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Swisher Mower And Machine Company

SWISHER MOWER AND MACHINE COMPANY (SMC) Introduction Wayne Swisher, CEO of SMC, is concerned with the company's future prospects. The unit volume sales of the SMC riding mower, which constituted 64% of the total sales of SMC, had plateaued in recent years. He is presented with an attractive private-brand arrangement that can impact SMC's prospects and has to decide whether to accept it. Alternatively, or additionally, he can decide to have more aggressive advertising and sales effort to recruit new dealers and assist current dealers. SMC is also preparing for the introduction of a new Trim-Max product. Wayne's ability to make the right strategic marketing decisions now will decide the destiny of SMC in the future. Product Line Swisher Mower Company (SMC), established in 1945, has a current portfolio of three products push mower kits, trailmowers and riding mowers. It is also in the process of developing a new product all-in-one trimmer, edger and mower. Chart 1 shows the percentage contribution of each of these products to SMC's total sales and Chart 2 shows the percentage contribution of each of these products to SMC's total gross profit in 1995. Assuming that 80% of the parts business is generated from the sales of the riding mowers, we can infer that 80% of SMC's profit arises from the sales of riding mowers or their spare parts. We can therefore observe that SMC's company's performance is largely dictated by riding mower sales. Riding Mower Referring to the material, we observe in Exhibit 7 that there is a rising trend in the unit sales of riding lawn mowers and lawn tractors in the 1990s for the mower and tractor industry. However, Exhibit 1 shows that the sales trend of SMC's riding mowers for the same period is constant. Compared to the 1970s and 1980s, the market share of SMC has also fallen in the 1990s. In terms of unit volumes, the SMC's sales peaked at a volume of 10,000 riding mowers almost 30 years ago i.e. 1966. They were able to generate sales near this level till 1973 (nine years). Unit sales declined to about 4200 riding mowers in the year 1974. They have been selling at this level for approximately 21 years now. However, during these 21 years, industry sales for riding mowers and lawn tractors have gone up from 640,000 units to about 1,263,000 units, a 97% increase. Clearly, SMC's performance indicates that it is lagging behind the US riding mowers and lawn tractors industry trend. Customers, Distribution and Promotion The current market segment served by SMC is mainly industrial users located in the non-metropolitan areas (75% of the company sales). SMC employs three different mechanisms for distribution; through wholesale distributors who in turn supply to independent dealers, directly to dealers and through private-labelling arrangements for two buying networks (Midstates and Wheatbelt). They also have a small presence in Europe and the South Pacific. Chart 3 shows the share of sales for different distribution channels. For the vast American west and pacific region, it virtually has no presence. SMC has not made any significant attempts to move into the metropolitan areas.

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SWOT Analysis To formulate a sound marketing strategy, it is important to analyse SMC's intrinsic strengths and weaknesses and its extrinsic opportunities and threats. This table summarises these factors and each is discussed in detail in the paragraphs after this table. Strengths Weaknesses 1. Established Company with more than 50 years history2. Recognised for product quality3. Differentiated product4. Strong financial position 1. Front-engine and rear-engine lawn tractors are more popular than mid-engine lawn tractors2. Limited distribution channels: mainly in non-metropolitan areas Opportunities Threats 1. Increasing trend for industry riding mower and lawn tractor unit sales 2. Potential of entering into new market segment in metropolitan areas with existing product Ride King (for small to medium size lawn area)3. Potential for reconfigured product in current market segment (front-engine mowers for nonmetropolitan area)4. Potential for new product in new market segment (Trim-Max for metropolitan area very small lawn area) 1. The sales of SMC riding mowers has plateaued and may decline if not managed Strengths SMC is a well-established company with more than 50 years history. The company is credited with producing the first zero-turning-radius riding mower, and no other competitor has yet to copy the exact design of the Ride King. SMC has a reputation for producing high-quality riding mowers with simple designs that allow for ease of use and maintenance. Its mowers often run for more than 25 years before they need to be replaced. SMC also has an excellent financial position. It has remained a profitable company since its founding with annual net profit margins of more than 10%, and has been able to generate cash flow at levels large enough to minimize the need for any major short-term or long-term financing. Weaknesses The main weakness of SMC is that the riding mower that it produces is the least desired model on the market. There are mainly three types of riding lawn mowers on the market: the front-engine lawn tractors/garden tractors, the rear-engine riding mowers, and the mid-engine riding mowers, which SMC produces. The front-engine model ranks first in popularity, followed by the rear-engine and mid-engine models. Secondly, it can be observed from the earlier discussion on the SMC's distribution that it has a distribution network that is limited to non-metropolitan areas. Opportunities As discussed earlier, industry sales for riding mowers and lawn tractors have gone up from 640,000 units to about 1,263,000 units, a 97% increase, in the last 21 years. In 1993 and 1994, the industry posted record unit sales, and projections for 1995 and 1996 indicate further increases in unit volume. This upward trend of the industry provides SMC with good opportunities to expand sales, distribution and production. Next, the private-brand offer alerts SMC that there is a potential market segment of residential users that

