Designer Shoe Co.
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Designer Shoe Company
James White
Alex Zarchan
MGMT 585-Strategic Management
Arthur Smith
August 11, 2012
Designer Shoe Co.
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Abstract
The worldwide market for shoes is a highly competitive business environment. This
market has four companies that are competing in four different regional markets. Designer Shoe
Company is one company trying to develop its business strategy to grow market share and
increase shareholder value. The company is utilizing a best-cost provider business strategy
focusing on providing quality shoes with market leading variety of shoe models. Designer Shoe
Company has focused its business strategy at reducing costs by maximizing production numbers,
targeting marketing options to specific markets, and by providing work incentives to reduce
labor costs. In addition to cost reduction, the company is committed to the principles of
Corporate Social Responsibility to improve the brand image. The primary competition to the
company is AbiPlex and Bareclaw. Designer Shoe Company will be planning on opening a
production site in Latin America to take advantage of additional cost reductions this site location
will provide to further develop the best-cost provider strategy.
Designer Shoe Co.
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Designer Shoe Company
The worldwide market for shoes is a very competitive environment. There are currently
four companies vying for market share in the internet, wholesale, and private label shoe markets
across four geographic areas. These companies include AbiPlex, Barclaw, Crows Feet, and
Designer Shoe Company. This paper will focus on the strategic vision of Designer Company
Co., the actions it took establish its business model, an analysis of its competition, and a strategic
plan to create growth.
Vision Statement
Designer Shoe Company’s strategic vision will read, “Designer Shoe Co. is an
international shoe manufacturer that will provide a low cost quality shoe to its wholesale retailers
while tailoring its product line to meet the needs in each regional market. The company will
remain agile to grow market share. Marketing activities will be a focus with the use of celebrity
appeal and rebate offers to manage market demand for its shoes”.
Performance Targets
The company will set its goals to align itself with the vision. The performance targets will
be set with this in mind. The first target is earnings per share. The current EPS is $4.91 in which
the mark set was missed by $0.09. The goal over the next two years will be set at $5.30 for the
next year and $5.70 the year after. The company has been very erratic in the last few years. This
is a moderate increase which will allow the company to focus on some consistency while
continuing to meet investor expectations.
Earnings Per Share
Designer Shoe Co.
(Thompson, Stappenbeck, Reidenbach, Thrasher, & Harms, 2012)
Return on equity will be set at 19% this is just above the average of the best three years
out of the last eight. This will be both challenging and attainable. It also keeps the company
competitive in the market meeting investor requirements.
Return On Equity
(Thompson, et al., 2012)
The credit rating has been an A+ for the last five years. The expectation over the next
two years is to keep the rating at or above an A- and keeping in mind that expansion
opportunities exist and will need to be financed in part by debt.
Credit Rating
4
Designer Shoe Co.
5
(Thompson, et al., 2012)
The image rating will be set at seventy five for the next year and an eighty the year after.
Designer Shoe Company has been pretty consistent staying around seventy and it is time to move
the rating in a positive direction. From year eleven to year twelve the rating jumped from sixty
four to seventy, so it can be done. The company will maintain a focus on corporate social
responsibility projects to keep improving the rating. These goals will move Designer Shoe
Company closer to the leaders in this category.
Image Rating
(Thompson, et al., 2012)
Designer Shoe Co.
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Global market share will be set at twenty three percent for year eighteen and twenty six
percent for year nineteen. Over the last eight years the company best mark has be 25.4%. The
goal of twenty six is just above 25.4 and there was a 2.6% change between years eleven and
twelve. This goal can definitely happen and will put the company on track to the highest market
share in recent history.
Global Market Share
(Thompson, et al., 2012)
The stock price target will be set at seventy five dollars and ninety seven dollars for the
year after. There was a nice jump from year sixteen to seventeen of twenty two dollars. The
target requires the company to continue a positive increase and repeat the gain made last year.
