Section A – This ONE question is compulsory and MUST be attempted
The company
The Fidelity Model Corporation (FMC) produces high quality model kits of locomotives, ships and aircraft. These kits contain plastic, metal and glass parts and are bought and constructed by enthusiastic hobby modellers. Many of these modellers customise the kits during construction to ensure that the final model accurately reflects the real prototype which they wish to represent. The model kits are relatively expensive and the price reflects the accuracy, detail, quality and size of the kits. The average price for an FMC kit is $500 and it is estimated that, on average, an FMC customer buys and constructs two FMC models a year.
The dealer network
FMC does not sell its model kits directly to the public. It sells them through appointed dealers who are independent, specialist model shops, often owned and managed by enthusiastic modellers. These shops sell a range of kits, including the kits produced by FMC’s main competitor, Barnhoff. FMC mandates a minimum price which dealers must charge for its kits. This is designed to prevent dealers from undercutting each other. This minimum price reflects a dealer margin of approximately a third of the price. So, for example, a product with a minimum price to the customer of $520 would be sold to the dealer, by FMC, for $390.
The model shops are important social hubs for the modelling community. Often modellers visit the shops to discuss issues and view product releases with other modellers. It is the model shops which demonstrate the products to prospective customers, provide assistance in construction, trouble shoot any problems with the finished model and liaise with FMC to resolve any outstanding issues which they cannot address.
Pete Waterless, a high profile celebrity modeller, put it succinctly in a recent television documentary.
‘We modellers are a solitary lot. We sit alone in our workshops constructing complex models. Sometimes we just have to go down the local model shop to see some fellow humans and seek advice and solace. Often we need a little bit of help to build the model. We sit for hours in the shop looking at models and talking about models. Most normal people think we are very boring and, in truth, we are!’
FMC customer profile
In an attempt to better understand its end customers, the people who actually buy its kits from the dealers, FMC recently commissioned a customer survey. For two weeks in May, selected dealers were asked to record the age of customers buying FMC products in their shops. Table 1 shows the results of this survey. For example, 45% of customers were males aged 60 to 79.
Table 1: Age and gender distribution of customers buying FMC products
The structure of the company
The board of FMC consists of the chief executive officer (CEO), the production director, the sales and marketing director and the finance director. The current CEO was appointed in 2005. He has considerable experience of the model kit market place.
The production director heads up the production department where components for the model kits are fabricated and packaged. There are four teams of ten people in this department, with each team led by a team leader who reports to the production director. There is also a quality control department of three people with a quality supervisor who reports to the production director. This quality team was established in 2007 by the previous production director to address product quality issues which were affecting the profitability and reputation of the company at that time. The production director responsible for this initiative has recently retired and a former team leader has been promoted to replace him. The logistics manager is also located in this department. He has a team of 12 drivers and six vehicles which are used to deliver the kits to the dealer network.
The sales and marketing director leads a sales team of nine people who are responsible for servicing the dealer network. Each sales person in this team liaises with between 10 and 15 dealers, depending upon the size of the geographical area they support. The sales team regularly visits every dealer to promote the company, explain changes in the model range and to deliver promotional brochures and display advertising. They also provide the dealers with completed kits of selected models so that these can be shown to customers. They are responsible for taking orders from dealers and liaising with production to fulfil these orders. All of the sales team have built up close relationships with the dealers who they are responsible for and many regard the dealers as personal friends. A small marketing team of three people also reports to the sales and marketing director. One of these people is responsible for national brand promotion, one is concerned with the production of brochures and display advertising and one is responsible for information technology in the company, including the maintenance of the website. The current website provides information about the company’s products and a list of dealers where these products can be bought. The sales and marketing director who led a review of the product range in 2007 has recently left the company. A new sales and marketing director has been promoted from within. She was previously responsible for national brand promotion.
The finance director heads a small team of four people. Two are responsible for accounts payable and two for accounts receivable. Dealers pay for the inventory they have ordered a month in arrears. For example, they pay for all products delivered in March at the end of April. So, only one sales invoice is raised per month for each dealer. The current finance director has been in post since 2011.
Most FMC employees have been with the company a long time. They are aware of a recent fall in revenue but believe that this is a temporary problem and little cause for long-term alarm. ‘After all’, said one, ‘we had similar problems in 2007. However, improvements in quality and a revamp of the product range soon improved things.’
The Change Agents (TCA)
The Change Agents (TCA) is a small management consultancy aimed at delivering ‘real, sustainable change in organisations’. The board of FMC is concerned about the decline in sales revenue and net profit (see Appendix A) and has commissioned TCA to submit a proposal for addressing this decline.
The management summary of TCA’s proposal is included as Appendix B. In brief, it suggests a radical change in the business model of FMC. It proposes that FMC should sell directly to the end customer via the internet and abandon the dealer network completely.
