Business Strategy, Application level

Case Study

1. You are a newly qualified chartered accountant from ICAB, joined recently as planning
manager to AES Enterprises Ltd (AES) an engineering firm based in Chittagong. AES was
acquired by Mr. Humayun Morshed some 30 years ago. Humayun Morshed had a reputation for
being a prudent business man and this was a good bargain. The business has made steady
profits, though it has seemed to lost its way in the last few years.

Humayun Morshed has handed over the business last year to his youngest son Manzoor
Morshed a mechanical engineer from BUET. Turnover of AES has rapidly grown last year but
profits have not grown in proportion. Humayun Morshed has invested a small amount in new
plants and bought some second hand machines as well. He did employ and kept some good
people and the firm has a reputation for top quality work. The works management is good. The
administration side is well run and the accounts are immaculate. Financially the business is in
good shape. It has always made a profit and the balance sheet is strong. It has substantial liquid
assets, there is no overdraft, and AES own the freehold. So funds could be available for
substantial investment.

Almost half the sales of AES are to one customer, a firm it has been supplying for 20 years.
Another five customer’s account for most of the rest.

Ariston Limited, a newly established engineering firm based in Chittagong, which won two major
construction projects recently, interested to have a joint venture arrangements with AES to
implement construction work of one of the recently awarded projects as they don’t have the
capacity to complete both the projects simultaneously. Manzoor Morshed asked Javed Akhter,
engineering manager to explore the opportunity, as AES has some excess capacity and Ariston
indicated a good profit margin. Javed Akhter’s report on the joint venture with Ariston was
positive although he has mentioned his concern on quality compliance of Ariston. Manzoor
Morshed reviewed latest accounts of Ariston and was impressed with high profit margin of
Ariston.

After analysing last few years performance of AES, Manzoor Morshed realised, the company
should focus on new customers and large projects in order to increase its profit margin to a
reasonable level. He decided to start devising the plan to prepare AES Limited for the future.

Requirements:
You have been asked to prepare a brief report covering:

(i) The importance of strategic planning ( 3)

(ii) An approach to the preparation of a strategic plan for AES Enterprises Limited. This
section should cover the planning process and analytical tools available to mangers.
Whenever possible it should be related to AES Limited’s current position ( 13)
(iii) Your view on the joint venture proposal from Ariston Limited, mentioning, conflict
between business and ethics, if any. ( 4)

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Answer:

(i) Benefits of strategic planning

The introduction of a strategic plan has the following benefits:

a) Attention is focused on the long-term future of the business rather than getting bogged down in short-
term problems;
b) Activities of various sections of the business are coordinated; Each manager will know what the firms
is aiming to achieve and will have criteria for evaluating various courses of action.
c) Making best use of scarce and limited resources
d) Specifying milestones for achievement of goals and monitoring progress by stages

(ii) It is vital that AES covers the following areas in its development of a plan:
a) Environment analysis
The direction of a firm’s strategy is considerably influenced by what happens around it. At the first step
AES should analyse its current environment and attempt to anticipate any likely changes. The analysis
should cover:

 Economic factors such as growth in demand for services, levels of interest rates, availability of skilled
manpower etc;
 Political factors such as exposure to import competition;
 Social factors such as changes in cultural values, e.g. safety awareness;
 Legal factors including employment legislation, consumer protection, and so on;
 Technological factors such as changes in manufacturing methods and technology employed by
customers;
Of the above, technological factors are likely to be of immediate concern. The firm is currently
operating with some primitive equipment.

b) Competitive forces
AES must also consider the competitive structure of its industry before strategy can be developed.
Areas for analysis are:

 Threats from potential entrants

 Threats caused by the power of its buyers
 Threats due to the power of suppliers
 Threats from substitute products
 Threats from existing competitors
Very few details are available on the firm’s competitive position apart from its customers. All the
output are taken by six customers, and virtually half by one customer. This leaves the company very
exposed to loss of business and puts it in a difficult position when negotiating prices. Any strategy
should attempt to remove this over-reliance on a small number of customers.

c) Internal analysis
Several techniques exist to analyse a firm’s internal position. These include:

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  The 5 Ms analysis strengths and weaknesses in terms of machines, men, money, markets and
materials;
 Ratio analysis and comparisons with other firms in the same industry should be carried out;
 Value chain analysis to identify cost drivers and value drivers;

d) Objectives
 Mission statement and objectives establish the direction which the firm’s plan will take.
Objectives should be clearly defined;
 AES is a private company and appears to be substantially family owned, aspirations of the family
will therefore influence its objectives. Other important stakeholders include the highly skilled
workforce and the loyal customer base both of whose interests should considered in formulating
objectives.

e) Corporate appraisal
The final stage before developing a plan is to consider the firms current and projected position. This
should allow the firm to assess its chances of achieving its overall objectives and to identify the need for
new strategies to bridge any gap between projected and desired performance.

SWOT analysis:

SWOT analysis is useful in generating future strategies. SWOT analysis of AES will help it to identify its
strengths, weaknesses, opportunities and threats. An ideal strategy is to exploit environmental
opportunities by using firm’s strengths.

A brief analysis of the existing data on AES reveals the followings:

Strengths:

 Reputation for quality

 Loyal customer base
 Skilled workforce
 High level of financial resources

Weaknesses:

 Flat profit and stagnant sales

 Relatively outdated plant
 Reliance on six customers

Opportunities:

 Joint venture with other companies

Threats:

No details available

GAP analysis

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Gap analysis involves the identification of gaps between projected performance and objectives.

f) Strategy development
Strategy development is an area for creative thinking. It attempts to design strategies that will bridge
the gaps identified under position analysis. AES should analyse the existing market and products and
explore the new market, product and diversification potentials.

Internal efficiency and market penetration involve attempts to reduce cost or further penetrate existing
markets by taking share from the competition. Cost reduction by introduction of modern and state of
the art machinery is one obvious possibility for AES.

Another approach could be differentiation of the firm from its competitors on a quality basis.

(iii) Joint venture

AES need to consider the joint venture proposal from Ariston Limited seriously because:

 AES Limited need to increase its customer base as it has a very low customer base and its business is
concentrated mainly to one customer;
 AES Limited need to focus on high margin business, as its profits are not proportionate to its
turnover;
But AES will have to critically review the following issues also:

o Terms and conditions of the joint venture proposal by Ariston to ensure AES Limited will be making
desired profit from the assignment;
o Quality of work of Ariston Limited (customer feedback of the projects completed by Ariston may be
useful);
o Reasons of achieving such high margins by Ariston Limited.
o Status of environment, tax and other compliance issues to ensure Ariston has no negative ethical
issues.

2. While rest of the Asia disappointed in terms of export in 2015-16, there was one surprising exception
to the pattern – Bangladesh. Bangladesh earned over USD 34 billion in 2015-16 fiscal year registering
around 10% growth from the year before. This phenomenal success can be attributed to Bangladesh’s
growing apparel industry, which accounted for around 80% of total exports.
As global demand for cheap clothing rises sharply, Bangladesh’s position as the second biggest textiles
exporter in the world continues to hold strong, which is mainly due to large number of young work force
and low labour cost. So there is good reason for Bangladesh to remain hopeful for the years ahead.

Yet, Bangladesh has many challenges onward. The road ahead is not completely clear for the industry.
With the EU being a principal recipient of garments, accounting for over 60 percent of exports, there is
the continued slowdown of European economies to consider. Moreover, growing competition from
Vietnam, could threaten Bangladesh’s current global ranking. As such Bangladeshi manufacturer will be
forced to enhance productivity levels in order to maintain their competitive advantage.

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In view of this, Bangladesh government has engaged Impact Economy Bangladesh, a leading Bangladeshi
advisory firm to suggest appropriate competitive strategy for Bangladesh garments sector to compete
successfully in the global market to continue the growth moving towards the largest textiles exporting
country in the world.

