Overview of the First Year
Discuss about the Strategic Business Management for Dairy Company.
This paper is a presentation to the board of directors of a business report for the management activities taken for the dairy company operating in an open market with four other competitors. The paper articulates the decisions made and an evaluation of their outcome as justification for why the decisions were taken.
At inception in 2013, the second quarter of the year returned no income because production had not started and setting up operations was taking up money, which is expected. The unit began processing and producing dairy products in the following quarter and achieved some sales. However, the period also coincides with the business beginning to seek out market share; at this point the company has minimal market share and therefore engaged in aggressive marketing strategies. The company focused on producing just two products in roughly equal amounts as shown by the sales volumes. Because of aggressively seeking market share, the cost of sales ate significantly into the revenues; further, the company had very little market share so the sales were not much. Coupled with a high proportion of fixed expenses, the business made a loss (Lack, 2013). In the following quarter, the strategy was still to focus on aggressive marketing to seek a market share; here strategies like aggressive pricing to attract new customers plus very high quality products that attract extra production costs increased production costs. Getting market feedback led to a wider product range to cater to market needs hence the addition of chocolate flavored milk to the product range. The gross profit improved as sales increased, but new product lines and the associated marketing costs led to an increase in operating expenses so for the entire first year the business suffered a loss although the cash flow was positive. A positive cash flow is essential to keep business operations running and help the company gain market share (Reider & Heyler, 2003).
The new product line showed better returns (gross profit) hence justifying the reason for commencing its production. With market a condition improving, such as research showing the benefits of dairy products, production was increased to reflect market changes. There was still greater focus on the chocolate flavored milk and lite milk because of their higher returns and the fact that the full cream milk market was saturated and hence had lower returns because it has to be priced to keep up with competitors. The strategy at this point was still; to increase market share and gain a foothold in the market (Bentley & Davis, 2010). In the second year of operation, the company was able to record improved gross profit in all the quarters due to aggressive marketing and product differentiation as well as effective response to market conditions. For instance news reports stated that dairy conferred health benefits, especially for lite milk; while value addition and product differentiation by producing chocolate flavored milk helped ramp up the sales (Dearlove, 2007). However, the fourth quarter, for instance, returned a loss as operating expenses rose faster than sales, despite increasing gross profits. There was need to increase marketing and advertising as well as raise production to respond to increasing demand for the company’s products, hence the company reported a significant net loss with a negative cash flow. The performance in 2014 was not satisfactory hence requiring a change for strategy in the next quarter, specifically to reduce operating expenses such as in advertising and promotion to balance the books.
Challenges and Changes in the Second Year
A significant reduction in operating expenses in the first quarter of 2015 helped return the business to profitability and external factors helped the situation. One competitor (the oldest dairy firm) went out of business while dairy prices normalized and competition became less stiff. Eliminating chocolate flavored milk from production was necessary to respond to adverse market conditions and this helped lower operating costs; with a prediction of milk prices increasing, the management needed to take full advantage. Increased dairy prices and reduced competition informed management’s decision to restart chocolate flavored dairy milk production; operating expenses were kept at a minimum and this helped the company register a profit, though still with a negative cash flow. It is absolutely essential that a company responds proactively and effectively to changes in the competitive business environment (Porter, 2002). While gross profits increased in the next quarter, operating expenses also increased; the increase is attributed to chocolate flavored milk whose production costs are high hence the company recorded a net loss and a negative cash flow. The 10th quarter since inception resulted in increasing operating expenses and led to net losses and negative cash flows as the company’s market share had not hit ‘critical mass’ to guarantee returns. Effort was still placed on aggressive marketing to gain more market share.
