How Can Lekhize Footwear Cope

Published Date: 02 Nov 2017

Submitted in partial fulfillment of the requirements of International Baccalaureate Diploma Programme 2010-2012.

Candidate Name: TREHAN, SNEHA

Candidate Number: 004669-022

Centre Code: 004669

Word Count: 3973

Supervisor’s Name: Mr. S.Ramesh

Examination Session: May 2012

Date of Submission: 21-02-2012

ABSTRACT

"How can Lekhize Footwear cope with competition of low cost and quality footwear entering from China to India?" I chose this research question because many companies in India are suffering because of the International suppliers and their sales are going down because of that. Lekhize Footwear was one of the companies which was facing the same problem and was not able to increase its sales revenue. They tried to increase their sales revenue but were not successful in doing so.

Primary data was collected through an interview with Mr. Aditya Chauhan, the sales manager of the company and Mr. Sumesh Lekhi, the owner of the company. The questionnaires were given to the customers and few retail stores in Mumbai. Secondary data was collected in the form of newspapers articles, final documents of the company such as Balance Sheet, Profit and Loss Account and Sales Revenue of the company.

Lekhize footwear can cope with the competition entering from China by using promotional and pricing strategy. The promotional strategies used by the company such as launching their official website have been effective so advertising the product more will help the company, according to the survey1* many people didn’t know about the product and the company and whoever knew about it came to know through internet so Lehize should promote it more so that more people know about the product which will lead to an increase in the sales. The company has to take into account both qualitative and quantitative tools which are used in this essay.

WORD COUNT-255

ACKNOWLEDGEMENTS

I would like to thank my Extended Essay supervisor Mr. S.Ramesh for his guidance and support.

I would also like to thank Mr. Sumesh Lekhi, the owner of Lekhize Footwear and Mr. Aditya Chauhan, the sales manager of the company for his time and help in my research and for the documents he provided me with. Finally to the customers and the retailers who helped me by filling up the questionnaires.

LETTER OF AUTHENTICATIONDE4C647E

TABLE OF CONTENT

Contents

Page No.

Abstract

2

Acknowledgement

3

Letter of Authentication

4

Introduction

8

1.1 Company’s background

8

1.2 Defining the problem

8

1.3 Justification of the study

8

1.4 Objectives

9

1.5 Limitations

9

1.6 Collection of data

10

Methodology

11

2.1 Primary Research

11

2.2 Secondary Research

11

Findings and Analysis

12

3.1 Graphs

12

3.2 SWOT Analysis

20

3.3Porter’s Five force analysis

23

3.4 The Marketing Mix

26

3.5 Sales Volume Trend Analysis

29

3.6 Ratio Analysis

31

3.7 Product Life Cycle

36

Conclusion and Recommendations

38

4.1 Conclusion

38

4.2 Recommendations

39

Unsolved Questions

39

Bibliography

Appendix:

Appendix A: Interview with the owner of Lekhize Footwear, Mr. Sumesh Lekhi on 10th November 2011

Appendix B: Interview with the sales manager of Lekhize Footwear on 12th November 2011

Appendix C: Questionnaires were distributed in the retail stores and to the customers of Lekhize Footwear

Appendix D: Balance Sheet

Appendix E: Profit and Loss Account

Appendix F: Article 1

Appendix G: Article 2

Appendix H: Article 3

40

41

42

45

47

53

55

56

57

59

INTRODUCTION

Company’s Background:

Lekhize Footwear was established in 1999 [1] to manufacture and design women’s footwear. It started with supplying the foot wears to major leading retail chains and now they have about 8 retailing groups [2] . To keep up with the new trends and fashion they have to do a lot of market research to be aware of the new styles in the market. Due to immense competition in the footwear market, the company’s sales revenue has decreased which is affecting the company. The company needs to increase its sales revenue in order to be stable in the market and increase its market size.

Defining the problem:

The company had been doing really well since it started but since past 2-3 years the company is not gaining much profit. As we all know that China has started ruling all the countries with their low quality and low costs of products. Many retailers and customers prefer low quality and low cost footwear. There are many companies in India which are facing the same problem. Due to cheap labor and efficient work many big brands are choosing China for manufacturing their products and the companies in India are losing their suppliers.

