Overcoming Economic Downturns: How Company X increased its sales in the short-run and retained its customers during the unpredictable economic time?
Company X is a subsidiary of a holding company, and it specializes in the supply of building materials and construction solutions, serving the construction industry in Saudi Arabia. Company X is a Saudi owned organization that was established in the year 2005 and operates in two strategic business units (SBU). Company X SBU includes the trading unit which is involved in the supply of building materials, and the second unit is the construction solutions unit which is involved the design and supply of structural formwork systems. Figure 1.1 in Appendix A depicts the sales of Company X from the year 2013 till 2017.
Introducing the Case:
In the years 2013, 2014, and 2015, the organization has witnessed a significant development in the customer portfolio as well as the organization revenues. The development was due to the introduction of new products and the development of a new unit (i.e., structural formwork systems) along with the success of the organization by gaining new projects. Unfortunately, by the end of 2015, the company faced few challenges which were related to a mix of internal and external factors. The challenges mainly stemmed from the lack of market segmentation (i.e., customer focus), and a relationship management issue with the suppliers. The primary cause of the above factors was the prevailing market conditions at the time (i.e., economic downturn).
As shown in Figure 1.1 in Appendix A, there was a dramatic drop in the sales that was manifested in the years following 2015. The company has lost almost 70 percent of its sales in the following years, and the organization has laid-off almost 25 percent of its employees in 2016 (see Appendix A, Figure 1.2). On the other hand, sales have dramatically dropped followed by a decline in the customer portfolio (see Appendix A, Figure 1.3). Sales with top accounts have declined followed by a drop in the organization profitability (see Appendix A, Figure 1.4 and Table 1.1).
What Happened? Causes and Effects
Since its inception, Company X did not have any proper market segmentation. There was a lack of customer focus. The company was targeting all kinds of projects and any customers to sell its products and services. Regardless of the size of the project, small, medium, or mega the lack of market differentiation. Hence, there was no strategic plan based on customer's type, size, and needs. This lack of customer focus affected the sales with top accounts as shown in Table 1.2 (see Appendix A). There was no consistency and growth with top accounts, and the sales of top accounts were almost lost in the years following 2015 (see Appendix A, Figure 1.5). On the other hand, the drop in sales has affected the companys relationships with suppliers and manufacturers. Company X is a distributor and sole agent for 24 international brands in Saudi Arabia and Bahrain. Only five brands had sales of more than 70 percent of the total revenues, while, over 14 brands generated only 10 percent of the company sales. Therefore, in January 2017, some of the suppliers and manufacturers requested from Company X to renegotiate the agreements claiming that the drop in sales has, in turn, affected their budgets and revenues.
The revision of the agreements included the appointment of other distributors along with Company X. Hence, the company will be at risk of losing its privileges of being a sole agent for these international brands. Company X has invested years and spent thousands (if not millions) of dollars over the past decade to build its reputation and brand recognition in the market, and this will not be a good option for Company X.
Saudi Arabia is one of the worlds largest oil producer and exporter. In 2015, the oil price crashed to below $30 a barrel, and since Saudi Arabias economy depends highly on natural resources, the country witnessed an economic downturn which caused some projects in the country to be canceled and many were kept on hold as a result. Therefore, in 2015, following the oil price crash, Company X experienced stiff competition from rivals in the market along with a cash-flow issue. The competition has been always there, however, due to the economic downturn, the government cut its spending budget on many sectors, including the construction sector. Therefore, the number of big projects was very limited, and hence there was a surplus in the supply in almost all sectors, and the demand was very low. This caused many companies to reduce their prices and cut their profits for the sake of surviving and overcoming the economic turmoil that was being experienced at the time which pushed competition too much higher levels than before.
Nevertheless, Company X, as any other company was starving for new projects. The company started reducing its prices which had a negative implication on its profits. This was followed by a cost-cutting plan which led to the laying off of many employees, and some were obliged to take open unpaid leave until further notice. This has significantly affected the companys productivity and operation efficiency. For instance, instead of having four trucks to serve some customers in a specific area or region, there were only two trucks to do the job, as the other two were laid-off to reduce cost. On the other hand, the number of the sales force was also reduced to half. Moreover, the customer service department was almost closed, and the marketing budget was cut into a quarter of what it used to be. This has weakened the services offered to customers, which in turn affected the relationships with customers in general and top accounts in particular.