Most of the competing companies have stock prices much higher than where these goals will end
up when reached. However, when reached, the goal will set the company on track to move into
the upper echelon in the market putting Designer Shoe Company in position to make major
moves in the near future.
Stock Price
Designer Shoe Co.
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(Thompson, et al., 2012)
Competitive Strategy
Designer Shoe Company had to adapt its business strategy during its past seven years of
operations. The company started with a differentiation strategy focused on high S/Q rating,
adjusted to a best-cost provider with High S/Q and models with a lower shoe price, and finalized
on a focused best-cost provider focusing on having lots of models with decent S/Q at a below
average price. These changes were due to the high cost of producing shoes for the company.
Designer Shoe Company will use the best cost provider strategy as its overall strategy. This
strategy was maintained by decisions made in the branded market, private-label market,
production, and finance strategy.
Branded footwear
The main idea here is to keep costs down so Designer Shoe Company prices will be
lower than its competitor with an S/Q rating which is competitive. At the same time it centralizes
the strategy, so the company can reach more markets. In the process to position the company in
the middle of the market to become the best cost provider, the number of shoe models was
increased to provide incentives to customers. By building the best cost provider strategy it
provides an opportunity to bring the costs down for production and build revenue through
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streamlining processes. This will mitigate the risk of getting squeezed between strategies. The
best cost provider strategy allows the company to keep costs down enough to be able to stay
competitive in the Europe- Africa markets and the Latin America market without having to
manufacture in those markets. In these markets the idea is to create maximum interest at minimal
cost to the company. This will be done through the celebrities signed by the company. Currently
the company has two manufacturing facilities one in North America and one in Asia – Pacific.
Maintaining an SQ rating of seven and offering rebates of six dollars per pair in Asia has proven
to be very beneficial for the company. It is very similar to the strategy employed in North
America except the rebates are about half and the advertising budget is lower (Thompson, et al.,
2012).
Private-label footwear
In the private label sector, the strategy is to continue to stay out of it until the time when
the possibility presents itself to be profitable for the company. In other words right now the
company cannot make a profit at the low prices needed to deal in this market. When the market
is built and there is an opportunity, it will become a segment in which market share can be
gained.
Workforce and production
The workforce compensation and production strategy is by far the most important part of
the strategy for Designer Shoe Company. Money is consistently being poured into this area of
the company. The upgrades made through option A and option C give the ability needed to
provide the customer with the best product on the market at the best price. Option A provides the
ability to reduce rejects giving the ability to produce the right product when needed. Option C
provides the ability to provide a high quality product with minimal contribution. Both of these
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upgrades will produce more opportunity to become “THE” best cost provider in the industry.
This is a major portion of the strategy because if the workers don’t have to work as hard, then it
is more likely for them to do something with the extra time. Production capacity was also
maximized to take advantage of these cost savings. At the same time the incentives for nonrejects have given huge gains and are expected to do the same in the future. There has also been
a large sum spent on best practices training which continues to gain dividends over time and are
expected to grow. As the employees grow more proficient with the job, the best practices
initiative will grow stronger. Then there is the opportunity to train the newcomers with these
practices included creating a shorter learning curve and promoting an environment where they
can provide new ideas to promote continuous improvement. While all the time the cost of
production continually drops giving the ability for the company to to drive prices down to allow
the ability to look at other markets and even expanding plant capacity (Thompson, et al., 2012).
Finance
The company strategy when it comes to finance is to keep debt low to reduce interest
expenses that can drain company resources. This also provides flexibility to the company to then
take advantage of future opportunities that may need debt financing. Free cash flow has been
directed on stock buybacks to help ensure shareholder value increases. Dividends were initially
reduced to keep positive cash flows but has since gradually increased to provide incentives for
long-term investors to invest in Designer Shoe Company.
Branded Competition
Designer Shoe Company had to adapt quickly to this competitive market in order to stay
profitable and increase shareholder value. The final strategy that the company settled on to set
itself apart was the best-cost provider strategy. The risk of best-cost provider is that it puts a
Designer Shoe Co.
