Abhishek, Abraar, Melanie, Sachi, Shruti, Victoria

William Oliver, The Bootmaker

Content:

Executive Summary....................................................................................................... 2
Introduction................................................................................................................... 3
Problem statement......................................................................................................... 3
Comprehensive Analysis................................................................................................ 4
A. Strengths, Weaknesses, Opportunities and Threats......................................................4
B. Analysis of Financial Data......................................................................................... 6
List of Alternatives.......................................................................................................... 9
Recommendations....................................................................................................... 10
Conclusion.................................................................................................................. 10
Implementation............................................................................................................ 11

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 Abhishek, Abraar, Melanie, Sachi, Shruti, Victoria

Executive Summary

Whilst facing challenges to maximise profitability, and moreover, to simply

break-even, William Oliver’s strategy of price competition is at odds with its market
position as a highly-differentiated niche player that offers high quality to a very
segmented market. Thus, this
analysis seeks to examine the
ways in which the William
Oliver company can develop
its business strategy and
fundamental aspects of its
costing methodology and
pricing policy.

The analysis pays

attention to the fact that the
William Oliver line was ranked as one of the leading shoe brands in the UK which pride
themselves in offering high quality craftsmanship and fine materials used during the
manufacturing process. Traditional skills in leather grading, colour matching and good
stitching ensured the company’s exclusivity which justified the reason for the high prices
passed on to its upper class customers in the range of £285- £860.

Despite operating at the top end of the luxury shoe market, until 2005, when the
company recorded losses of £400,000, the company’s turnover had been just about the
breakeven point for several years. However, adjusting prices to maximise the
company’s profits seemed impractical for the company as this strategy of reducing
prices meant that the sufficient additional volume may not have been able to
compensate for the reduction in contribution per unit. On the other hand, increasing
prices was also an unacceptable risk since the company’s existing prices were already
significantly higher than its competitors’.

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Therefore, based on our analysis, the best option for the company was to adopt
the job order costing method to account for its costs and to determine product prices.
This method is more suitable for products that are uniquely made based on specific
demands of the customer.

Introduction
William Oliver, a luxury shoe manufacturer, is looking to break even in 2006
after recording a loss of £400,000 in 2005. The company has a long history of
manufacturing handmade shoes that dates to 1849 in England. The shoes had been
worn by many famous personalities and royals over the years. William Oliver has
always manufactured quality shoes through craftsmanship, fine material selection, and
distinctive classic design. It believes that their traditional shoemaking method produces
shoes of higher quality that no other machine can match.

However, to improve profitability, John Phillips, the Financial director of William

Oliver, considered ways of expanding the brand through global distribution.
Nonetheless, this plan seemed futile due to lack of profitability challenging the company.
Thus, John Phillips hired Geraldine Easton, a management consultant, to help him
understand and turn around their business. In his discussions, with Geraldine, John
Phillips is mulling whether a more market driven approach should be employed. Philips
assumed that optimizing approach was not feasible because of uncertain product
demand curves and that rule of thumb was more applicable. Now John Phillips must
find a way to turn around the company to meet its 2006 objective of breaking even.

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Problem statement

How can the company operating in the world of luxury goods develop the
business strategy and fundamental aspects of its costing methodology and pricing
policy in the changing market of customer preferences?

Comprehensive Analysis

A. Strengths, Weaknesses, Opportunities and Threats

A SWOT analysis is a strategic technique that is used by internal users to better
understand the present Strengths (S), Weaknesses (W), Opportunities (O) & Threats (T)
of the company and provide with the strategic vision.

