Shoe Company Paper

7/30/2019 Shoe Company Paper

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D-Lite Shoe Company

A Report on its Strategy, Financials and Operations.


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Table of Contents

Our Mission ............................................................................................................................................................................. 4

Our Vision ............................................................................................................................................................................... 4

SWOT Analysis........................................................................................................................................................................ 4

New Entrants:...................................................................................................................................................................... 4

Substitutes:........................................................................................................................................................................... 4

Customers:........................................................................................................................................................................... 5

Suppliers: ............................................................................................................................................................................. 5

Rivals: .................................................................................................................................................................................. 5

Driving Forces ......................................................................................................................................................................... 5

Overall Strategy Execution ....................................................................................................................................................... 5

1. Production in low cost countries. ................................................................................................................................. 6

2. Economies of Scale ...................................................................................................................................................... 6

3. Broad Differentiation and Branded Footwear Emphasis .............................................................................................. 6

4. Focused on all geographic regions ................................................................................................................................ 6

5. Zero focus on Private-Label Footwear ......................................................................................................................... 7

6. Use of Celebrity Endorsements.................................................................................................................................... 7

7. Emphasized on wholesale first and internet market later. ............................................................................................. 7

8. Right changes in pricing at right moment to meet sales target as per demand. .............................................................. 7

10. Used advertising to simulate demand. ............................................................................................................................ 7

11. Used worker incentives to achieve worker productivity................................................................................................... 712. Clever mix of low quality materials with superior quality materials to keep cost down..................................................... 8

13. Efficient use of distribution to keep warehousing costs down......................................................................................... 8

14. Share buyback to increase EPS and reward share holders................................................................................................ 8

15. Celebrities....................................................................................................................................................................... 8

17. Retailer Support.............................................................................................................................................................. 8

Strategic Group Map ................................................................................................................................................................ 9

Plant Operations ...................................................................................................................................................................... 9

Conclusion............................................................................................................................................................................... 9

Appendix: Exhibits ................................................................................................................................................................ 10

Exhibit 1: 10 Year Percentage Change across Important categories in Shoe Industry.......................................................... 10

Exhibit 2: 10 years EPS growth chart ................................................................................................................................. 10

Exhibit 3: Last 10 years ROE Chart ................................................................................................................................... 10

Exhibit 4: Past 10 year Adjusted Credit Rating Chart.......................................................................................................... 10

Exhibit 5: Last 10 year Stock Price Chart............................................................................................................................ 11


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Exhibit 6: Last 10 year Image Chart ................................................................................................................................... 11

Exhibit 7: 10 year Percentage Cash Allocations .................................................................................................................. 11

Exhibit 8: 10 year Percentage Cash Allocations in Chart..................................................................................................... 12

Exhibit 9: 10 year Cash Allocations .................................................................................................................................... 12

Exhibit 10: 10 year Earnings by Region .............................................................................................................................. 13

Exhibit 11: 10 year Earnings in Percentages by Region....................................................................................................... 13

Exhibit 12: 10 year Earnings by Market Segments .............................................................................................................. 14

Exhibit 13: 10 year Revenue and Demand changes by Price and Segment .......................................................................... 14

Exhibit 14: Profit Summary by Shoes ................................................................................................................................. 15

Exhibit 15: Strategies used in Production ........................................................................................................................... 15

Exhibit 16: Celebrity Endorsements................................................................................................................................... 16

Exhibit 17: Strategic Group Map for Year 12 and Year 19 .................................................................................................. 16

Exhibit 18: 10 Year Financial Statements Snapshot ............................................................................................................ 17


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Our Mission

Our mission and values are to help people throughout the world realize the full potential of their body and

sole.

Our Vision

Our vision is to put a pair of D-Lites on every foot worldwide!

SWOT Analysis

The SWOT analysis of D-Lite Shoe Company can be illustrated in the following exhibit.

Strengths WeaknessesManagement Capabilities New to Shoe Industry

Product Appeal Market Breadth

Free Shipping Private Label Market

Retail Support/Outlets Delivery Time

Opportunities Threats

Green Products Market Conditions

Charitable giving Exchange Rate

Knickerbocker Theory

M&A of Company C Ethical issues

Michael Porters Five Forces Model shows the following levels of strength relative to substitutes, new

entrants, suppliers, customers and rivals.

