The Strategic Decision-Making Process - Case Study Example

COMFORT HOMES - CASE STUDY Strategic Analysis and Choice Strategic decision making process is defined as either a content approach that necessarily identifies content in the strategy or a process which identifies strategic processes associated with the decision making process (Simon, 1993). Such strategic decision making involves not only implications but also independent and dependent factors that impact on the outcomes. Thus the new Chief Executive Officer's (CEO) decision to present himself in a prime-time TV interview is of strategic significance for a number of reasons. In the first instance Bamford's decision is based on the premise that with the death of the old CEO things are bound to change at Comfort Homes. There is no better appropriate timing and place other than this kind of TV appearance. Customers eagerly await such announcements when policy changes take place on the aftermath of old guard changing at the helm. The strategic significance of this decision lies in the fact that the new CEO has recognized the relevance and the importance of the TV as a medium of communication to target potential customers who otherwise would be clueless as to the future strategy of CH. Secondly CH has been going through a turbulent period. Thus the TV interview was well timed and is seen as a strategic shift in policy thrust away from what was hitherto practiced under Mr. Khan. Such a strategic initiative with a great zing in it would essentially mean a shift in the corporate strategy and a reorientation in policy in keeping with the vision of the new leadership. Thus on a closer approximation Mr. Kahn had adopted Rational Decision Making Model (RDMM) as his first choice in the process of changing the strategic environment at CH. This is obvious when one looks at the fact that Mr. Kahn had been influenced by a desire to achieve some critical corporate goals though his entrepreneurial leadership style might have acted as a dampener on the subsequent outcomes. There is no gainsaying the fact that RDMM has a number of variants and Mr. Kahn chose to focus on the bounded rationality principle as enunciated by Simon (2000). During Mr. Khan's time the company received venture capital support and even got listed on the London Stock Exchange (LSE). These positive developments are essentially associated with the RDMM and therefore it must be noted that his philosophy of managing the hundreds of workforce at CH was essentially based on the staff motivating and innovative management strategies (Hatch, & Schultz, 2008). Thus RDMM was an integral part of the company's overall organizational and management culture. However it must be noted that bounded rationality principle as opposed to the concept of rationality optimization would have predominated at CH despite Mr. Kahn's apparent reluctance to delegate responsibility to the lower layers in the hierarchy. A random analysis would show that Mr. Kahn also applied some intuitive decision making principles though their significance in the context of management at CH cannot be determined now except to identify some traces of organizational culture based on a family-centric system of values and morals. The strategic management related outcomes of this approach of Mr. Kahn can be seen against the now evolving backdrop of a much vigorous normative work environment under Mr. Bamford. While much of it is purely determined by a great desire to overcome limits associated with irrational human behavior the corresponding level of work efficiency at CH can be attributed to the current leadership style of Mr. Bamford. This has been made public through his interview and its morale-boosting impact on the workforce is quite obvious though only the time will tell as to when and how the workforce would become fully motivated to achieve corporate goals as defined by the strategy. In the first place Simon's bounded rationality model is probably the most preferred by decision makers though Mr. Bamford has adopted much of it to leverage organizational outcomes that Mr. Kahn failed to see during his time. Thus it's quite obvious that RDMM's bounded rationality principle has helped two successive generations in completely different ways though neither of them has had foreseen the outcomes that are unfolding now. Finally Mr. Bamford's desire to adopt the bottom-up approach in motivating the ever increasing workforce at the distribution centers is a clear sign of an effort to break away from the past legacy of Mr. Kahn. The ever increasing digitalization of the whole process was initiated by him though during his time nothing substantial occurred in communication. Thus Mr. Bamford's effort to get the public and employee relations on even footing is perhaps the best choice available to CH. 2. Strategic Analysis and Choice: Porter's Five Forces Analysis Porter's Five Forces Model has been applied here to identify and assess the industry environment in order to get a detailed idea on the supplier power, buyer power, competitive rivals, threat of substitutes and threat of new entrants into the market (Porter, 2008). Comfort Homes has adopted some good strategies from those two models to gain better advantages when marketing its wide range of home products in European market segments. As the following analysis indicates are the Porter's Five Forces and their strategic weight on the CH's competition strategy. Bargain power of suppliers Supplier power refers to the degree of freedom that suppliers have over the firm which buys supplies from them. Comfort Homes has to procure household products from suppliers in the open market where rules of competition might threaten Comfort Homes' own strategic objectives as well as others. For example Comfort Homes has to employ a variety of marketing techniques to procure supplies in order to meet its customers' demand. How Comfort Homes would respond and how would the rest of the industry respond to all this, depend on a number of other variables such as the concentration ratios in the supplier industries, the availability of and the degree of dependency on credit, macro-economic variables, e.g. interest and business tax rates and a host of other factors. CH is much less likely to be able to exert pressure on suppliers to offer big bargains when the latter have greater freedom in deciding prices. Bargain power