Sunstone Logistic Systems expansion potential of telemetry offering to the South African car rental industry
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Sunstone Logistic Systems expansion
potential of telemetry offering to the
South African car rental industry
A consulting report project submitted by
Elizabeth Sephton
Student number: 1557943
Cell: +27 72 439 1582
Email: sephton.elizabeth@gmail.com
Supervisor:
Surika Chaithram
Wits Business School
February 2019
Table of Contents
Table of Contents ........................................................................................................ i
List of Figures ............................................................................................................. v
List of Tables ..............................................................................................................vi
1. Executive Summary ............................................................................................. 1
2. Introduction .......................................................................................................... 3
2.1. Opportunity.................................................................................................... 3
2.2. Purpose of report .......................................................................................... 3
2.3. Context of the report ..................................................................................... 3
2.4. Problem statement ........................................................................................ 3
2.5. Objectives of the report ................................................................................. 4
2.6. Assumptions of the report ............................................................................. 4
2.7. Limitations of the report ................................................................................. 5
2.8. Delimitations of the report ............................................................................. 6
2.9. Models and theories used for analysis .......................................................... 6
2.9.1. Customer Concentration ......................................................................... 6
2.9.2. Management theory: Porter’s Five Forces .............................................. 6
2.9.3. Implementation model: Ansoff Model ..................................................... 7
2.9.4. Implementation model: Business Model Canvas .................................... 7
2.10. Definition of terms ...................................................................................... 8
3. Organisation Background .................................................................................... 9
i
3.1. Client Profile .................................................................................................. 9
3.2. Nature and history of the Organisation.......................................................... 9
3.3. The organisation today................................................................................ 10
3.4. Business and market environment .............................................................. 10
3.5. Organization Grow Requirements ............................................................... 11
4. Models and Theories ......................................................................................... 12
4.1. Literature Review of Models and Theories .................................................. 12
4.1.1. Customer Concentration ....................................................................... 12
4.1.2. Management theory: Porter’s Five Forces ............................................ 13
4.1.3. Implementation model: Ansoff Model ................................................... 14
4.1.4. Implementation model: Business Model Canvas .................................. 15
4.2. Application of Models to Organization Growth Strategy .............................. 16
4.2.1. Application of Porter’s Five Forces ....................................................... 17
4.2.2. Application of the Ansoff Model ............................................................ 25
5. Recommended Opportunity ............................................................................... 28
6. Literature Review of Identified Growth Opportunity ........................................... 30
6.1. Car Rental ................................................................................................... 30
6.1.1. Car rental company activities................................................................ 31
6.1.2. Car rental location ................................................................................ 32
6.1.3. Fleet rotation......................................................................................... 33
6.1.4. Car rental consumer programs ............................................................. 34
ii6.1.5. South African car rental environment ................................................... 34
6.1.6. African car rental environment .............................................................. 36
6.1.7. Competing industries ............................................................................ 37
6.2. Consumer programs ................................................................................... 37
6.2.1. Program classification........................................................................... 39
6.2.2. Timing of rewards ................................................................................. 39
6.3. Discussion ................................................................................................... 40
7. Business Plan .................................................................................................... 41
7.1. Target market requirements ........................................................................ 41
7.2. Business Model Canvas .............................................................................. 41
7.3. Marketing strategy....................................................................................... 44
7.3.1. Product description ............................................................................... 44
7.3.2. Target customer segment ..................................................................... 46
7.3.3. Marketing plan ...................................................................................... 46
7.4. Operations plan ........................................................................................... 48
7.4.1. Management......................................................................................... 48
7.4.2. Human resources ................................................................................. 48
7.4.3. Business locations ................................................................................ 48
7.4.4. Facilities................................................................................................ 49
7.4.5. Daily operations .................................................................................... 50
7.5. Financial plan .............................................................................................. 51
iii7.5.1. Revenue sources .................................................................................. 51
7.5.2. Projected financial statements .............................................................. 52
8. Recommendations ............................................................................................. 65
8.1. Recommendations for further research ....................................................... 66
9. References ........................................................................................................ 67
ivList of Figures
Figure 1: Projected additional revenue requirements to reduce customer concentration
................................................................................................................................. 11
Figure 2: Ansoff Matrix (Ansoff, 1957) ...................................................................... 15
Figure 3: Porter's Five Forces Representation of Sunstone Logistic Systems
