Woof (Design) Limited

"The recession has really hit hard," exclaimed Gill Campbell, President of Woof Design, a small cottage-industry manufacturer of knitted products located in St John's, Newfoundland. Company sales in 1990 had fallen by nine percent compared to 1989, a level not seen since 1987. Orders from retail customers had been poor since November 1990. To compound these problems Gill had to face the realization that a number of her current retail customers had gone bankrupt. Moreover, she had just returned from the national trade shows on March 15, 1991, with a 30 percent drop in orders. "Are my products at the end of their life cycle," she questioned, "or would it be wise to expand my distribution and promotion efforts to get the sales curve to slope upward again?"

Company Background

In 1976 Woof Design was only a concept in the mind of Gill Campbell, a part-time craftsperson who was trained and experienced in the art of knitting and weaving. Ten years later, in 1986, the company was awarded the Newfoundland Export Award for sales to the rest of Canada. By 1990, Woof Design had Canada-wide sales in the range of one half million dollars in knitted garments and accessories.

This case was prepared by Professor Donna Stapleton and Mr. Vernon Smith, BComm 1992, of Memorial University of Newfoundland for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.

Copyright 1992, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include publication.

Gill established the company in 1977 as a graphics business. Over the next six years she nurtured her knitting and weaving of crafts to a full-fledged manufacturing business. In 1981, the company expanded to meet demand for knitted garments and accessories and was incorporated as Woof Limited with Gill Campbell being the principal owner. Gill was responsible for the overall direction of the company and was directly involved in planning, financial control, sales and marketing, as well as in product design and development. She felt that her technical and marketing skills were a major asset to the company, but as she explained, "I am not a creative person and hence product design has been a weak area in the company." Furthermore, the continued expansion of the company and its reliance on Gill in so many areas were in direct conflict with her desire to have a normal family life.

Woof Design operated from premises at 129-131 Queen's Road, St John's, Newfoundland. It was here that the four full-time management employees worked. In these two adjoining buildings, the company had 225M2 of office and storage space and 55M2 of retail space which was operated as a factory outlet. Company income was supplemented by renting a portion of these buildings to other businesses and individuals. Financing of equipment and working capital was accomplished by contributions from the shareholders, by bank loans, and most notably by mortgages on family property owned by Gill Campbell.

Between 1983 and 1990, the company had expanded to four full-time management employees and to about 70 independent, home-based production employees. During this same period, sales had increased dramatically from $36,300 in fiscal 1983 to $522,000 in fiscal 1990 and profits had turned around substantially. The company's products were sold nationwide in Canadian craft and gift stores, many of which targeted tourists and the more affluent individuals who desired to purchase high quality gift items.

Gill had expended some effort to expand the market to the United States and to Japan, with minimal success. Sales to the United States through two retail accounts totalled only $800 in 1989 and $2500 in 1990, while sales in Japan had not yet been realized. Gill knew that her products appealed to the up-scale woman who had an active, outdoor-oriented lifestyle and desired quality, individuality, comfort and fashion in her clothing, and who was willing to pay a slight premium to obtain it. Although Woof's products were positioned as high quality, high value, there was no deliberate policy of screening retailers to ensure that they portrayed this image.

In 1983 the graphics division of the company was sold. After this point, Gill continued to operate Woof exclusively as a cottage industry, using home-based craftspeople to produce machine knit scarves, cowl hats, vests, sweaters, and jackets as well as high quality hand-knit mitts, crocheted tams and hats, handwoven scarves, stoles, shawls and throws. Woof sweaters and accessories were made from an attractive blend of mohair, nylon, and wool and were uniquely designed and styled. The distinctive, classic designs were intended to provide the wearer with a fashion statement. The sweaters, in cardigan and pullover styles, were warm, yet lightweight, and could be worn with pants or skirts for evening, recreation, or work wear. Everything, including the company logo which was attached to each garment, gave the look of quality, style, and sophistication (See Exhibit 1). All garments and accessories were produced in one-size-fits-most, thus eliminating the need for retailers to carry a large inventory assortment and the need to have fitting rooms. According to Gill, Woof was seen to have quality products at much better prices than those of the competitors. In addition, she believed the retailers were also quite pleased with the delivery.