of buyers Buyer power is perhaps the most effective force with far reaching consequences for the business that the company has to face. For instance customers of Comfort Homes and other mail order service providers carry such weight in the decision making process of the individual company to such an extent that they can drive prices down if they happen to boycott a certain seller's products on the ground that their services are below their expectations (Hennig-Thurau, & Hansen, 2000). Buyer power has also been studied in the larger context of market segmentation with reference to price and income elasticities of demand. For example consumer demographics such as age groups, incomes, preferences and geographical location have a bearing on the firm's marketing strategy. Thus Comfort Homes has so far been operating its distribution centers across Western Europe successfully. The same success story might unfold in the UK given its exhaustive and comprehensive market entry strategy (Coopey, O'Connell, & Porter, 1999). The mail order market segment is ruled by the same economic principles but its qualitative shift has brought about a highly articulate population of consumers whose demand for the product at a given time is determined not only by the price and income but also by cross elasticity of demand based on comparative competitor advantage. Rivalry among competitors Rivalry or competition in the mail order business market segment is almost intense because existing scale economies of individual competitors would serve as the stepping stone to a price cutting war (Bouckaert, 2000). At any given time a particular mail order business can have excess capacity and thus the slightest hint of cost and productivity benefits associated with the probable winning over of market shares of rivals would compel them to act quickly and decisively. Comfort Homes has applied the same principle in the Western European market. Probably this is going to prove successful in the coming years because JD Williams, 24ace, Argos, Bargain Crazy, Grattan catalogue and many other competitors haven't been able to monopolize the market in the UK except to enlist the services of other mail order service providers (www.verdict.co.uk). Threat of substitutes Today there is large number of mail order businesses in the UK market and customers can easily get the same product from existing mail order catalogue shops, sometimes with lower prices. Thus it's a threat to Comfort Homes. In the mail order catalogue industry numerous substitutes exist in the form of price competition and customers can switch on to the other substitute products if those items are able to satisfy the same need (Hollan, 1991). In the mail order delivery industry numerous substitutes exist in the form of price competition, i.e. X-firm's product which is almost identical to the Y-firm's product, is preferable if the former product's price is lower than the latter's. Comfort Homes is not altogether impervious to this rule. Its current operations are highly determined by its speed of delivery and price sensitiveness. Thus Comfort Homes has realized the strategic threat posed by these newly emergent markets in Europe. However, its current level of market dominance is more likely to prevail into the next few years and it has effectively curtailed the threat of substitutes to a certain extent. Threat of new entrants Finally Porter's Fifth Force is about the threat of entry by new firms and it has a very negative impact on the existing mail order catalogue firms in the industry. When entry barrier is becoming low probability of new entrants to the market is becoming high, because of that, existing companies are unable to maintain their position and attractiveness to their customers (DiJulius, 2003). Thus through differentiating the product Comfort Homes can retain their customer loyalty and relationship with the suppliers where they can create some entry barriers for new entrants. Here what matters is the cost of production. Those firms whose costs are higher will be compelled to shut down. Comfort Home's current efforts to cut costs would definitely be a positive factor in contributing to its long term survival. For instance CH has developed a HR practice by using part time and temporary employees comparatively at low cost. But nevertheless the existing level of competition is further exacerbated by the threat of new entrants (Morganosky, & Fernie, 1999). Thus Porter's five forces are used to show a series of probable developments in an industry or market concerning different strategic moves that the organization can make in its marketing operations. 3. Strategies in Action i. Product-market expansion strategy The product-market expansion strategy for the Comfort Homes must be based on the following principles. This approach is to overcome the existing level of competition and strategically reorient its marketing campaign to achieve positive synergies directly and indirectly related to the corporate goals of the company (Chambers, & Eglese, 1988). Thus a product orientation and expansion strategy based on the existing brand strength associated with the CH's market leadership. Ansoff's product-market growth strategy might be useful to a certain extent, e.g. in targeting new niche markets (new markets- new products/brands). However, new niche markets where there is already some stiffer competition from rivals can be expensive. There is a significant boom in mail order market in Europe. For example Eastern Europe can be identified as an emerging market for Comfort Homes. As one of the leading mail order catalogue businesses, Comfort Homes has been able to grab the opportunity to exploit its market position to enter into the mail order catalogue market in Eastern Europe. As for the current performance Comfort Homes has only 16 distribution centers in the UK and Continental Europe with approximately 8,500 employees. Comfort Homes has realized that customers are their major asset and they lay great emphasis in creating their different distribution places. Comfort Homes has realized that increasing profits is one of their major success factors in time to come (Jarzabkowski, 2003). As for the future expansion in to the Eastern European cities would succeed nevertheless the intensity of competition is so high in mail order catalogue market because competitors' catalogues include all