You are a manager in the advisory services department of Impact Economy Bangladesh. You had a
meeting yesterday with managing director on this engagement, he has discussed in detail Porter’s
“The Competitive Advantage of Nations” concept, where Porter identifies determinants of national
competitive advantage which he referred as the “Diamond Factors”. The managing director has asked
you to:

(i) Identify, using Porter’s Diamond the sources and nature of competitive advantages
enjoyed by Bangladeshi garments sector. ( 12)
(ii) Based on your analysis, recommend a strategy for garments sector of Bangladesh to
continue the growth achieved and moving towards the top garments exporter in the world
( 8)

Answer to Qs no. 2 a.(i)

Porter identifies four elements of national competitive advantage. The elements are:
1. Factor conditions;
2. Demand conditions;
3. Presence of related and supporting industries at home; and
4. National firm strategy, structure and rivalry

Porter refers to these elements as ‘Diamond.’ Sources and nature of competitive advantages enjoyed
by Bangladeshi garments sector and can be analysed using ‘Porter Diamond.”

Factor conditions
Factor conditions are a country’s endowment of the inputs to production, such as human resources,
physical resources, knowledge, capital and infrastructure. Porter distinguished between basic and
advance factors. Basic factors include natural resources, semi-skilled and unskilled labour. The latter
are more important for sustained success, and include modern digital communications, highly
educated personnel, research laboratories etc.

Bangladesh appears well endowed with basic and some advanced factors. Even though Bangladesh is
not a cotton growing country, it has no problem with importing cotton from the cotton growing
countries all over the world. In fact, Bangladesh is the largest cotton importer country in the world.
Main advantage of Bangladesh is ample supply of unskilled and semi-skilled labour with sufficient
knowledge on garment sector. Moreover, cost of such labour in Bangladesh is lowest in the world.
Addition of 30 lacs new workforce in the economy for next 15 years will ensure sustainable

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 competitive advantage of Bangladesh in garment sector in the global market. While other countries
involved in manufacturing garments are facing labour shortage and struggling with increase of wages,
Bangladesh is blessed with plenty of male and female workers conducive to further growth in
garments industry.

Bangladesh’s position on advance factor is not fully advantageous yet. Bangladesh is improving fast
on digital communications. The country has shortage of educated human resources like merchandiser,
quality inspectors and many such skilled resources from other countries are working garment sector
in Bangladesh.

Demand conditions
The home market determines how firms perceives, interpret and respond to buyer needs. This
information puts pressure on firms to innovate and provides a launch pad for global ambitions.
Entrepreneurs of Bangladesh always respond to customer needs on a priority basis. Careful marketing
has made this response successful and Bangladesh has an enviable reputation quality, innovation,
reliability and customer focus in the world market. The success that has been achieved to date has
meant that Bangladesh has the necessary economies of scale to be able to successfully compete
globally. And now, Bangladesh is positioned second largest textiles exporter in the world and many
of the large buyers and garments importing countries are confident, Bangladesh is moving towards
the position of the largest garments exporter in the world.

Presence of related and supporting industries

Competitive success in one industry is often linked to success in related industries. Domestic
suppliers are preferable to foreign suppliers.
The presence of related and supporting industries at home, which have to date supplied Bangladesh
with the components it has needed in successfully competing globally in the garments sector.
Bangladesh has a very strong spinning industries base and capable of producing any type of yarn. The
country has already achieved a dominant positon in producing all types of accessories required for
garment industry. All these has poised Bangladesh to move towards the top garments exporter in the
world in the near future.

National firm strategy, structure and rivalry

National firm strategy, structure and rivalry issues create distinctive business environments in
different countries. Domestic rivalry is important because tough domestic rivals teach a firm about
competitive success, and rivals from the home market have to try different strategic approaches.
National

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 There are more than 3,000 garments factories in Bangladesh. These factories are not competing to
each other for the domestic market as these factories are export oriented and focused only to export
market. Many of these factories are in competition to each other for the export market. This healthy
competition has helped Bangladesh in competing the global garment market successfully. Most of the
garments factories in Bangladesh proprietorship business. They may not have appropriate corporate
governance in place, but they have flexibility in decision making process, which help them in dealing
with global customers effectively.
Overall, a very accomplished group of entrepreneurs has emerged in Bangladesh who are capable of
compete in the global context and able to lead Bangladesh garments industry to the next level.

