CASE STUDY: ECOSNEAK - ‘Sustainable sneakers for all’
Ecosneak is a sneaker merchandising company that prides itself
on its environmental credentials; it considers sustainability
(alongside high quality) to be central to its business model. The
company started operating three years ago in the Edinburgh market;
from the start its strategy was to target the higher end of the
market – the ‘quality’ and ‘customer intimacy’ segments - in both
the men’s and women’s markets. Ecosneak was set up two sisters –
Jenny and Jess Wilson; Jenny is responsible for purchasing and
inventory management, while Jess looks after marketing; a year ago
they recruited a former university friend of theirs, John Moto, to
focus on financial matters and he is now a key part of the
business, particularly as Stride has been facing more intense
competition over the last year or so. John has consequently been
asked to review the company’s financial position in 2021 and 2022
(presented in Tables 1, 2 & 3) prior to analysing the impact of
a range of possible decisions on revenues and profits.
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Jess is getting increasingly concerned that Ecosneak may be
losing its competitive advantage. She has discovered that new
competitors have been entering the quality and customer intimacy
segments and this has been putting pressure on the company’s market
shares in both men’s and women’s markets. She tried an experiment
in 2022 to examine the impact of price changes on sales revenues;
she increased the price of men’s sneakers by €10 per pair, while
cutting the price of women’s sneakers by the same amount. Purchase
and distribution costs were left unchanged. Unfortunately, this
seems to have caused a drop in net profits from the previous year
but, undeterred, Jess wants to examine three different pricing
options for men’s sneakers in 2023 despite the current economic
uncertainty and the looming threat of recession.
Jenny has begun to wonder whether the company can fight off this
competitive threat or whether it is time to rethink its entire
business strategy. One option that John would like the others to
consider is whether the company should expand into the Kid’s market
(targeting both quality and customer intimacy segments). However,
this option has so not far seemed particularly attractive to Jenny,
who feels that the company has little knowledge of the sorts of
sneakers that kids might like and that Ecosneak has insufficient
resources to expand without increasing borrowing.
In order to decide on the company’s strategy over the next six
years, John commissioned some background research a few months ago
from a consultancy company. On the basis of this he has attempted
to define and quantify the possible outcomes from the following two
(mutually-exclusive) options:
1. FocusonR&Dtoimproveproductquality
This is Jenny’s preferred option. It would require a €300,000
up-front initial expenditure in 2023. John has estimated (based
largely on past experience, one would have to say) that this is
expected capture increased market share in men’s and women’s
market and will result in additional annual net profits for
Ecosneak over the six-year period (from 2024) as follows:
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This option is favoured by John, but appears more risky, because
as far as Ecosneak is concerned, the market is untested and there
are a number of rival firms already operating in the segment.
Nevertheless, there is potential growth in the market and it offers
a route to expansion for the company. It would require investing
€170,000 in 2023 in additional warehouse capacity and other fixed
assets. John believes that the company could capture 10% of the
kid’s market each year from 2024 (total market size currently
amounts to 50,000 pairs of sneakers annually). Each pair of kid’s
sneakers is estimated to generate a net profit of €10. (Assume that
this will have no impact on company sales in the men’s and women’s
markets which will remain at current levels, as will all other
costs). The overall kid’s market will grow by 5% per year over the
six-year planning period.
Q3: Constrained Optimisation and Scenario Analysis
Constrained Optimisation: John Moto believes that Ecosneak’s
decision making might benefit from more rigorous analysis. One
potential technique that he recalls from his Business Management
studies at university is Linear Programming. He thinks
that the technique could be used in the analysis of the company’s
promotional campaign, but he has only a hazy recollection of what
Linear Programming involves and how it could help Ecosneak.
Until now, Ecosneak’s promotional campaign has been
based largely on TV advertising, targeting both men’s and women’s
markets, but this has not proved particularly effective. Jess, as
marketing manager, has suggested that a combination of Billboards
and Magazine advertising (in the World of Sports) may be a better
approach in 2023.
Scenario Analysis: The management team of Ecosneak would
like to separately model the first-year (2024) profit from entering
the kid’s market segment (Option 2, above), using scenario
analysis. Assume a notional fixed cost for the first year of
€20,000 (€120,000/6) and a selling price of €60 per pair. Assume
the variable costs for the bicycle (Purchase and Distribution) can
vary between €20 and €40, with a most likely value of €32 per pair.
First- year demand for the bicycle is expected to range from 8,000
to 18,000 pairs, with 13,000 units the most likely level of demand
for the sneakers.
Q1. Decision making under risk and uncertainty
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criteria?
(i) Maximax
(ii) Maximin
(iii) Minimax Regret
1.2 Assume now that Jess has been able to use published economic
data to derive the probability of the three ‘states of nature’ (UK
Economic Performance) occurring: Recession (40%), Stagnation (40%)
and Growth (20%). Assess the three options from a ‘rational’ or
risk neutral perspective. Which choice would you advise now?
1.3 You have been offered the opportunity to purchase
information predicting with absolute certainty the performance of
the UK economy in 2023. What is the maximum it is worth paying for
this?
1.4 Write a brief report for Ecosneak summarising your findings
and offering advice on the best pricing option for them to choose.
Make sure you highlight the impact of uncertainty and differing
attitudes to risk.
2021 Years Sales volume 29,832 Men* Women* 29,000 Total revenues (Men) €2,684,880 Total revenues (Women) €2,320,000 Total revenues €5,004,880 Cost of sales (Men) €1,193,280 Cost of Sales (Women) €1,102,000 Distribution Cost €294,160 Total Cost of sales €2,589,440 Gross margin €2,415,440 Marketing and Sales €400,000 General administration cost €1,400,000 Net profit €615,440 *Total Sales Quality and Customer Intimacy Segments 2022 25,500 30,000 €2,550,000 €2,100,000 €4,650,000 €1,020,000 €1,140,000 €277,500 €2,437,500 €2,212,500 €400,000 €1,500,000 €312,500
Price per pair Purchase Cost Distribution Cost 2021 Men's Sneakers €90 €40 €5 2022 Women's Men's Sneakers Sneakers €80 €100 €38 €40 €5 €5 Women's Sneakers €70 €38 €5
Men's Women's 2021 23% 20% 2022 18% 19%
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 €50,000 €100,000 €100,000 €125,000 €125,000 €50,000
Options Increase Price Reduce Price Price Unchanged UK Economic Performance (2023) Stagnation 110 250 95 Recession -100 100 50 Growth 600 200 420