sorts of goods from small toys to home furnishings. A sustained marketing campaign in Europe might be needed with new smaller competitors coming into the market almost on a daily basis with their highly distinguished brands and products (Mulcaster, 2009). i. Brand recognition Comfort Homes' brand of 'CH Own' is aspiring to be the most respected and recognized brand in the mail order catalogue market in the UK. However a strong brand doesn't mean that rivals would remain inactive. In other words the building of a strong brand depends on the already established degree of brand loyalty. For that to come about there must be some brand equity promotion activity. However CH is keen on expanding quickly in existing and new markets and has created CH distribution centers to facilitate this. The Comfort Homes must be constantly seeking to build up a strong brand on the basis of brand equity. Brand equity is a strategically significant measure of the existing customer's response to new promotions and the potential customer's assessment parameter to decide on the purchasing decision. Thus strong brands ultimately depend on the concept of brand value from the customer's viewpoint (Doukidis, & Vrechopoulos, 2005). Comfort Homes is always in the process of experimenting and introducing different types of products and services to satiate their mail order catalogue using customers. Brand or product differentiation strategies heavily weigh on the subsequent ability of the firm to differentiate its brand on the basis of quality. 4. Finance and Growth Strategies Cost savings and effectiveness Comfort Homes is a company that has a total capital employed more than 700 million pounds with a turnover of over 110 million pounds. Over the past years the company has been facing a severe competition in the market from the competitors. That can be one of the reasons for the reduction of the profit margin irrespective of increase in capital and investments and the sales revenue. So the company should adopt the cost savings and effectiveness strategy to maximize the profit margin of the company. Because according their financial statement total cost has gone up to 676 million in 2007 from 603 million in 2006 report and other expenses also should gone up to 121.7 million in 2007 from 98.3 million in 2006. This increase in cost has reduces the profits of the company so it is advisable to go for the cost saving and effectiveness strategy as one of companies growth and financial strategies (Reider, & Heyler, 2002). But when companies adopt cost saving and profit maximization strategy certain expenses will be cut off or reduce to achieve it. In comfort homes there are many employees work for part time basis. Liquidity and flexibility Another strategy can be suggested to adopt is to have a higher level of liquidity and flexibility in the financial means. Leverage in the sense the extent an investor or a business organization is utilizing borrowed money. It is management of liabilities to increase the return. In 2007 company liabilities of bank overdraft and creditors have increased than 2007 makes a liquidity crisis. There for it's advisable to go for the liquidity and flexibility strategy. They have to maintain a proper balance of the debt in order to avoid the risk of bankruptcy (Klassen, Glynn, & Porter, 1994). Those companies with high level of liquidity face a risk of lack of investments. It raise the interest expenses due to lack of return they get form the borrowed funds. It is essential to maintain a balance between liquidity and the investments when firms utilize borrowed funds. Financial gains and market power It is highlighted from the case study that there are many competitors for the comfort homes. There are 16 distribution centers for comfort homes to distribute and market the products (Michael, 1994). So the revenue they get out of these centers is very important factor. This strategy can be achieved through maximizing the sales revenue from the distributing centers. But at the same time company should careful about the quality of the service and the agency costs that are arising due to this strategy (Ryan, 2004). Free cash flow It is clear that the company's cash balance was improving in 2007 and company is in a position to utilize cash balances for better strategic initiatives. Simultaneously debtors also might increase along with the cash flow. The company should adopt a free cash flow strategy by increasing the debtor turnover ratio (O'Berry, 2007). Then there is no need to go for a bank overdraft or raise credit in the short run to avoid a liquidity crisis. But the company should not pressurize the debtors to pay the bills quickly because it can have a negative impact on the company. Thus there is a risk associated with this financial strategy of making recoveries and the finance department should act smartly to achieve this objective. Market Penetration As already pointed out a sustained market penetration pricing strategy such as very competitive prices, seasonal promotion campaigns or targeting potential customers on the basis of income in niche market segments is the best alternative for Comfort Homes. Such a market penetration strategy would have the additional advantage of permitting the company to forestall any hit-and-run marketing tactics adopted by rivals (Macmillan, & Tampoe, 2001). To be sure it's unlikely that competitors would adopt market skimming strategy in which price is higher and the seller would take as much revenue as possible and vanish in the short run. Thus it's pertinent for Comfort Homes to adopt a market penetration pricing policy and capture a sizeable market share in the long run. The risk associated with such a strategy is that budgeted expenditures for the marketing campaign might go out of control. REFERENCES 1. Bouckaert, J 2000, 'Monopolistic competition with a mail order business', Economics Letters, vol. 66, no. 3, pp. 303-310. 2. Chambers, ML & Eglese, RW 1988, 'Forecasting demand for mail order catalogue lines during the season', European Journal of Operational Research, vol. 34, no. 2, pp. 131-138. 3. Coopey, R, O'Connell, S & Porter, D 1999, 'Mail order in the United Kingdom. 1880-1960: how mail order competed with other forms of retailing', Consumer Behaviour; Market Research; Retail Marketing, vol. 9, no. 3, pp. 261-273. 4. 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