Competition .............................................................................................................. 24
Figure 4: Customer Interaction in Short-term Car Rental (Dessie, 2015) ................. 32
Figure 5: Representation of the density of car rental branches in South Africa (Avis,
n.d.; Bidvest Car Rental, 2018; Budget, 2018; Drive South Africa, 2018; Europcar, n.d.;
First Car Rental, 2015; Hertz, 2018; Pace Car Rental, 2015; Tempest Car Hire, 2018;
Thrifty Care Rental, 2018; Woodford Car Hire, 2018; Xtreme Car Rental, 2017) ..... 36
Figure 6: Business Model Canvas of As-Is Sunstone Logistic Systems Business Model
................................................................................................................................. 42
Figure 7: Business Model Canvas of To-Be Sunstone Logistic Systems Business
Model ....................................................................................................................... 42
Figure 8: Estimated Marketing related costs (Sunstone Logistic Systems, 2018b) .. 47
Figure 9: Projected vehicle purchasing behaviour for fleet rotation and fleet increases
................................................................................................................................. 52
Figure 10: Projected vehicle sales behaviour for fleet rotation ................................. 53
Figure 11: Forecast of required telemetry devices installed and active in customer fleet
................................................................................................................................. 61
vList of Tables
Table 1: Definitions and explanation of the terms used .............................................. 8
Table 2: Ansoff Matrix Possible Growth Strategies for Sunstone Logistic Systems . 25
Table 3: Growth Opportunity Alternative Comparison .............................................. 29
Table 4: Summary of Business Model Canvas concepts effected by the introduction of
the proposed customer segment .............................................................................. 43
Table 5: Pricing of rental telemetry device in 2018 (Sunstone Logistic Systems, 2018b)
................................................................................................................................. 45
Table 6: Projected pricing......................................................................................... 46
Table 7: Projected vehicle months per 100 vehicles in fleet at January ................... 53
Table 8: Projected vehicles to be tracked at January to meet revenue requirement of
organisation.............................................................................................................. 54
Table 9: Forecasted Monthly Cashflow 2019 ........................................................... 56
Table 10: Forecasted Monthly Cashflow 2020 ......................................................... 57
Table 11: Forecasted Monthly Cashflow 2021 ......................................................... 58
Table 12: Forecasted Monthly Cashflow 2022 ......................................................... 59
Table 13: Forecasted Monthly Cashflow 2023 ......................................................... 60
Table 14: Forecasted Income Statement ................................................................. 62
Table 15: Forecasted Balance Sheet ....................................................................... 64
vi1. Executive Summary
Sunstone Logistic Systems, headquartered in South Africa, providing routing and
scheduling, and telemetry software solutions to two primary customers in over 13
African countries was investigating a growth strategy for the organisation. The aim of
this report was to identify a suitable growth opportunity for the organisation aligned to
the organisation’s strategic objectives.
The organisation has grown significantly since its beginnings in 2009 but was at risk
due to its high customer concentration. This report therefore sought to explore the
opportunities available to Sunstone Logistic Systems in expanding to provide services
to a new customer segment to reduce the risks associated with high customer
concentration.
Appropriate models and theories were used to determine that high customer
bargaining power was a significant threat to the organisation and that market
development would be the most appropriate strategy to employ to address this threat.
The financial requirements reducing the organisation’s customer concentration in the
medium-term was given due consideration. Furthermore, the organisation’s objective
of retaining its focus on the African continent was an important factor in the selection
of a suitable opportunity. Alternatives for market development opportunities were
investigated and it was determined that the short-term car rental industry in South
Africa provided the most reasonable opportunity for Sunstone Logistic Systems to
meet its growth requirements in the period required. The value offering that the
organisation would provide to the target customer would be advanced telemetry
solutions to inform a consumer program to incentivise improved driver behaviour of
their vehicles by their clientele.
In depth investigation into the short-term car rental industry was conducted to provide
a better understanding of the environmental requirements of the target customer and
the challenges that the industry faces from e-hailing applications.
Financial projections were generated for the project for 2019 through to 2023. The
projections used several assumptions based on information provided by the
1organisation and the cycle of fleet sizes. The projected financials used a 3-year loan
to finance the project, with installations commencing in March of 2019 to coincide with
de-fleeting cycles of the target customer segment. The projected financials show
positive growth potential whilst meeting the loan repayment requirements and meeting
the revenue generating requirements of the organisation.
The report concludes by providing recommendations to Sunstone Logistic Systems
with the size of the new market segment essential to meeting its revenue growth
requirements and the intention of the new market segment to differentiate itself in the
South African car rental industry through consumer programs.
22. Introduction
2.1. Opportunity
Sunstone Logistic Systems is a small company that provides routing and scheduling,
and telemetry services. The organization has a high customer concentration which
poses a risk; the opportunity is therefore to identify the appropriate growth strategy for
the organization based on the strategic objectives of the organization and identify
suitable grow opportunities to reduce customer concentration.
2.2. Purpose of report
The proposal will attempt to provide an analysis of Sunstone Logistic Systems and the
environment in which it operates; to identify suitable growth opportunities with the aim
of reducing the organization’s customer concentration; to select the most appropriate
growth opportunity from the identified alternatives and analyze the opportunity
identified for growth.
2.3. Context of the report
Sunstone Logistic Systems operates from its Johannesburg offices offering services
to two principal customers in over 13 African countries. The organization operates in
competitive markets where multiple alternatives are available but has expanded as a
result of its ability to provide an integrated suite of products to its customers, who
prefer to engage with one service provider rather than multiple vendors.
2.4. Problem statement
This report seeks to identify a suitable growth opportunity for Sunstone Logistic
Systems to reduce its customer concentration from 65% to 50% (i.e. a 15% reduction)
in the medium term on the African continent.
32.5. Objectives of the report
The objectives of this report are to:
• Investigate the financial growth requirements of the organization to meet its
customer concentration targets based on the organization’s forecasted revenue
for the medium-term.
• Identify the external factors that the organization needs to address to improve
its competitiveness in the market using the Porter’s Five Forces model.
• Identify a suitable growth strategy based on the strategic objectives of the
organization using the Ansoff model.
