LOGIC Management Consulting

STRATEGY CONSULTING - CASE STUDY

CONTENTS

1 Background ....................................................................................................................................... 2

2 Project Planning ............................................................................................................................... 3

3 Internal Assessment ...................................................................................................................... 3

4 External Assessment ..................................................................................................................... 5

5 Key Strategic Questions: ...........................................................................................................10

LIST OF FIGURES Figure 1- Lines of Business ............................................................................................................................ 2

Figure 3-Simplified Organizational Chart ...................................................................................................... 3

Figure 2- Product Lines .................................................................................................................................. 4

Figure 4- Key Strengths and Weaknesses ...................................................................................................... 4

Figure 5- Marrimekko Chart .......................................................................................................................... 6

Figure 6- Simplified Market Sizing Table ....................................................................................................... 7

Figure 7- Key Competitors ............................................................................................................................. 7

Figure 8- Retail Market Map ......................................................................................................................... 8

Figure 10- Consumer Finance Matrix ............................................................................................................ 9

Figure 14-Share of Installment Sales per Product Category ....................................................................... 13

Figure 15- Age Distribution of Installment Sales per Product Category ..................................................... 13

LIST OF TABLES

Table 1-Net Sales per Product Category .....................................................................................................11

Table 2-Proft Margin per Product Category ................................................................................................11

Table 5-Share of Repeat Customer .............................................................................................................12

1 BACKGROUND

Imagine a Company XYZ that is a specialist retailer working in household appliances and

consumer electronics. The company was founded in the early 2000’s and was the first of its

kind in Egypt. In a market dominated by large government-owned department stores, many

doubted the idea and thoughts it wouldn’t survive for long. However almost 20 years later,

Company XYZ thrived to become a market leader in its industry while these department stores

closed.

The company is currently facing a series of challenges, the foremost is the declining

industry margins driven by the customer expectations and rapid advancement of technology

for the Original Equipment Manufacturers. This is coupled with growing competition both

domestically and from the GCC. So in order to ensure the sustainability and profitability of the

business, they need to design a strategy to not only mitigates against these increasingly

challenging trends, but also to take advantage of them to rise above the competition.

Through years of successful work with their brands and excellence in customer service

Company XYZ has been able to exponentially grow their retail footprint, attract more brands,

diversify its product offering, but also it ventured in new activities to better serve its

customers. First, it established a service center to serve its customers; this business not only

served as a revenue stream but also strengthened their brands’ equity. The second additional

service that has been widely successful over the years, is its provision of credit to its customer.

While this was a risky business decision, it proved fruitful until today.

Figure 1- Lines of Business

This company’s complexity is further increased when looking at the corporate culture and

organizational structure. Due to the complexity of the organization and the fast-paced nature

of the industry, top management would change the corporate structure almost every year.

Lin

es

of

Bu

sin

ess Retail

After Sales Service

Installment Sales

While this helped Company XYZ to adapt to the changing market dynamics and place the

right people at the right place at the right time, it also had the drawback of creating ambiguity

about career progression but also increased the risk of creating redundant departments or

misallocating key functions to the wrong department, which could result in conflicts of interest,

double reporting or having executives managing unrelated functions with different skill

requirements. The structure in place during our assignment was the following:

Figure 2-Simplified Organizational Chart

2 PROJECT PLANNING

Once we got briefly introduced to the company and got an understanding of the issues

they were facing, the first step was to develop a project plan that would serve the two

objectives of the assignment, namely a strategy that would mitigate against the industry’s

new challenges and beat the competition but would also be clear and comprehensive enough

so that the whole organization is aligned on where they would all be heading for the next 5

years.

The project was divided into 2 basic phases, first a DIAGNOSIS phase which included both

an external and an internal assessment. These assessments served to give us as consultants

a thorough understanding of the business internally as well as the market in operates in. This

phase provided us with the tools to work on the DESIGN phase, in which we worked with their

own taskforce team to identify opportunities for growth and generate ideas on how to capture

these opportunities.

3 INTERNAL ASSESSMENT

To develop a solid relevant strategy, we needed to get a good grasp of the core capabilities

of Company XYZ. The first step was to look in details at their product lines. The company is

working in 5 different product categories as shown in Figure 2 below

The largest sales by far were for Kitchen Appliances (KA), not only was this their first

product line but these were also big ticket items, meaning that each sale generated a large

sum of money. Because of the reasonably high margins they were also the largest contributor

to profit. Meanwhile, the highest growth was attributed to Mobile and Laptops (ML) which had

almost double the growth of the second highest growing product. However, the issue with that

product line was that margins are extremely low due very high competition. When looking at

the profit margins, the obvious star was Personal Care (PC). While its contribution to revenue

wasn’t that impressive, it had the second most important contribution to profit, after Kitchen

Appliances. For more details please refer to the annex.

