Cape Shoe Company.

Fishman, Eli ; Sterrett, Jack L. ; Kellerman, Bert J. 等

CASE OVERVIEW

The primary subject matter of this case concerns entrepreneurial start-up and strategic management and marketing issues. The objective is to provide students the opportunity to apply their research skills and knowledge regarding highly competitive industry and buyers to develop strategic management and marketing strategies. It is suitable for a senior-level course as well as students in an MBA program and can be taught in a 75 minute class session with two hours of preparation by students outside of class.

CASE SYNOPSIS

The Cape Shoe Company case focuses on an entrepreneurial start-up in the highly competitive shoe industry. Upon the closing of a Florsheim shoe factory in a region of the Midwest that was once home to a large number of shoe and apparel manufacturers, with the majority of these having closed over the previous 30 years due to lower cost of overseas production, and concerned about the continuing loss of shoe manufacturing in the U.S., an entrepreneur from Chicago with minimal experience in the shoe industry, visited a Florsheim factory prior to its closing by Florsheim. After deciding that the facility represented too valuable a resource to be abandoned, the entrepreneur subsequently purchased the shoe plant and named his new venture the Cape Shoe Company. Based on his concern about losing American manufacturing jobs, and the belief that he could produce a competitively priced product, his plan was to produce 100 percent Made in America shoes.

The interesting focus of this particular case and ensuing discussions is that the entrepreneur has made the decision to go forward with Cape Shoe Company and his 100 percent Made in America theme, although having yet to determine target market(s), competition, product differentiation, marketing channels, marketing strategies, etc. Regarding the rather unique nature of the Cape Shoe Company start-up, and current industry scenario, students virtually have a clean slate in which to begin discussions concerning recommendations on strategic management and marketing questions.

INTRODUCTION

Manufacturing has been a primary source of America's wealth for almost 200 years. In the early 1800's America obtained virtually all of its manufactured goods from Europe. During the War of 1812 the British blockaded many European harbors preventing America from obtaining needed goods. As a consequence, America began to develop its own manufacturing capabilities in the Northeast. After the War, in order to help pay for the war effort and to protect nascent manufacturing concerns, the Federal government placed a large tariff on imported goods. Southern states, which were primarily agricultural at the time, opposed the tariffs threatening civil war. Despite these divergent interests, a compromise on tariffs was reached to benefit the North and the South. Incipient manufacturing businesses needed to be cultivated for the future of the country.

Nearly two hundred years later the issue of free trade and tariffs has again become a salient polemic. Unlike the early 1800's, the antagonists are not regionally delineated. Like the early 1800's, the adversaries are defined by differences with respect to the nature of their work--manufacturing-based businesses versus information-based industries. As manufacturing diminishes in both volume and perceived significance, the majority of workers who are employed in service-oriented firms are more concerned with purchasing goods at the lowest possible costs, regardless of their production origin. In most developing countries labor is brutally exploited enabling manufactured goods to be produced at costs substantially below U.S. made goods.

A Business Week magazine feature article titled, "A Life of Fines and Beating--Wal-Mart's Self-Policing in a Chinese Sweatshop Was a Disaster. What Kind of Monitoring System Works?" describes the inhumane conditions in which Chinese workers are forced to produce leather goods for Wal-Mart, Kathie Lee Gifford, New Balance Shoes, and Timberland Shoes. Migrant workers from the countryside desperate for work take jobs in factories like the Chun Si Handbag Factory. Chun Si made handbags sold by Wal-Mart and Payless ShoeSource. A factory job offers living quarters and a temporary-residence permit that migrants need to stay out of jail. Workers were paid $22 a month and charged $15 a month for food and lodging in a crowded dorm. Additionally, the factory issued expired temporary-resident permits. This means workers are subject to arrest if they ventured out of the immediate neighborhood. The workers were captives of the factory. Abuse of this nature can only occur with the tacit approval of the local authorities.

