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Background The Leitch Quality Drug Company William F. Glueck of firm The Leitch Quality Drug Company operates three drugstores in Orlando, Florida. Orlando is a central Florida city having a population of about 100,000. The stores are owned by a partnership of two brothers, Carl and Richard Leitch, Walter Neds, and Norman Henry. All partners except Mr. Henry are registered pharmacists. The company is an old and well-established firm, having started as the Quality Drug Company in 1926. Carl Leitch began working for the company's store as an assistant pharmacist in 1934. Later, Richard Leitch attended pharmacy school and joined the firm in 1938. In the early 19408,the store experienced difficulties because of declining profits. The two Leitch brothers were convinced that they could improve the store's performance and made an offerto buy the store and go into businessfor themselves. The owners said that they would sell the business, but the price they set was too highfor the brothers to afford. They therefore convinced two other men, Keith Steider and Martin Rhodes,to join the partnership. The sale was completed in late 1944, and the Quality Drug Company became known as the Leitch Quality Drug Company. Mr. Steider died in 1953, and his share of the business wassold to Mr. Henry. Mr. Rhodes retired in 1965 and sold his share to Mr. Neds, another registered pharmacist. All partners share equally in the ownership of the firm. The city of Orlando grew rapidly during the 19505.In response to this growth Leitch bought out another drug company in 1958 and took over its store, which was only 2 years old at the time. An opportunity for further expansion occurred in 1961, when the owner of a smalldrugstore in the southern part of the town died. TheLeitch Company acquired this store. Currently Leitch owns three stores. No further expansion has beenconsidered. The existing stores have been remodeledfrom time to time, and in one instance greatly expanded. Two stores, the number one downtown store and the number three "southside" store are rather old-fashioned in design and appearance. All three facilities are .leased. This is a disguised case. That is, the facts in it are based on a real organization. But the names of the persons involved, the location. and the quantitative data have been changed because the organization requested it. It serves no useful purpose to try to determine which organization is the "real" organization. 436 TABLE 1 • LEITCH QUALITY DRUG COMPANY BALANCE SHEET STATEMENTS AS OF DECEMBER 31 1969 1970 1971 5401.734 156.625 7.001 389.933 5955.293 5331.232 113.572 5.388 438.672 5888.864 5 5278.562 2.008 5324.908 5.296 5330.204 255.732 5 74.472 Assets Current assets Cash on hand Accounts receivable Prepaid expenses Inventory Total current assets Fixed assets Furniture. equipment Leasehold improvements Less accumulated depreciation Net fixed assets Other assets: stock Total assets 5280.570 242.431 5 38.139 5.200 5998.632 5968.536 5141.746 2.000 28.211 13.933 5185.890 5127.344 2.000 21.620 4.764 5155.728 5763.058 154.077 $104.393 5812.742 5812.742 106.066 5106.000 $812.808 5998.632 5968.536 5.200 5 5 377.388 118.048· 6.792 424.576 926.804 331.012 7.356 5 338.368 266.628 5 71.740 4.200 51.002.744 Liabilities and net worth Current liabilities Accounts payable Notes payable Accrued taxes Other Total current liabilities Partner's accounts Balance at June 1 Add net profit for period Deduct withdrawals Balance at end of period Total liabilities and net worth 5 5 5 s 127.280 2.000 22.968 5.228 157.476 812.808 142.936 110.476 5 845.268 51.002.744 In 1964the Leitch Quality Drug Company entered into an agreement with Rexall, the national drug manufacturer, to sell Rexall products. The agreement gives Leitch exclusive rights to sell Rexall products within a 25-milearea. In exchange for. this privilege, the partners were obligated to buy a small amount of Rexall stock. For a while after the Rexall agreement, business grew and profits rose. The high point was reached in 1967, when sales exceeded $3 million. Since that time, however, sales have leveled off somewhat. In a conversation with the case writer, Carl Leitch explained why he thought the business was not growing as it should: "It's those new 'supers'-the large discount stores-that have cut into our business," he stated. "Why, I don't even consider them as drugstores. They sell everything--even groceries. Drugs are only a sideline. I can't really understand why people would want to fill their prescriptions at these stores, service is so impersonal. But they're growing and we're not. That's a fact that we have to face." To illustrate the trend in sales, Mr. Leitch showed the case writer some of his firm's financial statements for the past few years. (See Tables 1, 2, and 3.) 437 • The Leitch Quality Drug Company TABLE2 • LEITCHQUALITYDRUGCOMPANYPROFIT'ANDLOSSSTATEMENTS 1969-1971 • 1969 Net sales Cost of sales $2.913.242 1.700.218 Gross profit Operating expenses $1.213.024 860.665 $ 352.359 198.282 $ 154.077 Operating income Federal taxes Net income TABLE3 • 1970 1971 $2.658.896 1.654.892 $1.004.004 803.608 $ 200.396 94.330 $ 106.066 $2.799.124 1.668.296 $1.130.828 852.844 $ 277.984 135.148 $ 142.836 LEITCHQUALITYDRUG COMPANYPROFITAND'lOSS STATEMENT FOR STORES. 