Business Strategies and Customer Profitablity Analysis for Illusional Optics

BUSINESS STRATEGIES AND CUSTOMER PROFITABLITY ANALYSIS FOR ILLUSIONAL OPTICS

Group members:

May, 3, 2016

Table of Contents

Executive Summary        

Introduction        

Part I: Discussion of strategies and competitive advantages        

Differentiation Strategy        

Cost leadership strategy        

Recommendation of the best strategy        

Part II: Customer Profitability Analysis        

The implementation of customer profitability analysis in FedEx        

Part III: Customer Profitability System        

PART IV: Deep Analysis of Customer Profitability        

Part V: Analysis of strategic issues        

Issue one: Increasing costs        

Issue two: Profitable customers and unprofitable customers        

Issue three: High cost of goods sold        

Conclusion        

List of References        

Appendices        

Table 1. Cost per unit of activity driver        

Table 2. Activity cost driver amounts for 2016        

Table 4. Percentage Sales Revenue and Cost of Goods Sold for the Five Customer Groups        

Executive Summary

The purpose of this report is to present recommendations for Illusional Optics company to promotes the position in optical industry based on its current situation and provide a development direction for the company combined with the specific strategies to realize it.

As an optical company, Illusional Optics is currently facing a challenge in keeping a reasonable profit. In order to achieve this objective, we attempt to offer suggestions that can enhance its profitability through putting forward the best strategy to accomplish competitive advantage and conducting customer profitability analysis to manage customer related activity cost. After completing our analysis, two conclusions can be made. Firstly, differentiation strategy would be the best strategy for the company to achieve the advantages of marketing competition. Secondly, Activity Based Costing model would be a feasible customer profitability to tackle with diverse customers’ costs. Meanwhile, the company may acknowledge that this is accompanied by some strategic issues.

Introduction

This project aims to generate the recommendations on the Illusional Optics’ current situation and future direction of the company from two main aspects, the competitive strategy and activity based costing. The first part of the report, by studying the successful example of adoption of the strategies from other listed companies, we found the most appropriate strategy for the Illusional Optics in order to be competitive. Secondly, in regarding of the customer profitability analysis of two listed company, we design a customer profitability system based on activity based costing for Illusional Optics to improve their services and therefore places more focus on customer. Meanwhile, we explain in details that the profitability of five customer groups of Illusional Optics. And finally, based on our research and analysis, we also identify three potential issues that company may face after implementing the competitive strategy.

Part I: Discussion of strategies and competitive advantages

According to Michael Porter, there are three major marketing competitive strategies: differentiation strategy, cost leadership strategy and focus strategy. Company can adopt these strategies in order to improve their performance and achieve their marketing objectives. In this report, differentiation strategy and cost leadership strategy will be discussed.

Differentiation Strategy

The differentiation strategy means that the company maintain the diversity of their products with their competitors. They are able to offer the products or services that other competitors cannot provide. To successfully implement the differentiation strategy is to study and discuss customer needs and the behaviour in order to gain customer trusts of their brand and increase the company’s profit (Collins). The examples below are which successfully adopt the strategy.

Apple, Inc. (AAPL (NASDAQ)) is the most famous multinational technology company in the world. We can see Apple’s products everywhere and it seems like a part of our life, it includes Mac, iPad, iPhone, watch and apple TV. Apple’s products achieve diversity which can satisfy their customer from different domains, and also let the company be more competitive in loyalty of brand, advertising and launching of the new products. Nike, Inc. (NKE (NASDAQ)) is another example of implement the differentiation strategy. This strategy helps Nike to gain market shares in this broad athletic shoes market. However, Nike’s products are not only focus on foot wares, it has clothing, accessories, equipment as well. For example, they even categorised their athletic shoes into seven sub-classes, such as for life style, running, basketball and training etc. There is a corporation between Nike and Apple, Nike creates NikePlus which is a sensor in the shoes that can record the customer’s movements and fitness data by installing the application on their Apple products. Nike catch the customer’s thoughts and needs. This technology attracts customer to purchase their products and also increase Apple’s market shares.

Cost leadership strategy

Cost leadership strategy means the company maintain the lower cost and same quality products than its competitors or even the lowest one in the industry. It takes the cost advantage over the competitors for the purpose of attract more customers, since customers are price-sensitive (Sharp, 1991).

The first example is The Reject Shop Limited (TRS). It is a discount variety retailer in Australia, since the selling price of their products are lower than its competitors like Kmart or Big W. The company aims to obtain high performance in the low cost environment (ASX announcement, 2014). It offers a balanced mix of quality, low cost products with limited exposure to the rapid changing of customer’s tastes. Streamline supply chain of the management increases the effectiveness which can reduce the extra cost occurred during operation. Another example of successfully adopt cost leadership strategy is Costco (COST (NASDAQ)). For the purpose of keeping lower cost than its competitor, “Costco utilizes several means: continuous improvement, exploitation of the experience curve, and unbeatable supply chain” (Allen, 2012). Costco tries to improve the efficiency of their warehouse system, for example, only stock half amount of the inventory in comparison with Walmart, which increases the inventory turnover of the company. And also, the company has a rule that they cannot mark up the product price by 14% (Tai & Chuang, 2014). By doing this, Costco becomes the major competitor of Walmart, and gains the customer loyalty gradually.