Enjoy the Difference Company - Marketing Strategy - Essay Example

? VICA – Enjoy The Difference TABLE OF CONTENTS Introduction................................................................................. CompanyPerformance.............................................................. Learnings..................................................................................... Assessment of Team Performance............................................ Conclusion................................................................................... References Introduction This report shall focus on the VICA - “Enjoy the difference” - Company. This company has gained great praise due to its ability to maintain its name in Europe as a car-manufacturing corporation. The corporation has endeavoured to produce high quality cars by using high technology. The company has also managed to remain stable in the competitive European market. In order to fit in the market, the company created an initiative of assessing its target customers, with the aim of acquiring maximum profits from their business initiative. Effective marketing ensures competitive advantage by appealing to consumer values and preferences (Porter 1985; Porter, 1987). At the commencement of the project, our team embarked on a mission to maximise the company’s profits by weighing the shareholders’ investment. At the end of Round 4, our group had managed to acquire about four percent of the market share inclusive of the City and Large car. Our company is keen to check the profit and losses incurred by VICA. Focus on the workers’ demands is among the company’s major concerns, which it does in order to develop a rapport between the management and the workers, as well as to keep the company on its toes. The target group of the company’s City car falls below 25 years of age while the Large car is aimed at persons between the ages of 41-55 years. In terms of the City car the vehicle is suitable for short distances and is affordable for young people. On the other hand, the Large car is suitable for older people who need to carry luggage of varying sizes and move over longer distances. The forecast for Round 1 can be summarised in the table on the following page. The table is inclusive of sales, profits and balance. The forecast for the City car stood at 53300b while that of the large car was 40950b. CASH FLOW FORECAST Cash In Cash Out Opening Bank Balance ?500,000,000.00 Sales Income ?1,628,805,750.00 Total Material Cost ?1,211,774,167.50 Total Labour Cost ?47,000,000.00 Total Overheads ?242,508,062.56 Factory Cost ?650,000,000.00 Automation Expenditure ?17,500,000.00 Tax Payment ?38,392,055.98 Net Interest Payment ?0.00 Bank Balance before Loan -?77,918,536.04 Loan Requested ?200,000,000.001 Closing Bank Balance ?122,081,463.96 Company Performance Round 1 Forecast Model based on production, sales and bank balances pre- and post-loan Production 94,250 Sales ?1,630 m Post-Tax Profit ?86.9 m Bank Balance Before Loan ?- 77 m Bank Balance After Loan ?123 m The process of launching the cars into the European market was a complex task that needed to consider elements of establishing an appropriate pricing model, determining manufacturing capacity, the volume of labourers required, and profit/loss projections based on cost recognition. Strategies for launch included first identifying key market characteristics associated with lifestyle and preferences for small/large cars along with environmental attitudes. Market Share Analysis, Gross Margin and Post-tax Profit Round 1 Overheads Overheads Income Cost Fixed Overheads ?128,958,062.56 Market Promotion ?55,000,000.00 Research & Development ?48,700,000.00 Training Cost ?940,000.00 Total Overheads ?233,598,062.56 Budget capabilities, which maintained oversight related to loan procurement as a failure to include loan capital in the figures, dictated limited production capabilities due to overhead and other associated factors related to economies of scale and capital availability. The first production run for Citzen cars was 53,300 whilst larger cars were to be produced at 40,950 due to projective differences in market share demand of .95 percent for Citizen target consumers and 1.39 percent for Lugano. Gross margin projections were just over 14 percent for the Citizen model and 27.4 percent for Lugano. However, during round 1, there were significant drops in the actual gross margin to 9.09 percent and 1.59 percent, due to alternative brand competition available for customers and the lack of foresight to consider depreciation associated with assets and the capital costs of warranty obligations that totalled nearly 27 million pounds and which were not properly allocated on financial documents to satisfy accounting data. Round 1 activities discovered deficiencies in forecasting processes and cost recognitions that considerably altered forecast data as projected by the business which were slotted for correction and adjustment in Round 2. Profit in Millions The business managed, however, to sell all vehicles produced in Round 1, but could not maintain the market share hoped for nor guarantee profit due to high operating and selling, general and administrative costs. In Round 1, the volume of employed production workers were higher for City cars (1200) than for Lugano (800), however the high volume of staff projected for payroll illustrated a ?529.08 labor cost for the Citizen model and ?459.10 for Lugano, giving the business a total labor cost of 47 million pounds. Further, in order to add effective options to each car based on market characteristics and preferences, it added 880 pounds per vehicle for smaller engine installation. With enhanced features such as comfort, security and general passenger safety as a goal for the Citizen vehicle, the total selling price supplemented for better features to the customer was ?2945, with a total selling price of ?9043.50 in order to have a break-even or marginal profit opportunity. The Lugano model