Business Strategies and Customer Profitablity Analysis for Illusional Optics

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Recommendation of the best strategy

Combine the current situation of Illusional Optics and our research, differentiation strategy would be the optimal strategy to improve its competitiveness. The main reasons will be discussed as follow. In order to achieve strategic business success, the first thing to do is figuring out the critical success factors (CSF). First of all, based on its current situation, Illusional Optics has already acquired a superior product quality in the optical field, in other words, the quality of optical products is their core competence which makes significant persistent differences and assists to achieve their competitive advantages. Meanwhile, it means that their high quality products have been widely recognized and favoured customers. Therefore, it is noticeable that product might be the reasonable starting point to determine the critical success factors. Furthermore, as an optical company, the customer requirements vary slightly from individual to individual. As such, the diversity of their products plays a critical role in providing a variety of options to customers and satisfying their unique needs. Thus, it is necessary that being innovative in product design so as to establish a solid connection to the desires of customers. Base on the two points discussed above, the critical success factors could be concluded that achieve a sustainable competitive strength through product differentiation.

Bearing in mind the previous points, comparing to cost leadership strategy, differentiation strategy would be better suited for the company which leads to effective. For one thing, as the previous executive management meeting mentioned, it appears that cost reduction would at the expenses of quality inspection which may give rise to a decline of the product quality. This goes against the goal of the company. For another thing, from long-term perspective, differentiation strategy would be a stable and sustainable business model to guide future direction of the company and more synonymous with company’s mission which is the provision of good quality products to customer.

Briefly, we recommend the company adopting differentiation strategy to accomplish their mission.

Part II: Customer Profitability Analysis

Over the past 30 years since activity-based costing (ABC) was introduced, it have helped hundreds of thousands of companies to improve its profitability through providing a system for companies to have a closer look of the drivers of their cost and distinguish between profitable customers and those are not. In determining the profitability of customers, company needs to separate customers by groups according their purchasing behaviors and preferences. Then conclude all the cost of each customers segments and compare with the profits each group have generate. Thus, a company can separate profitable customers with those who make negative contribution or less profitable. Following this analysis, companies can inspect the customer profitability information and determine how to manage customer relationships in order to increase customer satisfaction and the profitability.

The implementation of customer profitability analysis in FedEx

For instance, FedEx Corporation (FDX) using customer profitability analysis to significantly reduce its cost in marking investment and customer maintains. By employing activity-based cost system, FedEx separate their customers into three segments: customer with highest spends and require little service and maintenance, customers who spends a lot in services but have potential in increasing spending and those who require a lot services but no potential in spending more in the future. FedEx makes a lot of efforts on retaining high spenders either by spend more in marking or offering discount. At the meantime, FedEx try to reduce service cost on the second customer segment or try to re-pricing these customers. For the last customer segment, FedEx spend very little or show not effort on marketing those customers (Wyner, 1999).

The implementation of customer profitability analysis in Marshall & Ilsley

Another example of implementing a CPM strategy is Marshall & Ilsley Corporation (M&I) which purchase by Bank of Montreal on 17 December, 2010. To maximize its client’s potential profitability, Marshall & Ilsley Corporation implemented comprehensive data warehouse system since 1995. By utilizing this system, the company collect valuable information which can be used to identify the cost and profit drivers within thousands of its branches, then analyze the customer profitability though cost driver to come up with a more customer focused corporate decision. (Hutt, 2000)

Part III: Customer Profitability System

According to Searcy (2004), there are some steps needed to be followed in order to design a customer profitability system which is based on Activity Based Costing (ABC) for Illusional Optics. First is to design the activity cost pools. Referring to the case, the customer related activity costs could be divided into seven parts, among these costs, processing normal orders and special orders (per order), invoicing of customers (per invoice), packaging and handling of optical products (per package) and delivery (per delivery) could be assigned to order level, which level is associated with customer orders and delivery of customer orders (Langfield, 2011). Meanwhile, sales staff contact with customers (per contact) and customer visits (per visit) by sales staff could be assigned to the customer level.

Details of seven main drivers:

Normal order

Normal order is a basic activity cost pool in ABC of Illusional Optics, which the cost driver of this activity is $16.5 per order. As it involved straightforward ordering existing products, as well as some manual work when orders are made by telephone or fax.

Special order

Special order is the activity cost pool designing for special requirements customers, whose products need to be customised, such as a pair of sunglasses with the different colour to the standard colour normally produced. Therefore, the cost driver for the special order is $20 per order.

Invoicing

Invoice cost may be based on the consumption of paper and printer ink, which is the basis for collecting receivables. Its cost driver is $18 per invoice.

Sales contact

Sales