Justification of the Study

After reading an article about China that it produces 1/3 of World’s Shoe [3] and researching more about the topic I chose Lekhize Footwear as my company as it was facing the same problem. In my first interview with the owner of the company I came to know about the company’s issues. I realized that the company was getting affected by the low quality and low cost products coming from China and I framed my research question as "How can Lekhize footwear cope with competition of low cost and quality footwear entering from China to India?"

Objectives:

The main objective of the research is to:

Ask the customers and the retailers if they preferred low cost and low quality footwear and what factors affected their choice. Most of them said that they would prefer good quality but due to the competition and in order to gain more profit they tend to take low cost footwear which has decent quality.

I checked if the company was using any tools to increase its sales revenue and how effective the tool was. I did this through the interview and by asking the customers if they knew about the launch of the website.

Give them some recommendations of how they can compete with the industries and increase their sales revenue.

Limitations:

Problems faced

Solutions

The customers and the retailers didn’t have much time to fill up the questionnaires.

Close ended questions as it was easier to just tick the correct answer

Getting the balance sheet and Profit and Loss Account was difficult

Convinced them to give for at least 2 years.

Collection of Data

Figure 1: Relevant data was obtained from the following sources before making conclusions.

Collection of Data

Tools Covered

SWOT Analysis

Ratio Analysis

Sales Volume Trend Analysis

Marketing Mix

Product Life Cycle

Porter’s Five Force Analysis

Internet

Balance Sheet

Profit and Loss Account

Personal Interview with

The owner of the company

The manager

Employees

Customers

General Public

Secondary Data

Primary Data

SECONDARY RESEARCH

Internet

Profit and loss account

Balance Sheet

METHODOLOGY

I gathered information from the Internet and the articles and after researching more on the information I formed my research question. Lekhize Footwear is one of the companies which is getting affected by China. The company tried to increase its sales revenue but was unable to do so. That’s why I framed by research question as "How can Lekhize footwear cope with competition of low cost and quality footwear entering from China to India?"

2.1 Primary Research

Interview with Mr. Sumesh Lekhi, the owner of the company and Mr. Kapil Chowdhry, sales manager of the company.

Questionnaires were given to 100 customers and 5 retail stores in Mumbai who were selling the product of the company asking them about the quality and designs of the product.

2.2 Secondary Research:

Internet

Newspaper Article

Balance Sheet

Profit and Loss Account

FINDINGS AND ANALYSIS

3.1 Graphs:

Graph 1: It clearly shows that many people aren’t aware of the manufacturing company and the company should promote the products. [4] 

Graph 2: It shows that because of the launch of their official website many people have come to know about the company [5] .

Graph 3: This graph shows that people of the age group 30-40 buy this product the most [6] .

Graph 4: This graph shows that the customers and the retailers who buy the product value the quality of the product the most. The designs and the price also play an important role while purchasing the product [7] .

Graph 5: This figure shows that most of the retailers and customers who buy the product are satisfied with the quality [8] .

Graph 6: This figure shows that more than 50% of the customers can afford the product [9] .

Graph 7: This graph shows that 46% of customers and retailers prefer low cost and quality footwear. The price of the product changes their interest [10] .

SWOT MATRIX [11] 

Strategic Analysis

Internal Factors External Factors

‘

Strengths Weaknesses Threats Opportunities

SWOT ANALYSIS [12] :

Superior design capabilities and quality

Quality is exceptional

Low cost of production

Quick respond to market changes

Quick decision making

Optimum quality designing

Experienced team members

Quality assurance

Customized Footwear

Research of design and development is done according to the future and present trends

Wide variety of products

Based in Mumbai which is the fashion capital

shortage of skilled workers

Low investments in Research and Development

imports of raw materials

Competitive vulnerability

Staff turnover

Lack of facilities

Unable to fund to make changes in marketing strategy

STRENGHTHS WEAKNESSES

New competition in the market

large competitors such as China attracting skilled workers

buyers buying low quality and low cost foot wears

Recession

Cost of technology investment

Decreasing profits

Availability of resources

Increase market share

Introduce new designs

Export in other countries

Improve local communities perception

Expand courses to meet broader range of customer needs

New technologies which will reduce the cost of the production and labour work

OPPORTUNITIES THREAT

Figure 2: SWOT Analysis

SWOT Analysis and Discussion

I have used SWOT analysis to know the strengths and the weaknesses of the company and the opportunities through which it can become better and the threats they are facing. It helps the business to compete and formulate its strategies.

