INDIVIDUAL ASSESSMENT - CASE STUDY - ALLOY.COM MARKETING TO by acm63157

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									MKC3130 - Strategic Issues in Marketing                                                               Sverre Gunnersen
29 July 2003                                                                                        Student #: 13043692

      INDIVIDUAL ASSESSMENT - CASE STUDY - ALLOY.COM:
                 MARKETING TO GENERATION Y

1.         Table of Contents and Figures

1.  Table of Contents .........................................................................................................1
2.  Current Situation and Trends........................................................................................2
  2.1. Market ...................................................................................................................2
    2.1.1    Definition ........................................................................................................2
    2.1.2    Size and Growth.............................................................................................2
    2.1.3    Structure.........................................................................................................3
  2.2. Environmental .......................................................................................................4
  2.3. Competition ...........................................................................................................5
  2.4. Customers .............................................................................................................5
  2.5. Internal ..................................................................................................................5
3. Key Issues ....................................................................................................................6
4. Objectives.....................................................................................................................7
5. Problem Analysis..........................................................................................................7
6. Alternatives...................................................................................................................7
  6.1. Focus on dependable distribution methods ...........................................................7
    6.1.1    Costs and Benefits .........................................................................................8
    6.1.2    Competitor Reactions.....................................................................................8
    6.1.3    Time Horizon..................................................................................................8
    6.1.4    Congruency with managerial predispositions .................................................8
  6.2. Reduce Operating Expenses.................................................................................9
    6.2.1    Costs and benefits..........................................................................................9
    6.2.2    Competitor Reactions.....................................................................................9
    6.2.3    Time Horizon..................................................................................................9
    6.2.4    Congruency with managerial predispositions .................................................9
  6.3. Maintain current corporate strategy.....................................................................10
  6.4. Alternative Evaluation..........................................................................................10
7. Recommended Strategy.............................................................................................10
  7.1. Contingencies......................................................................................................10
    7.1.1    Key Assumptions..........................................................................................10
    7.1.2    Contingency preparations for high and medium risk ....................................11
  7.2. Supporting Functions ..........................................................................................11
8. References .................................................................................................................12


Figure 1.1.2-1 - Growth stage of the Product Life Cycle ......................................................3
Figure 1.1.3-1 - Market Penetration Strategy of the Ansoff Matrix .......................................6
MKC3130 - Strategic Issues in Marketing                                Sverre Gunnersen
29 July 2003                                                         Student #: 13043692



2.        Current Situation and Trends

2.1.      Market

2.1.1     Definition

For the purpose of this analysis, the market has been defined by the industries Alloy.com
participates in, as opposed to the customers of these industries.

     •   Merchandise (core product)
            o Alloy.com brands
                      Stationwagon
                      Local 212
                      etc
            o Recognised teen brands
                      Vans
                      Diesel
                      O’Neill
                      etc…
     •   Advertising & Sponsorship
            o Website advertising
                      Banner-ads
                      Targeted advertising
                      Links to similar sites
            o Sponsorships
            o Magazine advertising


2.1.2     Size and Growth

     •   56 million strong group of Generation Y
     •   81% uses the Internet, 67% of online teens use online shopping sites
     •   $36.7b spent on apparel by “Teens” (34% of all spending)
     •   Revenue from various companies in the industry between $2.6m and $3.4m
     •   Profits between $197k loss and $985k loss
     •   Generation Y expected to grow to 63.1 million by 2010 (112.7% over 11 years)
     •   Strong competition and new entrants in the magazine market, the mall
         (merchandise) market, the teen website market - indicates market growth
     •   Increase in interest from advertises indicates market growth
     •   General increases in Teen spending (from $108b to $136b) indicates late growth
         stage
     •   Increase in net merchandise revenues of Alloy.com and iTurf indicates advances in
         marketing and/or market growth

The evidence suggests that the market is in the growth stage of the Product Life Cycle, as
depicted the figure on the following page.


                                                                             Page 2 of 12
MKC3130 - Strategic Issues in Marketing                                  Sverre Gunnersen
29 July 2003                                                           Student #: 13043692




                      Sales




                                                Time

Figure 2.1.2-1 - Growth stage of the Product Life Cycle

From this analysis, it is suggested that the industry of branded merchandise is relatively
healthy. However it should be noted that Alloy.com’s distribution method is highly
technological, and as a result is susceptible to a much faster life cycle, it may even be
bordering on being a “fad”.


