This report is commissioned to examine the new business strategies of Fabian Advertising. It draws attention to the facts that the sales revenue has been decreasing dramatically in recent years. The decrease in profits was because its clients have chosen its competitors’ services over theirs. As clients’ expectations and needs have changed, Fabian Advertising has to change to a new business mission – build. The company is in the high growth, low market share situation. Its competitive advantage is differentiation focus. It is targeting a niche and higher end market share. Its key success factors are “Customer Service”, “Innovation and Quality”, “Risk Management”, “Company Image and Reputation”, “Understand Your Client Needs” and “Know Your Competitors Well”. It uses “Activities Based Costing” for its cost allocation. It is selling premium services and products, so “Cost Plus Pricing” is more suitable than “Target Costing”. It uses net present value as capital budgeting technique. “Customer Profitability Analysis” is important, so it will know how to develop its marketing strategies. It is important for Fabian Advertising to create a new quality and time performance measurement using its competitors as their benchmark and further improve
2.Introduction to report
Fabian Advertising is an advertising agency. It is well known in creating short, simple and cost efficient television commercials for its clients. In recent years, Emil Fabian, the owner of the company discovered that profits of the company have decreased. The company can no longer attract clients like before. This was partly due to the change in customer characteristics. The demand in sophisticated, high quality advertisements has increased. Fabian Advertising needs to develop a new strategy to increase its market share. 2.2 Purpose
The aim of this report is to investigate new business strategies of Fabian Advertising. 2.3Definitions
2.3.1Definition: Competitive Advantage
Competitive advantage is a strategy that differentiates one company from the others. 2.3.2Definition: Key Success Factors
Key success factors are the most critical factors that possibly lead to the success of a company.
3.1Business Mission of Fabian Advertising
There are four types of business mission. Build, Hold, Harvest and Divest. 1 •Build (Question mark)- On a high growth, low market share basis. Therefore, it is worthwhile to invest. To acquire market share, compete with competitors, penetrate into new market. 1 •Hold (Star)-On a high growth, high market share basis. To penetrate further into market, modify products, introduce new products. E.g:, Apple products. •Harvest (Cow)-On a low growth, high market share basis. To earn as much profits as possible from leftover market share, as demand for this particular service or product has become stagnant. At the same time, try to reduce cost to maximize profit. 1 •Divest (Dog)-On a low growth, low market share basis. To leave the business. If possible, sell the company to recover some losses and invest in a new business. 1
Fabian Advertising wants to target a niche and upper class market. It needs to build on its existing working equipment, staff expertise, client base and company image. 2
3.2Competitive Advantage of Fabian Advertising
Figure 2 3
Fabian Advertising is targeting on high end customers. To these customers, price is not the main concern. Their main concern is the quality of the product and service. In the Porter’s Generic Strategies, Fabian Advertising’s competitive advantage is differentiation focus. Narrow competitive scope is the niche market. Higher cost is referring to the high end customers. 4
3.3Key Success Factors of Fabian Advertising
Key success factors are important to a company growth. As for Fabian Advertising, below are the few key success factors which are very important. 5
Advertising industry is a people’s business. Therefore, customer service is very important. The client needs to feel the sincerity, helpfulness from the staff and the willingness to go the extra mile to help.
3.32 Innovation and Quality
It is important for employees to stay updated with the latest knowledge and technology. These clients pay premium price so they will expect high quality commercial from the company. Employees should be updated with the latest knowledge to be able to advise them and give them ideas on how to achieve the best quality piece of work. 6 3.33Risk Management
Fabian Advertising is looking into expanding its infrastructure, hiring new staff and developing marketing campaign. It wants to target on higher end clients. It is said that this market is growing, which is uncertain. Fabian Advertising needs to measure the risks and “Return of Investment” (ROI) to increase the success of the business.
3.34Company image and reputation
Fabian Advertising was previously a traditional advertising agency. The image it once gave people was cost effective. It needs to change its image so that clients will feel justified to pay premium rates for its advertisements.
3.35 Understand your client needs
This is a very crucial part for the success of the company. Fabian Advertising has to understand its clients. It is not commercially viable to be the most innovative advertising agency in the world if the company does not know what its client wants. When it understands its client needs, simply work towards that direction. 3.36Know your competitors well
Advertising is an ever changing industry. Every day, there can be new agencies set up or wind up and new advertising ideas or trends generated. Before they can think of how to find or keep their clients, they have to know what others are doing. 7 One of the world’s top advertising firm, WPP, has the following success factors to become successful. 8
•Generating new business opportunities
•Attracting and retaining the best people
•Enhancing our reputation
•Meeting investor expectations
4.Tools and Techniques
Budgeting is more difficult to measure when there is greater uncertainty. This is due to when there is a greater uncertainty; the budget will be harder to meet as there will be constant changes involved. Hence, budgets are relied more in harvest units than in build units. As Fabian Advertising is based on customization, they will have more uncertainty towards the cost involved. Thus it is not much relevant for Fabian Advertising to have production and purchases budget. The budget should focus more on revenue than on cost. In Figure 3 below, we can see the comparison between build and harvest mission on budgeting. Figure 3 – Different Strategic Missions: Implications for Budgeting
Flexible Budgeting is not relevant in Fabian Advertising as every customer’s advertising cost is different. If flexible budgeting is involved, cost will escalate due to no reasons to keep the budget low.
