Bus 1001 Healthy Potion Case Study

Introduction

Healthy Potion (HP) is a unique beverage producing store that is expanding considerably well and generating great profits from selling a single product. This model however, proves unsustainable in the long-term as the reliance on the distinctive drink is overly excessive, thereby raising concerns about risk management. Hence, to address the situation and achieve the entity’s vision of diversifying, HP must formulate viable development strategies; using Porter’s Five Forces and SWOT analyses. Yet to put the new business development into effect, a strategic plan to raise the requisite fund of $200,000 is required. This involves evaluating the advantages and disadvantages of debt and equity financing.  

Strategic Analysis

In order to pursue the vision of expansion, it is essential to evaluate the internal facets of HP and the environment it is operating in. Such a process is primarily established through a SWOT analysis which helps identify a business’ strengths and weaknesses with its opportunities and threats (Helms and Nixon 2010). In particular, strengths are internal capabilities that relate to the success of a business. For HP, a key strength of the entity is its competency in producing and selling a unique healthy beverage in the local market. As such, the firm presumably has no direct competitors, leading to the formation of customer loyalty and retention. This is further reinforced by the businesses mounting sale figures, exemplifying the high number of recurring customers with an apparent preference for the product. Another twofold capability of the HP beverage is the health benefits that clienteles may encounter. Not only is it assumed to improve the lifestyle and wellbeing of individuals, it is also marketed at an affordable, low-selling price. Thus, this differentiated positioning places the business at a favourable level, allowing different consumers of different segments to enjoy the drink.

On the other hand however, internal restrictions that limit a business’ success are known as weaknesses. One of HP’s restrictions is its position as a relatively new business in the industry. As such, the entity faces tight budget constraints, limited financial resources and a lack of working capital. Collectively, these not only contribute to the stores weak brand image but they also hinder its ability to market its brand and product. This thus leads to a lack of consumer understanding for the beverage and the firm is consequently unable to diversify within the marketplace. Another internal drawback of HP is the low profit margin and revenue that it accrues from its low price setting and narrow production line. Also, by mass-producing a single product the firm fails to segment the market and identify its potential consumers (Cahill 1997). Further detracting HP from performing at an optimum level is its heavy reliance on a single supplier. With this, referring to Porter’s Five Forces, the business operates inefficiently for it faces the unfavourable control of its producer’s high bargaining power.

Alternatively, external factors that a company may be able to exploit to its advantage are known as opportunities. For HP, the entity currently sells a seasonal beverage and reaps greater demand during the warmer months of the year (O’Connor 2015). As such, a distinctive opportunity of the firm is its potential to enter into new markets. This idea can be carried out by selling drinks catering to the needs of consumers in the winter season and in doing so; new revenue can also be gained. Another opportunity of HP is the growing consumer demand for healthy beverages and indulgences worldwide (Simpson 2010). According to Gierow (2010), there is ‘a lot of potential for creating new beverage concepts that can be applied across multiple sectors’ (cited in Simpson 2010). In this sense, HP is able to expand its operations globally and establish a new base of loyal customers without the immediate threat of competition.

Contrarily, threats are unfavourable external factors that may present challenges to performance. A central threat to HP is the presence of potential new competitors resulting from the low-entry barrier into the industry. As Porter’s Five Forces reiterates, where there is greater rivalry, there is higher potential for an entity’s market power and profitability to diminish (Wilkinson 2013). The model also highlights the threat of indirect competitors supplying substitute goods. Some examples in the beverage market perceived as indirect rivals to HP include Boost Juice- specialising in selling fruit juice, Chatime- specialising in fresh brewed tea and Starbucks, renowned for hot and cold beverages. Supplier control is another explicit threat to HP. With only one supplier, the producer not only holds high bargaining power but also the ability to exert influence over HP’s revenues and sales. This is clearly exemplified through the instability of supply whereby the purchase order and actual delivery from producers in China show constant discrepancies.

Thus, by identifying the positive and negative factors of HP, management functions are now able to understand its capabilities and formulate new business developments. 

Strategy for New Business Development

Strategies for new business development involve ‘matching a company’s strengths to attractive opportunities in the environment, while eliminating the weaknesses and minimising threats’ (Armstrong, Adam, Denize and Kotler 2015, p. 53). Referring to Porter’s Five Forces, if a supplier wields control over a vital input in the buyer’s business, its bargaining power is considered highly detrimental to future business success. This influence however, can be recovered through vertical integration which involves ‘coordinating the different stages of an industry chain when bilateral trading becomes unbeneficial’ (Stuckey and White 1993). Manuj and Mentzer (2008) however, propose that there is no single efficient strategy for supply chain management due to its dynamic, large-scale nature which prevent firms from making sound business decisions. Rather, what best improves the effectiveness of a supply chain is dependent upon the product (Fisher 1997). Yet this viewpoint lacks adequate foundation, as by gaining control over suppliers, HP can improve product range, reduce internal costs, gain efficiency and secure distribution channels (Ding and Mahbubani 2013). Reinforcing such a notion, HP can further acquire patent rights to grow the unique herb in Australia whilst reimbursing royalties to its suppliers. This will also minimise reliance on its provider (Allred and Park, 2007).                                                                                                Alternatively, to address HP’s lack of capital and diversification, the firm can change its ownership structure to expand overseas. As Oldwick (1998) observed, ‘changing to a shareholder-owned structure is the key to competing with larger and more complex financial service enterprises’ (cited in Business Wire 1998). Yet Cohen (1998) proposes, ‘A change in ownership structure… is no substitute for capable management and strategic vision.’ He adds that some companies pursuing a corporate conversion will struggle to develop the ‘dynamic culture, market-focused orientation, and financial management expertise necessary to succeed in their new competitive arenas’. Nevertheless, as a growing business, by initiating an international expansion strategy and devoting funds to the project, HP will be able to establish new clientele bases and diversify its revenue streams.