2.1.3     Structure

Alloy.com’s two products are merchandise to end-users, and advertising/sponsorship to
retailers. However with advertising, Porter’s five forces are highly dependent upon the
organisations ability to create an effective communication channel via their core product,
and thus analysis of this industry would be ineffective. Therefore only the core market has
been considered.


Rivalry

Rivalry would be high as a result of market fragmentation due to the rivals making a loss,
and the large number of new entrants. However, this would be moderated by a high
concentration ratio within the industry (25% of all clothing and accessories sales are by the
largest 8 firms (Section 44: Retail Trade: Establishment and Firm Size: Concentration by
Largest Firms: 1997), and the perception of newness of the distribution method chosen.

The above evidence suggests that rivalry is medium to high, and expected to increase in
the near future as a result of the product life cycle maturing.


Threat of Substitutes

   •    Brand-name merchandise has the substitute of generic brand merchandise.
        Generic brand merchandise is priced much lower, and as a result increases the
        price elasticity of the branded merchandise.
   •    This price elasticity is moderated by the lack of demand for generic brand
        merchandise within Alloy.com’s target market - generation Y (Marlatt, p. 2, 1999)

Thus Alloy.com’s core product group has a low to medium threat of substitutes.

                                                                               Page 3 of 12
MKC3130 - Strategic Issues in Marketing                                   Sverre Gunnersen
29 July 2003                                                            Student #: 13043692



Buyer Power

As a result of the market tending towards a monopoly between a number of “key” brands,
and brand loyalty as a result of trying to be fashionable, buyer power tends to be low.
However it should be noted that the buyers are limited by funds, giving them a certain
amount of control over the prices set by the industry.

As a result, Alloy.com’s core market is considered to have a low to medium amount of
buyer power.


Supplier Power

Alloy is only primarily participating in the distribution, marketing and sales elements of the
supply chain, decreasing forward integration and therefore supplier power. In addition,
Lester Rand from the case indicates that the market is saturated by brand names.
However, branded merchandise is tending towards a monopolistic marketplace, and there
is a high potential social cost of switching brands.

It is proposed that the combination of these factors results in a medium to low supplier
power.


Threat of Entry - Medium/High
   • The massive costs of selling, advertising, and marketing evident in the financial
      statements provided demonstrate the cost of entry in this market, reducing threat of
      entry using a similar distribution method.
   • However, using less “brand dependant” methods to distribute brand name
      merchandise would have very low costs associated with it. However the likelihood
      of this is considered to be low (manufacturers not allowing erosion of their brand
      image).

Threat of entry into the branded merchandise market is thus considered to be low.


2.2.    Environmental
   •   Demographic
          o Generation Y is increasing in size (see 2.1.2 Size and Growth)
   •   Economic
          o Providers of Generation Y increasing spending provisions
   •   Technological
          o Steadily decreasing costs to purchase technology
          o Users ability to receive graphic displays or colour
   •   Political
          o Calls for banning of junk electronic mail (Mueller, 1997)
   •   Cultural


                                                                                Page 4 of 12
MKC3130 - Strategic Issues in Marketing                                   Sverre Gunnersen
29 July 2003                                                            Student #: 13043692

          o Generation Y is “body glittered, tattooed, pierced”, but have “conservative
            opinions about sexuality, government, the American dream and an end-of-
            century commitment to spirituality”
          o Male customers drawn to the Internet by music, extreme sports, games
          o Female customers drawn by chat and browsing


2.3.    Competition
   •   Branded merchandise retailers
          o Retail outlets
                     Neighbourhood mall
          o Online retailers
                     DELiAs Inc.
                     MXg Media Inc
   •   Advertising providers
          o Websites
          o Magazines

Since iTurf (part of DELiAs Inc) has a larger revenue stream, their net losses are lower. In
Alloy’s narrow market, Alloy.com is classified as a market challenger.


2.4.    Customers
   •   Primary
          o Generation Y females
   •   Secondary
          o Generation Y males
          o Brand-name merchandise manufacturers (non-core product)
          o Retailers targeting Generation Y (non-core product)


2.5.    Internal
Unfortunately not enough information has been provided to give a complete breakdown of
the internal situation using Porter’s Value Chain, it should be noted that Alloy.com
outsources inbound logistics, the service activity and technological activities. Alloy instead
chooses to focus on marketing and sales.