New Entrants:

We view the new entrant level of strength as extremely low based on the game constrains. In a real world

application new entrants would be at a disadvantage because the first movers have been able to realize a high level

of brand significance. Entering a mature market will result in the difficulty of getting a foothold relative to brand

awareness.

Substitutes:

We find that there is no real substitute for shoes, as footwear is a necessity in virtually every developed

country in the world; therefore, this is a relatively insignificant force.


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Customers:

As we have seen in the example of Nike Corporation; brand loyalty adds a mild level of strength in the

buyer force. The customers of Nike became sensitive to Nikes employment practices in South East Asia during the

1980s and 90s. These actions damagedNikes brand and revenue generation.

Suppliers:

This element is relatively weak as well. Large shoe companies dictate the location in which they want to

operate. In the shoe industry, companies will choose to move into new, low cost countries and force the

subcontractors to either move with them or lose the contracts.

Rivals:

Rivals are obviously extremely strong as they affect our decision making for every year. We note that as

companies A-F migrated to either the wholesale or private label sectors. As we had chosen a high level of

differentiation based on lucrative endorsement contracts and the most available models; certain rivals adopted our

approach which was evident by the migration seen in the Strategic Group Maps. The notion was that switching

gears to operate in another sector would cause fallout in SQ rating, therefore we maintained course and adjusted our

pricing with the aid of operational best practice methods.

Driving Forces

Relative to the BSG project, the macro-environment affected our sales when foreign exchange rates

fluctuated. We also utilized trade agreements to our advantage by building plant capacity in Latin America when

selling shoes to North America. An interesting aspect of the game would have been the introduction of ethical

dilemmas in foreign countries that could reduce S/Q ratings. This approach would mimic the problems that Nike

faced while operating in Indonesia and Vietnam. This internal move by the BSG game would teach students the

values of running a socially responsible corporation.

Overall Strategy Execution

10 years back we were handed over a company which was doing average. We were given a mandate to

expand the company and its operations so that company can use all its resources in optimal way to capture bigger

share of market-share. And in the process validate the immense trust stock holders put in our hands when they gave

us the key to their $300 Million dollar company.

Now after 10 years we chuckle and thank our shareholders for the big smile they must be having on seeing

the stellar performance company had for past 10 years. In past 10 years we returned back $378 million dollars back


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to our share holder pockets in form of dividends and stock repurchases, increased market capitalization by 500% to

$1.8 Billion, and revenue by 125% to $539 million. 10 years back company earned net profit of $25 million on sales

of $238 million, and now in the last fiscal year it earned $97 million on sales of $539 million. The sales doubled but

profits quadrupled speaking volumes about the strategy we had in place. (Exhibits 1-6).

Implementation of any successful strategy is always multi-faceted. And such was the case with us. We have

to implement range of measures to get where are now. Some of the critical components for our strategy were:

1. Production in low cost countries.First two years of our management were very critical and we took immensely risky steps. We decided

to close our NA plant as production in NA was not so economical. We took out loan of $200 Million

dollars and invested in a new plant in LA. In first year of operation under us we had net loss of $16 million

because we took such drastic steps. American plant was costing us $5.00 more than Asian plant per shoe.

This $5.00 per shoe for 2 million shoes, the capacity for NA plant, was putting us $10 Million behind each

year. In the end we were able to use country specific advantages at their maximum.

2. Economies of ScaleAs we ramped up production in LA and AP plants, we increased capacity regularly in both plants to

match the demand. The net effect of doing this was that we continued to achieve economies of scale. When

we started cost of goods sold were 57% and we were able to reduce that to 50% in our last year. Each penny

saved in production costs meant one more penny in our profits. The cost of pair sold went down from

$26.02 to $25.74 not much, but much if we consider that the S/Q rating also went from 5 to 7. (Exhibit 9)

3. Broad Differentiation and Branded Footwear EmphasisWe changed the company gears to follow broad differentiation. This meant that we offered 450 to

500 models of S/Q 7 shoes in wholesale and internet markets at attractive prices to attract customers. It

added to cost of manufacturing but was compensated by the growing demand of our footwear. (Exhibit 15).

4. Focused on all geographic regionsOur strategy was to market our footwear in all four global regions. We marketed celebrity endorsed

shoes of S/Q rating 7 in all 4 regions. This strategy paid us handsomely and helped us to mitigate the risksinvolved with foreign exchange rate variations. In our earlier years, EA was our stellar region, and later NA

and LA were earning handsome profits. The philosophy here was not to put all eggs in one basket and

spread risk evenly. (Exhibits 10-11)


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5. Zero focus on Private-Label FootwearEarly on we realized that private label could earn us very little per shoe compared to $7 to $14 per

shoe in internet and wholesale markets. Another problem with private-label was that if the bid is unaccepted

by the retailers we were then stuck with unused portion of factory, which then resulted in higher fixed costsfor rest of other production, and impacting profits tremendously.