also had price differentials of ?990 for a better engine and ?924 for engine size upgrades. These prices offered luxury-based philosophy that finally totalled ?17,820 as a selling price. Materials costs, however, in Round 1, continued to increase throughout the game that further changed margin and also profit before and after tax. Round 2 After the failures that occurred in Round 1 due to improper forecasting and lack of accounting oversights (plus all other aforementioned deficiencies by the business), the ultimate plan was to increase the total production of vehicles to ensure that profit objectives could be reached through revenue production. Labourers were increased and so were units of automation to assist in this objective. The wages that were paid to employees were also increased as a means to bolster growth in productivity. City Car-Citizen Large Car-Lugano Total Workers employed 2000 2000 4000 Units of automation 40 20 60 Weekly wage ?500 ?500 Raw material cost per car ?7,401 ?13,317.92 ?20,718.92 Design cost per car ?894.64 ?1,945.84 The amount of options available for each car were also reduced in Round 2 as a means of lowering raw materials cost and labour costs to add these options. However, the total design costs associated with production of both models increased due to the changes made to production output expectations and labour volume enhancements to meet production demand levels. The business decided to keep the selling price of the vehicles consistent with Round 1 to avoid complications with consumer defection to competing models. These prices were ?11,199 and ?25,199 respectively for City and Lugano models. Gross margin was increased to 15.8 percent and 28.02 percent for both models, respectively, to try to avoid further losses and also satisfy shareholder equity demands. To attain this goal, the business had to improve market share projections for Round 2 where the City model would achieve 1.5 percent and three percent for Lugano. What this led to was an ultimate increase in production of almost double from Round 1 at 90,200 City and 85,800 Lugano. The business realised that in order to make the company sustainable for the long-run, overheads needed to be reduced. The high cost of attempting to promote the brand, develop new options and concepts which is part of a regular business model, and training for labourers required adjustment and cost recognition to ensure better company performance. Overheads Income Cost Fixed Overheads ?222,968,297.19 Market Promotion ?80,000,000.00 Research & Development ?73,360,000.00 Training Cost ?4,800,000.00 Total Overheads ?411,458,297.19 Profit Results versus Forecast in Round 2 Round 3 In Round 2, the business maintained a general belief that increasing manufacturing output would lead to higher profitability. In order to maximize profit after the dismal profit results in Round 2, the company attempted to keep labour costs fixed from Round 2, but increased units of automation. In Round 3, the business determined that a change to production and output would be an opportunity to improve its profitability. To facilitate growth in sales, the business launched the Discover model, a significantly upgraded luxury model. The new target market for this buyer was 41-55 who are the markets most characteristically selective of the type of vehicles they drive. Therefore, the business selected over 20 different options to be included in this design concept and options for consumers. In this Round, the business was able to reduce the costs of research and development to attempt to drive profitability and reduce overheads. City Car-Citizen Large Car-Lugano Luxury Car-Discover Workers employed 1800 700 2000 Units of automation 40 20 10 Weekly wage ?520 ?520 ?520 Raw material cost per car ?7,612.69 ?13,698.66 ?27,711.02 Design cost per car ?920.22 ?2,001.47 ?4,300.43 Overheads Income Cost Fixed Overheads ?190,605,618.01 Market Promotion ?100,000,000.00 Research & Development ?27,980,000.00 Training Cost ?4,992,000.00 Total Overheads ?403,907,618.01 Furthermore, the business selected a very high, luxury-based selling price of ?90,849 as this group of consumers identified for the game would maintain the resources and demand for the Discover model. The same number of labourers were allocated to Citizen and Lugano models as were highlighted in Round 2, however 700 more workers were allocated to 1500 on the Discover model with 10 additional units of automation included. Despite these efforts, Round 3 did not produce any significant improvements as a whole, except to profit increases. There were over 13,000 units of Discover left unsold and the business only achieved 1.2 percent market share on this new luxury production unit. The actual gross margin achieved for City was 9.23 percent, Lugano at 22.41 percent and significantly less-than-forceasted Discover at 39.13 percent. These differences reflect improper assessments of the viability of options and consumer demand that was to be expected. Forecasts were ?3,776 million for all units and models and results were close to this target at ?3,558m which the business believes would have returned better results if all units of the Discover had been sold. In this case, the selling price of Discover vehicles and keeping labourers fixed in Round 2 (along with other identified efficiencies) made profit achievable. Profit Achievement Round 4 It was evident in Round 3 that the main contributor to the profit achievement was the high price set for the luxury car. Some labourers previously allocated to Lugano and Citizen cars were moved to enhance production of the Discover model. 