3 Scenario and sensitivity analysis (Please refer to data in the Case Study to answer this question)
You are considering expanding your operations selling sneakers in the women segment. The cost of manufacturing women’s shoes is the same as that of manufacturing men’s shoes, so purchasing costs are similar [24}. However, you know a manufacturing company that has indicated that it might reduce their price to € 20 or € 22. The additional fixed cost associated with selling in the new market segment is for an advertising campaign; this can be paid interest-free in four yearly instalments. Your decision should be based on the returns in the first year of entering the market, when sales are expected to reach 8,800 pairs, but could be 10% higher or 10% lower.
How could scenario and sensitivity analysis help you decide whether to expand in the women’s market? (6 marks)
3.2 Identify three alternative scenarios for what may happen if you decide to expand in the new market segment and explain which elements are uncontrollable and why. (9 marks)
- CASE STUDY
Sneaker brand Shoestring has been selling trainers in the men’s and children market for five years. They have adopted a cost leadership strategy. They are cutting all unnecessary costs and focusing on efficiency to have the most affordable trainers.
Table 1: Sales, Revenue and Cost Data for Shoestring (2021-2025)
|Total revenues (Men)||€3,203,650||€2,562,900||€2,434,750||€2,313,000|
|Total revenues (Children)||€1,856,200||€1,633,450||€1,535,400||€1,489,350|
|Cost of sales (Men)||€1,537,752||€1,230,192||€1,168,680||€1,110,240|
|Cost of Sales (children)||€965,224||€849,394||€798,408||€774,462|
|Total Cost of sales||€2,907,764||€2,415,294||€2,284,700||€2,188,890|
|Marketing and Sales||€240,000||€240,000||€240,000||€120,000|
|General administration cost||€1,500,000||€1,400,000||€1,200,000||€1,200,000|
Men trainers: € 24,00
Children trainers: € 26,00
The distribution cost is € 4,00 per pair of trainers
Due to problems in the supply chain, distribution costs may increase. The in-house research team estimates that distribution costs may increase by 10%. However, some supply-chain consultancies expect distribution costs to increase by 20%.
Men trainers: € 50.00
Children trainers: € 50.00
Cost of promotion campaigns
- Launching a campaign to capture market share in the women’s market: € 200,000
- Launch a television add: € 350,000
MORE AND MORE KIDS SEEN WEARING SNEAKERS.
“I wonder what we used to wear when we were kids,” says Margaret Hamilton, trend watcher. “If I see 20 kids a day, certainly 15 of them are wearing sneakers, as if there are not any more practical shoes for kids than sneakers.”
TREND: MOCCASINS COMPETITOR FOR MEN’S SNEAKERS.
You can spot them more and more: stylish flat shoes in hip colours. They are called moccasins, and they are a real trend within men’s fashion, taking over from sneakers.
Annie Conners, stylist at Terra Men’s Fashion, does not think it is odd. “The modern man is more in touch with their style. Women used to be the only ones checking whether their shoes and handbags matched; now, you see men checking their belts and shoes in a similar way. “Sneakers are loved for their comfort and versatility, but so are moccasins. A pro for moccasins is that they look slightly more classy and serious underneath formal attire, and men are becoming more and more aware of this.”
WOMEN’S MARKET A NEW TARGET SEGMENT FOR SNEAKERS.
Research done by Female Sneaker shows that more companies aim for women as their target group. Many large retail stores have started selling sneakers specifically designed for women, and smaller stores have followed suit.
At the moment, there are 440,000 potential women customers in search of women’s trainers. Only two competitors are currently operating in that market, but research shows ample room for new contenders.
INFLATION ON THE RISE
Due to extended supply chain disruptions, and the linked increase in inflation, interest rates are rising. To address this, the Bank of England has decided to raise its interest rate by 1%, leading commercial banks to announce that they will offer loans at a rate of 3%.
CUSTOMERS CHOOSE QUALITY!
More and more consumers choose quality shoes. “This has everything to do with durability and sustainability”, according to Jimmy Cahill. “The consumer has access to more information and realizes it does not want cheap, mass-produced products. Instead, they prefer good quality shoes, which fit well and promote a healthy and sustainable lifestyle.”
Total volume per market segment (number of sneakers sold in each market segment)
The government has announced that it expects ‘substantial growth’ in consumer spending. However, a well-known consultancy forecasts consumer spending to remain low or even to stagnate. Market analysis by your in-house team has concluded that there is a 50% probability of the government being right and that the chances of consumer spending stagnating are very low.
Your in-house research team has also done some analysis about the sneaker market.
- The children’s market will grow by 8% over a five-year period.
- Entering the women’s market with trainers priced at €40 could result in a 2% market share in the first year. After that, the market share will increase 2% every year, so that after five years, Shoestring’s market share will be 10% of the women’s market.
- The company has spare capacity, so apart from the marketing campaign, fixed costs would not increase.
- Television campaigns could increase the total demand in the men’s and children’s markets. In the first year of the campaign, additional profit could reach € 150,000. Profits will continue growing as indicated in the table below: