Business
- Introduction
Earth Baby Inc. (EBI) produces organic baby products for health conscious parents that include food, clothing and toys. The company has recently produced a premium product line of organic baby foods. Extensive research has indicated that babies that consume premium organic food shall have substantial health benefits over other babies. The company practices premium pricing for its products as it has an excellent reputation for quality products among the customers. The CEO and founder of EBI Joan Alvarez has recently received a business proposal from his classmate Robert Bradley who is the Vice President of a large discount retailer Great Deal Inc. (GDI).
- Proposal
A joint venture between EBI and GDI is proposed according to which EBI would make minor modifications in the manufacturing process of its best-selling baby foods and the products would be then packaged and sold by GDI. According to the agreement, EBI would receive $3.10 per jar of baby food and would provide GDI with a limited right to advertise the product as manufactured for GDI by EBI.
- Profitability of Venture
Direct materials, Direct Labor, and other variable costs needed for GDI order would be $2 per unit in comparison to full cost of $3 (Materials, Labor and Overhead) for EBI product.
- Business Problem
Advantages of EBI-GDI Joint Venture
- Low Cost of Production
The advantages of EBI-GDI Joint Venture are purely financial in nature as EBI would be able to reduce its cost of production from $3 to $2 which is a cost savings of 33.33 percent. The long term impact of such cost savings can be in the form of higher net earnings and more availability of capital for investment in other ventures and company expansion. The joint venture shall increase the liquidity of the company substantially (assuming that other factors remain constant.
- Distribution Channels
EBI shall get access to the well-developed distribution channels of GDI for the distribution of the baby foods that will allow EBI to reach more customers and make the product more accessible.
Disadvantages of EBI-GDI Joint Venture
- Brand Dilution
The joint venture between EBI and GDI implies that the baby food products shall be altered and packaged and marketed as a GDI product which may lead to the dilution of the high level of brand equity that EBI has developed over the past 10 years. Brand equity is differentiation that brand has developed with respect to the competition that may translate into higher profit margins for the company . The joint venture of EBI and GDI may dilute the brand equity of EBI and shall also increase the brand equity of GDI. Since, the baby products shall be packaged and marketed under the name of GDI, GDI shall be able to position itself as a quality brand among the consumers.
- Quality Risk
The reasons for the superior performance of EBI as a brand among the target consumers is the consistently delivered high quality food products to the customers. EBI has standardized its manufacturing process over the past 10 years and has achieved excellence in the production of high quality baby food products for the parents. The joint venture proposes a change in the manufacturing process of EBI that may alter the product quality to a certain extent. Even a minor change in the quality of the product may lead to dissatisfaction among the customers.
- Product Positioning
EBI products are high value premium priced brands in the minds of the target consumers that view EBI as a high quality baby foods brand. EBI can charge its customers with higher prices due to the higher quality of EBI products including health benefits for babies. GDI brand on the other hand is a large discount retailer that offers discounted or low price products to the consumers. In case EBI products are sourced through GDI distribution channel, the prices of the EBI products shall have to be reduced through deep discounts and this could disturb the positioning of EBI as a premium brand in the minds of the target consumers. Once EBI products are available at discounted rates, the consumers are likely to demand lower prices and the company shall then not be able to charge premium pricing for its products.
- Recommendations
After a detailed analysis of the positive and the negative aspects of the business proposal, it is recommended that EBI should not enter into a joint venture with GDI under the present conditions of agreement. The analysis has been conducted as a Hindsight group that is aware about the consequences of the business decisions .
EBI can however enter into joint venture with GDI on the following conditions:
- GDI should offer financial support for EBI production.
- EBI products should not be marketed as GDI products.
- GDI should distribute EBI products as premium products in its distribution network.
References
- Agans, R., & Shaffer, L. (1994). The hindsight bias: The role of the availability heuristic and perceived risk. Basic and Applied Social Psychology, 439-449.
- Glynn, M. S., & Woodside, A. G. (2009). Business-to-business Brand Management: Theory, Research and Executive Case Study Exercises. Bingley: Emerald Group Publishing.
