Assignment for Managing Business Strategy

Questions:

1.      Analyse the internal resources of Thorntons by identifying and classifying the activities and resources the company employs to produce and market its products. What are the firm’s strengths and weaknesses? 45 marks.

Thorntons’ activities and use of its resources had immense impacts on its production and marketing/retailing activities. As for any business enterprise, it aims to create competitive advantage and shareholder value. These value added to the company’s performance strongly correlates to the competitive strength of a business. In addition, analyses such as Internal Analysis covering the firm’s strengths and weaknesses are needed to guide business processes in promoting efficiency, thereby increasing profitability.  In order to see which among the numerous activities creates value to the company, a value chain analysis is included.

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Internal Analysis: Strengths and Weaknesses

As an initial study, Internal analysis is an important instrument for auditing the general strategic position of a business, focusing in its internal issues: Strengths and Weaknesses.

Strengths of Thorntons PLC

• Key player in UK specialist chocolates market—Brand Name

Founded in 1911, Thorntons gained a first mover advantage over other confectionary companies through creating its own niche in the high street confectionary market.  High street chocolate consumption is highly associated with Thorntons.  It has also multiple channels of selling the product, from company owned stores to franchises to online, telephone and mail order catalogues. (Jennings, 2004)

• Superior Product Quality

Only the best, top notch chocolatiers are employed by Thorntons. Aside from that, high presentational standards and choice of ingredients have made Thorntons a famous brand among the high street market (ThorntonsPLC, 2003). The chocolates maker is also popularly known as a maker of specialty unique chocolate products, like Easter eggs, etc.

• Multiple Distribution Channels

The company is expanding its wide distribution channels not through increasing the number of stores but through targeting centres of population in the high street market.  In addition, the company is also pursuing mail order catalogues, telephone orders and internet orders.

Weaknesses of Thorntons PLC

1. Company sales strongly a follow a seasonal pattern.

   Thorntons like many other companies are heavily affected by seasonal sales.  A huge chunk of sales are made up of holiday sales, specifically Christmas holidays and the Easter. The profitability of the business is highly undermined by the ability of the firm to attract customers during the lean months of sales.

2. Inefficiencies.

   The guiding principle in Thorntons is to serve the freshest products all the time. However, because of the seasonality of sales, additional manpower and resources are utilized. This additional employment of resources causes quality variation especially from different company stores.  In addition, the unpredictability of additional manpower needed during peak seasons is noticed to cause shortfalls in efficiency. Variation in process standardization had increased operating costs and decreased product quality. Consequently, these have lead to increased opportunity costs for some resources.

3. Market’s unresponsiveness to product development

   Because of stagnant sales for the company for such a long period of time, constant product development strategies were made. However, these strategies became unsound as seasonal sales continue to afflict the company. In addition, the strategy of Thorntons failed to acknowledge emerging developments across Europe and UK by opening more exclusive stores and not going to the mass market.

   Product development in several instances was not able to consider consumer expectations, particularly of new product lines, especially during Easter and Mother’s Day in 1999. New product line-up were issued, however, the company encountered difficulty when their expected sales were below targets, leaving the company with losses.(Jennings, 2004) Discover the question

   in a free-market system, producers are most strongly driven by which

4. Inability to successfully establish a foothold in International markets

   Thorntons was able to enter huge markets like the US and Europe, however, its success were limited as lack of opportunities undermined it.  The probable difficulty in the UK affected the strategy positioning of the company in the US, since the latter is more competitive and harder to establish a foothold more than entering it.

5. Vertical integration undermines the company’s inability to capture economies of scale.

   Vertical integration is the degree at which firms owns and controls its upstream suppliers and its downstream buyers.  Companies which are heavily vertically integrated are cohesive in the sense that the products they produce, satisfy a common demand (QuickMBA, 2007). However, vertical integration posed diseconomies of scale in its production, as new the introduction of new product lines did not enabled its vertically integrated companies to capture fixed costs, thus entailing higher operating costs for the company.

Thorntons’ Value Chain System

Thorntons’ Value chain is comprised of primary activities and secondary activities, affecting the general competitive strength of the company. The primary activities of Thorntons include the following elements and the value being contributed to higher profit margins. It is also noticed that in this analysis, Thorntons exhibits a high degree of vertical integration which had its drawbacks on economies of scale, marketing and strategizing to the target market.