• Identify, select and analyze an appropriate growth opportunity which is aligned
to the internal and external strategies identified.
• Conduct a financial projection to determine the operational and financial
implications for the organization in perusing the identified growth opportunity.
• Provide recommendations to the organization in implementing the identified
opportunity.
2.6. Assumptions of the report
• The financial requirements to reduce customer concentration from 65% to 50%
will be based on the latest set of financials provided by the organization.
• It is assumed that there will be no change to the relative proportions of revenue
contribution for the organization (i.e. customer concentration ratio would remain
constant if a new customer segment was not targeted.)
• The implementation of the growth strategy would be short to medium term.
• The implementation and management models selected are appropriate for the
organization’s requirements.
42.7. Limitations of the report
• The report will be limited by the depth of information that is provided by the
client on its customers and operations.
o Customer concentration ratio will be determined based on the latest
financial results of the organization.
o The required revenue stream to reduce the customer concentration ratio
to the desired level will be based on the latest financial results and the
projected revenue growth of the organization.
• Porter’s Five Forces model has a number of limitations due to its attempts to
simplify the systems it is used to describe. These limitations include:
o The model assumes a relatively static market structure.
o The model assumes competitive advantage is against other market
players, suppliers and customers.
o The model does not allow for the representation of the interdependence
of the forces.
• Similarly, the Ansoff model has limitations as a result of the simplification of
systems it is used to describe. These include:
o External market forces are not considered by the model.
The Porter’s Five Forces model and the Ansoff model will be used in combination to
identify the market and internal factors which will influence the strategy of the
organization.
52.8. Delimitations of the report
• This report will focus on the financial and market position of Sunstone Logistic
Systems and its operations on the African continent; markets on other
continents will not be considered.
• This report will focus on short-term commercial car rental industry; long-term
rentals and industrial vehicles will not be included in this report.
• Consumer programs will be looked at broadly to incorporate both loyalty and
rewards. Consumer satisfaction will not be included in this report.
• This report will provide a description of high-level system requirements; detailed
system requirements would need to be determined in consultation with the
customer.
2.9. Models and theories used for analysis
2.9.1. Customer Concentration
The concept of customer concentration has its origins in the manufacturing industry,
where it was recognized that the improvements in margin gained by firms supplying
major customers were accrued by the customer, rather than the firm (Irvine, Park, &
Yıldızhan, 2015). Customer concentration was selected as a theory for this report as
the client has identified customer concentration as a risk to the organization.
2.9.2. Management theory: Porter’s Five Forces
The Porter’s Five Forces model is a framework that is used for analyzing competition
in industries that influence corporate strategy. Porter simplified complex micro-
economic literature into five causal variables to explain performance: the threat of new
entrants (or entry barriers); the threat of substitution; the bargaining power of suppliers;
the bargaining power of customers; and industry rivalry (or competitive rivalry)
(Grundy, 2006). As the organization operates in a competitive environment the
external industry forces need to be analyzed and opportunities for improved
competitiveness to be identified. This model will be used in combination with an
organization focused model to identify possible management action to address the
opportunities identified.
62.9.3. Implementation model: Ansoff Model
The Ansoff model is a marketing tool that aims to provide the organization with a
two-dimensional planning tool that focuses on product and market growth. There are
four growth strategies available to organizations: market penetration; market
development; product development; and diversification (Ansoff, 1957). The
organization’s stated requirements were used to determine which of the growth
strategies were most appropriate for the organization and used to direct the
investigations for growth opportunities for the organization.
2.9.4. Implementation model: Business Model Canvas
The Business Model Canvas is a tool to describe and manipulate business models to
create new strategic alternatives (Osterwalder & Pigneur, 2010).
72.10. Definition of terms
Table 1: Definitions and explanation of the terms used
Term Definition Authors
Car rental The classification of a group of companies SASB (2014)
industry providing short-term vehicle rentals to
consumers. This excludes vehicles that are
leased to purchase and does not include
drivers as a part of the service offered to
consumers.
Consumer A series of planned activities, events and items
program executed by company functions with the
purpose of attracting and retaining customers.
Driver The operator of a vehicle. Merriam-Webster
Online (2017a)
Driver The quantification of the observable actions of
behaviour the driver of a vehicle, including but not limited
to speed, distance travelled, time of action,
position, acceleration, deceleration, turning
and heading.
Loyalty Faithful to a cause, ideal, custom, institution, or Merriam-Webster
product. Online (2017b)
Off-airport Not on airport property. Travel Industry
Dictionary (2013)
On-airport Located on airport property in or close to the
terminal buildings
Repurchase A contract giving the seller of asset the right to
agreement repurchase the asset after a stated period.
Reward A gift in recognition of effort, behaviour or Oxford
achievement. Dictionaries
(2018)
Telemetry The science and technology of remote Merriam-Webster
measurement and transfer of data via means Online (2017c)
such as radio, wire, satellite, or other such
devices, to an observer.
83. Organisation Background
3.1. Client Profile
The managing director of Sunstone Logistic Systems is Mark Jaffe. Mr Jaffe resides
in and has largely built his career from Johannesburg, South Africa. Prior to being the
managing director of Sunstone Logistic Systems, Mr Jaffe managed a large account
for a software development and consulting organisation that specialises in vehicle
logistics. Mr Jaffe identified a gap in the African market to implement the vehicle
logistics software which had previously been focused on the South African market. Mr
Jaffe’s philosophy has been to identify and adapt his organisation to the needs of the
customer to provide an integrated suite of solutions to the vehicle logistics market.