Woof Design sweaters wholesaled from $75 to $160, while the custom designed and coordinated accessories wholesaled from $12 to $50. These products were priced on a cost-plus basis and shipped by first class mail, FOB St John's. Items were added to the product lines only if production costs, including material and labour, could be held at, or below, 45 percent of the selling price.

New accounts were required to place a minimum initial order of $500 and on presentation of references were granted credit terms of 30 days net. Retailers were not granted any discounts, and subsequent orders under $250 were assessed a surcharge of ten percent of the order cost. Although Gill was occasionally approached by some of the weaker retailers for promotional assistance, Woof did not grant promotional allowances. Furthermore, none of the retailers were given exclusive selling privileges for Woof products.

Initially, promotion and sale of Woof Design products were through local craft fairs sponsored by the Newfoundland and Labrador Craft Development Association. Later, this was expanded by attendance at regional craft shows in the major Canadian cities. In early 1985, with the exception of the St John's factory outlet, the transition was made from retailing and wholesaling to wholesaling alone. In order to increase the volume and profitability of the business, the focus of the marketing effort became the wholesale spring and fall Gift Shows from Halifax to Vancouver. The travel budget to these shows averaged $3,000 per show with approximately $1000 being government subsidized.

To further enhance the promotional effort, a professionally designed brochure was produced for distribution to potential clients at an approximate annual cost of $2000. The brochure contained black and white lithographs and sketches of Woof Design products, coloured fibre samples, price lists, and order forms. In addition, a small amount of print advertising was run in Newfoundland to stimulate tourist and pre-Christmas sales. On average the Company spent up to $3000 annually on this advertising effort.

In October of 1985 Woof negotiated an agreement with Mr. John Beale of Nova Scotia to represent the firm nationally as a manufacturer's agent. His role was to position the firm in the best possible markets. This freed up Gill's time and energy for creative pursuits and the operation of the company. For this service, Mr. Beale received a ten per cent commission on Woof's wholesale price. Commissions had amounted to approximately $34,000 for each of the previous two years. Mr. Beale had an excellent track record in this position having been instrumental in the national success of Suttles and Seawinds, a Nova Scotia based cottage industry with annual sales in excess of $2,000,000. Suttles and Seawinds produced a line of both competitive and complementary products. Although Mr. Beale was given near exclusive responsibility for promotion, sales and distribution outside Newfoundland, Gill still remained active in the marketing area. She personally attended approximately seven national craft shows annually and continued to solicit new accounts. These shows each required one week of travel time and often conflicted with her personal and family responsibilities.

Woof had sales accounts with approximately 250 retailers of which just over 100 could be considered active. Of these active accounts, about 50 percent were located in shopping malls and downtown shopping districts, approximately 35 percent were in tourist and resort areas and nearly 15 percent were located in hotels and airports. In 1990, in excess of 30 percent of these accounts were only marginally profitable with purchases from Woof being less than $1000 annually. In contrast, 30 percent of them exceeded $3000, and 10 percent had purchases in excess of $7500. No single customer accounted for more than seven percent of Woof's sales.

Sales by Woof's retail customers were to a large extent dependent on seasonal fluctuations in the tourist industry which was being negatively affected by the recession. In many regions, sales were closely correlated to events such as trade shows, conferences, major athletic events, and carnivals. During 1990 and early 1991 many of these retailers were among the more than 1000 businesses which had gone bankrupt monthly during the past year. Bad debts, for Woof, prior to 1989 had not been significant, but in 1989 and 1990 they were in excess of $5000 and $7000 respectively.

