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Happy Socks - Fall 2020 Short Version With Answers(2)

Humber College
BMGT 265 – Managing Strategically
Fall 2020 Final Exam
CASE: Happy Socks
 Read the Case
 Answer the questions in the template below.
 You have 2 hours and 30 minutes to complete and submit.
Early in October 2020, Happy Socks received an opportunity to bid on a new order from a major Canadian retailer chain, requiring a response in 5
business days. Komalpreet Kaur and Carlos Gonzalez, the firm’s owners, believed that this order represented a unique opportunity for Happy Socks.
The company had been slowly improving its financial performance over the past few years, and were looking for strategic opportunities to expand
their business. Historically, the firm had been producing standard colour, casual socks for men and women, a steady (but not significant) growth
product. The request for bid however, was the production of trendy multicolour, intense pattern fancy colour socks that can be worn with either
casual or dress attire. Before accepting the request for bid, both Komalpreet and Carlos wanted to assure themselves that pursuing this potential
order was in the best interests for the company’s growth and development.
Happy Socks (HS) was a small manufacturer of casual socks since 2010. The company was located in a small town in Southwestern Ontario, Canada.
HS produced standard colour casual socks successfully in Canada. The socks stood apart from inferior quality imports based on the products ability
to not lose its elastic ‘stay-up’ power on a customer’s leg (ie. the socks stayed up, not falling and bunching around the customers ankle) and its
durability after many washes. HS has considered diversifying its product portfolio into other types of socks (and even other clothing articles) but has
not taken the chance on producing anything different due to concerns of their ability to take on new challenges outside of their core offering that
they have been expert at for 10 years. Currently, HS’s socks were sold to distributors, who serviced a variety of small independent retailers, in
Canada and the Eastern United States.
A buyer for a major Canadian retail store chain had been impressed with the quality and durability of HS’s socks and approached Carlos. The buyer
requested that HS provide a bid on producing and selling direct to the retailer multi-colour fancy socks which are on trend currently and look to be
experiencing unit growth sales. Carlos and Komalpreet strongly believed that slight changes in production methods and minor production
equipment purchases only would be needed due to differences in the sock fabric. The operations company that HS worked with could make these
adjustments for an estimated cost of $10,000. The operations company would also need to provide equipment maintenance on a contract basis at
a rate of $1,000 per visit. After this potential customer initially approached HS, both Carlos and Komalpreet travelled to Toronto to meet with the
retail chain’s purchasing department team. The meeting had been very successful, and one week later a the retail chain indicated that they wanted
to place the order with HS. Client entertainment costs from the visit in soliciting the order amounted to $750. After the initial jubilation of working
to solicit the order had subsided, Carlos began to have second thoughts about the whether or not HS should take on this new order. Carlos had
estimated that the wholesale price for the new multi-colour fancy socks would be $3.90 per pair, whereas the special order was contingent upon a
firm price quote of $3.60 per pair. Obtaining the order would certainly be a major step forward for HS and could lead to large future orders from
this customer or other major retailers. The company’s profit margins were already “squeezed” severely and both Carlos and Komalpreet thought
that a pair of these socks could not be produced for less than $3.15. Exhibit 2 shows the company’s budgeted costs for the current fiscal year,
including budgeted dollars for this special order. Based on this data, Carlos concluded that the company’s net profit margin was only about 7.4%
per cent at the existing $3.60 selling price. See Exhibit 1 showing the type of socks required to be manufactured for the bid.
Exhibit 1
Multi-Colour Fancy Socks
Competition in the sock production industry is quite intense. 2 competitors specifically were always the main challengers against Happy Socks over
the past 5 years
Main Competitive Advantage
Potential Weaknesses
Rainbow Designs
Being On Trend and Designs
Feet Coverings
Low Cost of Production on
Standard Offering
Product does not last as long
compared to Happy Socks
Costs incurred regularly to
upgrade designs in order to
be On Trend
Product quality is mediumlow
Design appeal is low
Average Selling
Price Per Pair
Estimated Average
Variable Cost Per
Estimated Fixed
HS’s factory was currently operating at its one-shift capacity of 13,000 pairs of socks per month and had a small backlog of orders. The special order
under consideration was for 20,000 pairs of socks as a test in a number of the retailer stores, to be delivered within two months, in time for the
Christmas season. If the test went well, orders could increase with significant volumes estimated to be about 50,000 pairs for the entire retailer
chain annually. Komalpreet believed that test quantity could be handled by having employees work some overtime each week for the next 2
months. The total utilities costs varied directly with production activity. A production supervisor was paid a monthly salary of $5,000 (including
benefits). Both Carlos and Komalpreet believed that the production supervisor should be paid a bonus of $500 per month if extended overtime
work was needed for this order. The 4 factory workers (non-unionized) were paid hourly and worked 35 hours each week. They also received timeand-one-half for any overtime work.