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they have not tapped in the metropolitan areas. This potential is noteworthy since the volume of sales that the chain has projected is double the total current volume of sales that SMC is having. There is also a potential for SMC to develop a modified product for the current market segment that it is serving. According to industry surveys, due to the larger physical dimensions, the front-engine configuration is perceived to be more powerful and capable of handling big jobs. SMC can modify its current mower to influence consumers to similarly perceive its products. Finally, SMC's newly developed high-wheel string trimmer, the Trim-Max, also provides it with an opportunity to tap a new product market. This can be launched in the metropolitan or the non-metropolitan areas. Threats The characteristics of the sales trend of SMC's riding mowers tend to indicate that the product is in the mature stage of its life cycle (SMC's sales trend is stagnant while the industry sales trend is rising). This is a threat that SMC must promptly manage. In summary, SMC has strengths in its production expertise, quality assurance and profitability, but is weak in market penetration and expansion. It has opportunities to expand its production and sales, but is also under the threats of risks associated with high reliance on a matured product. Evaluation of the Private-Brand Proposal Reject or Accept Proposal Private-brand offer Pros Cons Accept Opportunity to immediately expand sales distribution and increase sales by three-fold Utilisation of excess capacity Lower sales expenses Long-term benefits SMC can terminate contract with 6-month notice if loss is greater than expected in the first year Chain unlikely to terminate contract due to high set-up costs Greater exposure to liability claims Cannibalise existing sales Higher financing costs May not be able to cope with over-capacity if sales demand increases Over-reliance on private-branding sales Financial loss Reject Status quo no short-term financial loss and still maintain annual profit of $400K Limited relationship with private-branding retailers Competition & loss of long-term profit if other manufacturers take up the offer Need to look for other means to expand business Pros of Accepting Private-Brand Offer By accepting the Private-Brand Offer, SMC will be able to revive its stagnant business and immediately increase sales volume by two folds, from current annual sales of 4,200 units to 12,400 units. Sales for spare parts will also increase correspondingly. In addition, by tapping onto the larger distribution network of the chain, SMC can expand its business into the northern and western United States. At the present, most of SMC's distributors are located at central and eastern United States. SMC is currently under-utilising its facility at only 42% of total production capability. Accepting the offer will increase machine utilisation rate (based on depreciation expenses) from $0.15 / unit to $0.55 / unit. The offer will also lower the current sales and administration expenses rate, as the Chain will supply all advertising related to the private-branding product. SMC need not have to employ additional sales representatives.