Production in a Cottage Industry

In keeping with her management philosophy and her goals of remaining a modest, craft-oriented business, and at the same time desiring industrial production capabilities, Gill organized Woof Design as a cottage industry. This meant that the manufacturing process was performed by independent craftspeople in their own homes. Consequently her products would not portray a mass produced image. The workers, most of whom were women, were trained by Woof in mechanized knitting and were paid a flat rate for the products produced. This type of arrangement permitted flexibility of work loads and of production scheduling so that the workers could work at their own pace depending on their personal commitments. In the event of unexpected deadlines for orders placed by retailers, the workers could undertake extra work in order to meet completion dates. The cottage industry method permitted Woof to readily expand or contract production according to demand with little or no cost. As Gill explained, "With our current craftspeople, the company could comfortably do $500,000 in sales annually and could readily expand to $800,000. Expansion beyond this point merely required training new knitters as needed. Our flexibility and responsiveness to the market, as well as our fast turn around time, gave us a really competitive edge."

As a cottage industry which engaged approximately seventy home-based producers, one of the biggest challenges facing Woof Design was to provide accurate, detailed, and up-to-date knitting patterns that required the minimum amount of hand finishing and which ensured product consistency. In order to respond to the market rapidly, designs had to move from the concept stage, through to prototype, and into production as quickly as possible. Up to three prototypes had to be designed and manufactured before a final style was developed. At each stage, each piece of a garment had to be plotted and even minor changes required complete redrafting of the pattern. To contend with these problems, a computer software package was developed and implemented in 1988, enabling Woof to speed up design development and modification. In addition, the computerized design system facilitated the transfer of the finalized patterns to the large number of production workers.

To further maintain product quality and consistency, each piece returned from the knitters was weighed, measured, and logged into the computer. The knitters were penalized for any deviations from the required standards by an incremental pay docking system. Bulk buying of fibres from the same dye lot guaranteed that colours would remain constant in all items produced. Woof made every possible effort to produce a quality product and actively sought the opinions of its retail customers. Any complaints about its products were taken seriously and acted upon promptly.

The cottage industry method involved the distribution of raw materials to and the collection of finished items from the knitters. The entire cycle involved coordinating a large number of items from the order stage, through manufacturing, and then to shipping. Inventory control required weighing the materials which were sent to each knitter and matching the weight with that of the returned items. A computerized inventory control system automatically updated inventory and permitted accurate tracking of current and completed orders and the disbursement of raw material to the knitters. The system ensured that work was effectively distributed among the knitters, thereby assigning each knitter workloads to suit her individual preference and ability. The integrated function of the system allowed up to three employees to work at the same time without interference from one another. This feature meant that the company had the capability to at least double the volume of orders and clients with the same staff.

The Business of Crafts

The craft industry combined traditional and contemporary skills and designs; many crafts were produced for personal use as well as for sale. Since the early part of this century, craft production had been recognized by governments and service organizations as a real or potential source of household income. Although there were no exact figures on the number of craft producers or on the value of craft sales in Canada, it was widely accepted that the craft industry was becoming more and more important to the Canadian economy. Craft producers and development agencies had worked to increase the number and kind of crafts produced and to diversify the markets in which they were sold. Efforts were also made to overcome many of the challenges of marketing in this industry, including new product design, market expansion, building relations with members of the distribution channel, and promotion.

Craft production was distinguished from industrial manufacture by virtue of the craftsperson's control over, and responsibility for, each and every aspect of design and production. The craftsperson had to have the power to change design or production processes to impart individuality to the finished product. Where craft production was carried out with mechanized equipment or through serialized assembly methods, a link with traditional methods of production had to remain for the product to be truly defined as a handcraft.

Traditionally, designs and motifs used by craftspeople had their roots in, and were inspired by, the culture and the environment of the craftsperson. However, contemporary consumers, particularly those who purchased craft-oriented clothing and related accessories, demanded current styles, designs, and colours incorporated into a distinctive, high quality, handmade product. To remain healthy and viable, the craft industry needed innovative craftspeople who could adjust to market trends while preserving the integrity and the uniqueness of their work.