Primary activities are as follows:

1. Inbound logistics. These activities include receiving and storing externally sourced materials.  In order to maintain superior quality levels, majority of these outwardly sourced materials are needed to be in-house to assure the use of quality ingredients through the manufacturing process and expertise the firm was able to develop through its history. Thorntons has a large factory based in Alfreton, Derbyshire with a large local area involved with manufacturing and warehousing (BBC, 2003). In house manufacture also helps the company keep its exclusivity of Thorntons’ principal recipes.
2. Operations. Thorntons’ original taste and texture is a key feature of their specialty products. Most especially, the hand crafted look of the chocolates should make the process of packaging less automated than moulded chocolates such as that of Cadbury’s. In this value chain analysis, it is noticed that high operating cost had ensued because of the absence of automation, process standardization, and elimination of duplication. Product quality would also suffer if manual crafting continues.
3. Outbound Logistics. This includes the distribution channels of Thorntons through its company owned stores and franchises. In 2002, Thorntons had about 507 wholly owned shops and 200 franchised outlets. However, there has been a huge difference between average sales among franchised outlets and company-owned shops, as well as that of internet, mail order and telephone orders. Average order values in the latter three buying options are more than three times as much in the former, £25 against £7. In addition, mass market strategy among competitors is a more effective way of increasing market shares, s strategy only lately realized by the company. (Jennings, 2004)
4. Marketing and Sales. The sales of the firm are still unresponsive when it comes to its marketing strategy. The pace of product development of Thorntons is not in line with changes in preferences and expectations of consumers in UK. In addition,   its sales continued to be generated by seasonality, thus, profitability among its products is heavily weighed down if marketing strategies are not fitting, like what happened in what is expected to increase season sales.
5. Services. Customer support is not given by the firm after the purchase.  Customer support is very important for probable return buyers, however no definitive support is given except for the online and the telephone orders, which makes it possible for customers to ask about other product offerings of the company.

On the other hand, support activities of the firm need also be more focused:

1. Procurement. Procurement of materials for the production process is facilitated by heavy vertical integration of the company.  There are gains such as lower transaction costs, lower supply uncertainty and higher investment and synchronised supply and demand along the chain of the products; however, gains such as those mentioned above will be overshadowed by higher monetary and organizational costs of changing suppliers (upstream) and buyers (downstream).

   Thorntons is also an example of a forward vertical integration, a company with subsidiaries in-charge of distributing its own products, through its company owned stores (where there is a more direct and rigid control) and the franchises (where there is relatively a less rigid control from the mother company, but still operating under the guidelines agreed upon by them).

   Procurement is also a key element among Thornton’s non-core products and even largely supplied by outside producers. These schemes may hinder the company to capture economies of scale, as its suppliers are taking advantage of it through long term lucrative contracts.

2. Human Resource Management. The instability of the company’s marketing policies is one of the greatest factors that undermined its strategies. Starting as a wholly owned family business, to becoming a publicly held company, its CEOs constantly changes along with its marketing policies.  The marketing policies, unfortunately, is not in pace with product development and other relevant market variables.  In addition, the presence of additional casual workers during peak seasonal sales may undermine product quality, as well decrease average productivity among employees. A more effective strategy in human resource development in order to per shop sales could be through additional trainings. In addition, the formulation of the new product lines should be proactive enough to forecast possible changes in consumer lifestyles, preferences and tastes.
3. Technology Development. Technology creates a big value for the company. The protections of secret recipes have created an advantage over other competitors.  However, processes such as recipe management to batch control and testing must be automated, as these processes are integral parts of promoting efficiency in the company. These will greatly contribute to reduction of wastes and quality overruns.

According to Porter, a competitive advantage can arise from any part of the value chain: e.g.,  cost advantage (which are primarily driven by economies of scale, capacity utilization, Linkages among activities, etc)  and differentiation  (which are principally driven by policies and decisions, linkages  among activities, timing, location, etc.) (NetMBA, 2007).

On the case of Thorntons’, it could gain a competitive advantage on product differentiation because of it has already established itself a niche in the specialist chocolates market for quite a long time. However, there are just dome factors along its value chains that inhibit competitive advantage. As also mentioned, Thorntons could backward integrate to manage its inputs; or it may implement new processing techniques or make use of new distribution avenues. Ultimately, Thorntons will have to be creative in order to develop an original value chain design that enhances product differentiation.