Some of the recommendations of this proposal are based on an interpretation of financial information for FMC for selected years since 2007 ( Appendix A).
Appropriate industry averages for financial performance for FMC’s industry classification (light engineering – specialist) are shown in Table 2.
Table 2 Selected industry averages for FMC’s industry sector (light engineering – specialist)
A balanced response
When TCA’s proposal was presented to the board, most of the directors were shocked and rejected it immediately as impractical. The sales and marketing director cited the recent customer survey, saying ‘most of our customers are elderly, retired men. I don’t see them using the internet to buy things.’ The production director added that he had read that older people were particularly worried about the security and fraud aspects of internet use.
However, the CEO wanted a more balanced view and has asked you, as an independent business analyst, to write a report which:
– Analyses the context of strategic change from the perspective of selected features of the Balogun and Hope Hailey contextual features model. He notes that TCA makes some reference to this model in its proposal and so he is keen to use it as a basis for analysing the implications of the proposed strategic change.
– Evaluates the implications of the POPIT four view model for understanding how the business will be changed by the TCA proposal. He is concerned that the company takes a holistic approach to business change.
– Identifies and assesses likely barriers to moving to the proposed business model from the perspective of the customer. He wishes to understand what factors may prevent or deter current customers from becoming direct internet customers of FCA.
Appendix A
Financial performance for FMC for selected years in the period 2007 to 2016
Extract from financial statements
All figures in $000s
Analyse the context of strategic change at FMC applying five elements of the Balogun and Hope Hailey model: time, scope and nature, readiness, capability and preservation. Use performance data to support your analysis where appropriate.
Introduction
Balogun and Hope Hailey have identified a number of contextual features which need to be taken into account when designing and implementing change programmes. I have been asked to review the strategic change situation at FMC, with reference to TCA’s suggested strategic change proposal where appropriate, in the context of five of these contextual features:
– Time
– Readiness
– Capability
– Preservation
– Scope and nature of change
Time refers to the urgency of strategic change. In some situations, change has to be implemented very quickly in an attempt to ensure the survival of the organisation. Urgent change is often associated with financial problems, where the organisation needs to secure funding quickly to guarantee its short-term survival.
At FMC, revenue has declined in absolute terms by over 11% since 2013 and profitability has dropped by almost 30% in the same period. Retained earnings have also fallen, but so has long-term borrowings.
The calculation of selected financial ratios (see Table 1) actually provides little evidence to support TCA’s claim that ‘urgent change is required at FMC to address the financial performance of the company’.
Use the POPIT four view model to analyse the implications of implementing TCA’s proposed strategic change at FMC.
The POPIT model suggests that four aspects of a business change have to be considered: people, organisation, processes and information technology. Change which selectively focuses on just one or two of these aspects is likely to be unsuccessful.
Information technology
TCA’s proposal appears to focus on technology change, stressing the need to develop a fully-functional e-commerce website allowing order placement, order tracking and payment. It claims that ‘strategic change will be technology-led’ and that ‘TCA has considerable experience in technology-led change’. However, the POPIT model suggests that related changes will be required, in people, processes and organisation, for the proposed business change to be successful.
People
In the current process, FMC sales and marketing staff mainly interact with the dealer network. Generally, there are a large number of interactions with relatively few customers. These customers, the dealers, work closely with the FMC sales and marketing team and personal friendships have developed between dealers and FMC staff. Furthermore, the technical knowledge of these customers (the dealers) is relatively high. In the proposed business model, it is likely that FMC staff will have to deal with many customers, but the number of interactions with each customer will be relatively small and the technical knowledge of customers will be very varied. Some are likely to have no technical knowledge at all. Thus, staff in sales and marketing, and possibly production, will need to be retrained to deal with a different type of customer.
Organisation
The balance of staff within the organisation structure may have to be reviewed. Currently, customer support and service is provided by a relatively small number of people (nine) in sales and marketing who only have to look after a small number of customers (10 to 15 dealers each). It seems highly likely that more customer support and service staff will be required in the proposed business model. The potential scale of this support can be estimated. In 2016, revenue totalled $4,650,000. At an average price of $500, this equates to 9,300 model kits sold. It is estimated that each customer buys, on average, two FMC models per year. Thus there will be approximately 4,650 end customers requiring sales support. Sales and marketing will have to be re-organised to reflect this. There might also be a concern about staffing levels in production in the context of the possibility that production staff will be increasingly diverted from their production duties to answering technical queries from customers.
There will be no requirement for field staff to visit the dealer network to present and promote the product range. Display advertising material for shops will no longer be required. The focus now will be on ensuring that the e-commerce site is an effective marketing medium. For example, making sure that the website appears high upon search engine listings, and exploiting different ways of getting the message across, for example, showing videos of the models in construction. The member of the sales team responsible for the production of brochures and display advertising may no longer be required. However, extra staff may need to be hired to supplement the one employee currently maintaining the website.