Promotion and sales were generally performed under the auspices of regional craft associations, cooperatives, craft councils, service organizations, and private studios and galleries, or through retail stores. This type of marketing effort resulted in crafts producers competing with each other for the sale of woodworking, carvings, ceramics, metalwork, pottery, leather goods, jewellery, clothing, knitwear, and woven garments. Most crafts producers were adequately skilled in their craft but lacked a fundamental business orientation. This generally resulted in inefficient marketing and less than optimal realization of economic potential.

To broaden their markets and to develop a marketing network, many crafts producers wholesaled their products through distributors and agents to retail stores. These outlets, many of which were among nearly 7000 incorporated Gift, Novelty, and Souvenir stores throughout Canada, appealed to both the local market and to the seasonal tourist trade. Although the retail craft industry included many professionally managed outlets, it was dominated by small stores operated by craft-oriented owners who, like the producers, were not business minded. Many of these stores struggled to maintain sales and to survive, with a large proportion annually going out of business. Often these owners did not believe in advertising, other than by word of mouth; this attitude, if not the number one reason for failure, was considered by those in the industry to be near the top of the list.

Organized production and sale of crafts items were made possible by a nearly universal appeal for the aesthetic values of handmade objects which were originally manufactured for functional or for decorative use. Fundamental demographic and lifestyle changes had produced consumers with a high level of education and income and a desire for high quality, sophisticated, and often unique or specialized goods such as the crafts. Consumers had. become more principled and generally perceived craft products to be environmentally friendly and ethically made. Although these values and perceptions led to expectations of higher prices than those charged for mass produced goods, economic reality had forced sales trends toward lower priced crafts with $200 being a psychological price barrier for most consumers.

The Sweater Market in Canada

Although the sweater market was a mature industry, these garments were still fairly popular and were a staple wardrobe item for most consumers. During the 1980's, intricately patterned sweaters which were produced on expensive machines with highly skilled labour had become popular and were credited with a revival of sales in the industry. Nevertheless, some industry analysts noted that there was still a tremendous demand for knitwear with a hand-knit look. Novelty, created by exotic colour mixes, embroidery, and the blending of different fabrics, was seen to be a definite trend in the pricier, high-end market, for the 1990's. Imported sweaters which retailed from $100 to $500 accounted for nearly 70 percent of the sweater market.

The second half of the year was traditionally the high selling period for sweaters, but retailers were finding that knitwear, including sweaters, was becoming less dearly defined as seasonal wear. Cotton, which had been a prime sweater fabric in the late 1980's, was giving way to the lighter fabrics which were staying in the stores later and later into the fall. Many retailers featured sweaters paired with coordinating bottoms for an overall look and thus minimized the amount of time the busy customer spent shopping for an outfit.

The sweater market was dominated by three types of retailers: Department Stores, Discount Stores, and Women's Wear Specialty Stores. The latter type consisted of both national chains and independently owned boutiques most of which were strategically located in popular shopping malls and in prestigious shopping districts. To combat the increasing market share of the specialty shops, many department stores were setting aside strategic, in-store areas which were operated as boutiques and dealt mainly with specialty apparel. A proliferation of private labels with copyrighted designs gave many independent operators an element of exclusivity. This, combined with friendly and personal service, created a loyal clientele for many boutique operators.

Fundamental demographic and social changes of the late 1980's had changed the focus of the female specialty apparel market from the 16 to 27 year old segment, which tended to avidly follow fashion fads and styles, to the 28 to 40 year old career women who were seen to be more discriminating in their choice of clothing. Those women were becoming better educated, were reasonably affluent, and bought fewer but better quality garments for both workwear and leisure wear. Furthermore they were entering the workforce in increasing numbers, and because they had less discretionary time for shopping, were changing their traditional buying patterns. They were dressing to please themselves and tended to not follow the latest fads and trends in fashion. Individuality was their trademark and they demanded quality, value, and fashion in their choice of apparel.