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business between firms using low-cost and high-end differentiation strategies (Thompson,
Peteraf, Gamble, & Strickland, 2012). As a result of this, the top competition for branded shoes
was AbiPlex and Bareclaw.
AbiPlex
AbiPlex utilized the low-cost strategy to gain market share in the branded internet and
wholesale shoe market. This strategy focuses on “just one or a few consumer segments; they
deliver the basic product or provide one benefit better than rivals do; and they back everyday
low prices with superefficient operations to keep costs down” (Kumar, 2006). AbiPlex
demonstrated this strategy by keeping their shoe S/Q rating at a market low of a 6 and shoe
models production of 200 which was also a market low. These low production qualities and
options were then balanced out by pricing the shoes at the lowest cost across all markets.
AbiPlex priced their shoes 9.8% below the market average for internet sales and 13.9% below
the market average for wholesale sales in the most recent year of operations. AbiPlex was then
able to turn this pricing advantage into industry leading shoe sales across all wholesale markets.
North America
Europe/Africa
Asia/Pacific
Latin America
Shoe Sales (000s)
2162
2131
1634
1814
Market Share
32.5%
32.0%
28.0%
31.0%
(Thompson, et al., 2012)
The only way for AbiPlex to remain profitable with the low-cost strategy was to keep
their production and manufacturing costs to a minimum. One strategic option that the company
took to maintain this low cost strategy was to build a production facility in Europe/Africa. This
additional production location could be used to reduce the risk of exchange rates by producing
the shoe in the market it is sold in. An additional advantage to this production location is that
Designer Shoe Co.
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AbiPlex could avoid shipping and tariff costs of shipping shoes to the Europe/Africa market.
However, some of these cost saving options were absorbed by the high cost of labor and interest
expenses incurred by financing the building of this production location. These results may be
seen in minimal cost savings due to the company’s cost of pairs sold as a percentage of sales
revenue was 55.2% which was just .9% below the industry average cost percent. However, low
prices were not enough for AbiPlex maintain their market share. The company was forced to
spend the largest portion of sales in the industry for marketing costs. This additional cost ended
up bringing down the operating income for the company when compared to industry averages
(Thompson, et al., 2012)
.
(Thompson, et al., 2012)
This chart provides a graphical representation of how AbiPlex’s costs compared to the
industry average when compared to a percentage of sales. This chart shows that the company
was able to keep the costs of it shoes below industry averages but its warehouse, marketing, and
administrative costs were above the industry average. These higher costs resulted in operating
Designer Shoe Co.
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income below the industry average. In addition to comparing the costs to the industry average, it
is also compared to Designer Shoe Co.’s costs and operating income as a percent of sales. The
comparison of the two companies shows that Designer Shoe Co. had higher shoe cost but kept
the other costs slightly below that of AbiPlex. AbiPlex was able to have a higher operating
income (Thompson, et al., 2012).
The low cost-strategy for AbiPlex had mixed results over the years. This mix of results
was due to expansion costs as well as the actions of the competition to counteract the low price
strategy. The stock price for AbiPlex was as low as $17.96 to a high of 107.89 and has settled to
a current price of $67.25 with an average return on equity of 17.6% (Thompson, et al., 2012).
Bareclaw
Bareclaw utilized the broad differentiation strategy to gain market share in the branded
internet and wholesale shoe market. This strategy relies on a firm to produce a product or
service that is perceived to be unique by customers in the industry (Eng, 1994). Bareclaw
demonstrated this strategy by having an industry high shoe quality rating with an S/Q of 10 and a
top shoe model production of nearly 500. This mix of high quality and shoe model availability
allowed Bareclaw to charge an above industry average price for their shoes. Their pricing in the
internet market was 3.8% above the industry average and 6.7% above the industry average for
the wholesale market. Even though Bareclaw had higher prices, they still maintained shoe sales
in the wholesale market through their product differentiation as demonstrated by the chart below.