6. Use of Celebrity EndorsementsWe bided heavily on Celebrities to get our shoes endorsed and make our footwear attractive to

customers. Our upper limit was always $2.00 per shoe in terms of celebrity endorsements.

7.

Emphasized on wholesale first and internet market later.

Our area of focus was wholesale first. As we ramped up our volume of production we focused more

on internet. In our first year wholesale was contributing 90% of profits and in year 20 it was contributing

66%, compared to 10% and 34% for internet segment for same years. (Exhibit 12).

8. Right changes in pricing at right moment to meet sales target as per demand.Past 10 years saw constant change in pricing so that right adjustments to demand and supply were

met. This was critical as pricing higher would mean high margins with low volumes and lower pricing would

have meant that high volume with low margins. We aspired to make at least net margin of $7.00 per shoe.

(Exhibit 14). In internet segment our pricing varied from $90.00 to $65.49 and in wholesale it varied from

$41.00 to $63.29 in all regions. The other goal of our pricing was to keep our factory produce at 120% of its

capacity to meet the demand pricing created and achieve economies of scale. (Exhibit 13).

10. Used advertising to simulate demand.

We spend at least $2.5 Million in advertising in each region to simulate the demand. The main goal

was to spend 5% to 7% of revenues in advertising. Only in the last difficult year we end up spending 9% of

our revenues to simulate the demand. (Exhibit 7).

11. Used worker incentives to achieve worker productivity.

We used to have 2% to 5% salary hike per annum so that our workers can earn decent wages above

inflation to have a decent living. 45% to 54% of wages were paid as incentive wages. This increased

productivity. Our plants attracted high quality productive work force, and our cost of rejects became lowest


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in the industry. We also trained our workers in best practices and training cost were around $2000 per

worker per year. This combined with TQM/Six sigma program allowed us to produce S/Q 7 shoes at

lowest possible costs of $23.66. (Exhibit 15)

12. Clever mix of low quality materials with superior quality materials to keep cost down.

We had realized in our earlier years that we could manufacture shoes with S/Q 7 with a mix of 42%

to 44% superior materials and 56% to 58% lower materials. This was another strategy used to keep the costs

down. (Exhibit 15)

13. Efficient use of distribution to keep warehousing costs down.

We were mostly sending production from LA plants to LA and NA markets and from AP plants to

NA and AP markets. This allowed us to achieve lowest cost of $2.30 per shoe in wholesale markets.

14. Share buyback to increase EPS and reward share holders.

When we started the outstanding shares of our company were 10 million. At the end of 10 years that

count had reduced to 7.6 million. This strategy allowed us to return money to our shareholders and also it

helped us to keep our EPS high. Even our dividend payment would spread more per share when there was

lesser number of shares.

15. Celebrities

From the beginning we understood that celebrity endorsements sell the shoes. Our strategy on celebrities

was to get as many celebrities as we can. But we also wanted to limit the add cost per pair of shoe below $2. We bidon celebrities from year 11 and targeted celebrities with long term contact. We kept the bids reasonable, but high

enough to win at least few celebrities in year 11. You can get a rough idea of the worth of a celebrity by using the

forecast screen. Celebrity appeal helped our company by increasing market share in all regions. We also we were

able to charge more per shoe. The more capacity we have, the more valuable a celebrity is. The value of a celebrity

is the profit margin multiplied by the number of extra shoes sold in each region. Since the profit margin varies from

region to region, the value of a celebrity does too. As the game went on the competitors caught on with our strategy

and started place very high bids. Although we did not win new celebrities in year 19, we survived because we already

locked up enough celebrities with long term contacts in previous years (Exhibit 16).

17. Retailer Support

Retailer support is critical to our success. They will act as face our company. Starting from the year 11, we

used all possible number of retail outlets available and spent substantial amount on retailer support so that we

maintain good relationships with our retailers. We were using 3757, 2861, 1606 and 2720 retail outlets in NA, EA,

AP and LA regions respectively. At the end of 20th year we were paying $850 per retail outlet as retailer support


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costs. The retail support allowed our footwear to be more visible to our customer eyes. This strategy paid very

impressive dividends, also every year our sales increased in all regions.

