Finance future development
On the other hand, SMC should consider further actions to develop alternative strategies if it rejects the proposal to produce the private label. A Launching of new product: Trim Max. If rejecting the offer, the company could put more of its limited resources to the launch of Trim Max as a strategic move, widening its product line of trail-movers under the Swisher name. But the firm will possibly be confronted with some uncertainties, such as poor sales of Trim Max. B Improving profitability of Kits or discontinue it.
Among SMC’s four core products, Kits makes up to 8.2% of SMC’s annual sales yet offers zero profits. With better coordination among its relevant functional areas within the firm, SMC could examine closely the root causes of the unprofitability of Kits and try to eliminate the non-value added portion of the value chain. If SMC cannot improve Kits’ profitability at last, it should consider dropping the production of Kits at all. C Establishing nationwide distribution network
Upon rejection of the offer, in the long run, SMC should put its efforts on establishing national distribution network for its product mix, especially Trim Max, the new introduction to the market. As we mentioned earlier, the western part of United Sates is untouched yet. SMC could try to push the distribution channel toward the western part. D Diversifying product lines The advent of the new product, Trim Max, would no doubt improve the product diversification. Furthermore, SMC should expand the newly introduced products and reduce the reliance on its old flagship product, the Ride King, which was designed in the 1950s.
E More advertising Obviously, the introduction of the new product should be fully assisted by full-scale advertisements and vigorous promotions. SMC can promote its products in the current geographic scope of distribution channel to expand the sales. Furthermore, SMC could consider vigorously promoting its product to the untouched part, the western part of US, and help to set up the national distribution channels. Final decision: After delving into all the pros and cons of the two alternatives, Wayne believes that SMC should adopt this private label proposal with eyes on the long-term development of own brand.
Major reasons: For SMC, the benefits are comprised of both direct and indirect contributions. Direct cost saving and profit generation, A excess capacity utilization The most important reason to accept this offering is that SMC can make a full use of its capacity and make more profit. As we have explored previously, SMC has around 60% of idle capacity which comprised a potential opportunity costs. In addition, analyzing from economics’ angle, we find that total fixed costs of SMC’ s products remain unchanged with the utilization of idle capacity. The additional revenue arising from the sales of private label may possibly increase profits in SMC.
B Profitability In 1996, sales can increase by 15.2% and net profits would boost by 3.74% after accepting the proposal. In the next two years, the sales and net profits will be rocketed to 178.3% and 20.59%, respectively, comparing with those in 1995. Indirect benefits on regarding the production of private label as a stepping stone to promoting SMC’s own brand A Accumulation of profits to finance future development
The increased profit aroused from the contract could be accumulated as retained earning to finance the company’s future expansion. This is especially true, when SMC is of such a small scale (market share is less than one percent). It would be quite difficult to fully expand after sales and profits had plateaued for more than a decade. At this stage, private label production could provide SMC with necessary profits, which could finance future development.
B Accumulation of operational experience The firm can get much precious experience on operating business on a larger scale and in full capacity. The experience includes management, marketing, operation and technology experience. All of these experiences should be considered as a preparation for great leap in the future.
One afternoon in early 1996, Wayne Swisher, satisfied with his analysis about the current and future development of SMC, was confident that SMC could both benefit from the private label proposal, the birds at hand, and stay in track with the long-term development of SMC’s own brand. The funds, raised by utilization of excess capacity and the production of private label, and the experiences learned from production in full capacity, could assist SWC to step further to fully develop its own brands in the long run.