1971 Store 1 Store 2 Store 3 Revenue Net sales' Cost of sales Gross profit on sales $646.592 369.468 $277.124 $1.606.336 973.100 $ 633.236 $546.196 325.728 $220,468 $ 134.896 4.928 4.692 8.400 6.196 7,420 2.768 2.720 5.352 6.372 10.232 2.812 6.720 $203.508 $ 73.616 $ $147.548 3.364 3.896 7.600 2.740 6.916 1.008 16.560 3.884 6.884 5.940 2.620 7.544 $216.504 $ 3.964 Operating expenses Salaries Payroll taxes Advertising Trading stamps Depreciation Utilities Repairs Rent Store suoolies Bookkee':::ing services Taxes ar.c insurance Office exoenses Other ana miscellaneous Total ooerating expenses Operating income 268.820 8.232 9.970 25.600 8.896 16.192 4.016 35.320 12.676 9.366 12.668 6.388 14.688 $ 432.8~2 $ 200,404 Organization and management Carl Leitch, Richard Leitch, and Walter Neds work as pharmacist-managers at the three stores. Richard Leitch is manager of store 1, the original store; his brother has the responsibility for store 3, and Mr. Neds manages store 2. Mr. Henry is a local factory owner. As a "not-so-silent" financial partner, he frequently offers his advice and helps make major policy or planning decisions. Carl Leitch explained that each store is managed almost independently of the others. For example, each store orders its own stock and sets its own prices. Nearly all major decisions, including decisions to buy major equipment or redecorate the stores, are made by each store manager. Decisions involving a large capital outlay, such as store expansion, require the joint approval of all three working partners. Also, the stores do join together in some of their promotional efforts. Bookkeeping procedures are standardized, with one ac438 • Choice of strategy and strategic planning counting firm serving all three stores. "Really, just about the only reason we even have a formal partnership is so we can trade under the Leitch name," Mr. Leitch said. "People know and trust that name." In 1968 Mr. Henry and Mr. Neds presented a plan to incorporate the business. Convinced of the possibility of tax savings and of the advantages of limited liability, Mr. Henry tried to persuade his partners to follow the plan. The two Leitch brothers strongly opposed such a move, saying that they believed that the four men would lose all control of the company if outside shareholders were brought in. The matter was dropped from any further discussion. Richard Leitch told the case writer that "our present arrangement keeps us out of each other's hair. I'm not sure that we could maintain our present excellent relationship if we incorporated." The market and competition The three stores serve separate market areas within the city. Store 1, located in the downtown area, caters mainly to persons working downtown and to downtown shoppers from other parts of town. Business in the downtown area has tapered off in recent years, partly because of a parking problem and also because of the growth of shopping centers in the outlying districts. Store 2 is in a shopping center at the fringe of a well-to-do residentialarea. The largest of the three stores, it accounts for 60 percent of total sales. The third store is located directly across the street from one of the city's hospitals. It is in a predominantly low-income area. All three stores offer basically the same types of products and services. The three main categories are prescription service, fountain service,and sundries. Rexall products are promoted the most vigorously. This is because, according to one of the partners; they have a lower unit cost and higher markup. Other pharmaceutical products are used to supplement the Rexall line, however. Drinks, dairy products, sandwiches, and other snack items are served at the fountain bars. Sundry products include tobacco products, magazines, some cosmetic products, small household items, etc. Leitch's competition comes from both the small neighborhood-type pharmacies and the large "super" drug discount stores. The servicesand products offered by the neighborhood pharmacies are usually limited to prescriptions and drugs; few sundry items are carried. There is little price competition from the smaller stores, since they buy in smaller volume and have higher overhead costs. Leitch's competition mainly comes from four large stores.Two such stores, owned by the O'Shea Drug Company, are located very close to the Leitch stores 1 and 2. Both O'Shea stores, which are operated as franchises for a major retail drug firm, are larger than the Leitch stores. Recently, the O'Shea stores broadened their product lines to include such things as small appliances, school supplies, toys, etc., and began offering discount priceson some proprietary drugs and other items. . Within the past 3 years, two large discount drugstores have been built at suburban shopping center locations in Orlando. One is located three blocks from Leitch store 2. These stores carry a full line of merchandise, including appliances. clothing, a full assortment of household goods, hardware items, 439 • The Leitch Quality Drug Company and other goods. They do a high-volume discount drug business, with drugs and cosmetics sold at substantially lower prices than those of Leitch's or most of the other drug firms, The two new discount stores are typical of the new breed of giant discount stores. These stores carry a broad line of merchandise, including many highmargin items (electric hair dryers, etc.), as well as household goods, paper goods, soft goods, toys, photographic equipment, small appliances, records, hardware, and some automotive supplies. The growth of such stores may be explained in several ways. They are usually able to get better sites in the large shopping centers. Also they can price more competitively with supermarkets and other competitors. They generally have more merchandising experience, and enjoy economies in buying. Another type of competitor is the smaller