Strategic Group Map

We developed our companys strategy in the year 11. Our strategy was to set a reasonably high S/Q rating

and many shoe models. We kept adding more model year-after-year to reach maximum number of 500 models. This

strategy helped to increase our shoe demand combined with the fact that we were charging reasonable prices for

high quality shoes with S/Q rating of 7. We stayed true to this winning strategy and used it every year (Exhibit 17).

The exhibit shows that our competitors started to copy our strategy by year 19.

Plant Operations

We wanted to produce a good quality shoe at lowest possible price. In the year 11 we built a new plant in

LA region. Once the LA plant is ready for production in year 12 we sold uneconomical NA plant. After that every

year add new capacity in LA plant to achieve economies of scale, by year 20 our total capacity reached 9,100 M. Inaddition we did assembly line upgrade to reduce the rejects by 50%, Facilities upgrade to reduce the production run

setup by 50%, equipment upgrade to boost S/Q rating by 1, and Facilities upgrade to boost worker productivity by

25%.

We increased worker base pay by 2% to 3% annual hike and also paid incentive pay of $1.25 per each non

reject pair. This really helped to reduce the rejects. This increased productivity. Our plants attracted high quality

productive work force, and our cost of rejects became lowest in the industry. We also trained our workers in best

practices and training cost were around $2000 per worker per year. This combined with TQM/Six sigma program

allowed us to produce S/Q 7 shoes at lowest possible costs of $23.66 (see the exhibit 15).

Conclusion

A look at summary of past 10 years financial statement snapshot (exhibit 18) demonstrates how effective we

ran our company and left company with a very strong financial basis. Under our management the current liabilities

and long term debt has reduced. Whereas ending equity has increased to $417 Millions starting at $151 Millions 10

years back. Total assets went up to $445 Million demonstrating our commitment in increasing investment in terms

of plants, capacity and warehouses. We believe that such strong financials will take our company to grow and bigger

and be a significant force in the global footwear industry.


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Appendix: Exhibits

Exhibit 1: 10 Year Percentage Change across Important categories in Shoe Industry.

Exhibit 2: 10 years EPS growth chart

Exhibit 3: Last 10 years ROE Chart

Exhibit 4: Past 10 year Adjusted Credit Rating Chart


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Exhibit 5: Last 10 year Stock Price Chart

Exhibit 6: Last 10 year Image Chart

Exhibit 7: 10 year Percentage Cash Allocations

Year

Cost of

Pair Sold

Warehouse

Expenses

Marketing

Expenses

Admin

Expenses

Interest

Expenses

Income

Taxes

Net

Profit

Total

Dividend

10 57% 6% 14% 3.26% 4.00% 4.48% 10.45% 4.18%

11 78% 7% 15% 3.15% 3.17% 0.00% -6.22% 0.04%

12 57% 6% 12% 2.36% 6.44% 3.25% 12.21% 0.05%

13 53% 5% 12% 2.28% 5.11% 6.25% 14.59% 0.10%

14 55% 5% 13% 2.26% 4.11% 5.78% 13.49% 0.18%

15 56% 5% 13% 2.36% 3.33% 5.80% 13.53% 0.36%

16 57% 6% 13% 2.47% 2.08% 5.73% 13.36% 0.45%

17 54% 6% 15% 2.24% -0.03% 7.06% 16.48% 0.47%

18 52% 6% 13% 2.41% -0.16% 7.79% 18.19% 0.60%

19 48% 6% 11% 2.10% -0.12% 10.10% 23.57% 0.49%

20 50% 9% 13% 2.33% -0.21% 7.72% 18.01% 21.14%


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Exhibit 8: 10 year Percentage Cash Allocations in Chart

Exhibit 9: 10 year Cash Allocations


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Exhibit 10: 10 year Earnings by Region

Exhibit 11: 10 year Earnings in Percentages by Region


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Exhibit 12: 10 year Earnings by Market Segments

Exhibit 13: 10 year Revenue and Demand changes by Price and Segment


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Exhibit 14: Profit Summary by Shoes

Exhibit 15: Strategies used in Production


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Exhibit 16: Celebrity Endorsements

Exhibit 17: Strategic Group Map for Year 12 and Year 19

Year 12


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Year 19

Exhibit 18: 10 Year Financial Statements Snapshot

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