3.2. Nature and history of the Organisation
Sunstone Logistic Systems is owned and managed by Mr Jaffe. The head office is
situated in Johannesburg, with satellite operations and partners in East and West
Africa.
Sunstone Logistic Systems began its operations by providing vehicle logistics
software, but soon extended to telemetry and execution management solutions and
consulting services. The organisation has grown having two principal customers that
are beverage companies in over 13 African countries. The organisation has expanded
since its beginnings in 2009 to incorporate software development and telemetry
experts in addition to its software implementation and support team. The organisation
has grown organically to meet the needs of its customers. The organisation seeks to
select the best of breed hardware and software to provide custom solutions to its
customer requirements and use cutting edge technologies and systems to solve
operational needs (Sunstone Logistic Systems, 2018a). The management has actively
sort young ambitious technical experts to extend the capabilities of the organisation.
The organisation’s services are cloud-based and supported remotely from the
Johannesburg office, although software training and telemetry device maintenance
and fitments are conducted locally at their customer premises (Sunstone Logistic
Systems, 2018a).
9Each product individually has a high number of competitors in the market, but the
integrated suite of products has provided the organisation with the competitive
advantage to retain the business of its two principal customers.
The organisation has performed well in the ailing South African economy as a result
of its significant focus on other African markets, and its intense efforts on providing its
customers with an integrated product suite to meet their vehicle logistics needs.
3.3. The organisation today
The organisation has a relatively flat architecture, as a result of its relatively fast
expansion to approximately 30 employees (Sunstone Logistic Systems, 2018a). There
is significant overlap between the implementation and support teams. The software
development team requires the customer knowledge of the implementation team to
effectively address the needs of its customers. The organisation has identified further
opportunities to extend its existing product suite and is investing significant R&D
resources to fulfilling these.
Whilst the organisation aims to retain its two principal customers, management has
identified the significant risk of high customer concentration and is actively trying to
reduce this risk by attracting new customers. The customers that it has focused on are
small to medium size vehicle distribution operations. This customer expansion
initiative aims to leverage on the current resources, expertise and geographical
footprint of the organisation without endangering the survival of the organisation.
The organisation has not previously sought consultancy on its growth strategy.
3.4. Business and market environment
The organisation operates in a market that has several international competitors and
multiple local competitors in each of the 13 African markets in which it currently
conducts business. Vehicle logistics in these markets is the primary means of transport
due to poor rail infrastructure and large geographical areas needing to be serviced.
The local currencies in these countries are vulnerable to fluctuations in the US Dollar
and the price of fuel. This vulnerability has resulted in an ever-increasing focus on
10improving vehicle logistics efficiencies. Customers in these environments therefore
require consistent consideration and engagement to actively meet their changing
needs and promote efficient use of resources in doing so.
The two primary customers of the organisation are large corporate companies.
Although other corporate companies of similar size and geographic situation certainly
exist, it is unlikely that the organisation would attract the business of such corporates
based on its current size and its limited physical presence in local markets.
3.5. Organization Grow Requirements
The problem statement of the organization is to reduce its customer concentration
from 65% to 50% in the short to medium term on the African continent (Sunstone
Logistic Systems, 2018b) to reduce the organization’s risk exposure of having two
major customers.
To achieve a reduction in customer concentration 15%, the organization would require
additional annual revenue of approximately R9 146 832.24 in 2019, growing at an
annual rate of 12% for the next 3 to 5 years. Figure 1 provides a graphical
representation of the revenue requirements for each of the next 5 years to attain the
desired customer concentration ratio.
Projected additional revenue requirements to reduce
customer concentration of Sunstone Logistic Systems to
desired level
R15 000 000,00
R10 000 000,00
Rands (R)
R5 000 000,00
R0,00
2019 2020 2021 2022 2023
Year
Figure 1: Projected additional revenue requirements to reduce customer concentration
114. Models and Theories
4.1. Literature Review of Models and Theories
The literature review was conducted to gain understanding of the research that has
been conducted into elements of this report. Customer concentration was selected as
a model as it was explicitly stated in the organisation’s problem statements and was
therefore of significance. The Porter’s Five Forces management theory was selected
to analyse and evaluate the external factors influencing the organisation. The Ansoff
model was selected to analyse and evaluate the internal strategic growth opportunities
available to the organisation. The external and internal elements were used in
combination to develop potential growth strategies for the organisation, from which
one was selected based on its ability to meet the organisation’s growth requirements
and its feasibility to implement.
4.1.1. Customer Concentration
The concept of customer concentration has its origins in the manufacturing industry,
where it was recognized that the improvements in margin gained by firms supplying
major customers were accrued by the customer, rather than the firm. The customer
made use of their bargaining power to renegotiate contract terms to receive discounted
pricing, increased credit and other advantages. High customer concentration is
inversely related to price elasticity and directly related to demand unpredictability
(Irvine et al., 2015). Relationships between the firm and customer, where there is a
high customer concentration, are more prominent. By having high customer
concentration the firm is exposed to higher cost of capital and higher risk customer
defection (Dhaliwal, Judd, Serfling, & Shaikh, 2016).
