Thornton The example of Thornton matching the Ansoff’s Matrix can be explained as below: Market Penetration: Increase in the share of chocolate business at the expense of Sainsbury and Asda. Market Development: Movement into more distribution channels like ‘joint venture’ shops with Birthdays Group – a 500 strong chain of greetings cards and novelties outlets; exclusive supply arrangement with Tesco; expansion in to France, Belgium and USA Product Development: Thornton attempted to do product development increasing the rate and scope of new product innovation, repackaging and re-launching of old products that added 27 products in the year 1997 and close to 132 products in the year 1998. Diversification: Thornton developed new product ranges like desserts, ice cream, sponge puddings, cakes and cheesecake.          2.4 Five Forces Model: Thornton’s position with respect to the industry can be analysed on the basis of Michael Porter’s Five Force analysis. â€Å"Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.†(QuickMBA) Barriers to Entry: Though technologically there is no barrier for the new entrants to the market, the accesses to the distribution channels pose a great barrier to entry. Establishment of a new brand also would take considerable time and money in the form of advertising and promotional expenses. This acts as a barrier to the new entrant to the industry. The strength of this force is negligible. Threat of Substitute: There are a number of substitute products available for the products of Thornton. The new products from the competitors like Nestle and Cadburys as well as products from other brands and own label manufactures often pose a problem of substitute products available in the market. Switching to substitute products for the customers is inexpensive and easy as every brand is available in plenty in the various outlets like petrol bunks, novelty stores, greetings cards stores, super markets and specialized shops. The strength of this force is to be reckoned with. Buyer Power: The ultimate consumer being the buyer the force exerted by them on the industry is sizeable. Any small change in the quality of the products or in the level of service will make the buyers switch their loyalty to other brands. Moreover, being an impulse purchase the availability of a number of substitutes and the inexpensive way to switch to other brands make the buyer power act as a strong force.    Supplier Power:   The timely delivery of the product depends on the availability of the base materials in the right quality and right time. Though it is not difficult to establish new sources of supply it may take some time to establish the required level of quality and reliance on the timely deliveries. But the supplier cannot threaten to increase the price at his convenience as there a number of suppliers are available in the market. Hence it can be said that this force is only mildly acting on the industry. Competitive Rivalry: As such the industry is highly competitive with four major players occupying 72 percent of the market share. Any small downward trend in the market share of Thornton will be taken advantage of by the major players acting in the industry. Moreover except the force of ‘barriers to entrants’ and ‘suppliers power’ to some extent other forces are acting very strongly on the industry. Hence it can be said that the competitive rivalry is very high for Thornton Plc. Question 3: Relationship between Thornton and Marks & Spencer: The case study of Marks & Spencer also indicates the different strategies adopted by the firm to sustain its growth attained over a period. The basic weaknesses in the company that led to the downward trend of the company were: Excessive dependence on the suppliers within UK which increased the cost of the products for the company and affected the profitability Expansion of business within Europe and in the USA that finally proved unworthy or not maintainable due to various reasons Expansion and refurbishment of own retail units in the UK which increased the capital cost of the firm Development of new product lines like food when there was so much to be done in the existing clothing business. Thus the experiences of both Thornton Plc and Marks & Spencer can be identified as more or less same with the only difference is that Thornton depended heavily on the seasonal business. Marks & Spencer followed a Hybrid strategy under Bowman’s clock. With the experience of both the firms in the same direction it is quite possible that the business of the both the firms can be combined to take advantage of the advantage of the combiner synergy. However while combing the businesses by selling the chocolates through Marks & Spence r the following points need to be taken into account. 3.1 Overlap of Network: Though Thornton had a long standing supply arrangement with Marks & Spencer with a renewal of such supply arrangement may pose the problem of the overlapping of the network of the customers of both the stores, especially in locations where both Thornton and Marks & Spencer have their retail outlets. Being a commercial customer it is quite possible that the products offered by Marks & Spencer may differ by style and recipe from those provided through Thornton’s own outlets. It may not be possible for the customers to be sure as to whether the products were really made by Thornton. The authenticity of the products may not be fully realized in the perspective of the customers. This is one aspect that needs consideration when a decision to renew the contacts with Marks & Spencer is to be ever thought of by Thornton. Another issue that Thornton needs to consider is the quality of service to the customers. Marks & Spencer having it thrust on its core products of clothing, food and beauty products it may be difficult for the company to attach the same importance that Thornton gives its products. The personalized approach that is being attributed to every customer at the Thornton store may not be expected out of Marks & Spencer. The availability of substitute products by the side of the products of Thornton may also pose a problem for an effective increase in the sales of Thornton’s products. The product promotions and advertising for the competitors’ products will have its own impact on the sales of the Thornton’s products unless an exclusive arrangement with Marks & Spencer is entered only to deal with Thornton’s products. The display and product promotion of Thornton by Marks & Spencer is another area that needs to be addressed. The floor space and the kind of visibility to the products Marks & Spencer may offer to Thornton’s products will greatly depend upon the financial gain that M&S get out of the deal with Thornton. Hence a careful discussion and finalization of the contract is a pre requisite for Thornton to expect the kind of treatment for its products by M&S as the company expects to have. Thornton should look into the cost aspects and the projected sales through the outlets of M&S and decide on the financial working arrangement with M&S. 3.2 Possibilities of Other Working Arrangements: Thornton may look into the possibility of entering into other arrangements like renting a small shop floor area with M&S in the location where they don’t have their own retail units. Thornton may appoint its own staff to look after the sales and thereby can ensure the quality of service to its customer. The company may enter into a profit – sharing arrangement with M&S to create interest on the part of the latter to offer its shop area to Thornton. In this way both companies can retain their identities and at the same time work for the mutual profitability. This would eventually result in the increase in the sales of Thornton. This ‘shop within shop’ arrangement may be effective in controlling the cost of expansion for Thornton to expand in locations where M&S have its own stores. Moreover this sort of alliance is easy to work out and less complicated in terms of fixing the benefit to M&S. There will be no commitment on the part of M&S to assure any minimum sales also. 3.3 Merger: Another distinct possibility that can be worked out to the benefit of both the companies is a merger of both the companies for an agreed consideration to be paid to the shareholders of Thornton. This was what was tried by the company in the year 2003 to offer its management buyout arrangement. However, since the price for the control of the company was higher, at 180p per share there were no potential bidders for meeting the required price and the talk of a bid for Thornton disappeared in early 2004. Unlike this a workable merger proposal between both Thornton and Marks & Spencer can be worked out on reasonable terms that are beneficial for both the companies. This way the synergies of the merger of both the companies can be enhanced to take advantage of the combined forces of sale. Similarly there will be the distinct advantage of the customers of both the companies being attracted to the products of Thornton which may result in the improvement in the sales of the products of Thornton. Another distinct advantage may result in the form less cost of expansion for the merged company as the existing retail shops of Thornton can function as the retail units of the new merged entity or in the name o Marks & Spencer if it agreed to retain the name of M&S if it is agreed as a part of the merger arrangement. These shops can also market the products of M&S also depending on the availability of space in the erstwhile Thronton.                      References:    1.Marketing Teacher The Strategy Clock: Bowman’s Competitive Strategy Options http://marketingteacher.com/Lessons/lesson_bowman.htm Tutor2u Business Strategy: Ansoff’s Matrix http://www.tutor2u.net/business/presentations/strategy/ansoff/default.html QuickMBA Strategic Management: Porter’s Five Force, A Model For Industry Analysis   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  http://www.quickmba.com/strategy/porter.shtml