As Carlos and Komalpreet mulled over whether to move forward with this order, they knew that their response to this order would have a major
impact on the company’s future. Expansion was a desirable strategy, if the financial rewards compensated for the increased risks and additional
work involved; however, neither owner was totally comfortable dealing with large retail chains who could wield a great deal of bargaining power.
Komalpreet was also not convinced that HS was even efficient enough to compete successfully in the larger, more aggressive retail chain store
market. Yet, both Carlos and Komalpreet realized that something should be done to improve HS’s marginal profitability and, if they were to reject
this order, it would be unlikely that this retail store chain would solicit further orders from HS.
Exhibit 2
Raw Materials
Owners’ Salaries
Production Equipment
Production Equipment
Design Cost Amortization
Office Equipment Depreciation
Selling Expenses
Office Supplies
Other Expenses
Total Costs
Estimated Units Sold
Answer the following questions (use as much space as required):
Case Questions
1.Environment Analysis:
Prepare a SWOT analysis for HS.
Answer Column: Provide Your Answers In The Cells Below
 Quality of socks – ‘stay up’ feature
 Really focused on a narrow offering, making them very customer targeted with likely a loyal
customer following
 Company is not experienced at taking on new challenges (ie. not risk takers)
 Product offering is narrow
 Being ‘on trend’ hasn’t been an area of strength for this company historically
 Develop a new product manufacturing capability
 Diversify future risk by entering a new product space
 Take a chance on a (slightly) new product variation which could lead to other future
opportunities in a new product space (‘on trend’ product space) not explored by HS
 Selling direct to retail chains diversifies distribution strategy, opening up avenues to other
sources of revenue in future
 Some competition is more broadly focused in their production
 Some competition is more design trend focused which could be argued that this opportunity
might be a better fit
 COVID-19 could reduce sales due to people not going out for work/recreationally (you have to
make the assumption that this case takes place in a ‘COVID world’ for this Threat)
 Wholesalers could negatively react to HS selling direct, and find other manufacturers to
partner with
2. Business Strategy
a. Based on our discussions early
in the term regarding Generic
Business Strategies (Module 4),
which strategy do you believe
that Happy Socks is currently
pursuing with the production
of their standard casual socks?
b. Do you agree with their
c. Why or why not?
3. Marketing Strategy / Positioning:
a. From our discussion on
positioning earlier in the term,
what positioning strategy do
you believe that Happy Socks is
b. Do you believe that this
positioning represents a
sustainable competitive
advantage for the HS over the
long term?
c. Why/Why not?
a. Differentiation – Focus => product is high quality, unique feature (stay-up power) sock that is
not design/trend focused, but focused on the sock purchaser who wants their socks to stay up
and last long
b. Yes!
c. Based on case content, it doesn’t appear that in their geographic region, that there is a direct
competitor (ie. some other competitor that produces high quality product with a unique
feature, and positions their pricing according to that quality. As such, they likely have a strong
position in selling to their targeted customer segment. They have very likely well
differentiated their offering from their other direct competitors
a. Product Attributes
b. This positioning strategy could be built on a unique, even proprietary manufacturing process
or fabric materials that its competitors do not have access to. Or, competitors have chosen
not to pursue this type of product build and focus on other positioning strategies such as value
(low cost) and perhaps lifestyle (competitor that focuses on having on-trend sock designs). So
it is definitely sustainable over the short-to-medium term at a minimum.
c. The challenge that HS faces is trying to determine whether or not to grow their business.
Given their current business model ‘footprint’, they have to take their existing positioning
strategies to new geographic regions if they want to grow OR they need to consider pursuing
this multi-colour fancy sock opportunity. This would lead them to evolve their positioning
strategy, and look at more image/lifestyle based positioning since they are now entering the
design world. Over the long term, it is likely that a competitor would determine how to copy
HS’s existing ‘stay up’ technology if they believed that this market segment was profitable and
growing at the same time. This would make HS vulnerable if they would not consider other
growth opportunities
4. Growth Strategies:
a. Using the supplied BCG Matrix
to the right, plot the current
strategy of standard casual
socks (SCS) and the growth
strategy of producing the
multi-colour fancy socks (MCF)
in the appropriate quadrant.
Should HS consider other
opportunities to grow their
business based on the plotting
the above strategies on the
BCG matrix? Provide your
BCG Growth
High Market Share
Low Market Share
High Market Growth
Low Market Growth
Should HS pursue other opportunities? Yes or No?
“Historically, the firm had been producing standard colour, casual socks for men and
women, a steady (but not significant) growth product.”