While conducting interviews at the start of the assignment, one of the areas we probed

about was what people perceived as the strengths and weaknesses of Company XYZ. The

following summarizes the key strengths and weaknesses discovered during the internal

assessment:

Figure 4- Key Strengths and Weaknesses

Figure 3- Product Lines

Product Lines

Au

dio

Vis

ual

(A

V)

Ven

tila

tio

n (

V)

Pers

on

al C

are

(PC

)

Kit

chen

Ap

plia

nce

s (K

A)

Mo

bile

an

d L

apto

p (

ML)

4 EXTERNAL ASSESSMENT

Now that we had a firm understanding of the Company XYZ’s inner workings, we needed

to turn our attention to the market. This would be done through a series of steps, first we

would analyze the environment using the PEST framework. Then, we would size and segment

the market, analyze the competition and finally we would highlight the key trends in the

market.

The key highlights from the PEST analyses that were used to guide the strategy are:

P: Political instability in the recent years caused major uncertainty in Egypt and the

region, increasing risks of operating in the retail and manufacturing industries

E: Egyptians are borrowing more money explaining increases in consumer spending, yet

there is high potential for growth as indicated by the low personal loans to GDP ratio

S: Consumer spending shows a rising trend that has a very stable cyclical spending

pattern, and is forecasted to slowly recover in real terms

T: Internet penetration has produced a more informed consumer-base changing the

dynamics of the consumer/seller relationship

Following the PEST exercise, market sizing would be the first milestone in determining

where to play. By segmenting the market by product category and socio-economic customer

segments, not only were we able to measure the overall market share of Company XYZ, but

also get a grasp on which product categories and what customer segments should be the focus

of the strategy we were to design. But, accurate data on consumer demand is scarce in Egypt.

Therefore, the market size had to be modeled used several proxies to obtain a realistic

estimate upon which the strategy can be built upon.

The product categories corresponded to the products sold by Company XYZ, while

customer segments were based on socio-economic factors such as income, education, area of

residence… According to this segmentation, the “A” customer segment corresponds to the

highest socio-economic segment.

A key issue when sizing their particular market was that a large share of it was part of

what is called the grey economy. These were largely represented in the form of shops in Abdel

Aziz Street in Downtown Cairo. This street is a hub of appliances and electronics stores that

in many cases were unregistered, did not always pay their full taxes or customer duties, and

may at times have sold counterfeit products.

In our market assumptions, we used the marriages and appliances renewals as the key

drivers for sales in the market. We also added the usage patterns of the different market

segments and the average price points per each product the client is selling. After coupling

that with external information about the sales in the market, we found that the total market

for the targeted products is around EGP 27 Billion as shown in the “Marrimekko” chart below.

The advantage of this graph is that it shows multiple dimensions at once without being too

confusing. Basically, the boxes on the Y axis represent the size of market for each product

category, while the size of the boxes on the X axis represent the size of the customer segment,

meanwhile, each of the center boxes’ area represent the size of the market of a certain product

category for a certain customer segment.

Figure 5- Marrimekko Chart

While the above graph was good at showing all the data gathered, we needed to further

simplify it to make it useable. As such, we grouped together the most similar product together

as well as simplified the customer segmentation. First, we excluded the DE segment as they

mostly buy their products from the grey market and out of interest to the client. Second,

through some consumer research we found that part of the C1 segment have similar

purchasing habit than the AB segment while the rest were still more conservative and were

more similar to the C2 segment. So the resulting customer segments were “AB + Aspirer C1”

and “C2 + Conservative C1” The following table is the simplified version of the market sizing

table:

Figure 6- Simplified Market Sizing Table

Once this market was sized, we still needed to assess the competition to get a grasp of which

markets were more attractive. The following table gives a brief overview of the competition analysis:

Figure 7- Key Competitors

Website Ranking

Key Competitors

KA+PC

ML+AV+

V

KA, PC, AV, ML and V AV and ML PC and

ML

PC, AV, ML

Through both the internal assessment and the previous phases on the external

assessment we find a number of trends that were worth highlighting and would be key to the

strategy we were to develop. For the retail and commercial business we found that there was

a:

- Shift towards organized retail. Consumer were putting heavier emphasis on

convenience and customer experience, which were absent or low in the case of stores

in Abdel Aziz street

- Noticeable increase in the use of internet and social media in the shopping

cycle. Consumers appreciated the convenience and ease of getting information that

were synonymous with the internet experience. It was also important to note that while

the online channel of Company XYZ ranked below that of several competitors, their

social media presence was far better than any other competitor

- Threat of foreign entrants, mainly from GCC based competitors. There were 3

notable threats, the first company was leveraging on their repairs and maintenance

programs, the second on their large megastores that provided unrivaled product variety

and finally the third relied on their premium stores and top notch customer experience.