Strategic Alternatives

Like many entrepreneurs, Gill was content for her company to remain small and to earn a modest living from her venture. However, the dynamic nature of the marketplace challenged the viability of her enterprise and she was constantly confronted with obstacles to survival. Even though growth of the firm was not her ultimate goal, she recognized that the firm could not exist in isolation and that survival depended on the dynamic forces at play in the marketplace. Consequently, she knew that she must consider new opportunities and strategic alternatives simply to survive.

Alternative 1 - Product Development

Woof Design products had been almost exclusively inspired by Gill Campbell, and the thought that they could be nearing the end of their life cycle was a painful one. However, she realized that successful companies are those that undertake product redesign and innovation to respond to changes in market demands. In late 1990 Gill introduced eight new designs, two of which incorporated tapestry into the woven fabric. By March 1991 these new products had accounted for just under 30 percent of total sales. Gill was aware that product innovation and new product development alone could not guarantee either survival or growth for her company The reality was that any changes in Woof products had to be accompanied by an effective marketing effort including market research, promotion and advertising, and by an effective distribution network.

Alternative 2 - Niche Marketing

The original intention behind Woof's marketing effort had been to serve a niche market. The products offered were perceived as being unique and well suited to a narrow market which resulted in Gill's decision to distribute the products only through Canadian-oriented gift and craft shops. She wondered if she should narrow her distribution even further and sell only to those craft and gift stores which had an image compatible with that of her products. However, she questioned the appropriateness of this strategy as a means of improving sales and the effect it would have on profitability.

Alternative 3 - Domestic Market Development

Woof's attention to detail and quality had been, Gill felt, the key to the company's initial success and she was not quite prepared to concede that the domestic market was already saturated by her products. Although her market was national in scope, she was unsure that the proper level of market penetration had been achieved or that she was targeting the appropriate retail clients. She wondered if it would be wise to attempt expansion into the apparel market where she could target women's specialty clothing boutiques. While she understood the dynamics of marketing in the craft industry, she had reservations about her ability to compete in the apparel market which was very volatile and subject to fads and style changes, and was dominated by both domestic and foreign competitors.

Alternative 4 - Exporting

Gill felt that expanding her international exporting effort would increase her market diversification and would reduce her dependence on the domestic market. However, she knew it would require substantial human and financial resources and wondered if her production capacity would be sufficient to meet demand in the foreign market. From her experience with selling to the United States, Gill was aware that successful exporting required a thorough knowledge of market conditions in the foreign country and an understanding of the effect of cultural values on marketing. Gill knew that her products could be exported more easily if they were culturally acceptable and provided customer appeal in the foreign market. Moreover, she knew there should be a demand that was not being met by local producers, and that her products should be better and/or cheaper than any locally produced variety Because exporting would require considerable involvement with international shipping, payment, and documentation, Gill knew that the selection of the appropriate intermediary, whether it be export merchant, export agent, or distributor, would be crucial to the success of any future export ventures.

The Decisions

Gill was confronted with the necessity of revitalizing her products and improving company sales during a severe recession. To meet this challenge she concluded that changing the distribution strategy might be a logical move. This required Gill to make decisions on the geographic scope of the market, intensity of distribution, screening of retailers, and on the types of intermediaries to use. She knew, however, that any distribution decision could be effective only if it was coordinated with the product, pricing, and promotion strategies and targeted at the right market. In particular, she realized that any change to target the apparel market would require significant alterations to the distribution and promotion strategies.

Given the complexity of these decisions Gill felt overwhelmed at the prospect of making the wrong choices, and wondered what direction would give her small firm a competitive edge. As she commented, "I had a company ready to do $700,000 in sales in 1991 but given the effects of the recession I could anticipate receiving orders for only $300,000." She knew that the sales curve would slope upward again only if the right marketing decisions were made.

Exhibit 1