Research by Irvine, Park and Yildizhan (2015) supported Patatoukas’s (2011) position
that high customer concentration results in lower profitability of the firm, showing that
customer concentration had varying advantages and disadvantages during the life-
cycle of the relationship between the firm and the customer. More specifically Irvine,
et al. (2015) found that the benefits of early customer specific selling, general and
administrative investments are reaped as the relationship matures and the firm is able
to achieve higher operating profits.
124.1.2. Management theory: Porter’s Five Forces
The Porter’s Five Forces model is a framework that is used for analyzing competition
in industries that influence corporate strategy. Porter simplified complex micro-
economic literature into five causal variables to explain performance: the threat of new
entrants (or entry barriers); the threat of substitution; the bargaining power of suppliers;
the bargaining power of customers; and industry rivalry (or competitive rivalry)
(Grundy, 2006).
The five forces identified by Porter in the microenvironment drive competition and
influence the firm’s ability to be profitable. The attractiveness of the market and its
profitability largely define the market structure. It is this market structure that influences
the strategic behavior of the firm; thus the firm’s success is indirectly dependent upon
the market structure (Dälken, 2014). In the words of Porter, “Whatever their collective
strength, the corporate strategist’s goal is to find a position in the industry where his
or her company can best defend itself against these forces or can influence them in
its favor” (Porter, 1979, p. 137).
The organization operates in a competitive environment, shaped largely by external
factors such as transport infrastructure and market demands. The Porter’s Five Forces
model will provide context to the competitive African environment and illuminate the
competitive forces that the organization should address to meet or improve upon the
industry standards, and thereby become more competitive in the market. This model
will be used in combination with organization focused models to identify possible
management action to address the opportunities identified.
4.1.2.1. Limitations of the Porter’s Five Forces Model
The model assumes a relatively static market structure (Dälken, 2014) which does not
adequately describe the fluidity of the industry barriers. The model has its foundation
in competition and assumes that competitive advantage is gained over other market
players, suppliers and customers, but fails to link directly to possible management
action (Grundy, 2006). The model does not allow for the representation of the
interdependence of the forces (Grundy, 2006). Further criticisms of the model are that
Porter did not provide justification for the selection of the five forces (Dälken, 2014).
134.1.2.2. Opportunities for Extension or Improvement of Porter’s Five
Forces
As stated by Dälken (2014), the degree of impact of each of the five forces on the
market structure is variable depending on the industry. There is therefore potential for
the Porter’s Five Forces to be extended to include evaluation of the degree of impact
each of the five forces has on the industry under analysis. A critical literature review
would be required to determine how to evaluate the degree of influence
Furthermore Dälken (2014), raised the criticism of Porter’s Five Forces that its basis
did not include the more recent drivers of technology and their effects on each of the
five forces. A critical literature review would be needed to expand on the work of
Dälken and analyze the interdependencies of the original five forces and the drivers
of technology.
4.1.3. Implementation model: Ansoff Model
The Ansoff model is a marketing tool that aims to provide the organization with a
two-dimensional planning tool that focuses on product and market growth. The
model is defined by whether the products and markets are existing or new. See
Figure 2.
There are four growth strategies available to organizations: market penetration; market
development; product development; and diversification (Ansoff, 1957). These growth
strategies may be used in combination to meet the long-term growth objectives of the
organization. According to Ansoff (1957) diversification stands apart from the other
three growth strategies at it requires new skills, techniques and facilities to depart from
the present product line and market structure through vertical, horizontal or lateral
diversification.
Ansoff (1957) suggested that trend forecasts should be used in combination with
planning for contingencies and unforeseeable events to make informed decisions
relating to strategic growth for the organization.
14……………..
Figure 2: Ansoff Matrix (Ansoff, 1957)
4.1.3.1. Limitations of the Ansoff Model
The limitations of the Ansoff model include that it does not represent the change of
strategic interventions to daily operational activities for the organization, which is
apparent for Sunstone Logistic Systems. This model is internally focused and does
not account for the activity of external competitor activities (Munro, 2018). External
competitor activity is important for the organization as it operates in an environment
with both local and international competitors and significant external forces. Hence the
Ansoff model should be used in combination with other models that take external
competitive factors into account.
4.1.3.2. Opportunities for Extension or Improvement of Ansoff Model
A critical literature review would need to be conducted to determine if the development
in industry’s external has given rise to a third dimension to the Ansoff Model, for
example the stimulus for internal strategic growth.
4.1.4. Implementation model: Business Model Canvas
The Business Model Canvas is a tool to describe and manipulate business models to
create new strategic alternatives. The model is built on nine concepts that describe
how the organization intends to be profitable. These concepts cover the four main
areas of business: customers, offering, infrastructure and financial feasibility
(Osterwalder & Pigneur, 2010).
154.1.4.1. Limitations of the Business Model Canvas
The Business Model Canvas is market focused but does not include the concepts of
competition. Although strategic alternatives may be derived through the use of this
model.
4.1.4.2. Opportunities for Extension or Improvement of the Business
Model Canvas
As stated in section 4.1.4.1 the Business Model Canvas, does not include concepts of
competition, a critical literature review would therefore be required to identify how
competition could be adequately incorporated to the implementation model.
4.2. Application of Models to Organization Growth Strategy
A combination of the Porter’s Five Forces model and the Ansoff model will be used to
identify the external and internal forces which affect Sunstone Logistic Systems and
will used to determine an appropriate direction of the growth strategy.
The Porter’s Five Forces model provides the framework to analyze the external
competitive forces affecting the environment in which the organization operates. The
performance of the organization in each dimension affects its competitiveness and
profitability. The identification of initiatives to improve performance in one or more
competitive dimensions, is important in shaping the strategic efforts of the
organization.
The Ansoff model provides strategic growth alternatives that are internally focused.
The organization exists and operates in a competitive environment therefore the
internal strategic growth initiatives need to be informed by and aligned to the initiatives
of the organization to improve its competitiveness in the external environment.
164.2.1. Application of Porter’s Five Forces
In accordance with the management model of Porter (1979), the competitive forces
affecting Sunstone Logistic Systems were analyzed to determine the attractiveness of
the industry in which it operates and identify potential growth areas. The model was
used to determine the strategic position of the organization relative to the industry in
which it operates and identify potential growth areas based on the competitive forces
affecting the organization.
4.2.1.1. Threat of new entrants
The barriers to entry for the products within the Sunstone Logistic Systems suite are
low.
4.2.1.1.1. Routing and scheduling services
Multiple local and international software solutions exist as standalone or managed
services from a variety of vendors and software providers for routing and scheduling
vehicle logistics (Open Door Logistics Ltd, 2018; OPSI Systems, 2018; PTV Route
Optimiser, n.d.; Resolve, 2018; Staedtler-Logistik, 2018). New entrants may choose
to be resellers of existing products, thereby surpassing the capital requirements of
R&D.
Routing and scheduling software and services generally require integration to an ERP
(Gayialis & Tatsiopoulos, 2004) or order capturing system, which increases the cost
of switching (Barki & Pinsonneault, 2002), but middleware can be developed at
relatively low cost to counter these switching costs.
Routing and scheduling software vary in feature capability. The changing operating
environment of customers has put a greater focus on dynamic route planning
(Speranza, 2018).
174.2.1.1.2. Telemetry services
Similarly telemetry hardware and software providers exist locally and internationally
with varying cost, feature and service options (Aplicom, n.d.; Driver Check, 2104; MiX
Telematics Africa, 2018; Tracker, 2016; Trilogical, 2016; VBox AutoMotive, n.d.). New
entrants may choose to be resellers of existing products and platforms, thereby
surpassing the capital requirements of R&D.
Switching costs for the customer are associated to hardware replacement and
integration to other systems (if any) (Farrell & Klemperer, 2007). Hardware has a life
expectancy after which it requires replacement; this therefore presents an opportunity
to new entrants to time their entry to minimize total cost to the customer on hardware
loss. Customers do however tend to be locked in for the duration of the hardware life
expectancy.
4.2.1.1.3. Threat to new entrants summary
In summary there is a high threat of new entrants into the market sectors that Sunstone
Logistic Systems participates in due to the relatively low barriers to entry in securing
existing products and reselling these in the market without having significant capital
outlays for R&D rights.
4.2.1.1.4. Sunstone Logistic Systems in the context of new entrants
Sunstone Logistic Systems entered and expanded into routing and scheduling, and
telemetry services in part due to the low barriers to entry. Sunstone Logistic System
has developed it software suite to be strategically integrated, however this does not
prevent new entrants from doing the same.
4.2.1.2. Threat of substitutes
The products that Sunstone Logistic Systems has chosen to include in its suite are
likely to be required in the future and have a low probability of being substituted.
184.2.1.2.1. Routing and scheduling services
Routing and scheduling software will be required in the future for companies to retain
and improve distribution efficiencies and promote efficient use of economic and
environmental resources (Lin, Choy, Ho, Chung, & Lam, 2014). If transportation were
to be outsourced, the third-party logistics providers would require software to optimize
the utilization of their resources.
4.2.1.2.2. Telemetry services
Although there is potential for vehicle telemetry devices to be substituted by mobile
positioning data, however there would be an associated a loss of vehicle specific
events (e.g. ignition on/off events, accelerometer events, etc.). Commercial fleets
would be unlikely to use a substitute of mobile positional data if driver behavior
monitoring or vehicle recovery were of importance.
4.2.1.2.3. Threat of substitutes summary
There is a low threat of substitutes taking market share due to the continual need for
transportation for movement of product and the need to improve efficiencies
(Cattaruzza, Absi, Feillet, & González-Feliu, 2017) to drive competitiveness and
profitability of the customer.
4.2.1.2.4. Sunstone Logistic Systems in the context of threat of
substitutes
Sunstone Logistic Systems provides solutions that are focused on vehicle logistics.
The efficiency of vehicle logistics is continually under pressure in a global economic
climate of rising fuel costs and local infrastructure environments that do not offer
feasible alternatives means of transportation or localized production.
194.2.1.3. Bargaining power of customers
4.2.1.3.1. Routing and scheduling services
As previously discussed in section 4.2.1.1.1 multiple competing products exist in the
market, thus giving the customer a level of bargaining power because several
alternatives are available. Price sensitivity in this market is noteworthy for software
systems of similar capability.