Chun Si Factory's 900 workers were locked in the walled factory compound for all but 60 minutes a day for meals. Guards regularly punched and hit workers for talking back to managers or even walking too fast. Workers were fined $1 for infractions like taking too long in the bathroom. Wal-Mart, Payless, and others denied these conditions existed. But investigations by Business Week confirmed product sold in their stores was made in this factory under these circumstances. The article further described the elaborate schemes developed by owners to circumvent independent oversight.

By purchasing low-priced imports, many well paid American manufacturing jobs are lost. In 1965, 31 percent of the U.S. labor force was engaged in manufacturing. Early 21st Century, only 15 percent of U.S. laborers worked in manufacturing. This was the same as the number of people working in government. In 1965, CEO salaries were 44 times average worker pay. CEO salaries now exceed 212 times the average worker pay. The growing income disparity between the top one percent of U.S. households and the bottom 90 percent of U.S. households had been monitored by the Federal Reserve. The Fed had revealed that in the 1990s wealth controlled by the top one percent of households increased from 30.1 percent to 34 percent. The share held by the bottom 90 percent of households decreased from 33 percent to 31.3 percent. The top one percent then controlled more wealth than the bottom 90 percent by a margin of 34 percent to 31.3 percent.

Prosperity at the top of the economic pyramid has obscured declining incomes on the lower portions of the pyramid. There are abundant employment opportunities for elite information workers. Sufficient opportunities to earn a "Living Wage" must also exist for non-elite workers. These job prospects are found in the manufacturing sector. Manufacturing jobs usually pay better wages than growing service related positions because there is a greater value-added component--manufacturing creates more wealth.

It has been estimated that more than 20 percent of working Americans or more than 25 million people are underemployed. Even while working eight hours a day, forty hours a week, they do not earn enough to keep a family of four above the poverty line. This is almost double the number of underemployed in the early 1970's. Real wages have fallen about 20 percent since then.

In the industrial Midwest, as well as in the Northeast and West, American shoe and apparel makers are closing factories at an alarming rate. Virtually all of this production has moved to low wage, Third World countries in Asia--China, in particular. As a result, our annual trade deficit with China is expected to approach one hundred billion dollars. This deficit amount is added to the two to three hundred billion-dollar annual trade deficit the U.S. has with Germany and Japan.

CAPE SHOE COMPANY

Abbey Manufacturing, a plastic molding manufacturer, had produced a line of plastic molded display material for the shoe trade. The success Abbey realized in the intensely competitive plastic molding industry was based primarily on selling high quality product at low prices. Profitability was achieved by carefully controlling overhead costs, including administrative, sales and capital expenditures. People involved with production also handled many product development and front office responsibilities.

Eli Fishman, the CEO of Abbey Manufacturing, believes strongly in the importance of manufacturing in the U.S. economy. And, since Abbey sold model display products mainly to the shoe trade, it had provided him the opportunity to become knowledgeable about the industry. In 1999, Florsheim, a well-known nationally branded shoe manufacturer announced the closing of its Cape Girardeau, Missouri plant, ending a long history of producing high quality men's shoes in America.

Mr. Fishman, concerned about the continuing loss of shoe manufacturing in the U.S., decided to visit Cape Girardeau to inspect the plant. After inspecting the plant, prior to its closing by Florsheim, he decided that the facility represented too valuable a resource to be abandoned. The physical plant and employee skill levels were virtually irreplaceable in the U.S. Cape Girardeau, a town of approximately 40,000 inhabitants, is located in Southeast Missouri along the Mississippi River. This region of Missouri was home to a large number of shoe and apparel manufacturers, but most of these have closed over the last 30 years due to the lower cost of overseas production.

Mr. Fishman was subsequently able to purchase the Cape shoe plant and its equipment for a relatively low price. The Cape shoe plant was a 92,000 square food facility on 12.6 acres formerly owned and operated by Florsheim Group. At full capacity, the plant will employ more than 300 skilled workers. Production employees had an average of almost 20 years of shoe making experience. Supervisory personnel average over thirty years of shoe making experience. The plant was equipped with more than eight hundred separate shoe making machines and three assembly lines. The building, fully air-conditioned, was designed for all safety and health related considerations. Mr. Fishman decided to name his firm Cape Shoe Company.

