San Dollar Boat Charters Case Study

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Sand Dollar Boat Charters

There are several different things that can pose barriers to entry into a new business. Some barriers to entry are government intervention (regulation, limits on entry), or naturally occurring barriers to entry such as high fixed costs, a steep knowledge curve or the structure of the industry (Investopedia, 2013).

There are few barriers to entry in the boat rental industry. Startup costs are relatively low, and even the boats can be leased to further reduce startup costs. There is little physical infrastructure needed and there is little in the way of specialized knowledge (Entrepreneur, 2013).. Insurance is one of the biggest fixed costs. Thus, there is a high threat of new entrants if the existing industry players are enjoying success. Indeed, there is even a new business model of peer-to-peer boat rentals that threatens to challenge the existing businesses in this industry. Several peer-to-peer boat rental websites have established with a focus on locations in Florida, which one would have to think is going to be a major boat rental market, attracting all industry players (Dahlberg, 2013).

The structure of the industry presents a challenge, however. In many markets, the industry might be saturated. If there is high brand loyalty then this presents a significant barrier to entry. For example it is tough to get into the cola business and win market share away from Coke and Pepsi. Boat charters, however, tend to have a transient customer base of tourists, fishermen and casual visitors. This reduces the power of that barrier to entry. Thus, it is expected that new competitors can arrive at any time. For Sand Dollar this creates opportunity to grow and enter new markets, but it also represents a threat because Sand Dollar must constantly seek to win new business in order to acquire and subsequently defend market share.

Pricing Strategy

There are a number of different pricing strategies that Sand Dollar can take. One assumes that as a new company, Sand Dollar does not have a premium brand. The quality of the boats is not known, but pricing strategy will be relative to the niche in which Sand Dollar has chosen to operate. Some different options for pricing strategy include profit maximization, revenue maximization, cost recovery, survival, penetration pricing and skim pricing. One of the most important characteristics of Sand Dollar is that it is a new business, and therefore has to win market share from existing customers, or it has to build its business further. Another important consideration for Sand Dollar is that its business is in a perishable good. While it is paying for boats, any day where it does not rent a boat is lost income that cannot be made up later. So Sand Dollar needs to take two different things into consideration -- competitive positioning and the need to sell to its capacity.

This points to penetration pricing as the optimal approach for Sand Dollar. This is a quantity maximization strategy (NetMBA, 2010) that allows the company to gain market share by pricing below the competition. The cost is actually not that important, because the variable costs in this business are quite low. For the short run, pricing should focus on covering fixed costs and building market share. It is not that hard to scale down or exit the business if the strategy does not pan out in the long run. However, that the threat of new entrants is high will always force firms in the industry to keep prices down, so it is better to build that into the business model from the beginning, keeping a lean operation and pricing just about marginal cost in order to generate contribution to fixed costs and attempt to build out a dominant share of these markets. If competitors can be enticed to exit by these aggressive pricing policies, that will help Sand Dollar, at least until the next new entrant enters the market.

3. There is an argument to be made for different strategies in New Smyrna Beach and Key Largo for a couple of reasons. The first is that these are different markets with different market conditions. It is entirely reasonable to expect that New Smyrna Beach might have more tourists on day trips while Key West might be more oriented towards fishing charters. However, we do not as yet know the breakdown of either market with regards to the customer base

What we do know is that in both markets, the competitive dynamics are the same. Our pricing strategy is based on the external market conditions and ultimately on both locations there are few barriers to entry so we must approach our strategy from that perspective.

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Yes, there are differences perhaps in the clientele and there might also be differences in terms of the specific competitive dynamic of each business, and that might affect things like marketing and the types of boats we need, but the basic industry structure is the same, as is the pricing strategy. So in terms of how the company wants to compete, what operating strategy it needs to have, how it wants to price, these are all things that will be same for all of the company's locations. Indeed, to build a quality brand you need to have an offering that is consistent across multiple locations.

So the subtle operating decisions will clearly differ between the locations. This is fine, but these operating decisions should not affect the strategy. It is acceptable for example to price differently at each location, provided that the pricing strategy occupies the same positioning in the local industry. Rental car companies operate like this -- they price for the city not the car so the same car will have a different price in Albuquerque as it has in Vermont. So Sand Dollar, as long as it is undercutting the competition, is in a position where it can adjust its prices to meet local market conditions.

4.

An EFEM is an external factor analysis. So we have to look at the different external factors that drive each market. Some variables, like the political environment or economic environment are either not that important or they do not vary between locations -- a down economy in Smyrna is going to be the same bad economy in Key Largo, for example. Some of the variables for Sand Dollar are the size of the local market, the intensity of competition and the infrastructure (docks, etc.). The following table examines the strength of each of these variables with respect to these locations:

New Smyrna Beach

Key Largo

Size of Market

Good; close to Daytona, big holiday market (8)

Smaller market, no nearby airport (6)

Intensity of Competition

High (3)

Moderate (5)

Infrastructure

OK, not great, we have a rental agreement with a dock (6)

Poor, we have to use a parking lot. This does not help sell boats. (4)

So the total EXEM factor score for New Smyrna Beach is 17 points, and for Key Largo it is 15 points. The infrastructure is at this point the key differentiator. The market in Key Largo is smaller, but less competitive, but the problem is that boats in the water are easier to rent than boats stacked up in a parking lot off-site. The customer finds it easier to envision themselves having fun on the boat when it is already in the water.

5.

The situational analysis in this case will focus on where we are and where we want to be. Right now, this is a young company with one semi-established location and one new location that has yet to establish much of anything. A substantial amount of the organization's resources are going to be chewed up dealing with the new startup in Key Largo. Another point is that these two locations are nowhere near each other. This makes it more difficult from a management perspective. There are significant startup issues in Key Largo, especially getting some space at a dock. If New Smyrna Beach is going to be an established location we should probably also have a permanent location there instead of renting. So there are still some issues related to growing the two existing locations that need to be resolved. At this point, we have not had many capacity issues, but that can be taken as that we are working below capacity and therefore not much as much money as we should be. It would almost be better to turn away business at this point, because that would be a sign that we are enjoying some success.

Down the road, both of these locations will be established and we will want to be working on subsequent locations. If the company grows into a third, fourth or fifth location it will benefit from having consistency in its management and pricing strategies. The company can built a brand if it offers a consistent customer experience. So the most important thing going forward for the company is to establish these management systems that can take the….....

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