Fabian Advertising is using Activities Based Costing (ABC) costing system instead of the conventional costing system. The conventional costing system assumes that products cause costs. Activity based costing systems have activities as the fundamental cost objects. In Fabian Advertising, every customer is customized differently and hence creates different cost base on the activities needed for each advertisement. Hence, using ABC costing system will be a more accurate and effective way to assign cost for Fabian Advertising.
4.4Use of Standard Costing and Variance Analysis
There is no standard costing in Fabian Advertising as it is all customized to every individual customer. Hence, there would not be any variances so Variance Analysis is not appropriate.
CVP Analysis cannot be applied as there is no product mix available. CVP Analysis assumes constant sale price and cost which is not applicable in Fabian Advertising as their customers are all customized individually. They will consume different selling price and cost.
4.6Target Costing or Cost-Plus Pricing
Target Costing determining how much the business wants to charge for a product. It then minus its profit from that price to see how much cost it can afford to consume for that product. While in Cost-Plus Pricing, the business adds up the total cost of producing an item, then add a mark up for the profits to derive the selling price. Cost-Plus Pricing is simpler but it is not cost efficient. Since the customer absorbs costs, there is no motivation to save money in the production process. Target Costing encourage the business to operate efficiently as the price is already set and profit will be determined by how closely the production can meet the allocated cost. Target costing can lead to poor quality of products by cutting cost to meet the allocated cost. In Fabian Advertising, it seems like Cost-Plus Pricing is more suitable. Every customer’s demands are different and it is hard to set the price right at the start. Cost-Plus Pricing will meet the need to produce innovative and high quality commercials. It is also important to do it at a competitive price else customer will pursue other cheaper options.
4.7Capital Budgeting Techniques
Capital budgeting is the process that company use to authorize capital spending on projects requiring huge investment of capital. It is usually assess using quantitative analysis and qualitative information. There are several techniques for capital budgeting, namely, Payback Technique, Net Present Value (NPV) method and Annual Rate of Return method. Payback Technique measures how long it takes to recover for their initial investment. It is dividing the capital investment by the annual net cash flow. It is simple but it ignores difference in the timing & duration of cash flows during the project. Using NPV method, you will need to know the cash inflows/outflows, and the required rate of return (ROR) on its investments. Using total present value of net cash inflows and subtracts investment cost. If the NPV is positive, it means the required ROR has been met. ROR is by dividing the expected annual net income by the average investment. The annual ROR being used alone may be misleading. As it uses accrual basis of accounting and not actual cash flows or time value of money. Hence, NPV method is more preferred for Fabian Advertising.
4.8Customer Profitability Analysis
It is important for Fabian Advertising to use Customer Profitability Analysis (CPA). CPA can help improve strategic marketing planning. Insights into the profitability of individual customers, as well as the distribution of profitability across the customer base, can lead to better decisions in the areas of managing costs and revenues, managing risks and strategic market positioning. 9
4.9Just-In-Time Inventory Management
Just-In-Time inventory Management is not applicable as there is no inventory in Fabian Advertising.
4.10Economic Order Quantity (EOQ) Models
EOQ Models cannot be use as there is no need inventory for Fabian Advertising.
4.11Quality and Time Performance Measurement
While it is important to deliver in the shortest time possible, delivery of quality products is as important. Changes to advertising industry lead customer to look for innovative and high quality commercials. In Fabian’s case, it is mentioned that customer did not expect quick deliver as they understand that quality commercials require more time to produce. But on time deliver is still important. Hence, allocating enough time for the commercial is critical. Fabian Advertising needs to know the market benchmark to set the performance measurement for the film. Using a new set of business strategy, past performance measurement is no longer relevant. It is important for Emil to create a new quality and time performance measurement using competitors as their bench mark and further improve on it.
The purpose of this report is to investigate what kind of management accounting system is suitable for Fabian Advertising. Fabian Advertising business mission is using build strategy. The objective is to increase market share. Its competitive advantage is differentiation focus as the competitive scope is narrow and cost are high. The 6 recommended KSF are customer service, innovation and quality, risk management, company image and reputation, understanding your client and lastly know your competitors well. The tools and techniques to be included in its revised MAS are Budgeting, ABC costing, Cost-Plus Pricing, NPV method for Capital Budgeting Techniques, CPA and Quality and Time Performance Measurement.
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