There are however factors that weigh in organization’s favor, such as the cost of
switching to another routing and scheduling software; integration to ERP systems,
implementation, training and contract and SLA negotiations with new potential
software providers.
4.2.1.3.2. Telemetry services
As previously discussed in section 4.2.1.1.2 multiple competing products exist in the
market, thus giving the customer a level of bargaining power because several
alternatives are available. Price sensitivity is high in the telemetry services market.
Factors such as integration costs of telemetry to execution management systems,
deters customers from switching.
4.2.1.3.3. Bargaining power of customers summary
Customer bargaining power is high considering the number of alternatives available
for each product in the local and international markets, however switching costs could
be a significant deterrent to customers with high levels of integration between systems.
4.2.1.3.4. Sunstone Logistic Systems in the context of customer
bargaining power
The customer concentration of the Sunstone Logistic Systems customers is high as a
result of the organization having two principal customers, which intensifies the
bargaining power of its principal customers.
204.2.1.4. Bargaining power of suppliers
Due to the high number of providers described in section 4.2.1.1, suppliers have low
bargaining power. Suppliers compete in an international market on cost, quality and
features of their hardware and/or software.
4.2.1.4.1. Routing and scheduling services
Industry participants may develop their own software or have reselling agreements
with one or more software providers. The availability of multiple similar software
solutions means that suppliers have relatively low bargaining power unless their
resellers are contractually limited to using only their software/services or have used
their software as the platform for related products and services.
Once a software solution has been implemented for a customer switching to another
supplier becomes prohibitive as contractual agreement to the customer generally
requires that the software be provided for a specified period. This raises the bargaining
power of the supplier in supplementary work such as new development to meet
additional needs of the customer.
4.2.1.4.2. Telemetry services
Industry participants make use of both open and closed telemetry platforms. Those
which make use of open telemetry platforms have greater scope for the use of multiple
hardware vendors, thereby reducing reliance on their suppliers. Whilst those that make
use of closed telemetry platforms are limited to their suppliers, giving their suppliers
greater bargaining power.
The significant investment in the telemetry hardware makes it prohibitive for the firm
to replace hardware before the end of its useful life. However, should the firm make
use of an open telemetry platform this does not limit the firm from switching to a
different supplier for new installations of telemetry hardware.
214.2.1.4.3. Bargaining power of suppliers summary
Depending on the firm’s strategic choices in the type suppliers it uses, the supplier(s)
has a greater or lesser degree of power. The industry is characterized low bargaining
power of the supplier at the outset of the contract, as a result of the number of
alternative suppliers in the market, but increased bargaining power once the supplier
is selected and the solution implemented for the customer.
4.2.1.4.4. Sunstone Logistic Systems in the context of supplier
bargaining power
Sunstone Logistic Systems has long-standing relationships with software and
hardware providers but has not contractually limited itself to any one vendor. The
organization has also sought to reduce its reliance on vendors by developing skills
and software solutions in-house to meet the needs of its customers. The strategic
decision of the organization to build in-house competencies and intellectual property
whilst remaining vendor neutral has significantly reduced the potential bargaining
power of Sunstone Logistic Systems’ suppliers.
4.2.1.5. Industry rivalry
As previously mentioned, there are a high number of providers of similar hardware
and software solutions as those provided by Sunstone Logistic Systems, which
translates into intense competition between organizations to service these markets.
Firm concentration for the African and South African markets is low.
4.2.1.5.1. Routing and scheduling services
Organizations differentiate their product offerings product feature differentiation, price
differentiation, extended product range provision, consulting and support services.
Software solutions are developed locally and internationally, with resellers and
partners extending the reach of software solutions to numerous markets using local
and cloud hosted services.
224.2.1.5.2. Telemetry services
Telemetry service providers differentiate their product on cost, add-on products and
services (e.g. panic buttons, vehicle recovery, fuel monitoring, etc.) depending on the
market sector.
Telemetry service providers may choose to partner with complementary industries,
such as vehicle insurance providers, to structure packaged offerings to customers that
are competitively priced and ensure security in fixed term contracts for the firm.
4.2.1.5.3. Industry rivalry summary
Industry rivalry is characterized as high, with firms attempting to differentiate their
products and services to gain competitive advantage.
4.2.1.5.4. Sunstone Logistic Systems in the context of industry rivalry
Sunstone Logistic Systems has differentiated itself in the market by providing
customized integration, reporting and event detection to fully meet the needs of its
customers, which would require significant time investment from competitors to
replicate. The two principal customers serviced by Sunstone Logistic Systems in the
African market, gives the organization credibility within the market.
4.2.1.6. Discussion of Porter’s Five Forces
Figure 3 is a graphical representation of the qualitative interpretation of the competitive
environment in which Sunstone Logistic Systems currently operates and the forces
that affect the organization itself. (The scale is 0: low, 5: high).
The organization is subject to the same forces of threat of new entrants, threat of
substitution and industry rivalry as other firms in the industry. However, the
organization has reduced the power of its suppliers relative to the industry norm by
developing in-house capabilities and remaining supplier neutral. Due to the
organization’s reliance on its two principal customers (and therefore its high customer
concentration) the organization is subject to higher customer bargaining power than
the industry norm.
