Natureview Farm Case Study

Analysis of Natureview Farm's operating environment and its internal capabilities

The Natureview Farm Inc, a small yoghurt manufacturer, wants to grow its revenues by over 50% by the end of 2001. The company has achieved growth since its inception in 1989, but has also struggled very hard to maintain profitability levels. However, in 1997, the Natureview Farm arranged for an equity infusion from a venture capital (VC) firm to fund its strategic investments. The VC firm now needed to cash out of its investment in Natureview. Natureview management now needed to find another investor or position itself for acquisition. To increase its revenues by 50%, by the end of 2001, the strategic issue in front of the company is weather it should expand into the supermarket channel. But, this move would impact every aspect of the company’s business and would depart company from its established channel strategy.

In the last ten years of business, Natureview Farm's revenues had grown from less than $100,000 to $13 million as reported in income statement, 1999. Initially, the company entered the market with two cup sizes (8 ounce & 32 ounce) of yoghurt in two flavors only. The company always laid emphasis on natural ingredients and has built a reputation on the basis of high quality and great taste. This strong reputation helped the company to grow up to national distribution and went on to attain leadership in natural foods channel. By the year 2000, Natureview Farm started producing twelve refrigerated yogurt flavors, in 8-oz' cups and four flavors in32 oz. cups. The company had also started exploring multipack yogurt products as a growth option. The company earned a position of major brand in the natural foods channel and this position helped the company to build strong and valuable relationships with leading natural foods retailers like the chains whole foods and Wild Oats.

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Identification of strategic Issues

The key strategic issues faced by the company are weather the company should expand to supermarket channel to meet its revenue goals of reaching $20 millions by the end of year 2001. The move to supermarket channel would impact every aspect of the company’s business and would depart company from its established channel strategy. Another issue is the company needs to find another investor as Venture Capital is demanding a cash out of its investment in the company. The prospect of alternative financing is also difficult until Venture Capital cashed out completely.

SWOT Analysis:

Weaknesses

  • No alternative financing available
  • Lacks potential of taking higher risks and costs as well

Strengths

  • Usage of natural ingredients
  • Unique, smooth and creamy texture of yoghurt
  • No artificial thickners used

Threats

  • Accumulation of cash by Horizon from IPO
  • Being dropped out of traditional channel

Opportunities

  • Higher average shelf life of 50 days
  • Strong relationships with leading natural foods retailers
  • High quality and great taste

Analysis of Strategic Options-

The company has three options in front and needs to adopt one of them to meet its revenue related goals.

Option 1-

The first option is to expand six SKUs of the 8-oz. product line into one or two selected supermarket channel regions.

Option 2-

The second option is to expand four SKUs of the 32'oz.size nationally.

Option 3-

The third option is to introduce two SKUs of a children's multi-pack into the natural foods channel.

The three options available to the company have their own importance and benefits. But, the options available also have some limitations attached to them. We will analyze the options one by one in detail using qualitative economic model.

In the first option, the company is to expand six SKUs of the 8-oz. product line into one or two selected supermarket channel regions. The option is feasible as 8-oz is the best selling cup size of the company (exhibit 2). This option has great potential of business but involves risks and higher costs. The second option available to the company is to expand four SKUs of the 32'oz.size nationally. This option also has many advantages but there is a big doubt weather new users would try the brand with this multi-use size. The third option available is to introduce two SKUs of a children's multi-pack into the natural foods channel. For third option multi pack product need to be developed. The three options available require different costs to be incurred on marketing and advertisement expenditures. The three available strategic options as proposed by different heads of the company would also have different results in the form of sales and earnings. The sales projections of Natureview’s strategic options are depicted in exhibit 1.