“The buyer requested that HS provide a bid on producing and selling direct to the retailer
multi-colour fancy socks which are on trend currently and look to be experiencing unit
growth sales”
Based on above plotted businesses in the BCG matrix, I would recommend that HS pursue
other opportunities.
Their current product offering (SCS) is identified as a Cash Cow, implying that is generating
profit, but room for growth may be limited as this business does not look like a growth
Given that the multi-colour fancy sock (MCF) would be a Question Mark opportunity at this
point, but with the strong potential to be a Star in coming years, this would be an improved
business portfolio scenario for HS as it potentially would have a Star that could be supported
with cash flow from the stardard colour socks (SCS) that they are producing.
The biggest risk for HS is their lack of previous pursuit of growth opportunities, making the
MCF opportunity higher risk than they are used to taking.
But, given that the opportunity has similarity to what they are currently doing, the risk is
somewhat muted
4. Growth Strategies:
Ansoff Growth
Existing Products
New Products
b. Regardless of your decision
Existing Markets
above to grow your business,
make an assumption that the
company decides to pursue a
New Markets
growth strategy by …
Manufacturing and
selling multi-colour
fancy socks outside of
HS does not currently manufacture these socks, and would be entering a new geographic
currently sold markets
market, therefore a Diversification strategy
Export their current
Existing product being sold into a new market, therefore a Market Development
standard colour
product into overseas
New product (with assumption) sold in existing markets, therefore a product development
opportunity. You could also argue that this opportunity is a new product-new market
Launch a new dress
opportunity as selling dress socks would be targeting new customer segment and
sock targeted at
potentially new distribution channels
business clientele
Encouraging growth of existing products in existing markets using incentives is definitely
Start offering
Market Penetration
consumer incentives
Totally new product that has not been manufactured by HS before, therefore a
with your retail
Diversification strategy. Most likely, the target market will be potentially different as well
partners to encourage
BUT you can argue that the overlap in target market for casual socks would be high with tpurchases
shirt sales, aligning with Product Development strategy
Begin manufacturing
With the acquisition, there are new products (shirts and ties) that HS has not had
fancy design t-shirts
involvement in previously. This would likely lead to selling to new customer targets so
Purchase a sock
Diversification strategy
manufacturer that
also produces shirts
and ties
Place the roman numeral (eg.
i., ii., iii.) in the Ansoff matrix
quadrant of your choice for all
of the above growth strategy
options and provide your
4. Growth Strategies:
Which growth strategy would you choose?
c. Given your work in question 4b iii.
Launch a new, dress sock targeted at business clientele
above which one of the
following Ansoff growth
strategies do you believe
would work best? Provide your Rationale:
Opportunities that would be considered riskier given HS’s current strengths and weaknesses …..
Manufacturing and selling multi-colour fancy socks outside of currently sold markets. HS
doesn’t currently manufacture fancy socks. Asking them to manufacture AND sell these
socks into new markets may be a bit of a stretch for a company that is risk averse
Begin manufacturing fancy design t-shirts. This would be a stretch (no pun intended!) for
HS as they would most likely need mostly new manufacturing equipment, and they have
no experience in the t-shirt market. There would be some similarities (clothing, fashion),
but we don’t have any information in the case what the competition would be for HS in
the t-shirt market
Purchase a sock manufacturer that also produces shirts and ties. This would be slightly
less risky (compared to above 2 growth opportunities) for HS as they would have good
business acumen in the purchase of he sock manufacturing portion of the business. If they
Opportunities that would be considered to be of more reasonable risk …..
Export their product into overseas markets. This would be slightly lower risk as the
manufacturing expertise is in their current skillset. Exporting the finished product
overseas would be something new, but they might be able to leverage the skillset of one
its current distributors to help in marketing/selling the product to overseas retailers that
would be good target market
Launch a new, dress sock targeted at business clientele. New product, but probably into
its existing customer/geographic markets so the risk would lie in HS’s ability to
manufacture a dress sock (which they currently do not make). Potentially, they could
leverage the ‘stay up’ technology for the production of dress socks which could potentially
give them a competitive advantage
Opportunities that are easy, low risk …..
Start offering consumer incentives with your retail partners to encourage purchases. This
is a simple and virtually no risk growth approach to growing revenues within their current
product portfolio. This approach would likely involve taking market share from its
competitors. The only risk of this strategy, which would have to be monitored closely, is
the impact of product discounting (a perceived higher quality, higher value product) is
diluting the perceived higher quality level of the brand. Once you start discounting with
regularity, customers come to expect it
a. What would be Happy Socks
annual breakeven volume in
units assuming that the
average price per pair of socks
sold = $3.60
b. How does their breakeven
units compare to the 2
c. Based on the 3 competitors,
who is best positioned to make
the most profit in the short
term? Why?
