Review strategic position

Exam rehearsal question – from March/June 2019

Background information

SmartWear is a long established clothing retailer in Noria, a highly-developed northern European country, which is currently in the middle of a deep economic recession. The country is also experiencing political uncertainty because of its coalition government, who many influential commentators believe will not last for its full term of office. These two factors have contributed to record high levels of unemployment, low business confidence and a steady decline in the standard of living of the general population. The company also operates in two other countries on the European continent, Southland and Centrum.

SmartWear has enjoyed long-term business success mainly due to the fact that it has carefully positioned itself towards the lower end of the clothing retail sector. It sources its products directly from suppliers in low-cost economies, and it has been able to target a mass market with consistently low prices. This has meant that during the recent economic downturn in Noria it has been able to profit from the growing number of price-sensitive consumers, who have switched from the more high-end of the clothing retail market to budget retailers like SmartWear – who are the market leader in this high volume market.

SmartWear’s long term strategy has always been based on a low cost – low price business model, which is described through its mission statement and strategic goals. However, following a prolonged period of expansion and growth, including successfully penetrating several other European markets, the company is for the first time experiencing a marked downturn in both its operational and financial performance. This appears to be in part due to economic pressure and the growing intensity of competition in all of its markets, both at home and abroad.

At a recent board meeting to discuss the latest set of disappointing financial results, it was proposed that an external consultant be appointed to investigate the deteriorating performance of SmartWear and propose the best way forward for the company.

You are the external consultant engaged by SmartWear, and you have gathered the following information to help you with your assignment: consultant.

It is apparent that the downturn in SmartWear’s performance can be in part attributed to external factors beyond the company’s direct control. A recent national newspaper article further confirms that the economic situation in Noria has made trading conditions tough for business. Therefore, a good understanding of those external environmental factors negatively affecting the SmartWear business model is essential so that action can be taken to remedy the current situation and improve the future prospects for the company and its investors.

The board of SmartWear wants to fully understand how the general environment is impacting on the company, as this will directly influence its ability to enable the business to succeed and prosper. The board has asked you to brief the board on this issue for their next board meeting.

Required:

Prepare a briefing paper to be presented at the next board meeting, which:

(a) Analyses the environment in which SmartWear operates and consider how this might impact its business model, mission and strategic goals.

(10 marks)

Exhibit 1: Briefing notes prepared by the business development department for the consultant:

Suggested Answer:

(a) Briefing paper: Environmental analysis

Introduction

The operating environment that SmartWear has been experiencing has been very challenging and could explain in part the reasons for the recent downturn in its business fortunes. Although competition will undoubtedly have a significant part to play, all businesses will have been exposed to the same general environmental conditions. So, gaining a better understanding of the environment will help the board to decide how best to successfully adapt the current operations of SmartWear, and take advantage of opportunities emerging from the external environment.

Political issues

The precarious situation of the coalition government in Noria has created a sense of uncertainty within the business community. Without confidence in political continuity, investors are less inclined to risk their money. This will make it more difficult for companies, like SmartWear, to raise the necessary finance to grow the business further, or even sustain its current position. The high levels of growth which had been previously achieved no longer appear to be achievable, so the SmartWear board may need to reconsider the company’s strategic goals and focus on consolidating the company’s position in the market during this difficult and uncertain political period.

Economic factors

The current record high levels of unemployment, high price inflation and a resultant deep recession does not help the retail sector in Noria. However, it is reasonable to assume that with less disposable income, consumers would be more inclined to purchase their clothing needs from value retailers like SmartWear. Indeed, the company has benefited from this economically‑driven behavioural shift.

Should an economic recovery start next year, as suggested by the Finance Minister, then this would improve business prospects for all retailers in Noria. With rising employment and lower inflation, consumers may decide to return to more upmarket clothing retailers and away from low‑end companies like SmartWear. The board should consider its international portfolio of businesses in order to manage the risk associated with diverse national economies, since currently inflation and unemployment in Southland is much lower than in Noria. Therefore, any planned strategic expansion should be in international markets rather than domestically.

Social developments

The demand from consumers for cheaper clothing has required these items to be sourced from low cost economies. There has become an expectation that clothing will remain low priced, which limits how companies like SmartWear can compete. This could increase the number of new entrants into the low end of the market and suggests that only those companies who are able to sustain high volume sales will succeed in the long run. The board needs to bear all of this in mind when it is considering its growth plans and deciding how best to satisfy consumer demands going forward.

Technological influences

The growth of e‑commerce in the general retail sector has completely altered the competitive dynamic. Once developed, any online platform can be extended to include a variety of products, therefore new clothing e‑retailers can emerge from previously non‑competing businesses who have simply broadened their product offering. The resultant increased supply of clothing goods to the market with potentially contracting demand will put downward pressure on prices, squeezing the margins of all companies including SmartWear. The board is advised to consider the opportunities presented to SmartWear from developing and operating its own e‑commerce platform, as this could allow for substantial revenue growth without the need to establish a costly network of retail outlets and would allow a rationalisation of the portfolio of physical retail outlets, to release funds and reduce operating costs.

Marking Scheme

Up to 2 marks for each well-developed aspect of general environmental analysis such as the suitable use of PEST, or PESTLE, SWOT. (Up to a maximum of 10 marks)

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