Balanced Scorecard:

The balanced scorecard is a performance management system that keeps a check whether there is an aalignment between the large scale objectives and the smaller scale operational activities of a company that too on terms of sight and smaller-scale operational activities of a company are aligned with its larger-scale objectives in terms of vision and scheme. The balanced scorecard proposes the four general perspectives-

  • Financial perspective-

The financial perspective keeps a check weather the strategies implemented and applied by the company are contributing to the bottom-line improvement of the company. Key performance indicators of this perspective are the cash flow statement; return on fund invested; financial result; return on capital employed and return on equity. These key performance indicators would decide weather the strategy implemented by Natureview Farm is beneficial for the company and is providing contribution in the financial improvement of the company.

  • Customer perspective-

The customer perspective measures the value that is provided to the customer like time, quality, performance and service, and cost by the organization to satisfy customers to generate more sales and revenues. It also measures the results of this value proposition to the customer like customer satisfaction, market share etc. the measured results of value proposition indicates weather the value provided to customer generated more sales and revenues and increased customer satisfaction and market share in the same proportion or not.

  • Internal process perspective-

This internal process perspective deals with the complete processes that actually create and deliver the value proposition to the customer. Its main focus is to provide the value to the customers both productively and efficiently. The key performance indicators are number of activities; opportunity success rate; accident ratios; overall equipment effectiveness. These performance indicators would measure the efficiency of strategy implemented and applied by Natureview Farm Company.

  • Innovation and learning perspective-

The innovation and learning perspective keeps its focus mainly on the internal skills and capabilities that are required to support internal processes of value creation. It deals with the human capital; information capital and the organizational capital of the company and provides foundation in the strategy development. Key performance indicators of this perspective are Investment Rate; Illness rate; Internal Promotions %; Employee Turnover and Gender Ratios. The strategy is developed on the basis of internal skills and capabilities. Proposed strategy of expanding to a supermarket channel would be judged on the basis of investment rate and other key parameters that indicate and lays down the base for the formulation of strategy.

Application of Management Accounting Technique-

The management accounting techniques generally applied is activity-based costing (ABC), Just-in-Time (JIT), and total quality management (TQM). Activity based costing is a technique that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each. It helps an organization to establish the real cost of products and services. This technique is majorly used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives. This technique assigns more indirect costs in direct costs. It supports the identification of inefficient product, section and action in the company. This technique also helps to allocate appropriate resources on productive product, section and activity. This technique supports to control the cost at individual level and on departmental level and helps to find unnecessary costs. It is easy to allocate direct costs but this technique helps in allocation of indirect cost to products.

Using activity based costing; we would review all the three strategic options available to the company. In the option 1, the company is to expand six SKUs of the 8-oz. product line into one or two selected supermarket channel regions. The 8-oz. size received the highest level of competitive trade promotion and marketing spending. Natureview Farm's sales broker had indicated that supporting this cup size would require quarterly trade promotions and a meaningful marketing budget. Natureview's advertising agency has estimated that a comprehensive advertising plan (comprising television' radio' outdoor' and print advertising) would cost Natureview $1.2 million per region per year. These launch expenditures were in addition to the trade promotion expenditures the company would need to make. Natureview’s sales, general, and administrative expenses (SG&A) would increase by $320,000 annually; $200,000 would be incremental SG&A for additions to sales staff required to manage the supermarket brokers in the two regions, and $120,000 would go towards additional marketing staff'. With this level of advertising, Natureview would be able to achieve a 1.5% share of supermarket yogurt sales after one year, producing an incremental annual sales volume of just over 35 million units (exhibit 1).

In the option 2, the company is to expand four SKUs of the 32'oz.size nationally. Although slotting expenses would be higher because national distribution would require slotting fees across a larger number of retailers, promotional expenses would be lower-the 32-oz. size was promoted only twice a year. For a 32-oz. expansion, marketing expenses would be significantly lower as well-only l0% of what was projected for the 8-oz. size in each region, representing $120,000 per region per year. Natureview would need to hire sales personnel who had experience selling to the more sophisticated supermarket channel and would need to establish relationships with supermarket brokers. Additions to sales headcount for the 32-oz. expansion option would increase SG&A by $160,000.