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Strengths:
The company has obtained a royal stamp which in itself is a matter of great
pride. The stamp has gained lot of respect from the UK’s wealthiest classes who are
ready to pay the desired price for their custom made shoes. Also, the royal stamp has
increased value of the company among its peers allowing it to keep the profit margin as
high as it deem fit in order to maintain their status.The hand made and hand stitched
customisation that it offers is of excellent quality which is done by exclusively trained

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workers which no other shoe manufacture has. This unique quality makes William Oliver
stand out in the market.
Weaknesses:
Despite operating in an industry with many other competitors, the time taken to
produce each pair of shoes due to customisation has become one of the company’s
major weaknesses. The production of 100 pairs of shoes per day is way below the
industry average. Moreover, the high end shoe market is very niche and concentrated to
only UK’s rich segment which does not allow the company to earn increased revenue as
there are not many customers in this segment.
Opportunities:
With every problem there is an opportunity to cater into unventured territory and
come out as a winner. With regard to the situation, William Oliver can consider venturing
into different product segment such as bags, belts, suitcases etc which would require
customisation but also which would provide a new customer base. They can also
consider opening kiosk boutique at the high end locations of New York, London, Paris
etc in order to decrease their fixed retail outlet cost and establishing their name on the
global platform. Even the alliance with high end departmental store such as Harrods is
an option. They also have the opportunity to break the traditional marketing method and
adopt a digital technology as now the upper class community is spreaded worldwide
and not concentrated in one particular area.
Threats:
The company in its current situation cannot afford to have loss as there is a
possibility of them getting bankrupt because of high maintenance expense of the luxury
brand. This would also destroy their reputation they have earned for many years.
Furthermore, the competitors have started providing good quality product at cheaper
price because of the use of automation but the company cannot consider going into
automation because of its brand speciality. Due to the gap in pricing a large segment of
the customers are diverting themselves to the competitors. In order to lure the customer
if the company decreases the price, they would lose their repeat customer as they
would feel cheated and in order to earn revenue if the company increase the price they
won’t get many customer as they are already at the extreme of high pricing.

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B. Analysis of Financial Data

Using the data given we undertook, the CVP analysis calculated the breakeven
point using 100% and 75% of actual capacity. The Case provides 2 types of data, one is
per unit cost and their pricing method, the other one shows their bulk budgeted
expenses per each type of cost. The biggest concern is brought by the following
information: a) they were using historical costs for material, labor and manufacturing
overheads, b) they were budgeting zero profits from the beginning, c) adding 40% and
100% margins though they have reported losses of £400K, and most importantly d) they
were underestimating actual overheads by decreased capacity. They historically
continue to divide 500K of MgOVH on 24000 (100% capacity), whereas actual capacity
is only 18000, so the allocated cost should be £28, not £18.
The results are shown in the following Table:
Budgeted 100% Actual 75%
Cost profile £ per unit capacity capacity losses
Units 24000 18000
DM 55 55 55
DL 40 40 40
MgOVH 18 21 28
Total Mgcosts 113 116 123
Margin 40% 75 77 82
Price 188 193 205 -16
Retailer MU 100% 188 193 205
Retail price 377 386 409 -33
VAT 17.5% 443 454 481 -586667

No wonder, that on each British pound they sell every pair of shoes they incur
loss of £33, which multiplied by 18000 units turns into £586K loss of earnings.
In order to calculate the BreakEven price for the sales mix we rework the BE
formula:
Price x Q - VarC x Q = FC
Q(P-V)=FC
P=FC/Q+V

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Using this formula we easily get the average breakeven price of the production
mix (in case of 100% it’s budgeted as £271, whereas by 75% capacity it should be
increased to £319, otherwise very soon they would be found insolvent. Breakeven price
calculation is shown in the Table below:
100% cap 75% cap
Total fixed costs 3500 3500
Variable costs per unit 125 125
Sales price for mix 271 319
BEP units produced 24000 18000
Revenue to breakeven 6500000 5750000
This calculation confirms the fact, that they underprice their shoes (or the
“cheap” line of shoes is predominant), and they miss a substantial amount of money
from their calculations.
Unfortunately, there is no sufficient data on the unit level to drill down and
analyze the costing of a batch or the most expensive pair with crocodile leather etc.
However, at the first glance it is clear, that their costing system needs substantial
update:
● To use most adequate updated information instead of historical cost:
● To reconsider pricing policy. If they are continuing to be the “creme de la
creme” of the shoe market, their high prices are fairly justified by old-school traditional
way and hand work, so each pair of shoes is the most exquisite in the world. Their
product mix has too many cheap items which are not coving huge cost of retail
boutique.
● Methodologically I would split Income budget for manufacture and Retail
separately, because they have different margins and different costing.
Besides, we can examine their current budgeting and transfer it into the actual
numbers:
Act Avg per
Cost&Revenues, OOOs Budgeted %% Actual unit
Revenue 6500 5550 308
Units 24000 18000
Capacity 100% 75%

