Essay Instructions: Paper should be typed in font size 12 and Times New Roman, double-spaced. The limit is 4 pages. “Outside Sources, Internet Sources Only. The Maximum for Internet Sources is 2 to 3 Only."
**You should take the perspective of either being the person who has to make the key decisions in the case, or of a consultant who has been hired by this person to provide expert recommendations. Either way, you should identify the key issues (problems), list relevant alternative actions that can be used to deal with these issues, analyze them, and finally select the best one as your recommendation.**
Start your report by writing the case title. “Then, follow the pattern of the following example below:”
Key Issues:
1.Sales have declined by 10 percent over the last 12 months
List of alternatives:
1. Increase advertising by $5 million annually
2. Drop the brand
3. Redesign the brand by increasing R&D expenses by $3 million over the next 18 months
Analysis of the alternatives:
1.(here you will list the advantages and disadvantages of alternative #1, i.e. the increase in advertising)
2. Advantages and disadvantages of alternative #2, i.e. dropping the brand
3. Advantages and disadvantages of alternative #3
Recommendations
Recommend alternative #1, because… (You need to explain why you think that based on your previous analysis alternative #1 is superior to the others due to its more favorable ratio of advantages to disadvantages.
Keep in mind that sometimes you may decide to combine more than one alternative in your recommendations, as long as they are not mutually incompatible. In the above example, one cannot combine alternatives #1 and #2, but one could combine alternatives #1 and #3. In case you decide to combine more than one alternative in your recommendation, you will still need to prioritize them, i.e. explain which alternative should be implemented first, and which one should be implemented second.
Keep in mind that when you list your alternatives, they should be specific actions. Avoid generalities such as “improve quality”, “rethink strategy”, etc. You need to explain exactly what to do to achieve the objective. Do not confuse the goal with the means to achieve it. The goal is dealing with the issue, and the means are the alternatives.
Case Study: X-L Clothing
“Would you like a cup of tea” the flight attendant asks Mr. Fredrick Durhan as he awakens from a short nap during his flight from Tokyo to Shanghai. Mr. Durhan enjoys taking these short breaks from the frantic pace of running his company to seize new opportunities in China. An elderly Swissman, Mr. Durhan is the CEO of X-L Clothing Company. Known for being open-minded and optimistic, Mr. Durhan came to Asia over a decade ago and has been very successful in marketing his line of outdoor sports clothing, such as ski suits and high-altitude gear. Eight years ago, Mr. Durhan came to China, and soon discovered that the market in China was far larger than those in Korea and Japan where he had started his business. He cooperated with the Chinese party and in a relatively short period of time had to set up the sportswear factory and began producing and selling clothes in China. At present, he owns to large-scale factories in China. The annual output is 2 million pieces in the first factory in the first factory and 2.8 million pieces in the second factory. The trademark "X-L," which Mr. Durhan brought to China, has achieved a meeting position in the high end market. Mr. Durhan takes advantage of China's low cost labor and produces a cloth by using first-class technology. The production techniques and quality are controlled by the ISO9002 system, and international designers are employed to integrate fashionable styles and ideas into the products. As a result, the products have gained an excellent reputation in the Chinese market. While anxious to enter the new markets, Mr. Durhan believes he needs to proceed cautiously. The company’s current distribution channels are set up for direct selling through retail stores and established specialty shops in medium and large cities. This way X-L is able to build brand image and manage its distribution.
Looking back over the past seven years, X-L’s market development resembles a long, zigzag pattern. X-L started in Beijing and Shanghai with a half a dozen employees. Specialty shops were opened in both cities to promote its professional and functional outfits to the consumers. As a new brand and product, X-L gear was difficult to market to Chinese consumers, especially compared with the established brands of Columbia, Arc’ Teryx, Mountain Hardware, Vaude, and North Face. Mr. Durhan, however, was confident that the Chinese market would adopt a local brand. Due to his persistence and the product's quality, the X-L brand has been accepted by gymnast throughout China, as well as many high-end consumers. X-L’s technology is extremely precious to the company, and, like pandas in the wild, must be protected. All the name brand manufacturers guard this type of information in fear the others may steal it and harm their business. Competitors were few. However, there are now at least 30 specialty shops for outdoor sports clothing in Beijing alone. Even peddlers in the wholesale market claim that they have their own product advantages and mimic the latest styles. The professional outdoor sports clothing market used to be luxury items for an elite minority, but now the new entrants are penetrating the broader market. Overnight, or so it seems, the market is booming and moving toward the mass market. In 2002, the outdoor sports outfits’ sales in China amounted to RMB 1.5 hundred million, while the global sales of outdoor sports outfits in 2001 reached $15 billion. At the present, there are over 200 clubs for outdoor sports in China and the annual rate of increased have been 30%. Accordingly, expenditures on clothing have been increasing continuously. Consumer spending on clothing in 2001 was 3.21 times more than in 1990, and the consumption of the clothing per person in 2001 increased by 6.63% from 2000. Lifestyles have changed; more and more people are beginning to walk in the countryside to enjoy nature. Many residents of China's medium and large cities now participate in outdoor recreation, such as mountain climbing, fishing, hiking, and camping, as well as domestic travel.