North America
Europe/Africa
Asia/Pacific
Latin America
Shoe Sales (000s)
1610
1520
1474
1596
Market Share
24.2%
22.8%
25.2%
27.3%
(Thompson, et al., 2012)
Designer Shoe Co.
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In order for Bareclaw to manage their costs for the high shoe quality and model
production, the company had to take dramatic steps to manage their branded production capacity.
The company sold all of their production capacity in North America. They used the revenue
from the sale of this production to complete plant improvements to improve S/Q rating and
reduce production set ups for shoe model production. The revenue from the sale was also
directed to increase production capacity in Asia/Pacific. This strategic move transitioned all of
Bareclaw’s production into a single, low labor cost, production hub. As a result of this cost
advantage, high quality shoes could be produced with large profit margins.
(Thompson, et al., 2012)
The combination of increased sale prices and decreased cost structure has allowed
Bareclaw to experience tremendous growth and shareholder returns. The company share price
has increased from $17.60 to $126.86 while averaging an 18.0% return on equity (Thompson, et
al., 2012).
Private Label Competition
Designer Shoe Co.
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The private label shoe market was much less competitive and mainly dominated by
Crows Feet. Crows Feet was able set the market by under pricing the competition and met most
of the market demand for North America, Europe/Africa, Asia Pacific, and Latin America. The
company was able to complete this strategy by maintaining their production in North America
and expanding production capacity in their Asia/Pacific facilities by 2700. This additional
production capacity allowed the company to meet their branded sales needs and dump their
remaining capacity in the private label market. The use of Asia/Pacific also reduced the cost for
these shoes and thus allowed Crows Feet to control the majority of the market share in each
geographical area. Their average shoe bid price across all markets was $25.39 while the average
minimum bid across those same markets was $47.50. So Crows Feet was able to price their
shoes 53% below the market maximum. Since they were able to price their shoes so low at such
a large quantity, Designer Shoe Co. could no longer compete profitably and left the market in
year 17(Thompson, et al., 2012).
Actions to Take
Designer Shoe Co.’s actions over the next two years will focus on expanding its ability to
be a best-cost provider of shoes with high quantity of models. The first step to expand this
strategy is to build a new production facility in Latin America that would produce 2000 shoes.
Since no other company has opened a facility in Latin America, Designer Shoe Co. would be
able to higher staff at a market low rate of $2800. Other benefits to this additional capacity are
to hedge against exchange rate fluctuations and reduce fees related to shipping. Shoes produced
in Latin America can be exported to other markets when exchange rates reduce costs or can be
kept in Latin America when exchange rates increase costs. This new production facility will also
be used to greatly reduce shipping costs. Currently, Designer Shoe Co. produces all of its shoes
Designer Shoe Co.
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for the Latin America market in Asia/Pacific. This means all shoes shipped to Latin America
have a $2 shipping cost and face a $6 per shoe tariff cost. These costs are reducing the
profitability for the shoes in Latin America. By using the most recent average shoe cost for Latin
America of $32.30, these changes would reduce that per shoe cost by $7 and make each shoe
cost an average $25.30. Based on year 17 sales of 1,545, this $7 reduction in cost will result in
$10,815 in increased profits. Then as the Latin America market demand increases, so will the
regions profitability. This increased low-cost shoe capacity will then allow Designer Shoe Co. to
reenter the private-label market because the company can reduce its shoe price to stay
competitive and be profitable. The additional available capacity from Asia/Pacific can be used
to bid in the private-label market instead of shipping out to cover branded shoe sales. The other
advantage to Latin America’s added shoe capacity is that shoes produced in this location can be
shipped to North America with no tariffs due to NAFTA. This added capacity can be used to
lower the average shoe cost in North America as demand expands in that market (Thompson, et
al., 2012).