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If this private-branding opportunity turns out well, both parties are likely to extend the boundaries of the contract. Future contracted annual volume may increase, and SMC can even introduce more products to be included in the distribution. For instance, SMC can bring in its new product, Trim-Max to the expanded distribution network. Both parties are not bounded by the contract in the long term. In the event that actual losses are more than expected in the first six months, SMC can terminate the contract by giving a 6-month notice and minimise future losses. On the other hand, it is unlikely that the Chain will not go for a long-term relationship with SMC. Set-up cost of getting another supplier is high, and ultimate customers may be dissatisfied if products were terminated. Cons of Accepting Private-Brand Offer With broaden distribution and higher volume as a result of taking up the private branding offer, there will be greater exposure to liability claims, although SMC has not experienced any significant product-liability claims for products sold or used since 1956, and it is thus unlikely that the risk of exposure will increase substantially in the short term. In addition, existing sales can be cannibalised by private-label sales, although the negative impact on the income statement as a result of the cannibalisation is not material. SMC will have to incur additional costs to finance its higher cash requirement due to higher inventory and accounts receivable level as a result of taking up the offer. Financing costs is expected to increase by $78,000 and $59,000 respectively, assuming current 60 inventory days and 45 days credit term. With private-branding sales, SMC will be able to operate at 24% above its existing production capacity. If demand were to increase in the future, the factory may not be able to cope with the higher requirement. SMC may need to consider expanding its production facilities in the future. In addition, accepting the offer will result in increasing its private-branding sales from existing 40% of current sales to 80%. Such overreliance on private-branding sales is dangerous if the organisations were to terminate the contract suddenly. Except for all the above-mentioned cons, the most damaging factor is that SMC would suffer huge income losses if the offer were accepted (see Table 1). In fact, further calculations would show that the company would continue to see red for the next 10 years. Profit would only be made from the eleventh year onwards. Thus, based on financial grounds, the offer should not be accepted. Pros of Rejecting Private-Brand Offer If SMC rejects the offer, and assuming ceteris paribus, the company will remain status quo and enjoy a yearly profit of about $400,000 with stable business. At the same time, SMC can devote more time and effort in building its own brand and expanding its network. Cons of Rejecting Private-Brand Offer Private-branding represents the biggest share of total industry sales (about 70%). SMC will be going against the industry trend and may miss out opportunities if it rejects the offer and constrains itself to only 40% of its sales in private-branding.

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If SMC rejects the offer, the Chain will approach other manufacturers to take up the opportunity. Future competition would increase and market share would be reduced. There would be difficulty defending itself and protecting the existing sales. In addition, the private-brand offer represents a rare opportunity and quick solution to expand SMC's existing market share. If the offer is rejected, SMC has to find other means to revive its stagnant business. Even if a solution were found, it will take an extremely long time to triple sales volume. TABLE 1 : Assumptions and Support to Above Financial Analysis Note (a) Sales Current manufacturer's list price of $650 @ 5% discount = $617.50 @ sales volume of 8,200 units / year. Note (b) Cost of Goods Sold (COGS) Unit COGS of $601.75 = Current COGS of $553 plus additional costs of 7.5% of current sales price. Note (c) Lost in King Ride Gross Profit Loss of 300 units per year @ $650 Sales Price @ 15% Gross Profit. Note (d) Lost in Independent Dealers Profit Current distributors sales (or 55% of 1995 total Sales) @ $650 Sales Price @ 15% Gross Profit, and assuming sales loss of 5%. Note (e) Increase in Parts Business Profit Assuming 25 years products life cycle, 1995 sales revenue for parts business is based on products sold from 1971 to 1995. This gives parts sales of $7.40 per mower that had been sold. Using the same analogy and using 1995 gross profit margin of 24%, parts sales in Year n will be based on mowers sold from Year 1 to Year n-1 at the rate of $7.40 per mower. Note (f) Financing Costs - Inventory Sixty days inventory (or average of 1367 units / year) @ 601.75 COGS @ 9.5% financing costs. Assume no change in inventory turnover and aim to ship finished goods immediately to chain's regional warehouse upon completion. Note (g) Financing Costs Accounts Receivables Current Accounts Receivable days of 45 days (or average of $624/267 / year) @ 9.5% financing costs. Note (h) One-time Costs Average of $10,000 and $12,000, to be recovered in the first year.