Answer to Qs (ii)
Firms can gain competitive advantage from:
 Lower costs of supply to customers (cost leadership)
 Differentiated the products (differentiation)
 Concentrate on a specific area of the market (Focus/niche)

Garments is a labour intensive industry. Even at this age of automaton, many areas of the production
process could not be automated and therefore availability of semi-skilled and skilled workforce vital
to maintain global leadership in garment industry. Many countries in the world are struggling with
supply of workforce to garment industry as there are not enough workers available and the cost of
labour has gone up substantially.

Around 3 million new workforce joining the economy of Bangladesh every year and that will be
continued for next 15 years. Bangladesh’s greatest advantage is continuous supply of low cost
workforce. Where the competing countries facing upward labour cost and shortage of labour. The
competing countries therefore, concentrating on other relatively lower labour intensive sectors.

In this context, Bangladesh has the opportunity to formulate strategy to become the largest garments
exporter in the world. Suggested strategy for Bangladesh to become the top garment exporter may be
as follows:

Cost leadership:
Bangladesh definitely should continue to pursue the present cost leadership strategy. Bangladesh is
known for supply of cheap garments products. Bangladesh can effort to continue cost leadership
strategy as the country is blessed with plenty of low cost unskilled and semiskilled workforce who
have contributed immensely to reach Bangladesh the second largest garment exporter in the world.
So Bangladesh should strengthen its position as global cost leader in the world for garment sector and
try to increase export of low cost garment products substantially and grab a significant share of

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 Chinese share as they are reducing their focus from export of low cost garment products due to sharp
rise of wages in China.

Differentiation
Bangladesh should also very strongly pursue the differentiation strategy as it has already achieved
knowledge, experience and reputation in garment sector and is successfully supply high end products
to many global buyers. There are lot of sophisticated state of the art factories in Bangladesh who are
capable of competing any supplier of the world.

More and more firms and factories should concentrate on differentiation. Some of the factories will
need to be involved pursuing sophisticated marketing initiatives with high end and top buyers. They
may need to introduce in house designing team, upgrade their factories.

Focus/niche
Bangladesh also should pursue focus and niche marketing. Global niche market will be reasonably
sizeable. Bangladesh has a very good opportunity to grab a major share of this segment of global
market as Bangladeshi workers have acquired enough knowledge on various products. Moreover, the
high end market may require lot of manual and specialised workmanship we the country has an
advantage.

But Bangladesh should be very careful in formulating and pursuing all the strategies simultaneously.
Entrepreneurs will require to put special attention to clearly distinguish the marketing strategy for
different segment. Firms which will be pursuing cost leadership should be distinguished from the
firms involving in focus marketing. It is very important to ensure they are not stuck in the middle of
two strategies. Example of Japanese car manufacturer is relevant here. Toyota for example have been
successfully pursuing all segments of the market: cost leadership (Allion, Premio), differentiation
(Camry), and niche (Lexus).

In conclusion, we need to pursue a very robust strategy to be the top garment exporter in the world.
At the same time we need to put highest emphasise on skill development, cost control, efficiency
enhancement to successfully compete in the global market to achieve the top position in the world.

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(b) Hairobics Bangladesh Limited is a chain of hairdressers with 25 sites operating in Dhaka and
Chittagong. It has a very simple philosophy – quality haircuts for women who are short of time. It
operates a no appointment, drop-in system. Customers take a ticket on arrival and wait in a large
comfortable seating area until their numbers are called. All staff are multi-skilled and there are no
specialists. The company aims to keep waiting time below twenty minutes.

The salons offer a wide range of services from vary simple cuts to more complex styles and treatments. In
60% of their stores Hairobics offers beauty treatments, such as facials, in a separate salon on site. The
company’s main publicity comes from personal recommendation by satisfied customers, but they also
occasionally advertise in high quality women’s magazines.
After a recent period of expansion, the management of Hairobics Bangladesh Limited feel that their
business model is not being applied consistently throughout the organisation and they have decided
improvements and adjustments need to me made. However, none of the management team knows how to
relate their philosophy to their operations to the best effect.
Requirements:
(i) Using the concept of the value the chain, explain how Hairobics Bangladesh Limited can
adopt the quality and speed approach throughout their activities. ( 12)
(ii) What are the benefits and problems of value chain analysis for a company such as Hairobics
Bangladesh Limited? ( 4)

Answer to question (i)

The value chain is the sequence of business activities by which, in a perspective of the end-user, value is
added to the products or services produced by an entity.
Primary activities are directly related to the processes of production and sales.
Inbound logistics are those activities involved with receiving, handling and storing inputs to the
production system.
Operations convert the resources input into the end product.
Outbound logistics relate to storage and distribution.
Marketing and sales inform customers about the product, and include advertising and promotion.