Strengths: These are the internal positive factors of the company compared to the competitors. In this case, the company has superior design, skilled and experienced designers and it is based in Mumbai which is a fashion industry and the demand for the product is also more.

Weaknesses: These are internal factors which are negative and they are the strengths of the competitors. These factors are- lack of skilled workers, they have to import the raw materials and cost of transportation is very high. These factors need to be removed to compete with the rivals. The workers can be trained so that there are enough workers in the firm. The cost of the transportation can be reduced by ordering high amount of raw materials and storing it in a warehouse which will reduce the cost of raw materials as well as the cost of transport.

Opportunities: These are the positive external prospects for future development. The company can increase the market share, introduce more designs and have a wider range of products for the customers. New technologies can also help in reducing the labor work and it’ll be more efficient.

Threats: The external factors that act as an obstruction for the company which create problems for the company. New competition in the market is a threat to the company. Large competitors are attracting the skilled laborers and buyers who buy low cost footwear. There is a decrease in the profits made by the company. Getting the resources is also difficult as the company has to import the raw materials. The company can overcome these problems by attracting the laborers by giving them good working environment and assuring job security.

Porter’s Five Force Analysis [13] 

Figure 3: Porter’s Five Force Analysis

Analysis and Discussion:

I have used Five Force Analysis as it helps in evaluating the competition within an industry. This tool also helps in identifying main issues in the company.

Threats of new entrants to an industry:

The natural entry barrier for this industry is not that high so it is easy for other industries to set up their business. The economies of scale [14] is considerably low so it is very easy for the other MNCs or other companies to enter the market. The high number of competitors who are able to sell the product of low quality at much lower rate in the market has also reduced customer’s loyalty. Getting the raw materials of the product is very difficult but low quality raw materials are easy to find so it is easy for the competitors who don't give that much importance to quality to get the raw materials. The capital required to make the product is pretty high as the new technologies are required to make the designs of the product. They can create strong brand image by investing more in promotion. They can control distribution channels [15] by making an agreement with the retailers.

Threat of Substitutes:

MNCs (China) are able to sell their product at much lower rate and the choices for the customers have increased and it is easier for the customers to switch to other products. It is a threat for the company as the product can be substituted very easily. The customers now days don’t give much importance to the quality of the product as they buy the product pretty often, the quality does make a difference but if the competitors are able to sell the product at a cheaper price but of low quality then according to the survey [16] 60% of the customers would prefer that. The company can have wider range of products so that the retailers and customers have enough varieties to go through and create barriers to entry.

Bargaining power of suppliers [17] :

The Company is not able to increase the cost of the product as the company doesn’t have any bargaining power. There are few potential suppliers. The company has to import all the raw materials and it very difficult to find cheap supply so they have to agree with the demands of the suppliers. All the raw materials are taken from different suppliers so the concentration is low and it is difficult to switch to another supplier. The company can use vertical backward integration [18] .

Bargaining power of buyers:

The company has around eight retailers and the retailers have high bargaining power as there are many suppliers in the industry. The buyers have a choice of switching as there are many suppliers in the market. The demand of the customer increases and the buyers tend to buy different products from different suppliers so that they have enough choices for the customers. To meet with the demands the company has to come up with different designs and models, it has to be more flexible. The buyers are not loyal to the suppliers they tend to buy low cost products. They can use vertical forward integration.

Intensity of rivalry (existing competition):

Rivalry is more intense in markets that have very low entry barriers and where there is lots of small-sized firms [19] . The degree of competition in this industry is very intense as the number of competitors is very high. The company is not able to differentiate the products. The pricing method is also fixed according to the competitor’s pricing method and MNCs (China) have reduced the cost of the product so it is difficult for the company to sell the products at the same rates as according to the survey [20] many retailers prefer lower rates.