While reviewing some data, Mr. Durhan discovered that the number of people who participate in hiking and camping is larger than those of fish. People will go on a trip's also outnumber mountain climbers who require longer trips. Overall, these statistics indicate a significant preference for outdoor sports that only involve one-game round trips. If these consumers were offered have good-quality outdoor clothing at an acceptable price, more people would wear them. Mr. Durhan believed that in satisfying the ordinary customers’ desire for outdoor recreation, high-quality products sold at a moderate price would find an enormous market. In 2001, outdoor recreationist in China accounted for 9.7% of the population, a year-to-year increase of 1.5%. In 2002, the figures were 15.8%, over 200 million people, and double the number in 2000. Sales to this market increased 39.3% in 2003. This indicates that there is still substantial room for development of the outdoor recreation clothing market. Although participants of outdoor recreation represent only a small portion of the outdoor population, these consumers have been increasing rapidly each year since 2001. The X-L brand has also paralleled the pace of development. At present, the company has opened 14 shops in Beijing, Shanghai, and Guangzhou, and has more than 140 employees. Sales volume has exceeded RMB90 million. The growth of the X-L brand has reflected the development of the market, as well as the tremendous potential of the market. Mr. Durhan believes that the principal condition for growth of the enterprise is to guarantee the quality of the products. He assures this quality through control procedures in the production process that checks each critical process. The raw materials and finished products go through individual technical checks and measurements to ensure that defective products are corrected or destroyed. The human design of products also reflects his pursuit of perfection. While wearing the X-L brand, outdoor enthusiasts feel that all their needs have been considered by the designer. The protective zipper is softly blocked off from irritating the wearer’s skin. The waterproof slot concealed in the fringe provides protection from the rain. Likewise, the stitch joints have been covered with glue to prevent rain drops from intruding. A functional pocket has even been provided for a mobile phone with special passages for wires from a headphone. Such designs can be found in other products. Consumers are highly satisfied, and the X-L brand is recognized for its superb design advantages.
Mr. Durhan has also aggressively promoted his products and reinforced his brand position by associating with newsworthy special events. By sponsoring the Chinese Mountain-Climbing Team in their quest to climb the world's highest peak, he showed how first-rate products can help conquer the most challenging outdoor task. It's not only built the brand image, it also sent a strong message to the younger generation to challenge nature and themselves. The Chinese Mountain Climbing Team’s established position in the professional outdoor market was instrumental in gaining market share for X-L and increasing its sales volume. But Mr. Durhan still worries. To him, the rag trade is not a trade that involves high technology, and competitors entering this market in China using cheap labor could do so quite easily. Holding the leading position in the high-end market is not guaranteed. After all, the consumers of
X-L represents only a small part of the overall Chinese market. High prices can only be supported by small minority, and the mass market can easily be attracted to other brands. This reveals an enormous gap between the needs and pricing for the mass market, compared to the high level products/market. Price had always been the most important factor that prevented outfit for outdoor sports outfits from being accepted by the mass market. In particular, college students really like the X-L gear, but they could not afford high-quality products. Therefore, Mr. Durhan considered setting up another brand to compete with the mid-market. The outdoor clothing market includes many genuine products and knockoffs where quality is suspect. Although there are currently more than 10 major international brands of outdoor gear, only four to five brand names are available in a Chinese market. Furthermore, none of the major brands in China have focused on the local market. They have not conducted any specific market research, nor have they created any special designs for the Chinese consumers. And, they have only agents and intermediaries in China's selling their products.
The reality is that the foreign competitors have claimed only a small share of the market, while the lion’s share is going to the lesser-known companies and knock-offs. In addition to the knockoffs, there are a significant number of inferior products in the market. The inferior products are often made from leftover materials that have not been inspected and come from secondary suppliers who use untrained and inexpensive laborers. The X-L Company chooses not to use “uncontrolled” materials from secondary (and cheaper) suppliers because they worry about the quality. In outdoor activities, such as mountaineering and exploration, outfits are critical to the health and safety of the sportsman. Knockoffs or unqualified products may cause injury or loss of life. Even if the products are used for casual camping, those with poor ventilation or waterproof performance can harm the user. Chinese consumers have little knowledge of outdoor sports clothing. They also lack the ability to adequately judge product quality. This creates opportunities for the franchisers and agents to produce and sell knockoffs, and it prevents the major brands from taking a larger market share. This has resulted in the foreign brand companies devaluing this type of product line in the Chinese market. The primary condition for entering into the mid-level market is the reasonable price and quality. Mr. Durhan believes that there is no need to increased investment in the current production capacity. X-L’s design capability could create an attractive product, and its quality control system could guarantee the quality of a new products. By selecting lower-cost cloth, while meeting the general functional requirements of the outdoor clothes, the new products could be priced lower, making it possible to enter the midmarket. To create a competitive advantage for his products, Mr. Durhan emphasizes that the products must be designed to meet the functional requirements of the consumers, including the waterproof and ventilating characteristics. At the same time, the price of the products must be acceptable to the ordinary consumers. However, for the new products, the original distribution channels are not appropriate because:
1.The original brand, whose products are purchased by superior sports enthusiasts, might be harmed and result in the loss many of those customers.
2.The distribution pattern is selective, using specialty shops and limited availability to establish an image of top grade products. The sales force is well-trained and locations are only in primary cities. The sales force is expensive to train and maintain.
3.The new products require sales volume, broad distribution, and quick expansion to establish a strong position in the middle market.
To make the price more competitive, Mr. Durhan believes that they should not use national sponsorships (such as the Olympic team) and that advertising expenses should be used for special events that are related to popular outdoor activities and mass-market advertising. As Mr. Durhan finishes his cup of tea, the plane is approaching the runway, and he will soon have to make many decisions about the new market that offers so much potential. “Please pull your seat backs forward, lock your trays in their upright position, and make sure your seat belts are fastened,” a flight attendant announced. Mr. Durhan smiled as he thought about his plans for expansion into China's huge potential market and hoped it would be a safe and happy and landing too.
