2002, Professor Jerome M. Katrichis
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Sports Authority Example
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VI. Evaluating Alternatives and Reaching Decisions
B. Evaluation of Alternatives
Changes to the current corporate strategy of price leadership and differentiation have been proposed. The existing strategy as well as the differentiation alternative is consistent with Sport’s Authority’s mission of offering an extensive selection of merchandise with a focus on customer service. Adopting a price leadership role would have several conflicts with the mission statement. It would not allow the company to be the “authority on athletics” or provide the service to meet its customer’s needs.
With regards to profitability, the existing combined strategy, as well as the price leadership strategy has a negative impact on Sports Authority’s profitability goals. The price leadership role produces low net margins due to low prices, while the differentiation strategy can tailor its margins to meet profitability improvement goals because there are no restrictions on pricing. Consumers will tend to pay higher prices when they are receiving additional benefits such as product information and instruction, customer service, and large selections of merchandise.
Currently, there are no financial restrictions for Sports Authority with regards to strategy changes. They are financially capable of executing each of the alternatives in Section V. The combined strategy and the differentiation strategy will require additional capital for store renovations.
Sales and market share can be significantly affected by changes in the corporate strategy. Maintaining the existing strategy will have minimal effect on the sales and market share of the company. Adopting a price leadership role will allow Sports Authority to “buy” market share through price penetration, but revenues may remain unchanged due to lower product pricing. Store location plays a role when discussing the effect on sales and market share for the differentiation strategy. Sports Authority’s outlets include freestanding locations and shopping centers, making Sports Authority a destination outlet. As a result, consumers rarely conduct impulse purchases and are less likely to compare prices between competitors. Therefore, the 3% increase in prices with the differentiation strategy would not have a negative effect on the company’s sales or market share. Sales will typically increase while market share remains constant.
Although both growth and non-growth strategies will be consistent with the company’s mission, the aggressive growth strategy will specifically emphasize Sports Authority’s desire to project an image of success.
A no-growth strategy will have no financial implications on the company in the short term. In the long term, however, the company can experience a negative effect on profitability due to the loss in potential sales. A growth strategy, on the other hand, would require a considerable cash outflow in the short term and currently the company does not have the funds to pursue an aggressive strategy; however, there is room to promote store growth and expansion on a limited basis. Profitability for the company would increase, especially when shared costs such as advertising, are allocated amongst a greater number of stores.
The potential for increase in market share exists with the store expansion policy. The greatest potential is to take away market share from the company’s main competitor Dick’s, who is also pursuing an aggressive growth strategy.
With a no-growth strategy, sales for the company will remain relatively stagnant, while an increase in sales will be noted with the expansion strategy due to the larger number of customers that will frequent the new stores. In addition, rather than alienating customers, the growth strategy will entice new customers to make purchases as a result of the improved accessibility of the stores and the opening of new market potential.
3. Product Mix
Sports Authority offers an extensive selection of merchandise within each product category, including brand name merchandise. For example, in the equipment category, Sports Authority offers merchandise for both traditional and exclusive sports, accommodating the needs of sports enthusiasts and the leisure sports segment. Whether Sports Authority chooses to expand its soft line product offering or maintain the current product mix, either alternative will remain in line with the company’s mission of offering an extensive selection of sporting goods, athletic footwear and apparel.
Profitability in both the short-term and long-term would not show a significant change if the company’s product mix would remain the same. However, with an increase in sales of soft-line products, profitability would initially grow due to the increase in sales volume, but would decline in the long-term. This decrease in long-term profitability can be attributed to higher costs associated with expanded inventories, increased sales staff, and a heavy advertising campaign. In addition, it is assumed that Sports Authority will not be a destination outlet for apparel and footwear for the long-term. The initial marketing strategy will attract customers to make soft-line purchases, but sales will taper off for these categories in the future.
With a 63% increase in long-term debt over last year, Sports Authority currently does not have the financial resources available to embark on an extensive advertising and promotional campaign to alert customers of their change in product mix.
Although the expansion of the footwear and apparel sectors may increase Sports Authority’s market share within these product categories, the increase will be very slight due to the saturation of competitors in the market. If the top five sporting goods companies only hold 10% of total market share, very little can be accomplished by way of percentage growth for each segment. The greatest difference will be experienced in the sales value and volume for these products, so that when combined, they would surpass that of the hard line sales.
By changing their product mix, Sports Authority may also experience a loss in customers who currently frequent the store for their sports equipment needs. These customers have come to depend on the store to be their best source for sporting equipment due to the selection of merchandise offered. However, with a shift of attention to apparel and footwear, equipment customers may feel under-serviced and limited in their product selections and may choose to make their purchases elsewhere.