According to the provided financial information, Alloy’s revenue is tending to increase,
indicating that their marketing and sales activities are fairly successful.

The erratic net profit that is reported is attributed almost entirely due to operating
expenses. These operating expenses are assumed to include primarily advertising, and
outsourcing costs that are not directly attributable to sales (e.g. outsourcing of
technological activities). Clearly unless significantly higher revenues are attained, the
operating expenses are in a desperate state of disrepair.




                                                                                Page 5 of 12
MKC3130 - Strategic Issues in Marketing                                Sverre Gunnersen
29 July 2003                                                         Student #: 13043692

The organisations corporate strategy appears to be capitalising on the profitability of the
industry, and relying on an emerging technology to do so. However, the “fad” factor seems
to indicate that the “emerging” technology may not be emerging as much as management
believes it to be.

Alloy.com is trying to penetrate more deeply into an established market - Generation Y
(e.g. by retail chains), with an existing product (branded merchandise). Accordinging to
Ansoff (Kotler, 1998, p. 48), this would place Alloy.com’s corporate growth strategy in the
“Market Penetration” quadrant as per the following diagram.

                                                    Products
                                            Existing       New
                                            Market      Product
                                Existing   Pentration   Develop-
                                                         ment

                      Markets
                                            Market      Diversif-
                                           Develop-      ication
                                 New
                                             ment




Figure 2.1.3-1 - Market Penetration Strategy of the Ansoff Matrix

Finally, the organisations human resources are of concern. Specifically, the organisations
management team is relatively young and inexperienced, and using a limousine for
transport gives the impression of high spending tendencies within a company that is
reporting quarterly losses. It is suggested that the management team may be
overconfident in the projected success of the organisation, or simply too inexperienced to
deal with the large amounts of money being discussed with the upcoming IPO.


3.      Key Issues
Strengths
   • Growth stage of the core and secondary industries (Figure 2.1.2-1 - Growth stage of
      the Product Life Cycle)
   • Large amounts of capital soon available with upcoming IPO

Weaknesses
  • Lack of management experience
  • Dependence on assumption that emerging technology will in fact emerge

Opportunities
  • Purchase of AOL’s promotional deal
  • Reduction in outsourcing to reduce costs

Threats
   • Unrealisation of growth in supporting distribution method


                                                                              Page 6 of 12
MKC3130 - Strategic Issues in Marketing                                  Sverre Gunnersen
29 July 2003                                                           Student #: 13043692

     •   Competitors agreeing to AOL’s promotional deal


4.        Objectives
It is understood that the following are the objectives of the management team and the
marketing team of Alloy.com:
     • Company
          o IPO Price
          o Profit
     • Marketing
          o Customer loyalty
          o Market share
          o Sales


5.        Problem Analysis
The symptom of the underlying problems is Alloy’s reliable quarterly loss. Given that
Alloy.com has also already received significant amounts of venture capital, and that they
are intending on launching onto the stock market, it would be fair to say that both the
investors and management are confident that this venture is likely to turn a profit in the
near future.

However, it is argued that Alloy.com is making the presumption that there is much more
growth left in their choice of distribution method than there is. If their assumption were to
be proven incorrect, Alloy.com is in a position where its core distribution channel is not
effective, and its most successful is not enough to support the company’s costs., investors
and management are relying on capital to pay for marketing - however capital is always
limited.

It is argued that management are over-confident as a result of inexperience, becoming too
emotionally involved, resulting in taking poorly calculated risks with the company in the
hope of “getting rich quick”.


6.        Alternatives
While replacement of the “problem” members of the management team would indeed
solve the problem, investors are likely investing in the passion of the management team.
As a result, this has not been proposed as an alternative, and changes at a corporate
strategy level have been considered instead.


6.1.      Focus on dependable distribution methods
This alternative entails taking the focus away from distribution over the Internet, which
presently accounts for less than 5% of revenue. While this alternative does not eliminate
the website or catalog, it does involve the opening of retail stores to promote the Alloy
brand names supported by the brand names of strategic partners.