The latter also hosted a very popular online marketplace in line with the likes of Amazon

and Alibaba.

- Expected market consolidation. Several indicators pointed towards a consolidation

of the market where only the bigger players would survive. These indicators were

increased deregulation and privatization, increasing competition plagued with lower

and lower profit margins, increased regulatory costs, products’ whose lifecycle is

nearing maturity and finally due to the impact of the internet.

All these facts combined lead us to the following summary for the retail business:

Figure 8- Retail Market Map

KA+PC

ML+AV+

V

To have a good grasp on how we could grow the consumer finance business we took a

closer look at both demand and supply of consumer finance in Egypt. The first task was to

understand why people go for consumer finance in the first place. While there are a multitude

of factors in play, one of the key reasons was because of deficiencies in the banking sector in

Egypt. These could be summarized in 3 key problem areas: financial sector infrastructure,

market distortions and social/cultural barriers

While we had proved the existing and growing demand for consumer finance, we couldn’t

give any recommendation before studying the competition and understanding what gap

Company XYZ was to fill. First we had to identify the types of competitors out there. There

were three very distinct sets of competitors:

- Banks

- Retailers

- Sales Finance Companies (companies specialized in providing informal consumer

loans)

The result is plotted in the following matrix:

Figure 9- Consumer Finance Matrix

This matrix showed that retailers, among which Company XYZ was a leader, did serve to

fill a certain gap in the market. While banks had the lowest interest rates they also had very

strict eligibility criteria, meanwhile, sales finance company were convenient and had very low

edibility criteria but had very high interest rates and were known for their questionable ethics.

So retailers could provide consumers with easy and convenient financing schemes while being

cheaper and less abusive than sales financing companies.

5 KEY STRATEGIC QUESTIONS:

Given the above information as well as the quantitative data in the annex, kindly assist

the management of the company to solve the following dilemmas:

How should they protect their market share in the key markets?

Should they shift towards the online store format? If yes, how?

Do they need to expand regionally, or do they need to focus on their local market?

How can they optimize their product portfolio?

6 ANNEX

- Table 1: This table represents how much revenue the company generates from each product

category but also the growth of each revenue stream

- Table 2: This table shows the profit margin of each product category and how much this

margin has changed over the past 3 years

- Figure 11: This graph presents the sales by installment compared to the total revenue

generated as well as the growth of each revenue stream

- Figure 12: This graph shows how much the interest rate on installment sales increase the profit

margin of the company

- Table 3: This percentages in this table are the share of installment customers who had made

an installment purchase in the previous year

- Figure 13: The first column shows how cash sales are distributed per customer segment, wihle

the second shows the same for installment sales

- Figure 14: Each column represents how much of each product category’s sales are from

installments and how much were with cash

- Figure 15: Each line shows how much a certain product category’s sales come from each age

segment. The higher the line the higher the sales at that particular age.

Table 1-Net Sales per Product Category

*CAGR: Compounded Annual Growth Rate = ((Ending Value/Starting Value)^(1/n. of years))-1

Table 2-Proft Margin per Product Category

Profit Margins per Product Category

Operating

Profit Margin

CAGR (2011-13)

Kitchen Appliances 5.0% 0.0%

Audio Video 0.2% 15.0%

Mobiles and Laptops 2.5% -10.0%

Personal Care 10.0% 2.0%

Ventilation 8.0% 1.0%

Figure 11-Annual Total and Installment Sales

2011 2012 2013 CAGR (2011-13)

Household Appliances 160,000,000 145,000,000 210,000,000 15%

Audio Video 47,000,000 50,000,000 80,000,000 30%

Electronics 25,000,000 30,000,000 60,000,000 55%

Small Domestic Appliances 9,000,000 10,000,000 18,000,000 41%

AC 8,000,000 10,000,000 12,000,000 22%

Grand Total 249,000,000 245,000,000 380,000,000 24%

Net Sales

Kitchen Appliances

Mobiles and Laptops

Personal Care Ventilation

Figure 12- Installment Contribution to Profit Margins

Table 3-Share of Repeat Customer

Figure 1410-Share of Installment Sales per Product Category

Figure 1511- Age Distribution of Installment Sales per Product Category

Figure 13-Customer Segment per Payment Method

PC

Others

KA

ML

V

AV

Kitchen Appliances Mobiles &

Laptops Vent. Audio Video Personal Care