discount drugstore, averaging 2000 to 3000 square feet in size and featuring fast-moving health and beauty aid products. Markups for such stores are modest, with turnover rapid. At present, there is one such store in "Orlando. In a brief conversation with the case writer, Mr. Neds stated that he was very much concerned about the impact of the new discount stores. He explained that before the new stores were even opened, he told his partners that Leitch would lose sales. At that time, he suggested that they examine their profit margins item by item to see if some prices could be cut to meet the competition. This idea was immediately rejected by the two brothers, who did not want to lose their profit margins. When Leitch sales actually did begin to decline, the Leitches still resisted any move to lower prices. At that time Carl Leitch remarked, "Our main selling point is the personal service we offer. We can't continue to offer this service if margins are cut." Promotion For the most part, advertising is done independently by the three stores. Newspaper ads are run on the average of once a month for each store. Because the stores rarely offer special prices on goods, most of the advertisements mainly promote the store name. A typical ad is headlined: "Thirty Years of Service: You Can Depend on Us." The Rexall Company furnishes the materials for newspaper insertions and, in addition, pays one-half of the a(tY~rtisingcosts. Rexall also runs nationwide ads in many leading magazines, at no cost to the Leitch stores. These advertisements are meant to promote the Rexall name and do not name individual franchises. Generally speaking, Rexall offers no discounts on its products to druggists. One exception to this policy is the annual summer "one-cent sale." During this sale of Rexall products, the stores offer "two for the price of one plus a penny." The Rexall wholesaler offers sale goods to the individual stores at a reduced price for this sale. Mr. Neds said that this sale is usually successful, but it has not produced the results in recent years that it did in the past. Although not as low as the prices in discount stores, the prices on Rexall products are, by and large, lower than those for the more famous name brands. 440 • Choice of strategy and strategic planning Rexall aspirin, for example, may sell for 15 to 20 cents cheaper per 100 than a better-known brand. Prescription drugs vary less from brand to brand. The partners proudly point to one aspect of the traditional neighborhood store which remains in their stores: the fountain bar. "This is almost an institution in this country," said Richard Leitch, "but I'm afraid it's dying out. Although we don't realize much in the way of a profit from these bars, we still feel they give our stores a warmer atmosphere. Besides,when the kids come in to get a sundae, their parents often have them buy something else while they're here." Another aspect of the firm's "personal touch" is the credit given to customers. Most customers, in fact, do business at Leitch stores on credit. Carl Leitch said that the stores did not profit directly from carrying customers on credit (no interest or service fee is charged), but the availability of credit was popular among the "old-timers." Credit applications are rarely checked, since most persons applying for credit are known by the employees. Delivery service is also offered by all three stores. Operations Each store manager is responsible for the purchase and control of all inventory. The department heads assist the managers in buying the goods needed for their own departments. Most purchases are made through salesmen who visit the stores up to twice a week. Inventories are not kept at fixed levels. Instead, a "short list" is kept in all departments. Thus, when a clerk or department head notices that an item is low or depleted, an entry is made on the list. Whenever a salesman appears, any items that he carries and that are on the short list are ordered. The person doing the ordering decides the quantity. Conceivably, anyone working in the store can order when a salesman visits. Buying trips are made by the three partners about three times per year. At these times, merchandise is selected for the Christmas, summer, and back-to-school seasons. A physical count of inventory is made for all stores once each year. This occurs between Christmas and the first of the year, before preparation of the financial statements. The permanent records kept on inventory consist of order slips, shipping invoices, and ending inventory listings. Pricing is done on a cost-plus basis. Three classes of items are marked up by different percentages of costs. All tobacco products are marked up by 25 percent above invoice price. Magazines, books, and periodicals carry a 20 percent markup, and most other items are marked up by one-third of the invoice price. This does not apply to Rexall brand items, whichcarry a markup of 50 percent above cost. The partners follow "fair trade" practices and do not use price cutting as a tool to increase sales volume. The partners believe that this policy allows them adequate profits and at the same time makes marketing easier. An accounting firm keeps track of credit sales records. A bookkeeper comes to each of the three stores to record credit slips three times per week. It is possible for an individual to have a separate credit account at all three stores 441 • The Leitch Quality Drug Company • .. and at the end of the month receive a statement from each. Credit at one store guarantees a person that he may receive credit at the other two. Deciding the