23This high customer bargaining power may pose a risk to the organization’s ability to
compete effectively in the market in the future. It is therefore recommended that the
organization act to strategically reduce the customer bargaining power forces that it is
subject to.
Porter’s Five Forces –
Sunstone Logistic Systems
Threat of new
entrants
5
4
3
Industry rivalry 2 Threat of substitutes
1
0
Bargaining power of Bargaining power of
suppliers customers
Industry Sunstone Logistic Systems
Figure 3: Porter's Five Forces Representation of Sunstone Logistic Systems Competition
244.2.2. Application of the Ansoff Model
See Table 2 for the identified growth strategies available to Sunstone Logistic Systems
according to Ansoff’s matrix.
Table 2: Ansoff Matrix Possible Growth Strategies for Sunstone Logistic Systems
Existing Products New Products
Existing Market Penetration Strategies: Product Development Strategies:
Markets • Increase market share • Product improvement
• Increase quality • Product line extensions
• Increase marketing • New products for same
• New application market
New Market Development Strategies: Diversification Strategies:
market • Expand markets for existing • Vertical diversification
products • Horizontal diversification
• Geographical • Lateral diversification
• New segments
• Resellers
4.2.2.1. Sunstone Logistic Systems Growth Strategy Requirements
As discussed in section 4.2.1.6 the objective of the growth strategy is to reduce the
customer concentration of Sunstone Logistic Systems. This would exclude the market
penetration and product development growth strategies described by Ansoff, as these
are concentrated on existing markets, whereas the objective clearly requires new
markets.
This therefore narrowed the possible growth strategies to market development and
diversification. According to the research conducted by Robson, Gallagher and Daly
(1993), following a diversification strategy is likely to endanger a small firm’s survival
prospects, unless the firm has first built a strong foundation in its primary business
operations. This sentiment was echoed by the client, who highlighted that the risk of
diversification was deemed too high for Sunstone Logistic Systems by its management
at the current time (Sunstone Logistic Systems, 2018b).
25Market development strategies is therefore the only growth strategy which will meet
the organisation’s need to reduce its customer concentration without exposing the
organisation to risk levels that may endanger the survival of the organisation.
4.2.2.2. Market development strategies
4.2.2.2.1. Geographical expansion
When comparing the existing Sunstone Logistic Systems geographical foot print to the
Doing Business Economy Rankings by the World Bank (2018), it was noted that the
organisation already operates in 11 of 16 top ranked countries to do business in in
Africa. 3 of the countries that are not included in the Sunstone Logistic Systems foot
print are small island nations (Mauritius, Seychelles and Cabo Verde).
To expand geographically Sunstone Logistic Systems would need to consider
targeting African countries that have greater barriers to entry and operation than those
in which it already operates. Alternatively, Sunstone Logistic Systems may consider
expanding to geographical regions beyond Africa that have a high dependency on
vehicle logistics and have similar operating environments to the geographies in which
already operates (i.e. developing countries), however this is outside of the scope of
this report. Entering new geographies would likely require significant investment in
marketing and potentially a partnership with a local complimentary organisation.
4.2.2.2.2. New segments
4.2.2.2.2.1. Consumables
Sunstone Logistic Systems has focused on beverage company vehicle distribution,
which is only one segment of vehicle logistics. Routing and scheduling and telemetry
services for vehicle logistics of other consumables offer alternative potential segments
for Sunstone Logistic Systems to target.
The South African market is at an advanced stage of consolidation with few franchised
supermarket chains dominating the industry. These supermarket chains have
consolidated and centralised procurement and distribution functions (Chikazunga,
Joordan, Bienabe, & Louw, 2007). According to Kiiru (2015) South Africa’s retail
26industry has the highest levels of formalisation on the continent (60%), followed by
Kenya (30%).
According to a report by AT Kearney (2015), developing retail markets such as Nigeria,
Ghana, Mozambique and Tanzania are good entry points for retailers seeking to enter
the African market due to their growth potential and improving infrastructure. Ghana
for example has a fast-growing retail segment of open-market stands and
neighbourhood kiosks. Smaller kiosk serviced daily by distributor’s motorised tricycles
whilst larger kiosks are serviced three times a week by distributor’s delivery vans
(Agyenim-Boateng, Benson-Armer, & Russo, 2015). There is potential to align with the
distribution logistics functions to support these developing markets that are not yet
consolidated and centralised as is the case in the South African market.
4.2.2.2.2.2. Sales representatives
Sales representative activity routing and scheduling is more static than the dynamic
needs of distribution which reduces the need for routing and scheduling for this market
segment, however telemetry and execution management services may be required to
verify sales representative activity.
The sales representative functions have developed substantially to incorporate the
use of mobile and tablet technologies for inventory and price checks, order placement
and invoice processing activities (Agyenim-Boateng et al., 2015). As such, this market
segment does not offer significant potential growth for Sunstone Logistic System’s
routing and scheduling or telemetry product offerings.
4.2.2.2.2.3. Service sector
Scheduling and execution management of on-location service activities was identified
as a potential sector in vehicle logistics that Sunstone Logistic Systems, however this
sector is set for the same trajectory as sales representatives in the use of mobile and
tablet technologies which makes this sector unsuitable.
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