Thorntons is also part of a larger value chain system, operating in a highly vertically integrated system:

In order to strategize its competitive advantage on product differentiation, however, it must be able to manage well the value chain of which it is a part as well. The economies of scale would not be easily realized by Thorntons’ for a long time if vertical integration persists (continuously buying non-core products from external sources, packaging etc,) although for a long time there will be a strong coordination between upstream and downstream activities.  A similar scheme could be adopted by Thorntons wherein lesser degree of vertical integration with suppliers and channel partners could still achieve equal or if not better coordination

The core competence of Thorntons still lies on its boxed chocolate market, since it has possessed procedural knowledge/ know-how that were maintained for so many years. Although its market share is not the largest, the increase in the market share went along well with the growth in confectionaries market (see appendices for the statistics).

Critical Success Factors:

Critical success factors are vital elements for a strategy to be successful. The plan that should be implemented should take into consideration the following factors:

Critical Success Factors

• Source of CSF
• Primary Measures and Targets
• Increase the number of Customers

Industry

• Increase Customer Retention Rate by 80% and 30% new customers every year.
• Raise Productivity of Employees

Environmental

• Increase Employee Retention by 90%
• Minimize seasonality effect during lean months

Industry

• Offer additional product lines that of limited time offer only every three months.
• Responsive Product Line to Market Needs
• Strategy

Continuous product development and research on changing lifestyles, tastes and preferences of consumers every three months.
The interplay of the above factors could lead to favourable outcomes in the strategy of the company. In order to circumvent seasonality sales, increasing consumer retention rate by a very high percentage with new customers per year will be very effective. In addition, production inefficiencies like low labour productivity could be at least corrected by giving relevant workshops and training programs to employees, thus increasing worker retention rate.

2.      Critically evaluate the market strategy of Thornton’s using appropriate models and theories.  20 marks.

In the evaluation of Thorntons’ market strategies, the following models  were used: External Analysis, Ansoff’s Matrix and the BCG Matrix. Considering first the opportunities and threats to the firm, we may look at External Analysis of the business environment:

Opportunities:

1.  Increased Market  Penetration  Through Distribution Channels
   There is a great opportunity for Thornton to enter greater product distribution channels like grocers and high street listings. It is highly expected that Grocer and High Street Listings will greatly publicize Thorntons’ products to the market (ThorntonsPLC, 2004). In addition, in 2002, 43% of chocolate confectionary sales were from multiple grocers from 39% in 1997.  This opportunity would also enable the company to generate profit even during the lean months, since this type of arrangement between the manufacturer and the direct seller will prompt like-for-likes sales. In addition, Thorntons could possibly sign-up for retailing arrangements with large merchant like Tesco and Marks and Spencer’s.
2. Café Thorntons
   The café segment is performing ahead of other units of the company at 3.9% like-for-like growth. Trial locations have performed very well, with return in investment in less than two years. It also provides an opportunity to explore chocolate drinks markets. (ThorntonsPLC, 2004)
3. Possible Export Opportunity to North American and Mainland European Market
   The possibility of entering international markets will always appear to be very attractive. Even if attempts have failed before, exportation may also be considered as a possibility, but more  studies are required.

Threats:

1. Changing customer tastes and expectations
   Because of rapidly changing economic environments, tastes and preferences of consumers do not stay the same for long (Ettenberg, 2002). Consumer tastes and preferences are highly affected by demographic, socio-economic and political factors. Thorntons should continually improve the product development processes in order to respond to their needs.
2. Sales cannibalisation
   Noticeably, Thorntons has a very low market share compared to other firms.  It occupies only 9% in the market for boxed chocolates and about 3 % for other confectionaries. Industry growth in the confectionaries market is also slow and sluggish, particularly hampered by seasonality of sales. Lindt and Suchard are also competing brands, albeit more ubiquitous than Thorntons. Product, packaging and promotion will be a determinant for growth.(ThorntonsPLC, 2004)

Ansoff’s Matrix:

The Ansoff’s Growth matrix is a means to helps businesses decide their product and market growth approach. Ansoff’s product/market growth matrix suggests that a business’ efforts to grow depend on whether it markets new or existing products in brand new or existing markets(McDonald, 1997).