                                                                               Page 7 of 12
MKC3130 - Strategic Issues in Marketing                                    Sverre Gunnersen
29 July 2003                                                             Student #: 13043692

6.1.1    Costs and Benefits

   •    Estimated start-up costs of opening a retail store (including purchased inventory) -
        $75,000 (bizstarter.com Members Resource, 2003)
   •    Estimated initial costs of manufacturing additional product - $100,000
        (bizstarter.com Members Resource, 2003)
   •    According to American Census data (Section 44: Retail Trade: Establishment and
        Firm Size: Concentration by Largest Firms: 1997), the average revenue per
        establishment of “clothing & clothing accessories stores”, was $870,000 annually.
   •    Physical retail stores is an established distribution method, thus sales are much
        more predicable.

It should be noted at this stage that IPO capital could be used to fund this venture. For the
purpose of comparison, a suggested number of retail outlets is 25, resulting in expected
worst-case initial costs of $5m, and expected (conservative) additional revenue of $43.5m
p.a. At a cost of goods sold of approximately 50%, this results in a $21.75m p.a. estimated
profit.


6.1.2    Competitor Reactions

Being a market challenger in a very dynamic market, it is likely that if the competition is to
react, they will do so using a counteroffensive defence. However it is suggested that the
prime competitors of Alloy.com are not prepared to enter the physical retail market as they
see the Internet as the way of the future.

In the event that the competition launches a counteroffensive defence and copies the
strategies of opening retail outlets, losses of revenue to the order of $250,000p.a. are
expected. It is estimated that there is a 10% chance of this occurring.

However, with the reduction in brand building marketing, competitors may see this as an
opportunity to reduce their expenses, which will have the effect of increasing projected
sales. It is estimated to increase sales by approximately $50,000p.a., and there is an
estimated 50% probability of this occurring.


6.1.3    Time Horizon

Opening a retail store is estimated to take 2 months to find and settle in a suitable location,
and another 2 months to find staff and set-up the store.


6.1.4    Congruency with managerial predispositions

Unfortunately this alternative goes against the concept of the company. The director and
CEO of Alloy believes that they key to success is the speed of distribution through
catalogs and on-line, as opposed to store distribution.

Investors are expected to have two reactions - the investors buying into the get-rich-quick
theory of investing in Internet start-ups may see this as using IPO capital to fund a strategy
that doesn’t boast such massive returns as retail on the Internet, therefore reducing the

                                                                                 Page 8 of 12
MKC3130 - Strategic Issues in Marketing                                   Sverre Gunnersen
29 July 2003                                                            Student #: 13043692

IPO price. However more long-term investors who are more interested in the risk of the
venture will find that this move reduces the beta coefficient, and subsequently increase the
IPO price.


6.2.    Reduce Operating Expenses
Another alternative for Alloy is to reduce it’s operating expenses, which currently sit at
$3.5m per quarter. This is largely attributed to outsourcing of major parts of the supply
chain, and major expenses in advertising (see 3 Key Issues).

This alternative aims to reduce operating expenses so that the company is less dependant
on massive increases in revenue, which may not be as likely as management appears to
believe. This strategy also aims to increase the value of advertising, by focusing on more
direct sales methods instead of brand building.


6.2.1   Costs and benefits

Employment of staff to take over from outsourcing of order-processing for both telephone
and on-line transactions, is expected to reduce the cost of goods sold by 30%. Based on
1999 figures, this represents a saving of $374,000 per quarter. Refocusing on more direct
advertising strategies is expected to increase revenue by 30%, or an increase in gross
profit of $734,000 per quarter.


6.2.2   Competitor Reactions

Competitors will likely perceive this shift in strategy as gaining competitive advantage, and
possibly react be taking the opportunity to reduce their own expenses. However in either
case, there are no direct costs or benefits relating to Alloy.com that can be accurately
quantified.


6.2.3   Time Horizon

A redirection of advertising funds will result in the advertisers having to create alternative
communications. It is suggested that a reasonable time horizon for this is 1 month.

Employing and training staff however will take significantly longer, and is expected to take
up to 4 months before the outsourced organisations are finally phased out.


6.2.4   Congruency with managerial predispositions

Again this strategy is expected to go against the predispositions of management as
management is convinced that massive expenses in brand building will pay off in the
medium to long term with massive brand loyalty. As a result of this, they would also not
appreciate the benefits of reduced costs.