Mr. Fishman's plans included paying all Cape Shoe Company employees an hourly rate which was higher than the locally determined "Living Wage" which was $8.84/hour, and also paying full medical benefits. Living Wage is defined as a wage sufficient to maintain a family of three above the eligibility level for food stamps. The Living Wage contrasts sharply with the federally mandated Minimum Wage of $5.15/hr. with no benefits. Minimum wages are more closely associated with unskilled service jobs, such as those in the retail and food trade.

While Cape Shoe Company would have higher labor costs than most producers overseas, it will have an excellent production facility, modern equipment, and a highly skilled workforce. Because the plant purchase price was low, it would help to keep overhead low. Mr. Fishman also believed that he could reduce selling costs, and that, along with low overhead costs, would allow him to price competitively. He believed that the market for American-made goods was substantial, as long as items were priced competitively with foreign-made goods. Based on his concern about losing American manufacturing jobs, and the belief that he could produce a competitively priced product, his plan was to produce 100 percent Made in America shoes. While there are some competitors who still tout their products as American made, many use components that are made outside of the U.S. and some assemble their products outside the U.S.

Mr. Fishman's plan to produce a 100 percent Made in America shoe was born, not having yet decided, however, on target market(s), what kinds, styles, and brands of shoes he should produce, how to differentiate his product from competitors, what channels he should use to sell his products, how he should promote his products, what should be his pricing strategy, and so on.

INDUSTRY NOTE

Throughout the industry, shoes are traditionally distributed through a variety of channels. These include direct sales using the Internet, catalogs and shoe-trucks; selling through large retail chains and department stores; and selling through smaller independently owned retailers.

Going direct to individual consumers generally requires a substantial investment in direct mail material and advertising. Retail chains and department stores are often self-serve. They prefer branded products since there are generally no salespeople to recommend a particular line. To establish a brand over a relatively shorter period of time, it is necessary to invest heavily in advertising. The final option is to sell to independent retailers.

Independent retailers are generally small, local stores offering their customers full-service fitting. Operating in many cities and small towns across the U.S., these shoe store owners tend to be sensitive to the quality a manufacturer offers. Just as important, they many times are able to steer consumers to particular footwear. The independent retailers tend to also relate to the manufacturers position on the loss of U.S. manufacturing jobs. Further, the independents appreciate the service smaller manufacturers' offer with respect to filling small orders.

A traditional shoe marketing channel flows from the factory, through a commissioned sales representative, to a retailer to the final consumer. The factory margin tends to be about 60 percent; the commissioned representative receives approximately 7 percent, and the retailer margin is another 66 percent. A pair of shoes with a $40.00 direct labor and material cost would retail for approximately $114.00. Attempting to maintain initial factory margin and bypassing the sales representative would result in a retail cost approximately 15 percent less than branded shoes, which use an extensive sales representative network and require higher factory margins.

TASK AT HAND

Based on the facts presented herein, and your research skills and knowledge regarding the shoe industry and shoe buyers, your task is to help Mr. Fishman develop strategic management and marketing decisions. Specifically, you are asked to develop recommendations on five strategic points:

1. Identify specific industry target markets and provide appropriate recommendations and reasoning for Cape Shoe Company.

2. Identify industry competition and provide appropriate recommendations and reasoning for Cape Shoe Company.

3. Identify various ways in which industry products are differentiated and provide appropriate product line and differentiation recommendations and reasoning for Cape Shoe Company.

4. Identify various marketing channels for the industry and provide appropriate recommendations and reasoning for Cape Shoe Company.

5 Identify specific marketing strategies and provide appropriate recommendations an and reasoning for Cape Shoe Company.

Eli Fishman, CEO, Cape Shoe Company

Jack L. Sterrett, Southeast Missouri State University

Bert J. Kellerman, Southeast Missouri State University

Peter J. Gordon, Southeast Missouri State University