METRO ELECTRONICS INC.
You, CPA, recently had a meeting with the investor group that owns Metro Electronics Inc. (Metro). Metro is
a company with 250 employees and annual revenues of $25 million. The investor group is concerned that the
strategy implemented by the current CEO, Richard Taunton, may be alienating Metro’s core customers and
its staff, and thus may not be sustainable in the long term.
Background:
Metro was established over 30 years ago on the outskirts of St. Jacobs a mid-size Ontario city. The store
originally followed a strategy of offering the best electronic products at the best price with the best service.
Metro was the first electronics store in the area with the look of a warehouse. Most of the store’s inventory
was left in half-open boxes that were placed on the floor or on large industrial shelves. To fulfil its promise of
having the best service, Metro hired selectively and invested significant funds in training each sales
employee. Metro managed to hold on to its sales staff by paying a generous base salary supplemented with
bonus pay based on the store’s total monthly sales.
Metro flourished until the national big-box electronics retailers expanded into the St. Thomas area, and online
retailers of electronics entered the market. These big-box stores and online retailers could purchase and sell
products at lower prices due to their high volume of sales. In addition, online retailers had lower costs, since
they were not required to maintain a physical location. As a result, Metro added tile flooring and higher-end
fixtures and lighting to better compete for customers who had come to expect a pleasant shopping
environment along with great service.
Due to the competition, Metro’s profitability declined, although it was able to maintain a steadfast group of
loyal customers, mainly due to their relationship with the sales staff and the fact that Metro was locally
owned and managed.
Metro’s previous CEO initially responded to the sharp drop in profits by cutting each department’s budget by
15%. He did so by reducing the sales staff’s bonuses and benefits, a tactic that led to many of the most
experienced salespeople resigning. These sales staff were then replaced by part-time staff with lower wages,
fewer benefits, and a limited bonus plan.
In addition, a long-needed investment in a new point-of-sale (POS) and inventory information system with
customer relationship management capabilities was postponed indefinitely.
Unfortunately, these cost-cutting tactics failed to return Metro to profitability, and Metro’s CEO at the time,
who was close to retirement, was asked by the investor group to step down about a year and a half ago.
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Current operations
The investor group determined that Metro needed marketing help and hired Richard, an automotive marketing
executive, to be Metro’s new CEO. Richard determined that the competition for customers was so fierce that
Metro’s operating costs and sales prices would have to be further reduced for it to regain profitability.
Richard reduced sales staff’s compensation to the minimum wage and introduced a commission based on
individual sales. Richard also cut training costs for all staff, stating that the large individual commissions
would be enough to motivate the staff to learn how to best sell electronics. To reduce inventory and shipping
costs, Richard cut the number of products available, keeping only mid-range branded products and a genericbrand product line.
With the new sales tactics and reductions in inventory, Metro became profitable under Richard last year.
However, there was an increasing number of customer complaints regarding the poor customer service and
the low quality of the generic-brand items. JJ responded to the negative customer feedback by frequently
exclaiming that the staff just needed to try harder to make more sales if they were to help Metro achieve
profitability.
Required:
After meeting with the investors, the lead partner, Jacki Anand, asks you to review her interview notes
(Appendixes I, II, and III) before preparing a report for her. Jacki asks that you:
Part 1 — Prepare a SWOT analysis.
Part 2 — Describe three strategic alternatives available for future growth.
Part 3 — For each of the strategic alternatives, analyze their relative strengths and weaknesses as a fit for
Metro.
Part 4 — Recommend the best strategy for the business.
Part 5 — Prepare a strategy map and balanced scorecard for the strategic alternative assigned to your group
(to be determined in the workshop).
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Appendix I
Notes from an interview with Richard, CEO of Metro Electronics Inc.
Richard, Metro’s CEO, would like to maintain the company’s current strategy, as this Appendix I
strategy has increased Metro’s profits by more than $1.2 million from the prior year.
Alternatively, Richard has suggested that if the investor group does not like Metro’s current strategy, then the
company should focus its strategy on low-cost products.
Richard has recently visited several large electronic and consumer product fairs, and he is impressed at the
increase in the variety of low-cost electronics, furnishings, and consumer products that can be easily sourced.
Richard proposed that Metro focus entirely on selling these items. As part of this new strategy, most sales
staff could be eliminated and replaced with high school students working on the floor to ensure enough stock
is available. Metro would return its warehouse to its original appearance.
Richard notes that the product costs, including shipping, would be about 50% less, so Metro could easily
undersell competitors with branded electronic equipment or furnishings. In addition, no one currently offers a
broad range of low-priced generic goods in the Canadian market.
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Appendix II
Notes from interviews with Metro’s sales staff
The salespeople are frustrated with the new compensation system and the move toward aggressive selling
tactics with customers.
The sales staff earn the largest bonuses for persuading customers to buy Metro’s new extended service
contracts, as they have profit margins of over 80%. However, some sales staff feel guilty about selling them,
as they do not cover much beyond what the provincial sales act states retail stores must cover, or even what
manufacturers’ warranties offer.
A sales manager said that he was nostalgic for the early days when the sales staff worked as a team to put a
total home package together for the customer. Currently, salespeople are very reluctant to ask others for help,
as they do not want to share the commission, so each salesperson tries to be a product expert for all of
Metro’s products.
Another sales staff member confided that she often volunteers to go to customers’ homes after work to help
them install the new electronic equipment for free and to recycle their old electronics to make the sale.
The sales staff are also concerned that they often spend a significant amount of time educating the customer
regarding each product’s features, only to have the customer leave Metro without buying anything. Some
sales staff wonder if customers are “showrooming” — that is, going to a physical store to see and evaluate a
product, such as a TV, and then buying the product elsewhere at a lower price. Metro currently does not sell
its products online.
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Appendix III
Notes from an interview with the investor group
The lead investor noted that a new upscale shopping mall is opening on the outskirts of St. Jacobs. The
developer (whom one of the investors is familiar with) is wondering if Metro would like to reserve a spot in
the mall as the only consumer electronics store.
The developer is willing to trade a 15-year lease for a prime location in the mall with approximately the same
floor space (10,000 square feet), the necessary leasehold improvements, plus $200,000 in cash in exchange
for Metro’s current building and land. In return, Metro must agree to sell a broad range of high-end electronic
products that will appeal to the wealthy clientele the mall hopes to attract.
The lead investor noted that this change in strategy would mean Metro would once again focus on advising
customers on which products to purchase, as well as offer full installation, disposal of customers’ old
electronics, and an extended warranty as part of a full-price package.
The lead investor ended the meeting by noting that although Metro has enough capital to fund its near-term
working capital needs, it lacks the capacity to borrow additional funds. He feels that the $200,000 cash
proceeds would help to fund the needed IT upgrades for the POS and inventory systems, plus provide the
working capital needed to fund a larger inventory of higher-end products.
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