            The Ansoff’s matrix (in appendix 2) shows the marketing strategy of Thorntons PLC in order to secure market shares. Since existing markets for its products are fairly limited in UK, since growth has been very sluggish even on industry levels, it is imperative to secure new markets. Thorntons is seen in-between Product Development and Product Diversification: The former is the strategy for existing markets with new products and the latter is for new markets with new products. Product Development pertains to the strategy of a business when a business introduces new products into existing markets. The firm is thus forced to develop modified products which appeal to existing markets. Thorntons did this by constantly introducing new products, which can appeal to present markets, similar to the introduction of new product lines to the market.  On the other hand, diversification is a growth strategy where a business introduces new products in new markets. An example from Thorntons includes Café Thorntons, T-shirt, novelty items etc. If Thorntons wants to adopt this strategy, it should have a clear idea of what it expects from the strategy since these types of ventures are very risky.

BCG  Matrix

Another important planning method that can be used to describe the marketing strategy of Thorntons’ is the Boston Consulting Group’s Matrix.  The method calls for the identification of individual Strategic Business Units (SBUs), where units of companies can be planned separately from the other businesses(Herrmann, 2001).

The following SBU’s are classified are classified into the classifications of the BCG Matrix: Question Marks: These are products with low market shares, but operate in faster growing markets. This SBU have huge potentials, but requires substantial investments in order to increase its market share. This included Café Thorntons, a source of growth for the company posting about 2.9% like-for-like growth. Its café products are the main driver at 11% like-for-like growth. Another SBU in Thorntons classified under question marks are internet, mail order and telephone services, whose sales reported a 100% increase in sales within half a year, with an average order of £25 against £7 purchases in shops. These questions marks are among the most profitable in the product/service line-up of the company.  In the borderline between Dogs and Cash cows, premium boxed chocolates are included. Occupying only 9% of the total market share with seasonality-driven growth, the premium boxed chocolates remain to be the biggest sources of. It is placed on the borderline between dogs and cash cows, since it is experiencing very low growth rates and market share remains to be very stagnant.

Porter’s Generic Strategy

            Porter’s generic strategies generally tell us of the three different strategies used by firms in order to analyse industries and competitions. These strategies had explained that firms with high market shares are generally profitable and so other firms with smaller markets. Firms with larger market shares tend to focus price leadership schemes, while smaller firms had segmented the market where they can focus on. Firms on the medium scale however are less profitable since they don’t have any generic strategy (Underwood, 2002).

            Thorntons are not exactly that profitable. However, being a small firm, it targets a unique niche in the market, the company focused on creating a product which is apparently unique in order to lure the attention of its target market away from the bigger firms. This strategy is called differentiation strategy, which is also focused on the diversification of its product line. Unique brand following/ Increased customer retention rate is the main goal of this strategy.  This strategy entails the following strong points:

• Sound research and development (Pisano, 1997). R&D is done but market responsiveness varies and sometimes inconsistent with recommendations.
• Resilient product engineering.  Thortons’ products are unquestionably good, only that it has to stir-up the product line constantly.
• Effective creativity skills. New ways of knowing changes in consumer tastes, preferences and expectations should be creatively met by the product line-up quickly.
• High-quality collaboration with distribution channels. Vertical integration makes it more efficient to collaborate on distribution channels of company owned stores and franchised stores. Thorntons should look for retailers with a high degree of market access.
• Strategic marketing skills. The ability to deliver what consumers want in the best way the company can highlights this skill especially in times of intense competition.
• Ability to convey the significance of the differentiating product characteristics. For market segmentation purposes, each product will be more tailored to the needs of the target market. The more segmented it is, the more highly tailored it should be.
• Attract highly skilled employees. Highly skilled employees are productive and efficient. Continuous trainings and workshops have an advantageous effect to the company’s bottom-line.

3.      Do you consider that some kind of relationship between Thorntons and Marks and Spencer would be beneficial for the firms? Use appropriate evaluative models to underpin your analysis. 35 marks.

Yes, there is some kind of relationship that could transpire between Thorntons and Marks and Spencer that would be beneficial in the long run. Using the Suitability-Accessibility-Feasibility Analysis, we can say that their collaboration would be instrumental in their success.