The workload will also change in the finance team. There will be more invoices to process, but there should be fewer payments to chase as payment on order is expected. The team will now be dealing with a large number of small transactions rather than a small number of large ones.
It seems very likely that the dedicated logistics team within production, with its six vehicles and twelve staff, will no longer be required. Conventional postal and courier services are much more effective ways of distributing single orders to a large number of individuals. Thus the proposed change may bring about staff redundancies and provide an opportunity to raise capital through the sale of vehicle assets.
Processes
Much of the customer purchasing process will take place through the proposed e-commerce website. However, processes will have to be put in place to update this website, to remedy mistakes made by customers when using the website (for example, inadvertently ordering the same product twice) and to ensure that the order tracking information is correct and up-to-date. There will also have to be changes made to the delivery process (as deliveries will be made to individuals rather than dealers) and returns. Again, returns will now be from individuals, rather than dealers. Thus, effective processes are required to support the e-commerce operation and, returning to the people theme, staff will need to be trained in these processes.
Identify and assess the barriers to moving established customers to the e-commerce model proposed by TCA.(12 marks)
Professional marks will be awarded in question 1 for the structure, tone, coherence and clarity of your report. (4 marks)
This final part of the report looks at potential barriers to customers embracing the proposed way of purchasing. I will first focus on what customers will lose if FMC abandons its dealer network.
The physical element of the marketing mix appears to be very important to FMC’s customers. One of the reasons for visiting a model dealer is to physically see and handle the kit prior to purchase and perhaps to inspect a finished version of the kit. Completed kits of some models are provided to dealers specifically for this purpose. This is not possible in the proposed business model. It is feasible to provide some elements of a physical experience in the e-commerce site. For example: by showing photographs of the model from all angles and by including videos of the model under construction or operation. However, it will not be possible to replicate the physical element of the current buying process completely and so FMC needs to be aware of this. If physical evidence is an important part of the buying decision, then customers may no longer purchase if the proposed business model is adopted.
It is also clear that many of FMC’s current customers have emotional ties to the model shops where they purchase from. Most of these shops are run by fellow enthusiasts, facilitating a great degree of interaction between sellers (dealers) and buyers (customers). The shops appear to culturally provide a social function, where isolated modellers can get together with like-minded people. FMC’s major competitor is not abandoning the dealer model and there must be a concern that customers will increasingly buy kits produced by this competitor as a matter of principle. FMC’s axing of its dealer network could be seen as an attack on fellow enthusiasts and there is a possibility that FMC will alienate its customers by this approach.
In practice, many modellers encounter problems when constructing their models. The dealer provides front-line post-purchase support, giving advice or providing the physical space where advice can be given by fellow modellers. They may also offer practical help, troubleshooting problems and dealing with FMC, if these problems cannot be resolved. FMC will have to provide a similar after-sales service to maintain customer satisfaction. Again, potential customers may not find this particularly satisfactory. In the current business model they can have any issue resolved quickly by someone who they know and trust and with whom they can discuss the problem and any possible solution. Furthermore, they know that any problems which cannot be addressed immediately will be subsequently resolved by the dealer dealing directly with staff at FMC. Potential customers might consider that dealing with FMC directly is not worth the bother and so not purchase from them.
In switching to purchasing over the internet, FMC has to be sure that the current customer base:
– Have access to the internet. Even if an internet service is available, it cannot be assumed that FMC’s customers have actually subscribed to such a service. TCA states that broadband coverage in the country is now 90%. However, this does not mean that 90% of the country has actually subscribed to this broadband service.
– Have a credit or a debit card. This will be required for purchases over the internet.
– Are willing to purchase goods over the internet. Many users are concerned about fraud and security and so may be unwilling to make purchases over the internet.
– Are willing to make high value payments over the internet. Even if customers are willing to make online purchases, the high value of each purchase ($500) might be a deterrent.
Further research is needed here. The sales and marketing manager’s assertion that old men will not use the internet to buy model kits is stereotypical and unsupported by any data provided in the scenario. In fact, the phenomenon of the ‘silver surfer’ is acknowledged in most countries. The production director’s concern that many older users were reluctant to make online purchases due to fears about fraud and security is better founded. This does not mean that the proposed change in the business model should be rejected outright. However, it does suggest that customers should have the facility to make off-line purchases, based on the information they have found on the website. For example, they should have the option to phone FMC to place and pay for a kit over the phone. This has further implications for the processes and people supporting the proposed change.
Finally, it must be acknowledged that the dealer network itself might be a barrier to potential customers who are unable to physically get to a model shop. Changing the channel might bring in many new customers which compensates for the loss of some existing ones.