How Company X approached the problem?
On the 15h of April 2017, Company X formed an internal committee to investigate the firm's issues and to find solutions for the problems faced by the organization. The committee consisted of the Operations Manager, the Deputy General Manager and four other members, one from each of the sales, marketing, procurement, and accounts departments. The committee had to deal with the following issues:
Analyzing the overall performance of Company X, including sales, profitability, products, operations and all the staff.
Analyzing and identifying the causes behind this significant drop in sales
Analyzing the market and give proposals for reducing the competition.
Give recommendations and solution for the problem and propose a business strategy that will enhance sales and profitability as well as reduce the cost.
Based on the data provided, the team had to come up with solutions to the problem within two months. Nevertheless, upon careful analysis of the situation, which took almost three months, the team proposed and recommended the following:
Reducing the product portfolio from 24 to 10, which will help Company X better segment its markets and allow the company to focus on customers needs from a narrower perspective, and hence, capitalizing on few brands, which will, in turn, increase the growth of the most selling brands, and thus, enhance the sales as well as the profitability.
From a cost perspective, the reduction of the brand portfolio will allow the company to reduce its workforce from different departments, including the warehouse and logistics, sales, procurement, customer service, marketing, accounts, and engineering department. Almost 60 percent of the workforce is expected to be laid-off. The number of employees will be reduced from 82 employees in April 2017 to 39 in September 2017. The reduction of the workforce will be as follows:
13 staff from the warehouses including a warehouse manager
12 from the sales team including one sales director, two managers, and one supervisor.
five from the procurement including the procurement manager
four from the customer service department
four from the marketing department
five accountants including a chief accountant
A comparison of the workforce before and after the plan is available in Appendix A, Figure 1.6.
This, in turn, will allow the company to reduce its overhead costs from $3.7M to $1.5M, (73% reduction in overheard costs) on a yearly basis (see Appendix A, Table 1.3).
As for the cash-flow issue, the team proposed to give discounts to customers on the due amounts that exceeded 120 days credit. On the other hand, the team proposed to redefine their selling strategy and sell the products on the cash basis. However, due to the competition, Company X was not able to renegotiate agreements with customers on the cash basis. However, the management proposed to negotiate a less flexible credit terms. Usually, payments are agreed with top accounts between 90 to 120 days. However, the management requested to give 60 days for top accounts and 30 days credit for other clients.
Furthermore, some on-going proposals and changes were addressed and considered by the management of Company X, including the implementation of a CRM system, restructuring, shared services, and training programs for employees.
In regards to the market analysis, the team have compared Companys X prices with other rivals in the market and found out that their offerings were to some extent higher than the competitors. They have considered price vs. quality analysis. Therefore, the team recommended that Company X must renegotiate agreements with suppliers to get better prices with a more flexible payment terms since the market condition is in a recession period.
The General Manager considered the committees recommendations and proceeded with the implementation process. Termination of brands was executed, new agreements with suppliers were successfully negotiated, and targets were met regardin ofg reducing the number of brands, reducing the cost of the materials (in the short-term ONLY) and benefiting from flexible payment terms with suppliers. Company X was able to reduce its costs in the short run and reduce the competition. On the other hand, there was a focus from the sales-team on the stock of the brands that were eliminated. A promotion campaign was designed to target top customers with offers on available stock of discontinued models and brands that were eliminated. The promotional offer was based on a rebate strategy, selling at low margins with cash payments only. Reasonable targets were set to customers, and if met, a discount of 5 percent on the total achieved target will be deducted, and the amount will be replaced with materials of other brands. The new strategy along with the price cut and promotional campaign has increased the sales, as shown in Appendix A, Figure 1.7. However, this strategy was designed only for the short-term and lacked the long-term growth in sales, customer portfolio, and customer retention.
Questions to Address in this Case Study:
What shall Company X do to improve its relationships with key customers?
How can Company X best segment its market and create offerings for each segment?
How can Company X create value for top accounts?
Could Company X improve their sales and profits in a more efficient way?
How can Company X enhance its relationships with the suppliers and manufacturers?
How can Company X, in the long run, overcome the challenges that the company is facing from its competitors?
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