THE MARKETING MIX [21] 

Figure 4: The Marketing Mix

THE MARKETING MIX ANALYSIS AND DISCUSSION:

I have used the marketing mix to re-evaluate and strengthen marketing strategy which includes the Four Ps which are Product, Price, Place and Promotion. All four elements are interdependent.

Product: A product is described as any good or service that serves to satisfy the needs or wants of the customer [22] . It can be tangible or intangible. The Lekhize footwear serves the same purpose which is to fulfill the needs of their customers. The Lekhize footwear manufactures footwears of best quality and are appreciated by the clients as well. The customers of Lekhize footwear according to the survey [23] are also satisfied with the quality of the product. The quality control team makes sure that the quality is up to the mark by getting the raw materials from a good supplier and by examining all the stages when it is manufactured so that the quality remains the same. The footwears are designed by professional designers who are well aware of the latest and future trends. The footwears are made for all the occasions- festive footwear, party wear, flip flops footwear, etc. the colors and designs used by the company are well appreciated by the clients. They are manufactured by using user friendly fabrics [24] and are designed according to the requirements made by the customer. There is no competition for the product as far as the quality is concerned.

Price: The Company faces a problem in the pricing strategy as the degree of competition is very high and few companies are able to sell the product at a cheaper rate and the customers also prefer buying that. The prices are set according to the competitors though the company is not ready to reduce the price of the product because the quality of the product is very good and the cost of production is also high so the price of the product cannot be reduced. There is not much demand for this product as there are many competitors in this market. The clients who are loyal to the company and have been buying the product for a long time get a discount which benefits the buyer which doesn’t make them look for another supplier.

Place [25] : After the launch of the official website the customers can now order the amount of products on the internet. Now the customers don’t have to find the product in any store they can directly select what they want or what design they want and order the amount they need. The product is also distributed to many retailing groups which further sell it in different stores. There are two channels of distribution one is where the company is the first mediator which means that they sell the product to the retailers and then the retailers sell it directly to the consumers and second where the consumers can directly buy the product by contacting them through the company’s official website and buying the product directly from the manufacturer is also cheaper for the customers than buying from the stores.

Promotion: This refers to the strategies which are used to attract customers. By opening the official website the company has already attracted many customers which have promoted the company a lot. The Lekhize can now even promote it more by advertising it in the newspapers or Television as the consumers can now buy the product directly from the company and it will be easier to promote. They should put up banners and posters on the roads and highways so that more people know about the product. They can also use sales promotion which is a temporary way of enhancing the sales by reducing the price of the product.

SALES VOLUME TREND ANALYSIS [26] 

Year

Quarter

Sales revenue (lakhs)

Four-quarter moving total

Eight-quarter moving total

Quarterly moving average (trend)

Seasonal variation

Average seasonal variation

2008

1

383

2

429

3

510

438.125

71.875

57.21

4

412

1734

445.375

-33.375

-33.30

2009

1

420

1771

3505

448.25

-28.25

-23.54

2

450

1792

3563

452.625

-2.625

9.75

3

512

1794

3586

473.00

39

57.21

4

445

1827

3621

503.625

-58.625

-33.30

2010

1

550

1957

3784

530.625

19.375

-23.54

2

565

2072

4029

553.625

11.375

9.75

3

613

2173

4245

552.25

60.75

57.21

4

528

2256

4429

535.875

-7.875

-33.30

2011

1

456

2162

4418

517.75

-61.75

-23.54

2

528

2125

4287

507.5

20.5

9.75

3

505

2017

4142

4

554

2043

4060

Figure 5: Sales Volume Trend Analysis

Graph 8: Sales Volume Trend Analysis showing the seasonal variation

The trend analysis helps to know the seasonal variation and to predict the future sales. It shows the average variations for each quarter. But this tool may not be that accurate as the trends might change. According to the first quarter the first variation is negative and in the second quarter it improves. In the third quarter the company is able to achieve market sales. In the fourth quarter the sales go down and it is worse than the first quarter. This shows that the company is able to sell the product at a higher rate in the second and third quarter and the company makes profit from these two only as in other two it is facing loss.