In the option 3, the company is to introduce two SKUs of a children's multi-pack into the natural foods channel. Sales and marketing expenses in this channel were lower; the cost of the complimentary cases was estimated at 2.5% of the product lines manufacturer sales, and the marketing expenses were estimated at $250,000.

As per the costs involved in three options available, the option 1, seems to be the most costly of all as the advertising expenditures would be very high for a 8 oz pack. The total increase in the costs of the company would be 2*1.2million + 3,20,000+ 2,00,000+ 1,20,000 if the company goes for option 1, as guided by activity based costing is higher than the option 2 as 32 oz pack needs promotion only twice a year as compared to 8 oz pack that needs to be promoted quarterly. The sales and marketing expenses in the third option are comparatively lower than the first two options. The anticipated incremental retail unit sales for the three options are in line with the costs incurred on the three strategic options available.

Strategic Options Additional costs incurred($) Anticipated incremental retail unit sales retail price per unit additional revenue generated
Option 1 3.04 million 35,00,000 0.74 25,90,000
option 2 2,80,000 5,500,000 2.70 148,50,000
option 3 2,50,000 1,800,000 3.35 60,30,000

As per the table above, the option 2 seems to be more profitable based on the activity based costing. But, there are certain other factors before recommending to any strategic option. The future prospects of the options also need to be considered.

In option 1, Eight-ounce cups represented the largest dollar and unit share of the refrigerated yogurt market, providing significant revenue potential. Other natural foods brands had successfully expanded their distribution into the supermarket channel. The first brand to enter the channel could therefore have a significant first-mover advantage and earn more than expected revenues.
In the option2, although 32-oz. cups comprised a smaller unit and dollar share of the yogurt market' they currently generated an above-average gross profit margin for Natureview. There were fewer competitive offerings in this size, and Natureview Farm had a strong competitive advantage because of the "product's longer shelf life' Natureview's brand had achieved a 45% share” of this size segment in the natural foods channel. This option also has many advantages but there is a big doubt weather new users would try the brand with this multi-use size.

In the option 3, The Company already had strong relationships with the leading natural foods channel retailers, and expansion into the supermarket channel could potentially affect these relationships. Yogurt was an important product to natural foods retailers from both revenue and a profit standpoint. Natureview does not have the necessary resources or skill-set to sell effectively to and through supermarkets. Natureview Farm's all-natural ingredients would provide the perfect positioning from which to launch its own children multi-pack product offering into their core sales channel. The sales team was confident that they could achieve distribution for the two SKUs. The financial potential was very attractive. The projected total yearly revenue for the two multipack SKUs would be approximately 10oloo f the natural foods channel category dollar sales. Gross profitability of the line would be37.6%. But, somehow I feel there are certain limitations attached to my analysis. The analysis of the three strategic options available for the company is done only on the basis of cost and the anticipated incremental unit sales. There are number of other prospects which should be considered before selecting any option available to the company. The other prospects which shall be included in the analysis are the strategies implemented by the competitors and weather these competitors are also looking for the same options of launching their products. The analysis is also short in taking other factors in account like increase in the costs of production by the company in different package of cup sizes etc. In short, such strategic decisions need to analyze all the features related to the production; marketing and distribution of the products.

Recommendation-

After going through all the financial and non financial factors of the strategic options available, I recommend option 3, that is, to introduce two SKUs of a children's multi-pack into the natural foods channel. This option would be the most favorable as it involves least extra costs to be implemented and earns substantial revenues with a gross profitability of 37.6%. Moreover this option would be more feasible as the sales team and distribution channels are quite confident about this channel. The company had also started exploring multipack yogurt products as a growth option. The company earned a position of major brand in the natural foods channel and this position helped the company to build strong and valuable relationships with leading natural foods retailers like the chains whole foods and Wild Oats. All these factors would certainly help the company in future in expanding its business and to emerge as a leader of organic products all over the country. For more considered recommendation, I would need to know the exact development of multi-pack as it is still under planning and research and development division is still working upon it. The exact cost of production of the multi-pack can only be ascertained only when the multi-pack is launched in the market.