future The Leitch brothers, who are both in their mid-sixties, have been thinking about retirement for some time. They were therefore quite receptive to a recent offer by a national food store chain to buy the Leitch Company drugstores. Presently, the food chain operates a chain of discount drugstores, and is anxious to become established in the Orlando area. If it buys the Leitch stores, it plans to remodelthem completely and convert them to high-volume discount stores. According to the terms of the merger proposal, the grocery finn would offer common stock having a book value equivalent to twice the partners' capital accounts in exchange for the Leitch Company's assets. The market value of the stock is presently close to book value. There is no offerfor the three Leitch partners to continue in their present capacities, although it was mentioned that "they could probably work as pharmacists at other stores in the chain, if they so desire." The offer has drawn mixed reactions from the partners. Carl and Richard Leitch both think that it "looks like a good deal," but neither one says that he is quite ready to retire. Mr. Neds, who at 35 is much younger, is bitterly opposed to the sale. Mr. Henry has not expressed his feelings, but it is felt that he would go along with the sale. In a private conversation, Mr. Neds told the case writer why he opposed the sale of the business: "To begin with, I think we have a lot of potential," he said. "We've already got some of the best locations in town. It's just a matter of tapping into a market that is already there. Oh sure, the new discount stores have hurt us a little, but only because we've let them. We've got to change our image-perhaps do some remodeling. But above all, we must become more competitive price-wise. I'm hoping that you can convince my partners to stick with it a while longer, and perhaps help us lay down some guidelines for the future." 442 • Choice of strategy and strategic planning ...
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Final Answer



Case Study: Leitch Quality Drug Company




Case Study: Leitch Quality Drug Company
Strategic planning in businesses is crucial because it allows the business to remain
competitive and utilize the available opportunities in the best way possible. The presence of a
strategy allows the business to craft its direction and the direction of its sales as compared to the
business conditions prevailing in a particular period. The Leitch Quality Drug Company is one
example of strategic planning and business decision-making where the course of the business is
directed by the decisions made by the partners. The direction of the company is determined by
the policies that the three partners implement and their decision-making, in this case, is crucial in
determining the success of their company.
The Leitch Quality Drug Company is a three-store drug business based in various
locations of Orlando and currently facing a financial decline due to the stiff competition from
large discount stores and franchises which have captured the market. The four owners are Carl
and Richard Leitch (the Leitch brothers), Mr. Ned, and Mr. Henry. The initial owners Carl and
Richard were once employees of the company before purchasing it when the owners underwent
financial difficulties in the 1940s. The company operates under a partnership with Rexall which
is a drug manufacturer in a partnership which amassed the growth of profits but has since leveled
off. The current dilemma in the company is that although it has served the residents for a longer
time than most of its competitors, Leitch Quality Drug Company has lost its market share with
the sales falling due to the competition that it faces from the large discount stores and O’Shea
franchises in Orlando. While the brothers consider selling the business to a company that has
offered a proposition, Mr. Ned is bitterly against the idea while Henry has not responded yet.
Case Objectives



The Leitch Quality Drug Company case study presents several objectives of strategic
planning and policy-making in business. First, there is the objective of understanding how
established partnership in business works in the face of stiff competition. The three partners are
in disagreement about the direction of the business. The second objective is to understand
strategic planning in partnership organization and how it could be used to address business
competition in the local area. The third objective can be defined as the need to understand the
decision-making process in a partnership faced with declining sales due to the apparent change in
the industry such as the presence of more competitive and different discount stores.
The case study also provides an opportunity to analyze and understand the partnership
and operation of a business that operates different stores independently but under the same name.
Furthermore, it is also an opportunity to analyze the efficiency of owner-managers in the three
different locations as seen in the case. The business also lacks a central management system and
thus provides an insight into the efficiency of decentralized management of business stores under
a partnership. Above all, the future of the business is undetermined. Therefore, the last objective
would be to recommend effective solutions to the business situation that the company finds itself
Key Issues
The Leitch Quality Drug Company is faced with several issues which need attention and
keen policy analysis to allow the success of the company. The first issue is the imp...

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