                                                                                Page 9 of 12
MKC3130 - Strategic Issues in Marketing                                   Sverre Gunnersen
29 July 2003                                                            Student #: 13043692

6.3.      Maintain current corporate strategy
The final alternative is to continue with the current corporate strategy of large spending,
and dependence on the Internet as a distribution method.

For the reasons previously discussed, in the event that the assumptions made by
management do not materialise, Alloy.com will be left with $55m in investor capital spent,
a quarterly loss of over $2m, and be filing for Chapter 11 Bankruptcy Protection.

It must be acknowledged however that if management’s assumptions turn out to be
correct, Alloy.com can expect massive profits over a very short period of time.


6.4.      Alternative Evaluation
     •   Benefit is measured in USD per year
     •   Time is measured in months
     •   Direct costs are expected costs incurred regardless of competitions reaction
     •   Comp EV is the expected value of the costs incurred by the competitions reaction
     •   EV is calculated as (benefit - ((direct cost + comp EV) x 1/time)
     •   EV represents expected value of activity to company for each month that the
         company is required to undergo change
Alternative                                   Benefit Time   D. Cost Comp. EV            E.V.
Focus on dependable distribution methods   21,750,000    4 5,000,000        0       4,187,500
Reduce Operating Expenses                   1,496,000    4         0        0         374,000
Do Nothing                                          0    0         0        0               0
Table 6.2.4-1 - Expected Value Analysis


7.        Recommended Strategy
According to the above expected value analysis, focusing on dependable distribution
methods provides a much larger return to Alloy than simply reducing operating expenses.
However, these two alternatives are not mutually exclusive. In this case it is recommended
that both strategies be undertaken.

Both strategies can be executed simultaneously, with both strategies also completing at
approximately the same time.


7.1.      Contingencies

7.1.1     Key Assumptions

     •   Growth stage of the PLC for branded merchandise - low risk
     •   Late growth stage of the Internet as a distribution method - medium risk
     •   Rivalry expected to increase significantly in the near future - low risk
     •   Initial IPO price of $15 per share - high risk
     •   Large portions of Generation Y spending yet untapped - medium risk

                                                                               Page 10 of 12
MKC3130 - Strategic Issues in Marketing                                   Sverre Gunnersen
29 July 2003                                                            Student #: 13043692

7.1.2    Contingency preparations for high and medium risk

   •    In the event that the Initial IPO price is significantly less than the expected $15,
        Alloy may not be able to invest in the planned 25 retail outlets and may have to
        reduce this figure to avoid exposing itself to more debt.
   •    If Generation Y resources aren’t as abundant as they are assumed to be, more
        investment may be required in an aggressive marketing campaign to steal the
        necessary market share from competitors.
   •    If the Internet as a distribution method is not in the late growth stage, then the
        proposed strategies will have detracted from Alloy’s ability to profit from it’s early
        (and extremely fast) growth.


7.2.     Supporting Functions
   •    Whether or not Alloy agrees to AOL’s proposal does not affect the proposed
        strategies, however this proposal represents a significant opportunity, or a
        significant threat if a competitors seizes the opportunity.
   •    The recommended alternatives both involve a change in direction at a corporate
        strategy level, so evaluating and altering the corporate strategy is essential to
        success.
   •    The opening of retail outlets requires large amounts of capital, and thus activities
        that will maximise the IPO price are of importance.




                                                                               Page 11 of 12
MKC3130 - Strategic Issues in Marketing                                 Sverre Gunnersen
29 July 2003                                                          Student #: 13043692



8.      References
Bizstarter.com Members Resource,
(http://www.bizstarters.com/article_files/nuts_bolts.cfm), Accessed 27 March 2003.


Internet Software Consortium - Number of Internet Hosts, (http://www.isc.org/ds/host-
count-history.html), 2003.


Kotler, P., Armstrong, G., Brown, L. & Adam, S. (1998), Marketing 4th edition, Prentice
Hall, Sydney.


Marlatt, A., Internet World: Yen for E-Tail,
(http://www.findarticles.com/cf_0/m0DXS/26_5/55521189/p2/article.jhtml?term=), 15
August 1999.


Mueller, S., Group Says, “Ban Junk Email”,
(http://www.cauce.org/pressreleases/pr1.shtml, 9 May 1997


Section 44: Retail Trade: Establishment and Firm Size: Concentration by Largest Firms:
1997, (http://factfinder.census.gov/servlet/IBQTable?_ts=66715532831), 1997.




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