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Note (i) Increase in Sales and Administration Costs Assume at 10% of Current Expenses due to savings from sales representatives & advertising. Note (j) Warranty Work Proposed labor cost of $22 / hour @ 340 hours / year. The 340 hours / year is arrived at using annual operating hours of 1706 for 8200 mowers (10,000 mowers at 40 hour / week shift for 52 weeks) @ 20% warranty rate (assume same as parts business). Note (k) Liability Insurance Assume at 1% of total revenue since risk is low. Evaluation of Alternatives Marketing Ride King to Metropolitan Areas Market Ride King Pros Cons Target Metro-politan Expand market segment right product for the right customers (have smaller lawns and prefer more manageable-size mowers) Need to commit resources in expanding distribution network in metropolitan area Target Non-Metro-politan Good 75% of SMC's sales with existing distribution network Target wrong market segment with Ride King (mid-engine mowers and perceived as less powerful) as customers have bigger lawns and prefer front-engine lawn mowers Pros of Marketing Ride King in Metropolitan Area About 75% of SMC's sales are currently targeted at non-metropolitan consumers, who have larger mowing areas and prefer front-engine mowers that are perceived to be more powerful. However, its flagship product, Ride King, is a mid-engine model that is not as desirable from consumers' perspectives. By retargeting Ride King at the metropolitan area, whose consumers have smaller lawn area, SMC will be able to enter into a missed frontier and expand its sales in a different market segment. Cons of Marketing Ride King in Metropolitan Area SMC has to commit additional resources to increase the distribution channel in the metropolitan area. More marketing, advertising and other promotional efforts have to be incurred. Pros of Continuing to Market Ride King in Non-Metropolitan Area SMC has a relatively sound standing in the non-metropolitan area with Ride King mower. Sales are stable, with 75% of its sales in this market segment. Not much effort is needed to reinforce its market in this segment. Cons of Continuing to Market Ride King in Non-Metropolitan Area As mentioned above, SMC would be missing out a crucial market segment a segment where there is a

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perfect match between the consumers and the product. Evaluation of Alternatives Introduce / Defer Trim-Max Trim-Max Pros Cons Introduce Target at new market segment consumers in metropolitan area with very small lawns Need to commit resources in expanding distribution network in metropolitan area Defer Consumers' perception of new product is unclear SMC may lose out if competitors introduce a similar "walk-behind" mower first Pros of Introducing Trim-Max Now Trim-Max fits nicely into the market segment in the metropolitan area where consumers have very small lawn area. SMC should introduce Trim-Max before its competitors. Cons of Introducing Trim-Max Now Similar to the alternative of re-targeting Ride King in the metropolitan area, more resources have to be committed to increase the existing distribution network. Pros of Introducing Trim-Max Later It is unclear how consumers perceive the new product. It may be more worthwhile to spend more time to perform further research (for instance, by conducting surveys) to increase the attractiveness of the product to the target market segment. Cons of Introducing Trim-Max Later As mentioned, competitors may monopolise the market if they introduce a "walk-behind" mower before SMC. Evaluation of Alternatives Develop Front-Engine Mower Front-Engine Pros Cons Develop Survey shows that most consumers prefer front-engine mowers Provides existing nonmetropolitan consumers with a perceived more powerful engine. Need to commit additional resources (e.g. R&D) Small player in the front-engine market Not to Develop Focus on the mid-engine niche market Forgoing opportunity in high growth market segment Pros of Developing a Front-Engine Mower Consumers in the non-metropolitan area have larger mowing areas and prefer the front-engine mowers, which are perceived to be more powerful. With 75% of SMC's current sales being targeted at the nonmetropolitan area using a mid-engine mower, there is an obvious mismatch between product and

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consumers' preferences. A front-engine mower should be developed to exploit the potential of this market segment. In addition, the product proliferation offers existing consumers an alternative choice a more powerful engine, or a less powerful one. Cons of Developing a Front-Engine Mower SMC's core competence is in manufacturing mid-engine mowers. By venturing into a new product, more research and development expenses will be incurred. More time may be needed before SMC is confident of launching a front-engine mower. It may also have to contend with being a small player in the big frontengine mower market. Pros of Not Developing a Front-Engine Mower Although mid-engine mower is not consumers' top choice, it is nevertheless a differentiated product with a market niche. It may be more worthwhile to capitalise on this advantage, re-target it at the right market segment, and turn-up a bigger player in this special market. Cons of Not Developing a Front-Engine Mower By not developing front-engine mowers, SMC will forgo sales opportunities in a large market share with high growth opportunities. There is also a danger that its existing consumers in the non-metropolitan area may change preferences for the perceived more powerful front-engine mowers. Further Analysis of Marketing Strategies In the earlier paragraphs, we have analysed SMC using SWOT analysis and discussed the pros and cons of the alternative marketing strategies it can pursue. In this paragraph, we further analyse the alternative marketing strategies using the growth path matrix (figure A) and the means-ends chain (figure B) to select the marketing strategy to pursue. Figure A Products/Technologies Market Existing Related New Existing (A) Market Penetration (C) Product Extension Product Expansion Related (B) Market Extension (D) BusinessExtension BusinessExpansion, Concentric Markets New Market Expansion BusinessExpansion, Concentric Products Conglomeration (A) Market Penetration We have discussed that the characteristics of the sales trend of SMC's riding mowers tend to indicate that the product is in the mature stage of its life cycle. This means that the potential of increasing sales for the current product in the current geographical market is low. Also, there is a mismatch of the riding mower product and the current market segment that it is serving.

