The CEO at West Lake Home Furnishings LTD, Charles Bowman, came across with a proposal of reducing the retail price of a signature line of decorative lamps from $69. 99 to $29. 99 for a period of one year. This customer has a large U. S. based retail chain accounted for one-third of West Lake’s wholesale business in 2006. The company had to adjust by holding higher inventory levels in warehouses. West Lake Home Furnishings LTD is intending to stay at top of its business and is very eager to grow.
After analyzing the benefits like increase in profit, growth of sales, market penetration, effect of reduced price on other businesses and the rapport with the wholesaler, it has been decided to accept the offer. Large and promised order for a year is the justification for accepting the reduced price in the offer. The main objective of the company is to maximize the profit. In order to achieve this at retail price of $29. 99, quantity of sales should increase to a considerable level in order to accept the proposal. The current situation in Canada, there were several significant trends in the home furnishings market, 1.
Baby boomers population with a higher income population 2. consumers tended to spend more money on home products in the first two or three years following the purchase of their home 3. new competitors had entered the industry with lower prices Reducing the price leads to higher demand of quantity are in favor of higher quantity of sales. The proposal ensures the required quantity of sales. 1. In May 2007, the CEO of West Lake Home Furnishings LTD was analysis an offer that one of his top three wholesalers put on the table. List the advantages and disadvantages of the proposal. Advantages| Disadvantages|
Market penetration & Market Share this will impact in Increase in Profits and Growth in Sales| Retailer buyer had already contacted similar suppliers in Asia who would be willing to manufacture a similar-looking private-label line. | The retailer’s growing network of stores and this line This line was not sold anywhere | It was common for retailers to change suppliers frequently if their products were not selling well. And this because of the variety of| The retailer had gross margins of about 30 % and was willing to drop its gross margins to 15 % for this special one-year promotion.
They are betting for gaining a greater benefit in short run | Bowman provided to the retailer’s buyer, detailed information about costs, and specifications, and even the name of the Chinese factory that manufactured the line| China suggested that, for an order this large, West Lake’s cost of goods sold for this signature line would drop to $20 from about $30. | Effect of price reduction on other customer’s retail pricing| Maintaining good rapport with the wholesale customer| | Large and promised order for a year is the justification for accepting the reduced price in the offer. | | 2.
Conduct 5 forces analysis for the industry which West Lake Home Furnishings LTD operates in. In fact you should consider 2 scenarios: current situation and situation in which the CEO of West Lake Home Furnishings LTD accepts the proposal. Scenario 1: Deny the proposal| Scenario 2: Accept the proposal| If Bowman deny the proposal the growth in sales cannot be achieved| An immediate growth in sales from the wholesale business can be achieved with immediate effect| The growth in the retail store will follow a steady trend| Profit from Retail store and Internet sales could also be increased to some extent.
Growth forecast looks better and almost obvious. | In the retail sector, profits could be increased by hiring a sales consultant. | Market penetration of the signature line of decorative lamps and thereby the brand West Lake will be deep due to the prominent shelf space at the wholesaler’s retail chain all over and due to the increase in sales by five times. | Also, by improving the marketing strategy & internet sales profits could be increased. Market share of West Lake will also get increased| Market penetration would remain the same trend| West Lake could rule out the possibilities that other competitors taking up the offer and also the possibility of the wholesaler getting consignments directly from Asian suppliers are ruled out, thereby avoiding a potential competition. | There is a possibility that the wholesaler may get the consignments directly from
Asian suppliers, which may reduce the market share of West Lake | Reduction in retail price of Signature line of lamps for the particular wholesale customer can later make other wholesalers negotiate on price, which can lead to reduce gross margin from the entire wholesale business. This could be controlled by linking it to the volume of purchases, which could ultimately lead West Lake into a high volume – low margin company in the long run. | Any other competitor who accepts the offer by the wholesale customer could also affect the brand value and market share of West Lake. A good relationship could be maintained with the wholesale customer, thereby assuring present and future association with them. | Denying the proposal may also affect the relationship with the wholesale customers and may lead to potential losses of business with them. | Open Negotiations with the Wholesale customer| According Porter’s five forces model which is actually a business strategy tool that helps me out in analyzing the case Porter’s model of competitive forces assumes that there are five competitive forces that identifies the competitive power in a business situation.
These five competitive forces identified by the Michael Porter are: As I mentioned earlier I used this tool to identify and make my analysis, focusing mainly in Bargaining Power of Buyers this is because Bowman is facing this situation; the buyer is offering to drive down Bowman’s products price, offering Bowman´s to work together in ordering large volumes. So, this implies that the Buyer has more bargaining power when generally: * Buyer purchases in bulk quantities * Product is not differentiated Buyer’s cost of switching to a competitors’ product is low * Shopping cost is low * Buyers are price sensitive
* Credible Threat of integration And I also focused in Industry rivalry which means the intensity of competition among the existing competitors in the market. Intensity of rivalry depends on the number of competitors and their capabilities. Industry rivalry is high when: * There are number of small or equal competitors and less when there’s a clear market leader. Customers have low switching costs * Industry is growing * Exit barriers are high and rivals stay and compete * Fixed cost are high resulting huge production and reduction in prices These situations make the reasons for advertising wars, price wars, modifications, ultimately costs increase and it is difficult to compete. CONCLUSION Having said this; I considered that West Lake Home Furnishings Ltd should accept the offer.