Ratio Analysis [27] :

Ratio

2011

2010

Current Ratio

2.6:1

2.7:1

Acid Test

1.5:1

1.6:1

Return on Capital Employed

7.5%

9%

Gross Profit

63%

70%

Net Profit

23%

30%

Stock turnover Ratio

0.69 times

0.78 times

Figure 9: This table shows the ratio analysis

Ratio Analysis and Discussion [28] :

I have used this tool to analyze the financial performance of the company.

Current ratio: This helps to check whether the company is able to use its current assets to cover its short – term debts. For 2010, the current ratio was 2.7:1 which is satisfactory as the current assets are two and a half times more than the current liabilities. For the year 2011, the current ratio was 2.6:1 which is lesser than the last time but it is better because the ideal current ratio should be 2:1 [29] . The firm has a higher current ratio for both the years- 2010 and 2011 which shows that the company has more current assets which could be used for day to day expenses.

Acid Test Ratio: It is like current ratio except that it doesn’t include stock while measuring the short term liquidity of a business. For 2010, the quick ratio is 1.6:1 and for the year 2011, the quick ratio is 1.5:1 but the ideal ratio is 1:1. The ratio measures the ability of a firm to cover short-term debts with its cash and debtors.

Return on Capital Employed [30] : The ROCE for the year 2010 is 9% and in the year 2011 it is 7.5%. This indicates that the company has very less return on capital employed.

Gross Profit Ratio: The Gross profit of the company for the year 2010 is 70% and for the year 2011 it is 63%. There is a decrease in the gross profit due to decrease in the sale of the product and decrease in revenue.

Net Profit ratio: The net profit for the year 2010 is 23% and there is an increase again in 2011 by 7% which is 70%. The net profit is less than Gross Profit which means that the company has lesser profit to invest in the business again. Despite earning so much gross profit the company’s net profit is very low but it can be improved by reducing indirect expenses.

Stock turnover ratio [31] : The stock ratio for the year 2010 is 0.78 and for the year 2011 is 0.68. The rate of stock turnover is very less. The company can increase the stock turnover ratio by reducing the range of products by selling the better ones. But the stock turnover shouldn’t be too high as this will reduce their ability to benefit from purchasing economies of scale.

Product Life Cycle

Sales Revenue

Time

R&D Launch Growth Maturity Saturation Decline

Figure 10: Product Life Cycle

Analysis and Discussion:

This tool helps to identify the changes in the product’s marketing strategy which needs to be done. As the product comes under the fashion industry, which is continuously changing the product has a shorter life cycle. So the demand for new products is always more as the demand for footwear never stops. There are six stages for a product and every stage has a different marketing mix.

Research and Development: Lekhize footwear spends a lot of time doing the market research as it is a fashion industry the trends keep changing and the company has to be aware of the future trends as well. Before designing any footwear a lot of research has been done.

Launch: There is no launch of the product but the retailers are told about the new products and the customers come to know about this directly from the website.

Growth: At this stage the sales volume of the product increases. The retailers buy the product and there is an increase in the demand of the product so the sales revenue increases and the profits increase which makes the competitor come up with the same design.

Maturity: At this stage, sales revenue increases but at a slower rate.

Saturation: Till this stage, too many competitors come in and start selling the product at a lower cost and the customers are attracted to them. Lekhize Footwear can use competitive pricing strategies [32] in this case to continue to boost sales.

Decline: At this stage, the demand of the customer dies as the fashion trends keep changing the life span of the product is very less and the company has to come up with new designs in order to not lose the customers.

CONCLUSIONS AND RECOMMENDATION

4.1 CONCLUSION:

The company needs to cope with the heavy competition and not let the sales go down and in order to increase its sales revenue I framed this research question - "How can Lekhize footwear cope with competition of low cost and quality footwear entering from China to India?"