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Pursuing a market penetration strategy in the current geographic market is therefore not recommended. We recommend that SMC maintain its current level of advertising and sales effort in the current geographic market (non-metropolitan areas) and consumer market (industrial users). (B) Market Extension The private-brand offer provides SMC with a good opportunity to pursue a market extension strategy i.e. to introduce a slightly modified riding mower product to a new geographic market - metropolitan areas. However, if the offer is accepted based on the terms given by the chain, it is not financially feasible, bearing most of the risks and not growing a market for its brand of products. We have discussed that SMC's riding mowers are not the preferred product for industrial users in the nonmetropolitan areas. However, there is a potential for SMC to be popular among the homeowners who wish to mow their gardens or lawns in the metropolitan areas. It is likely that the national retail merchandise chain has noted this potential or it would not project that it can sell a volume of riding mowers that is equivalent to double the current volume that SMC is selling. Having weighed the pros and cons, we recommend that SMC reject the private-brand offer and pursue a market extension strategy with its own efforts. It can approach a wholesaler or another retail merchandise chain that is willing to offer more profitable partnership terms and should preferably enter the metropolitan areas before the chain that approached it does. SMC is not advised to counter offer the chain that approached them as the contract for producing 8,200 mowers can only earn half the rate of return that it is currently enjoying for its sale of 4,200 mowers, when the sale price of the mowers is 5% higher than its current list price of $650. In view of the low bargaining power that SMC has, as a small player in the market, it is almost impossible to expect the chain to agree. (C) Product Extension If SMC pursues a market extension strategy for the riding mowers, its resources will be strained if it also introduces Trim-Max simultaneously. Also, it is observed that the configuration of Trim-Max may be more suitable for residential users than industrial users. Thus, we will recommend that SMC defer the introduction of Trim-Max till it establishes a distribution network in the metropolitan areas through its market extension strategy for riding mowers. In any case, we do not expect SMC to be tardy in its entry into the metropolitan areas, thus this deferment will be a short one. Another product extension effort is also recommended for SMC in the medium term. SMC can reconfigure its riding mower by shifting its engine to the front or by enlarging the mower physically. We do not expect huge research and development expenses to be incurred but these changes can improve its competitiveness in its current market segment, where users perceive their mowers to be less powerful or durable. This will make its product more right for its current target market segment. (D) Business Extension Finally, when SMC establishes a distribution network in the metropolitan areas, it can pursue a business extension strategy. In other words, it can introduce its new Trim-Max product to the metropolitan areas (new market) through the distribution network. Figure B

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The growth path matrix discussion has explored the means to increase unit sales volume to increase longterm profits. We will now consider the alternative of increasing productivity. Decreasing Inputs Extending the sales of riding mowers to the metropolitan areas will give SMC the opportunity to decrease inputs and hence increase efficiency as it can improve asset utilisation. Increasing Outputs SMC can improve its sales mix by reducing the volumes of less profitable product variants. We recommend that SMC eliminate the sales of Push Lawn Mower "Kits" since they are not profitable at all. Consion and Recommendation In summary, we recommend that SMC adopt the following Marketing Strategy: Metropolitan Areas Non-Metropolitan Areas Industrial Users Population expected to be small, will not target Industrial Users Riding mowers may not be suitable. Product in its mature stage.Do not adopt a Market PenetrationStrategy (A) Adopt a Product Extension Strategy (C) Residential Users Population expected to be large, riding mower is a suitable product Adopt a Market Extension Strategy (B) and eventually a Business Extension Strategy (D) Residential Users Population expected to be small, will not target (i) Reject Private-brand offer (ii) No change in advertising and sales effort in the current geographic market (iii) Target riding mowers at the residential user market in metropolitan areas (Market Extension) (iv) Defer introduction of Trim-Max (v) Cease Push Lawn Mower "Kits" sales and Develop a more appropriate product for the industrial users in the non-metropolitan areas (Product Extension)

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