Roberto Vona » 5.Basic strategic decisions

Lesson content

Learning outcomes

Provide the right tools to make and evaluate strategic decisions in retailing.

Lesson contents

• Retail companies: features and their impact on strategic set-up.
• Development strategies as emerging strategies.
• Strategic alternatives for small-scale retailers.
• Competitive strategies.
• Product range as a strategic problem.
• How to manage capital and labour factors.
• Differences between managing wholesale and retail companies; production, logistics and marketing.
• Size: the area of attraction and the size of the potential market.
• Structural know-how of the point of sale.
• Positioning: the map of preferences and the map of perceptions.
• The financial structure and the financial needs of commercial enterprises.
• Agreements, networks and alliances: branch enterprises and associations.
• The evolutionary cycle of association in distribution.
• Franchising – Investiment evaluation in the field of business.

Features of retail companies

Basic factors and strategic decision (cont.)

Choice of assortment

Especially for small or very small points of sale, it is necessary to optimize the range of products according to:

• Width (number of purchase opportunities offered);
• Depth (brands and testimonials);
• Consistency (stock on hand).

The range of products is evaluated according to the following:

• Completeness of the basket of goods required by the market (avoiding overlaps and cannibalism);
• Quality that matches price levels accepted by the customers;
• Visibility of products (display methods and techniques).

Size and location (cont.)

Preference map

Links clusters of customers to their ideal distribution formula

Perception map

Analyses how customers perceive the positioning of signs in a competitive context, where some of the variables are considered discriminatory.

Principle components of assets and liabilities statement

Active components

• Storage equipment (shelves, cold stores, etc.).
• Handling equipment (forklifts, trans-pallets, tec.).
• Motor vehicles.
• Data processing equipment (hardware and software).
• Bar code reading system and invoicing system.
• Fixed plant (air-conditioning, lighting, electricity and water systems, alarms, heating).
• registered private brands.
• Start-up.

Sources of finance

• Own means.
• Credit line.
• Leasing.
• Tax relief and trade benefits.
• Credit on consignments.

Agreements, alliances and associations.

Agreements and alliances

Sometimes written agreements, or just based on trust, formalising the relationship between independent businesses in the same field on a legal, financial and commercial level.

The different types of agreements, include:

• Voluntary unions.
• Purchasing groups.
• Commercial affiliations.
• Franchisings.

These agreements can also become mergers or acquisitions.

Agreements, alliances and association (cont.)

Entrepreneurial association

• Can be set up between businesses operating in the same field (horizontal association), or between businesses above or below each other in the supply chain (vertical association).
• Allows traditional businesses to respond to the growth of large retail companies.

Financial objectives

• To optimize the scale of management operations.
• To develop interrelationship economies.
• To develop new business and market areas which are more effective and efficient compared to single companies.

Image objective

• Help the development of enterprise culture.
• Promote social and philanthropic work.

Franchising

This is an Enterprise network which has “a central element called a “franchisor” linked to satellite elements called “franchisees” through business agreements established in a “franchising package deal”. The said satellites are completely independent and manage themselves within one entrepreneurial group project”.

It is a contract through which, with a fixed payment (fee) and/or a variable payment (royalties), there is the right to use:

• A certain distribution formula.
• The management know-how.
• Relationships within the industry.
• The notoriety of the brand (different from case to case).

Franchising costs

• Respect rules of behaviour which independent entrepreneurs sometimes find hard to do.
• Make structural investiments (location, image of the point of sale, shelves, electronic equipments, erc.) which comply with the standards “imposed” by the franchisor.
• Pay an amount of managing expenses (rental, personnel, royalties, stock. etc.) which are affordable only if the volume of business is quite big.

The evaluation of investiment projects

The preferred methods for evaluating investiments in trade are:

• Direct capitalization of average operating income produced by the business being evaluated.
• Discount back the assumed net cash flow produced by a business over a specific period of time (up-dated net value).

The evaluation of investiment projects (cont.)

Correction of the estimated cash flow of the up-dated net value

For trade, it is necessary to correct or integrate the estimated up-dated net value, so that it is possible to measure the effects on the estimated net cash flow for 3/5 years of specific managerial resources and competences, partially quantified by the following perfomance indicators:

• Market share (numeric and weighted);
• Notoriety of the brand;
• Promotional aids received;
• Level of effectiveness of the product range (percentage of fresh and brand-name products);
• Prospects for markets where company is present, and its relative competitive position;
• Extension of payment obtained from the supplier;
• Average size of the points of sale and of the area for each worker;
• Productivity of the points of sale (turnover per square meter);
• Productivity of the workers (turnover per worker);
• Territorial distribution of the sales network and of the Distribution Centres;
• Effectiveness and efficiency of logistics.