Show any calculations and state
any assumptions.
a. Breakeven = fixed costs / (selling price per unit – variable cost per unit)
Happy Socks Cost Type
Raw Materials
Owners’ Salaries
Production Equipment
Production Equipment
Design Cost Amortization
Office Equipment Depreciation
Selling Expenses
Office Supplies
Other Expenses
Total Costs
Breakeven Units Formula = Fixed Costs / (Selling PricePer Unit – Variable Cost Per Unit)
Selling Price
Per Pair
Average Variable
Cost Per Pair
Happy Socks
$330,921 146,270
Rainbow Designs Inc.
$345,000 156,818
Feet Coverings Inc.
$290,000 138,095
Estimated Fixed Breakeven
$1.34 variable cost per unit for Happy Socks determined as follows:
 Total variable costs = $223,479 (raw materials) + $11,938 (utilities) = $235,417
 Variable cost per unit = $235,417 / 176,000 (units expected to be sold by Happy Socks
taken from Exhibit 2 in the case)
 = $1.34 per unit variable cost
b. Feet Coverings has the lowest breakeven production units requirement, Happy Socks 2nd
best, and Rainbow Designs has the highest breakeven requirements
c. Based on this limited data, it looks like Happy Socks has the best looking contribution
margin number of the 3 competitors …..
Happy Socks
Rainbow Designs Inc
Feet Coverings Inc
Cont’n Margin
$3.60 - $1.34 = 2.26 per unit produced
$3.45 - $1.25 = 2.20 per unit produced
$3.25 - $1.15 = 2.10 per unit produced
Based on looking solely at breakeven units, Feet Coverings has the lowest breakeven
units of the 3 competitors. As such, without considering other variables, they should
be able to achieve positive profit contribution at a lower level of production than their
6.HR / Ethics:
Could the expenditure of $750 on
entertaining the retailer be
constituted as a conflict of interest
by the buyer? Explain why / why
In the purest sense of ‘business ethics’, the entertainment expenditure on the retail chain
buyer could be viewed as a conflict of interest which should be avoided.
However, being a conflict of interest is a ‘sliding scale’ meaning that some forms of conflict of
interest are perceived as bribes, others are not
How do you determine the difference?
o Entertainment expenses are generally accepted globally, but the amount in question
spent is usually a good measure
o Bribes are totally acceptable in many countries globally. In Canada however, they are
o Many companies use the rule that when the expenditure is low relative to the benefit
of the business transaction that occurs, then conflict of interest is also diminished.
o In this case, $750 spent on an initial order that would be approximately $72,000 (~ 1%)
seems relatively low and entertainment costs are a normal part of many business
o However, if we use Walmart as an example, a buyer is not permitted to accept a cup
of coffee from a vendor.
o So – answer for this question – could be the expenditure is OK based on the small
expenditure amount relative the business transaction amount OR you could say that
this is a conflict of interest for both the retailer and HS – BUT JUSTIFY YOUR POSITION
As the owners of HS, will you fulfil
the order? Why or Why not?
The answer to this question should have alignment with the analysis that has been done in the
previous questions
 From a SWOT perspective, there are some potential ‘headwinds’ facing HS if the decide to
pursue this strategy
o Competitors seem to potentially be better suited from a ‘design on-trend’ perspective
o Risk of some of the wholesalers that they currently deal with not working with them
anymore due to excluding them from the value chain for this order
o HS does not seem to have expertise in the ‘trendy’ clothing apparel space
 SWOT positives …
o HS has a unique product proposition, not just trendy apparel
o The distribution channel opportunity
 They already are pursuing a differentiation- focus strategy – this opportunity would represent
another ‘niche’ market offering for them, just in a different customer space than they
currently operate in
 They seem to be motivated to grow their business but they don’t have a track record of being
risk takers
o this opportunity represents a reasonable risk – I would classify this as a new product
(just barely!) in an existing marketplace (even though the customer segment that
would be buying this product may look somewhat different than their current
customer segment base)
o product category (socks) is the same, just a potentially different end user
o if the unique product feature of current socks can be ported to the fancy socks, then
they could have a competitive advantage, at least in the short-to-mid term
 The retail chain appears to really like their existing product, likely due to the ‘stay-up’ power
 Recommendation:
o as long as the fixed cost expense of running the test with the retail chain is not
significant (and the case indicates that it is not) then HS should definitely pursue this
o partner (contract) with an existing apparel consultant/design firm to help HS build a
sound marketing communications and positioning plan for this new product launch at
HS cannot launch this product with the same approach as their standard
product offering as the new opportunity needs to appeal to customers who
are focused on being ‘on trend’