From the above study we can see that by opening their official website Lekhize Footwear’s sales increased and it was effective and helped them gain more profit which otherwise they wouldn’t as the competition is really high. The company doesn’t advertise the products at all which has also affected the expected sales.

The first thing that occurred to me was lowering the cost of production but the quality of the product would become bad as the cost of raw materials was high and the main aim of the company is to provide the customers with good quality footwear. So the company couldn’t cut the cost of the product.

The company has to take into consideration both qualitative and quantitative factors while taking a decision. The quantitative factors are Ratio Analysis and Sales Volume Trend Analysis which are used to know the company’s performance. The ratio analysis shows that the Return on Capital employed, Net Profit and the Net Sales has reduced compared to last year.

According to the sales volume trend analysis we can observe that the sales are very high in the third quarter and the first and fourth quarter are negative which should be improved. The estimated sales and calculations show that this project will help increase revenue and hence profit.

The qualitative analysis such as Force Field Analysis, Marketing Mix and Product Life Cycle show that the company has more advantages than disadvantages if it carries on with the promotional strategy.

Even according to the survey [33] , we can observe that many customers and retailers prefer low cost footwear and more than 50% of the people who were interviewed didn’t know about the company and its products.

Lekhize Footwear can cope with the competition entering from China by using promotional strategies and pricing strategies.

4.2 RECOMMENDATION:

The official website has promoted the company and many customers came to know about the company through this so the company could use above the line promotion like Television, radio and newspapers.

The company should start using eco friendly products as the leather takes 1000 years to degrade and now days the people are becoming more concerned about their environment so it’ll be better for the future as well.

They should put up company’s posters and banners so that the people know about the company and their products.

According to the sales volume trend analysis it is observed that the sales are very high in the third quarter and the company could promote the product more at that time and have a wide variety of products for the customers according to the taste and preference of the customers.

4.3 UNSOLVED QUESTIONS:

What are the other marketing strategies that Lekhize Footwear can use to increase its market share?

To what extent can Lekhize Footwear increase the sales at the time of recession?

How feasible is it for Lekhize Footwear to use eco - friendly products to attract more customers?

BIBLIOGRAPHY AND WORKS CITED

Websites Referred:

http://www.indiamart.com/lekhizefootwear/ , 24th September 2011, Time: 7.35pm

http://www.indiamart.com/lekhizefootwear/aboutus.html, 24th September 2011, Time: 7.50pm

http://www.maxi-pedia.com/SWOT+analysis+matrix+method+model, 13th October 2011, Time: 3.30pm

http://www.unc.edu/~andrewsr/ints092/clark.html, 30th August 2011, Time: 10 am

Books Referred:

Stimpson, Peter, AS Level and A Level, Business Studies, Cambridge: Cambridge University Press, 2002, Sales Volume Trend Analysis, Page No – 155.

Coucom, Catherine, IGCSE and O level, Accounting, University of Cambridge International Examinations, Cambridge University Press India Pvt. Ltd., 2008, Ratio Analysis, Page No - 369.

Wood, Frank, Pearson Longman, Business Accounting 1, Pearson Longman Eleventh Edition, Pearson Education Ltd, United Kingdom, Ratio Analysis, Page No - 621.

Cox, David, Success In, Book-Keeping & Accounts, International Student Edition, International Student Edition printed 1990, Reprinted 1997. Ratio Analysis, Page No - 357

Hoang, Paul, Business and Management, Victoria: IBID Press, 2007. SWOT Analysis, Page No – 98.

Dave Hall, Rob Jones, Carlo Raffo, edited by Ian Chambers and Dave Gray, Pearson Longman, Businees Studies, Third Edition, Pearson Education Ltd., 2004, The Product Life Cycle, Page No – 177.

Gutterifge, Lloyd, IB Study Guides, Business and Management, Great Britain by Bell and Brain Ltd, Glasgow. Marketing Mix, Page No – 80.

Clark, Paul, Golden, Peter, O’Dea, Mark, Weiner, John, Woolrich, Phil, Course Companion, Business and Management, Paul Clark, Peter Golden, Mark O’Dea, John Weiner and Phil Woolrich 2009. Porter’s Five Force Analysis, Page No – 189.