Question

Bonia Corporation Bhd has posted positive earnings in FY17 including its latest fourth quarter ending June 30, 2017, but analysts are unsure if the company’s strategy to move into higher margin products will pay off. The company is mainly involved in the manufacturing and retailing of luxury leather goods, apparel, accessories as well as licensed international brands such as Braun Buffel. To improve its earnings potential, Bonia has adjusted its pricing strategy by introducing higher-margin products, reducing discounts given out to customers as well as adjusting the prices for new product ranges, in particular for the Bonia and Braun Buffel brands. But will this be enough to sustain its profit record? Analysts say it could be a tough road ahead for Bonia.

Assume that you are one of the analysts and Bonia has approached you to assist them. What would be your recommendations? You are required to obtain as much information as possible on the status and forecast about the industry from the internet or any other sources. You may use Porter’s Five Forces model to help you in the analysis before you make your recommendations.

Answer 1

Company Background & Brief Introduction

Bonia is a well-known and recognized Asian Fashion Brand which sells luxury leather products such as handbags, purses, apparel and accessories. It was formed in the year 1974 by Mr. Chiang Sang Sem who opened the first boutique in Singapore.

Bonia has gained its name as an important brand in the sector with its luxury products over the years. It provides an elegant, modern and contemporary styling to people of different genres and has seen sales heavily increasing over the years and has become one of the well-known brands across the globe.

That said, the road for Bonia will not be easy in establishing itself as mentioned in the case study. Bonia technically is not a super luxury brand such as a Louis Vuitton which is readily accepted with whatever pricing strategy it implements because of the higher brand value and recognition which the products have.

In general, the products being offered are of a niche segment which do no target average buyers and are for people with very specific needs.

Case Specifics:-

As a manager, it is important to assess the business and give clear insights which could make the new strategy of the company to engage itself and make it recognized as a super luxury brand possible. For this, there exist various techniques which are deployed for research to enable transition in a company to be smooth and plan for adversities well in advance respectively.

Porters 5 Forces Model and their specific research for the company is as depicted.

1) Bargaining Power of the Buyer: - (High)

Bargaining power of the buyer represents the relationship between the buyer and seller. It depicts the amount of negotiation which the consumer for the product is capable of in the industry. The bargaining power of the consumers for luxury products especially those that are priced high are relatively higher.

In this case, a small issue with the bags or the product quality will heavily dent the interests of the organization. In the era of information and technology, the company must build a brand value to reduce the bargaining power of the buyer. Presently, the buyers can easily negotiate and would switch over to other brands conveniently owing to lower costs. To place a high quality high priced product, the company needs to create a brand value which reduces this. There are companies like Charles & Keith which easily run away with the companies customers because of the lower cost offerings.

The company in this terms, must be able to depict a stronger brand value to the customers, and my suggestion would be to place relevant advertisements highlighting why the product costs more so that relevant sections can be interested in buying the product

2) Bargaining Power of the Supplier (Low)

One of the major reasons why Bonia as a company has seen major success is because it negotiates extremely well with suppliers and is therefore able to sell at a higher price. This power should be enhanced owing to the fact, that in the future the company would need active expenditure in branding and that would require higher margins.

In this case, lower bargaining power of suppliers indicates the fact, that due to rapid growth in the Industry the company can easily source its raw materials and choose alternative sources, which would not impact the production lines respectively.

3) Threat of New Entrants:-

In this case, the cost of becoming a company that manufactures luxury items is extremely high. Bonia has set its foot correct into becoming one such company owing to the fact that it has operated in the sector for such a long time. Presently it should focus its attention more towards making the brand name of the company of more value to the customers to ensure that the product is able to sell at a higher price. New Entrants is not a big problem since it requires huge capital overlays and industrial knowledge which not many companies possess respectively.

4) Threat of Substitute Products

Probably the biggest threat for the company presently is the fact that at the price point which the company is targeting currently there exist a vast variety of other manufacturers who have run the business for decades. High cost products require years of successful branding and promotion. One small problem with the products would mean an end for the company and its efforts.

Over the years even though, the company has maintained sales. It is important for it to note, that middle level luxury goods and premium ones are not perceived in the same way. The company should therefore consider this as an important aspect and take measures, which enhance the value of the product in the customer’s eyes to be able to knock of the threat of substitute products respectively that would be my suggestion as a manager

5) Rivalry among firms in the industry

At present, the rivalry in the industry in which Bonia operates is extremely high. It experiences cut throat competition and it sees the likes of companies such as Charles & Keith, Coach, Guess Kate Spade which operate in the same segment and are selling similar products.

To dodge this and be able to successfully sell higher priced products in the market space, as said, the company needs to create an image which will change the opinion of those buying the product. This means creating a brand name that is like none other.

Please feel free to ask your doubts in the comments section