The Latin America expansion plan will come at high cost to build a new production
facility. Designer Shoe Co. will need to use a mix of internal financing and debt financing to
cover the upfront cost. The company ended year 17 with $41 million of cash on hand and can
leverage it’s A+ credit rating to fund the building project. The actual cost of building is
estimated at $83.6 million. This project will be funded with 40% internal financing and 60%
debt financing. This financing breakdown will use $33.44 million in cash and $50.16 in debt.
The company will also temporarily halt its stock buyback program to ensure free cash flow will
cover the cash portion. The debt portion will be funded with a 10-year loan with an interest rate
Designer Shoe Co.
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of 7.6%. The estimated returns on this new capacity will have an average ROE of 19.9% and
add 0.46 EPS.
Estimates
Optimistic
Expected
Pessimistic
Additional Revenue
$113,997
$104,574
$96,109
Additional Costs
$104,135
$96,241
$93,436
Change in Net Profit
$9,862
$6,333
$4,673
Change in EPS
$0.76
$0.52
$0.10
ROE for New Capacity
29.4%
20.9%
9.5%
(Thompson, et al., 2012)
Lessons Learned
Management team of Designer Shoe Co. learned two very important lessons during this
business simulation. The first lesson dealt with working as a team and to keep moving forward.
The second lesson was about the usefulness of a vision statement and the ability to adapt to a
fluid marketplace.
Team
A team is critical component to the business environment. It is important to have people
who you work with that can pull ideas together and put them into a working solution. If
everyone has ideas but no action then plans will fall through. If one person is struggling then the
team can come around to provide support so that objectives are met. The other aspect of
teamwork is to keep a positive mindset and turn obstacles into opportunities. This lesson is not
only important in business but also in life in general
Vision
Designer Shoe Co.
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The second lesson learned is about the importance of the vision statement. Vision
statements can be viewed as something that management comes up but is not really followed.
However, a well developed and explained vision statement has the power to guide all employees
through daily operations and lead to change as it is the aspirations for the future and provides the
course for long-term planning (Thompson, Peteraf, Gamble, & Strickland, 2012). In addition to
this, it also needs to be re-evaluated to ensure it is still guiding the company on the correct path.
The original vision for the company was to be a leader in shoe quality and model numbers.
However, after a couple of years of business, this strategy was not working and needed changing
or else the company was facing financial ruin. So it was decided to change the vision to focus on
just providing low-cost shoes that provided market leading number of model options. This
refocus of the vision allowed the company to adjust their operations that lead to increased profits.
The other lesson learned for the vision was that it is not enough to just have a vision, but act
boldly on it as described by Eric Beaudan (2010) in his description of Creative Execution. The
managers of Designer Shoe Co. often found themselves reacting to the competition. The future
plans of building a production plant in Latin America will have the company acting boldly to
pursue their strategic vision as a best-cost provider. This will force the competition to react in
order to keep up with market share, cost controls, and profitability.
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References
Beaudan, Eric (2010). Creative Execution. In A. A. Thompson, M. A. Peteraf, J. E. Gamble, &
A. J. Strickland, Crafting and executing strategy: Concepts and readings (18th ed., pp. R29-R-34). New York, NY: McGraw-Hill Irwin.
Eng, L. (1994, January 1). Using generic strategies: Some caveats. Singapore Management
Review, pp. 43-47.
Kumar, N. (2006, December 1). Strategies to fight low-cost rivals. Harvard Business Review, pp.
104-112.
Thompson, A., Peteraf, M., Gamble, J., & Strickland, A. (2012). Crafting and Executing
Strategy: Concepts and Readings (18th ed.). New York, NY: McGraw-Hill/Irwin.
Thompson, A. A., Stappenbeck, G. J., Reidenbach, M. A., Thrasher, I. F., & Harms, C. C.
(2012). The Business Strategy Game: Competing in a global market place. Retrieved
from http://www.bsgonline.com/