Strategic Cost Management Framework - Essay Example

Business Overview WHSmith PLC is one of the United Kingdom's leading retail groups made up of two core businesses - WHSmith Retail and WHSmith News. After a disappointing year, it adopted a simplified structure with the sale of WHSmith USA, WHSmith ASPAC, and Hodder Headline (WHSmith Group, PLC, 2005). While WHSmith News remains to be the market leader in newspaper and magazine distribution, with steady growth in sales and profits, WHSmith Retail's experience during the last year was not as favorable. Based on its 2004 Annual Report, WHSmith News experienced a 9% growth in profits increasing to 35m from the previous year's 32m, with a 6% increase in sales. However, WHSmith Retail sales fell by 1% to 1,453m from last year's 1,463m, driven mainly by a 2% loss in its High Street Retail business. This loss in high street retail was only mildly offset by the excellent performance in travel retail characterized by an 11% increase in profits to 21m from 19m in the previous year, and a 3% increase in sales. Reasons for the overall profit loss of the group were attributed to a significant decrease in sales due to unsuccessful marketing and promotions and the continued sale of products with decreasing demand; and an unsuccessful investment in technology, which contributed to the company's increased costs. Another aspect of the retail business is WHSmith Online. Launched in 2000, the retail website, www.whsmith.co.uk, has not been utilized by the company to its potential and is not integrated with the rest of the retail business. It experienced a loss of 2m in profit, similar to the previous year and sales of 7m. In order to turn the company around and increase retail sales, the company will focus on developing a multi-channel retail strategy, taking advantage of WHSmith Online's full potential to increase online sales, as well as sales in high street and travel stores. Strategic Cost Management Framework Shank and Govindarajan (1991) defines strategic cost management as "the process through which a sophisticated understanding of an organization's cost structure is developed and used in the search for sustainable competitive advantage." They argue that blending the three themes of value chain analysis, cost driver analysis, and competitive advantage analysis represents the most powerful way to determine which strategic direction will be most beneficial for an organization (Shank and Govindarajan, 1992). By applying Shank and Govindarajan's framework, one can understand why implementing a multi-channel strategy will benefit WHSmith's retail business in the long run. WHSmith Value Chain Analysis A value chain is "linked set of value-creating activities" (Shank and Govindarajan, 1992). Based on WHSmith's value chain, one can see that a multi-channel retail strategy is most profitable for the company. First, by analyzing WHSmith's internal value chain, one can infer that WHSmith Online has developed as a separated business division that is not integrated into the WHSmith Retail since its launch in 2000. WHSmith Online does not support any of the value chain activities of the group and its potential was not fully explored. Thus, it remains to be a traditional retail business. In the purchasing stage, products are purchased from its distributors based on the demand forecasted by the company. These products are then shipped to warehouses, which deliver them to the respective high street retail stores in the distribution and merchandising stages. High street retail stores then arrange these products, utilizing the available spaces and conduct marketing activities as directed by the central office in the store operations and marketing stages. At this stage, the point of sale is situated at cash registers in each store and mails received by the company from its loyal customers. Figure 2. WHSmith Internal Value Chain Analysis Based on the existing internal value chain and the performance during the previous year, the following improvements need to be employed (WHSmith, 2004): Purchasing: Discontinue purchase of products with low demand. Distribution: Improve product availability Merchandising: Improve product mix was and ensure that "the right products are in the right stores" Store Operations: Expand and maximize space, increase product density, and improve value proposition Marketing: Improve the efficiency of marketing resources While the company has already begun administrative and other operational changes to implement the aforementioned suggestions, integrating WHSmith Online into the retail business and utilizing its full potential will complement current initiatives and benefit the value chain through the following: Purchasing: WHSmith Online can serve as a research tool for the company in testing the demand of new products with negligible costs because orders in the online store, from distribution to delivery, are covered by the distributor. It also eliminates the need to purchase the products from distributors before selling them, decreasing expenses and wasted resources. Distribution: Product availability can be increased because customers in stores can opt to buy them online if they are currently not available. Merchandising: Product mix was can be improved by using the Online store as a survey tool to determine what products customers in a geographic area are more likely to buy. Store Operations: WHSmith Online has an infinite storage