After sales service

Support activities obtain purchased inputs, human resources, technology and infrastructure to support
the primary activities.

Competitive advantage is obtained by configuring the value chain in certain ways. Hairobics Ltd can use
the value chain to ensure that their philosophy of quick, quality haircuts can be adopted and maintained
throughout the business.
The main areas that Hairobics Ltd. needs to concentrate on are HRM, Procurement, Technology
Development, Operations, marketing & Sales.

Human Resources Management

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An important way Hairobics Ltd generates value for its customers are by operating without appointments
and with multi-skilled staff.

Hairobics Ltd therefore must ensure their staff have the capabilities to meet the objectives of quality and
speed. They need to be highly trained as they need to be able to work quickly and avoid making mistakes.

They need to be multi-skilled so that each member of its staff can achieve maximum utilization and be in
a position to deal with any customer and her needs.

Technology Development
There are many areas in this kind of business where technology can help to achieve the organisation’s
started aims.

The simple ticket waiting system might be developed to provide an indication of waiting time and an
option to prefer a particular stylist, for example. Hairobics Ltd could consider appropriate IT facilities for
the waiting customers.

Operations
Hairobics Ltd should consider making the beauty salon business entirely separate from the hairdressing
salon as the two businesses seem to offer a mixed message to clients – one of speed but also relaxation.
Furthermore, the company needs to analyse its current and potential market and determine whether they
will require more complex services such as colouring as this kind of procedure would add to the time the
stylist needs to spend with each client. They could consider offering a separate area for such services and
having dedicated staff working in this area.

There is potentially a new market for Hairobics Ltd to explore by considering the people who are just too
busy to leave the office for a haircut.

They could consider offering in-house hairdressing services to large office complexes.

Marketing and sales

A sophisticated business needs an appropriate marketing communications strategy. Hairobics Ltd has
been fortunate in that its name has become well-known through personal recommendation.

Hairobics should certainly consider some kind of targeted campaign, even if only run at a low level of
intensity to ensure its services are known to potential customers. Careful advertising in local and national
newspapers might be appropriate. A high quality direct mail campaign to business addresses might be
appropriate as well.

Answer to question (ii)

By performing a value chain analysis a company such as Hairobics Ltd is forced to look in detail at its
activities and identify areas for improvement. This may never be achieved it if the company is simply
considering on external analysis as a source of new opportunities.
Businesses need to focus on trying to achieve sustainable competitive advantage; by considering each
activity of the business as a potential source of strength or possible weakness, the company can ensure
that maximises the value that it offers. This analysis can also help to identify core competences, which are
particularly appropriate source of competitive advantage in the long term.

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All companies should concentrate on achieving consistency throughout their operations. Examining the
business in the light of the value chain is a method of ensuring that value created in one area is not
destroyed in another. In the case of Hairobics Lit there is, for example an element of contradiction
between the aim of targeting women who are short of time and the use of a queuing system rather than
appointments.
A further aspect of the value chain analysis that needs to be considered is the application of this concept
to the entire value system and the linkage between that system. By considering these linkages, a company
can achieve better relationships with its customers and suppliers and ensure partners are sought who hold
similar values and conduct business in a similar manner i.e. are compatible.
The value chain also has some limitations in its application. Fairly obviously, it was based on a
manufacturing model and it may be difficult to apply to businesses in the service sector such as Hairobics
Limited. Companies in this situation need to ensure they are comfortable with general principles of the
exercise and not get too caught up in trying to make their business fit within a certain framework.
Companies also need to ensure they don’t focus on value chain analysis to the detriment of environmental
analysis and a consideration of competitive force.

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