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Merkland Sportswear (MS) is the market leader in sportswear in Ceeland, selling a variety of sportswear products under its own well-known brand. It is primarily a product development and marketing business as it contracts out all of its manufacturing to third parties around the world and it mostly sells its products through third-party retailers.
It has only one store which is located in the capital city of Ceeland. The purpose of this store is to act as a centre for its marketing activities and to be a tangible representation of the MS brand. However, the main marketing activity for
MS is the recruitment and promotion of star sports men and women as MS brand ambassadors. MS tries to have the most well-known sports star in each of the 10 most popular sports in Ceeland as an ambassador.
You are a performance management advisor to MS, brought into the company by the chief executive officer (CEO) to help the board with a number of issues. The first area which the board of MS requires your input is in a review of the existing performance dashboard for MS (Appendix 1).
The dashboard is deliberately kept focused as it is for board use and the CEO has indicated that the three performance headings of ‘financial, design and brand’ will be kept at this time. The board has accepted that there may need to be up to two metrics for each of ‘brand’ and ‘design’ but they want to keep the number of financial metrics at three.
The mission statement of the business is designed to be broadly appealing. It is ‘to inspire Ceelanders to compete’.
From a business perspective, the aims are more focused, MS aims to grow as a business and to maximise shareholder wealth. The CEO further clarified the broad strategy to achieve these aims saying, ‘We want to inspire competition not just in our customers but also within the company, to seek our greatest competitive advantage.
We will achieve this by creating innovative products which provide reduced risk of injury and enhanced sporting performance supported by the best marketing operation in Ceeland.’
In order to assist in providing more detailed strategies to achieve these aims, the board has instituted a review of the competitive position of MS by commissioning a SWOT analysis (Appendix 2).
The CEO has asked that your first task be a review of the current dashboard metrics (Appendix 1). You should then review the SWOT analysis to suggest changes to the dashboard metrics within the constraints which the CEO has outlined.
Also, you are given details on a recent new development in the market. Nush Sportswear, one of the major competitors of MS, has recently suffered a scandal which has been widely reported. An investigative reporter discovered that oneof the suppliers who manufactured sports shoes for Nush had been using child labour.
The country in which the manufacturer worked had rules prohibiting child labour, but enforcement was very weak. This story has been widely covered in the media and has led to consumer boycotts and a review by the Ceeland business regulator into Nush’s sourcing policies. It has been discovered that this is common practice in the sports footwear business where manufacturing is outsourced to such countries.
MS’ shareholders have reacted with alarm to the potential damage that this could do to MS’ brand. They have asked the board to consider changing their policy of outsourcing footwear manufacture. The board is considering two alternative responses:
1. Review and ensure that all outsourced footwear manufacture complies with appropriate employment terms and conditions (where necessary manufacturing would move to third-party companies in countries with appropriate regulation and enforcement); or
2. Create a manufacturing operation for MS in order to have full control of operations.
In response 1, the review of existing third-party manufacturers is being performed by a team from the procurement department. They have also considered the impact of moving all footwear sourcing to more strictly regulated environments. The results of this investigation are given in Appendix 3 and the board wants an evaluation of the qualitative and quantitative impact of this response.
In response 2, the board is considering setting up a factory for the manufacture of all MS footwear. They want to understand the impact of this on MS’ existing performance metrics. First, they need a forecast of the profit from the factory as there are three distinct economic scenarios under which it might operate (see Appendix 4 for details).
Second, the board wants to know how the new factory will impact on the existing performance dashboard. However, since the probabilities of these economic scenarios are under debate, the board has said that they want this work to be independent of the results of the profit calculation from Appendix 4.
Therefore, the board wants you to use an estimate of $103m profit before interest and tax from the new factory to evaluate the impact of the new factory on the dashboard. (This estimate is before product development and marketing costs as it only represents the manufacturing operation at the factory.)
Finally, the consultant who did the SWOT analysis has mentioned to the board that if they are thinking of reviewing their existing strategies, then they should consider using the value chain to secure competitive advantage. The CEO thinks that you should assess the implications of using the value chain for the performance management of MS. (An outline of the value chain is given in Appendix 5.)
Required:
Write a report to the board of MS to:
(iii) Calculate the expected operating profit of the new factory and evaluate the use of this method of decision-making under risk. (6 marks)