Prudent management and higher efficiencies saw operating expenses drop, leading to a profit although the cash flow position remained negative in the 11th quarter. In the 12th and 13th quarter, operating expenses were kept low resulting in profitability despite the cash flows being negative due to heavy investments in gaining more market share. Focus was placed on product segments that brought the highest returns and where the company would compete favorably with the competition while operating expenses were kept low; market share growth started to slacken, although the company returned a profit and had a positive cash flow as operating expenses were further reduced in the 14th quarter. The market conditions, being favorable (with stable prices and a promise of increase in dairy prices), production was maintained and operating expenses kept low while pricing remained competitive. This was maintained in the 15th quarter where profitability and positive cash flows were maintained. While chocolate flavored milk had the lowest sales, it was the second most profitable segment. Maintaining the same strategy for 2017 for the subsequent quarters is considered the best strategy as it guarantees the company can continue being profitable and will help improve the share price, hence leading to an increase in capital (from shareholder contributions); much needed to keep the business afloat in a relatively volatile business environment.
Reviewing Strategies in 2015-2017
Higher efficiencies in using the available capital and assets of the business to generate revenue were considered an important strategy to keep operating expenses low. Especially that the business market share growth was slackening and competitors were becoming more aggressive with new product lines. However, the company sought the strategy of having a niche market of lite milk and chocolate flavored milk with full cream milk produced to cater to the needs of the wider market segment (Patricia, 2017), (Bennett, 2014). The strategy is to increase profits and profitability through value products for a niche market; having fewer products can result in greater profits when combined with having a niche market (Edelson, 2011). This is informed by the fact that having more product lines result in greater manufacturing costs that eventually eat into profits as operating costs rise. Therefore, the strategy is to consolidate manufacturing so that few products that have higher profitability are produced for a niche market. Consumers are gradually showing a preference for fewer product lines (fewer choices) and simple but engaging customer experiences (Ashkenas, 2010). Thus a strategy of focusing on a smaller product line helps reduce overhead costs, especially those associated with manufacturing the many different products such as dairy milk powder, which competitors produce.
Maintaining this strategy for 2017 will help ensure the business is fairly shielded from external shocks such as fluctuations in product prices and competitive pressure from competitors. The management prefers a strategy of flexibility and high levels of efficiency as the previous quarters in 2014 showed that aggressive marketing and market penetration tactics, including aggressive pricing resulted in increased overheads and hence high operating expenses that resulted in losses and negative cash flows. These factors served to compound the situation for the company, in light of highly competitive and fluctuating prices. Based on facts and past research, the management figures that consumers prefer smaller product choices and hence the company should focus on its niche markets, responding as required to shocks in the external market. For instance, at one time, the production of chocolate flavored milk had to be stopped for a whole quarter since the business environment was challenging and led to huge losses. Because producing chocolate flavored milk has many overheads, the result was a steep rise in operating expenses that led to losses and negative cash flows.
Adopting principles such as activity based costing (ABC) will help allocate costs and overheads more effectively to guarantee higher efficiency in running the business to ensure greater profitability and positive cash flows. ABC coupled with lean principles of eliminating waste such as just in time (JIT) and continuous improvement f processes such as Kanban and kaizen ensure that wastages and hence, operating costs are minimized to ensure continued profitability and positive cash flows (Kaplan & Anderson, 2007), (Jones 73). These help keep the share prices up and therefore provide the much needed extra capital from shareholder contributions while also improving shareholder value. The company will also adopt a growth strategy by focusing on expanding the market for lite milk whose health benefits have been reported in the media to increase profitability because 2017 to 2018 and 2019 have seen stagnant growth, with profitability remaining in a plateau. With competitors making substitute products, the company for example experienced a negative cash flow in the 21st quarter as price fluctuations led to zero profits in full cream milk leading to a loss. External factors, increasing competition and aggressive pricing saw another net loss in the 22nd quarter although with a positive cash flow. The production of lite milk and chocolate milk should be increased and that for full cream milk drastically reduced as it is no longer profitable and just adds to overheads that lead to losses. Market forces of normal and increasing milk prices helped the company return to profitability in the 24th and 25th quarters.
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