Customer Profitability Analysis-

Customer profitability analysis focuses on the relationships between employee satisfaction; customer satisfaction and corporate profitability. It provides an understanding to increase customer revenues and to decrease customer costs. Customer profitability analysis can be done in three steps.

1. Understanding and analyzing customer profitability.
2. Maintaining and increasing customer profitability.
3. Turning unprofitable customers into profitable ones.

This analysis would be able to improve operational performance of Natureview Farm by making it more focused to customers and by increasing its value in the market. To determine customer profitability, the causes of revenues and the costs should be well understood. This customer profit analysis would help Natureview Farm to bring together marketing and accounting professionals to analyze, manage, and improve customer profitability. The customer profitability analysis would also help Natureview Farm in increasing their customer satisfaction profitably. This would also lead the management to focus on the areas of improvement and that would lead to higher customer satisfaction and greater corporate profitability. The company can use activity based accounting to determine how to increase customer satisfaction and the profitability of both individual customers and customer segments. This analysis would provide information regarding improved profitability of the company and the customer satisfaction. Before initiating such a project, financial controller of the company should keep a good record of the customer value propositions. Financial controller should also make use of customer perspective applied in balanced scorecard. The customer perspective measures the value that is provided to the customer like time, quality, performance and service, and cost by the organization to satisfy customers to generate more sales and revenues. It also measures the results of this value proposition to the customer like customer satisfaction, market share etc. the measured results of value proposition indicates weather the value provided to customer generated more sales and revenues and increased customer satisfaction and market share in the same proportion or not.

Reference: http://fmcenter.aicpa.org/Resources/The+New+Finance/Customer+and+Supplier+Value+Chain/Executive+Summary+%E2%80%94+Customer+Profitability+Analysis.htm

Conclusion-

The Natureview Farm Inc, a small yoghurt manufacturer, wants to grow its revenues by over 50% by the end of 2001. In the last ten years of business, Natureview Farm's revenues had grown from less than $100,000 to $13 million as reported in income statement, 1999. The company always laid emphasis on natural ingredients and has built a reputation on the basis of high quality and great taste. This strong reputation helped the company to grow up to national distribution and went on to attain leadership in natural foods channel.

The company earned a position of major brand in the natural foods channel and this position helped the company to build strong and valuable relationships with leading natural foods retailers like the chains whole foods and Wild Oats. The key strategic issues faced by the company are weather the company should expand to supermarket channel to meet its revenue goals of reaching $20 millions by the end of year 2001. The move to supermarket channel would impact every aspect of the company’s business and would depart company from its established channel strategy. Another issue is the company needs to find another investor as Venture Capital is demanding a cash out of its investment in the company. The prospect of alternative financing is also difficult until Venture Capital cashed out completely. The company has three options in front and needs to adopt one of them to meet its revenue related goals.

Option 1- The first option is to expand six SKUs of the 8-oz. product line into one or two selected supermarket channel regions.

Option 2- The second option is to expand four SKUs of the 32'oz.size nationally.

Option 3- The third option is to introduce two SKUs of a children's multi-pack into the natural foods channel. After going through all the financial and non financial factors of the strategic options available, I recommend option 3, that is, to introduce two SKUs of a children's multi-pack into the natural foods channel. This option would be the most favorable as it involves least extra costs to be implemented and earns substantial revenues with a gross profitability of 37.6%. Moreover this option would be more feasible as the sales team and distribution channels are quite confident about this channel. The company had also started exploring multipack yogurt products as a growth option.

Appendices:

Exhibit 1

Reference:
1. http://www.valuebasedmanagement.net/methods_balancedscorecard.html
2. http://www.en.wikipedia.org/wiki/Balanced_scorecard

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