space, provided the web site has a large bandwidth. Marketing: WHSmith Online, if improved, is a very cost-efficient marketing tool that can reach an infinite number of customers. Point of Sale: The web site serves as a crucial point of sales, with 71% percent of its customers owning credit cards, 43% of which own more than two. In addition, customers who visit the web site also have the highest purchasing power online (Net Value Research, 2001). Thus, making it a crucial point of sales for the company. WHSmith Online also complements the point of sales in high street retail stores because customers who buy online are more likely to make offline purchases six times more (Jupiter Research, 2004). Cost Driver Analysis Shank and Govindarajan (1992) identifies two types of cost drivers that are integral to a company's strategic position. These are structural cost drivers, and executional drivers. With regard to the retail industry, the following are crucial drivers of costs: with regard to structural costs, (1) scale, insofar as investments in marketing, and purchasing are concerned, and (2) product line complexity, the need to widen product range and increase the types of product under profitable product ranges; executional costs, on the other hand, include: (1) workforce involvement, particularly customer service and workforce efficiency, (2) utilization of space in each store, and (3) the need to utilize linkages with customers and suppliers. Based on the value chain, WHSmith online can minimize costs in the aforementioned crucial cost drivers through: Scale: WHSmith Online serves as an effective, yet cheaper form of customer research and marketing. It also eliminates the need for the store to make large purchases because it allows WHSmith to showcase products, without actually buying them from distributors by giving customers access to the distributors' product line through the online display. Product Line complexity and Space Utilization: By allowing more products to be displayed in the website with lesser costs. Improved linkages between the company and its suppliers and customers through better communication channels. The website provides customers with alternative means to communicate with customer relations, and vice-versa. It also allows WHSmith to improve supplier relationships by providing its distributors with information regarding customer preferences through surveys and helping them market their products, as well. Retail Industry: Competitive Analysis The retail industry is very competitive. WHSmith has as its main competitors Bertelsmann with 13.0 market share, Pearson PLC, with 12.9, and News Corporation with 8.6. WHSmith is fourth with 7.0 market share (Euromonitor, 2004). Other companies include Bloomsbury, Holtzbrink, Hachette, Time Warner, and BBC. The stiff competition in the industry, however, is non-indicative of the industry's market value. Studies have shown that the industry has reached its maturity and in general is in decline. Thus, as a leader in the industry, the pre-tax losses reported by WHSmith are indicative of this general trend and not necessarily of bad management. However, this does not imply that retailers in the market should simply let the industry run its course. Instead, this implies the need to find innovative ways to package its products and sell them to customers. With this in regard, strengthening WHSmith's online business and integrating it into its retail business is a profitable and sustaining move of the company. In 2003, internet distribution in the UK has increased by 16% to 4.4% and is expected to grow through time, making it a very lucrative way to sell WHSmith's merchandise (Net Value Research, 2001). Aside from very profitable online sales potential, research also shows that internet retailing influences offline spending as a result of online research, such that for every $1 spent by customers online, they are likely to spend $6 offline in the company's store (Jupiter Research, 2004). Moving WHSmith towards a multi-channel retail strategy through online website sales, however, opens the company for greater competition (Figure 2). Thus, it is important for WHSmith to implement drastic changes in its current website to make it appealing to customers and give it an edge in the online retail industry. Strategic Positioning In order to be successful in its future strategies, WHSmith Online must compete both in terms of low costs and product differentiation. With regard to low costs, WHSmith can leverage WHSmith Retail's relationship and linkages with suppliers to strike better deals with regard to their products. In addition, by eliminating distribution and storage costs in its online business, they can afford to lower prices in certain products. Figure 2 With regard to differentiation, the company can leverage its brand name to differentiate it from competitors. It has a reputation of offering quality products, which the company can leverage upon. Furthermore, its complete line of stationery products also differentiates it from other retailers. It can also use the WHSmith Clubcard and offer points to online buyers. In addition, the company can make use of its loyal customer's high buying power to offer high-end products that are not usually available in most sites. Lastly, its 544 high street retail stores and 129 airport and station stores give it an edge against online competition. Implementing Company Strategy One can expect commendable