SAF Analysis

Marks and Spencer have an extensive background in local and international retail of lingerie, women’s wear, men’s wear, children’s wear, food, home, and beauty. Thornton’s on the other hand, had a similar background in specialty confectionary. Both faced similar problems of local and international expansion, leadership and stock price plunges, etc. however, both are acclaimed as brands which carved huge niches in the markets.

Both firms’s value chains resemble a vertically integrated system, each part on the value adding cycle is an integral part of the whole system itself.  Exploring the possible linkage between, we should say that in order for a business collaboration to transpire, they should make each other a part of their own value chain system.

Suitability-wise, the activities of both firms are not directly competing against each other, but rather the possibility of the activity where they could compete together exists. In addition, the generic strategies of both firms do encompass some parts of the other firm. Thorntons is relatively in “profitable” position by virtue of its generic strategies of product differentiation, tailoring its products to the needs of its relatively smaller market. On the other hand, Marks and Spencer, being among market leaders, offered market segmentation as its strategy. The market segmentation strategy of M&S caters to many social classes and market segments.  The combination of Thorntons’ product differentiation strategy with M&S’s market segmentation strategy will be sound ways multiply efforts to increase both companies’ sales.

Thorntons could act a sole supplier to Marks and Spencer of specialist confectionary products. This suppliership relationship will give Thorntons a great advantage over its competitors since Marks and Spencer’s has a great reach in the UK market, having about 450 branches in the UK alone.  In terms of accessibility, the supplier-retailer relationship between them enhances the market reach of Thorntons chocolates to the general public. A substantial floor space and strategic locations shall be allocated to Thorntons as well. Thorntons will be responsible in transporting its products to M&S branches. In addition, if successful, Thorntons may also explore M&S’s global reach in about 200 stores across the whole world (Marks&Spencer's, 2007).

In order for them to rightfully track their plans, initial market research on the feasibility of the undertaking should be carefully considered. The results of this research would then be utilized to tailor the business undertaking to the preferences and expectations of its potential customers.  In addition, the same of experience of customers in buying from company-owned stores of Thorntons should not be sacrificed by these more aggressive commercial undertaking. Since Thorntons’ products will be always available at Marks and Spencer’s, the problem of heavily seasonal sales could be ameliorated. Stores like Mark and Spencer’s are frequently visited by people all the times, and much more magnified during the holidays, with an average of 15 million foot traffic per week.(AkamaiTechnologies, 2006). The entry of Thorntons will add ease and comfort in shopping in Marks and Spencer’s. If this beneficial scheme would not be adopted, people who want to shop at separate Mark’s and Spencer’s Product Divisions and Thorntons shops, consumers in the end would choose Marks and Spencer’s as it has more goods to choose from. Thus, this scheme will not only provide Marks and Spencer and Thorntons a possible profitable venture, as it also help amend some of their perennial problems.

 Why will this arrangement be internally suitable and economically beneficial for both of them? For one, each one has a comparative advantage in each of their specialized activities—both companies can perform the activities in which they know they have core competence with less opportunity costs. Although both of them have similar functions of manufacturing and marketing, one has a comparative advantage over the other in either one of the activities, but not both.

Competence-wise, both companies possess it in their respective fields. Thorntons’ was able to harness its competence through its business line, the same case with Mark’s and Spence, who had already established itself a niche in the British retailing market. Through this arrangement, it will promote efficiency, as some resources of both companies will be freed up because either company will take care of the job it has a comparative advantage in.

Appendix 1. UK Chocolate Market Value.(BusinessInsights)

Appendix 2.  Ansoff’s Matrix for Thorntons PLC.

Literature Cited

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BBC. (2003). Chocolate fantastic: Thorntons tour.   Retrieved April 2, 2007, from http://www.bbc.co.uk/derby/features/tours/thorntons/index.shtml

BusinessInsights. Chocolate Confectionery Industry Insights

Future profit opportunities and growth indicators.

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Marks;Spencer's. (2007). About Us.   Retrieved April 7, 2007, from http://www.marksandspencer.com/gp/node/n/45999031/026-2274633-1630049?ie=UTF8&mnSBrand=core

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ThorntonsPLC. (2004). Interim Results Presentation Retrieved april 2 , 2007, from http://www.thorntons.co.uk/PUBLIC/THT_CM/investor_information/docs/Interim_Results_Presentation_February_2004.pdf

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