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DM 1100 16.92% 825 46

DL 800 12.31% 800 44
MgOVH 500 7.69% 500 28
Total MgCost 2400 36.92% 2125 118
Dispatch Cost 100 1.54% 75 4
COGS 2500 38.46% 2200 122
GM 4000 3350 186
SGA fixed outlets 3000 46.15% 3000 167
Selling costs variable 1000 15.38% 750 42
Total costs 6500 100.00% 5950 331
Profit/Reported loss 0 -400 -22

Since they reported £400K losses, we can build their actual revenue, and thus
we can conclude that underestimated costs predominate in their budget . Entire costing
system should be reconsidered in favor of CVP costing + Job order costing for
extremely exclusive shoes. For pricing our recommendations would be to continue high
pricing policy under this brand name and be a supplier for Royal families over all Europe
and Dubai. In the further paragraphs we will also discuss list of possible alternatives for
William Oliver in terms of marketing and future business strategy.

List of Alternatives
a. William Oliver Bootmaker can come up with a subsidiary company with a
separate title from its parent entity (William Oliver), to hit a market with customers that
fall under mid-range income level by acquiring cheaper materials and manufacturing the
same design of shoe but at lower costs and prices.
b. As stated, the company has 25% idle capacity which can be utilized by
introducing an additional line of products such as Leather belts, leather handbags and
leather gloves under the same brand. This might help in improving the inventory
turnover.
c. The company can persuade the retailers to reduce the markups charged
to consumers which is quite high. If the retailers do not agree to the terms set by William

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Oliver with regard to higher markups, then they can consider opening up their own
outlets to control retail prices.
d. To give the firm a competitive advantage, the use of kiosk machines at the
company’s outlets can be used to take measurement inputs from customers for orders.
The company can then offer the convenience of complimentary delivery services to the
customers.
e. The company can also add a face to their brand through hiring a celebrity
brand ambassador like Kate Middleton and/ or Prince William and family in order to
grow brand awareness.

Recommendations
 It is strongly recommended that company should adopt the CVP and job
order costing method to account for its costs and to determine product prices as this
method is more suitable for when products are made based on specific customer
orders.
 In addition, it is better to utilize the idle capacity by transforming the
material into different types of products such as belts and bags of leather which can
preferably match with their original style of boots. This will also increase the inventory
turnover rate whilst reducing the issue of excess capacity on the company’s books.
 The company is recommended to perform test runs to determine if there
are manual operations which can easily be substituted by machines. After
replacements, company can develop multi-skilled employees who can run the machines
and can do the manual work such as blocking, punching, cutting and sewing.
 If the company considers operating their own outlets, a strong
recommendation can be to install boutiques that will allow customers to input their
preferable measurements and styles. This is a useful strategy that can be adopted to
minimize labour costs and can also be used as a competitive advantage as William
Oliver can gather feedback about consumer preferences.

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Conclusion
Based on our analysis, it can be seen that William Oliver’s current costing
system has been affecting the company’s profitability in a negative manner. However,
most luxury companies operate with a purpose to maximize profitability. Thus in attempt
to improve the financial performance of the company, this analysis assessed ways in
which William Oliver should improve its business strategy and fundamental aspects of
its costing methodology and pricing policy in the changing market of customer
preferences.

Implementation
Job order costing can be implemented by avoiding full traditional cost system
where they account for direct material cost, direct labor cost, selling and administrative
costs and overhead costs and adding it to the markup percentage to determine the final
product price. However, job order costing will help the company determine the product
cost by each item’s direct materials, direct labor used and assign them to the
manufacturing overhead. Since Oliver Williams makes a luxury product, job order
costing can help them trace the cost allocated to each manufacturing department.
By adding a new product line (belts, bags and gloves) they can encourage
customers to buy their shoes with a combination of the new product line. This may
benefit William Oliver by using their idle capacity and increase sales.

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