results for the company's overall sales; provided that goals set by the company - increasing online sales for WHSmith Online and increasing in-store sales through online consumers - are achieved. There are several hurdles that the company must overcome to make the venture successful: Improve Web Design and Increase Online Sales. The main problems posed by the current website are the poor user interface and poor layout and design in its homepage. While its simplicity is commendable, one cannot ignore the fact that most of its products do not images available making browsing in the site a boring experience (Williamson, 2004). Its low-cost deals to compete with its competitors are also hidden deep within the website, making it difficult for customers to find them. The lack of customization for returning customers also makes the site lacking in terms of customer service. Thus, improvements must begin with a website overhaul. Drive traffic into the Website. WHSmith has a group of loyal customers, who incidentally also have the highest buying power, compared to its direct competitors. According to a study conducted regarding internet usage in the UK, WHSmith's customers have 641.0 Buying Power Index (BPI), which is considerably higher than its competitors. While this can drive traffic in the short-term, long-term success will rely in driving traffic from new online customers, which could also be turned into High Street Retail Store customers. In addition, to integrate WHSmith Online into the WHSmith Retail business, and consequently increase sales in High Street Retail stores, the company must: Show items sold in stores online and allow items sold online to be picked up in stores and Launch in-store ordering of full range of online products. Multi-channel retailing is a strategy that cannot be ignored by WHSmith. Aside from converting every $1 of online sales to $6, studies have also indicated that 60% of online shoppers often make the final purchase offline (Jupiter Research, 2004). This is a good indication for the fate of WHSmith's High Street Retail given the large number of stores they have in the United Kingdom and Ireland. In addition, according to the Wall Street Journal, studies indicate that customers who get online orders in stores also end up spending $90 more when they get to the store. Furthermore, this also provides opportunities for the company to integrate both aspects of the business. In order to take advantage of this strategy, the following steps must be undertaken: 1. The new website design must allot web pages to accommodate a section where in-store items can be displayed. 2. Assess current capabilities and install the ability to interface the inventory system with the website to ensure that in-store products displayed in the website are available offline in high street stores. 3. Integrate the tracking and inventory system used in high street and travel stores into the new system being developed. 4. Provide each WHSmith Store with an online account where products can be ordered by store attendants for customers if they are not available in the store and online products can be picked-up. Costs The estimated costs for each aspect of the project would entail: Action Step Estimated Cost Improving Website Design $600,000 to $1.5m (depending on the changes needed for the website and the extent of research needed) Driving Traffic $140,000 per year (at least, depending on the extent of marketing campaign) Showing Items Sold Online $350,000 per year Offer In-Store Pick-Up $150,000 to $500,000 depending on the available system TOTAL $1,240,000 (at least) From: Souza, Randy. "Get ROI From Design." Forrester Research. June 2001 Impact on WHSmith's Retail Business According to a study conducted by Spence & Co. (2003), the following measurable results can be achieved: Conclusion As the previous sections have illustrated, integrating the company's online business with the rest of its retail business is a very profitable and crucial direction that the company must take in order to increase sales, improve the business' value chain, and decrease costs. First, by implementing such strategy, WHSmith's value chain can be greatly improved through increasing storage space and improving product availability, serving as a crucial marketing and customer service tool, and becoming an integral research tool for the company. It also provides additional point of sales that can greatly increase the company's profits. In addition, it also improves the major cost drivers of the company by exploiting linkages, and improving product complexity and space utilization with minimal costs. A multi-channel strategy allows the company to compete both in terms of cost and product differentiation. Lastly, aside from being an innovation in the retail industry that companies cannot ignore in order to stay ahead of competition, it is a major sales tool because of the effect online shopping has in offline spending. (Word Count: 2,490 words) References Euromonitor. (2004) United Kingdom - Major Market Profile. Books in the UK: Major Market Profile. 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Retrieved 18 august 2005, from the WHSMith PLC Group web site http://www.whsmithplc.com/grp/WHSPLC-IR-Reports.htm. Williamson, D. (2004). WHSmith Site highlights the Company's Failings. Centaur Communications. Ltd. Retrieved 19 August 2005 from http://www.findarticles.com/p/articles/mi_go1964/is_200410/ai_n7463612. Read More