900 workers were allocated in total for Discover after shifting this personnel. Raw material cost per car ?7,931.30 ?14,271.98 ?28,870.80 Design cost per car ?958.73 ?2,085.23 ?4,480.42 Meanwhile, the business rejected increasing the overhead associated with marketing promotion for Discover models as by this point it was rationalized that the company had an established brand on the consumer market now that the introductory stage in the product life cycle had ended. Since the Citizen model had high consumer adoption and preferences, the selling price was logically increased to help offset overhead costs and other costs related to manufacture. The new selling price was set at ?12,239 and also increased for Lugano to ?27,539. Discover was priced with an inflation acknowledgement of four percent to ?94,509. In Round 4, gross margin was forecasted at 9.24 percent for Citizen, 19.85 percent for Lugano and a higher 38.19 percent for Discover. Higher consumer preference for options were selected also in this round, which improved profit and sales totals. ?3,688 million was forecasted in this Round as profit, with an achieved profit of actually ?2,360 million after post-tax. By the end of this Round 4, the business had finally attained a positive cash flow after recognizing bank balance totals. Final Round 4 Profit Achievement Learnings Calculating gross margin occurs by taking Sales Revenues less the cost of goods sold and then dividing this figure by revenues; further multiplying totals by 100 to achieve a figure. The purpose of this is to ensure effective pricing structures for the business and also as it relates to costs of promotion for effective forecasting and planning (Farris, Bendle, Pfeifer and Reibstein 2010). In Round 1 more so than any other round, gross margin forecasting was critical to understanding the type of overhead that would be incurred as it relates to marketing and promotional investment. Additionally, this was a launch period in the product life cycle in which there is no established brand, something critical for ensuring customer engagement with the product and the company as a reputational whole (Boone and Kurtz 2007; Wong 2009). Prior to the end of Round 1 and Round 2, it would be unrealistic to assume that pricing could be based only on the cost of goods sold, as there are many externalities that impact pricing and sales capabilities. Customer lifestyles, values and attitudes deeply impact acceptance of a pricing structure as it relates to the microeconomics concept of price sensitivity or elasticity (Boyes and Melvin 2006). Under a traditional structural-functional perspective of strategic management, it would be a logical assumption that revenues are mostly dictated by the cost of goods sold including additional pricing mark-ups to offset non-production activities. However, Round 1 had unrealistic profit expectations forecasted by the team without a significant recognition of consumer-driven externalities that would impact pricing structure. The business attempted to utilise a penetration or dynamic pricing structure in Round 1 that would undercut competition, one in which the business prices significantly lower than competition to gain brand attention and consumer general interest in the product (Malighetti, Paleari and Redondi 2009). This, however, did not lead to higher consumer interest in the game and did not serve to offset losses associated with high overhead and ineffective labour allocation. Round 1 should have implemented less of a dynamic pricing structure during the launch phase and instead relied on the heavy investment that already existed in marketing and promotion to ensure a solid brand reputation and to spread brand influence related to the Citzen and Lugano cars. Round 2 attempted to make modifications to the cost of goods sold as an effort to curb losses associated with manufacture versus sales revenue improvements. There were regular changes to the options methodology as a means to cut the cost of production. However, Feng Chia University (2010) outlines that in oligopolistic market structures, such as this car market, suppliers have considerably-less bargaining power and higher switching costs as it relates to competition. Porter (2012) provides his Five Forces Model that describes the different externalities that serve to erode business success, of which one is bargaining power of suppliers. If the business had, first, considered that after launch they would have more power to negotiate pricing in the supply chain, forecasted supply chain elements impacting cost of goods sold could have been modified lower. These are tangible executive-level, strategic decisions that involve alliances with suppliers or recognition of more cost-effective distribution or lean philosophy that can significantly reduce raw materials costs. If the game were to be played again, the business should have reduced cost of goods sold in relation to raw materials by considering the oligopolistic market structure. This would have assisted in developing a total profit in the first Rounds that was a little closer to the projected profit margin by considering that such agreements, plannings and alliances can reduce supply costs. Komninos (2002) further identifies that it is often difficult for businesses to recognise the signs of moving from maturity to decline, that is until the sales revenues actually reflect a sudden or gradual drop. The Round forecasting did not take into consideration that some competitors might have products that had achieved their growth and were about to move into decline. This would have given the business a better competitive advantage by using promotion to illustrate innovation versus competition offering the same tired products to consumers. As a result, production volumes could have remained constant from Round 1 into Round 2 by realising that external market conditions will change the volume of competing products on the market. Adjusting gross margin to a lower level would have also created more realistic balances between profit forecast and actual profit achieved in Round 2 with the assumption that this product now had a brand following and some competing products would be removed from the sales market. Mintzberg, Ahlstrand and Lampel (1998) offer research knowledge regarding learning processes, suggesting that comprehension is emergent in which historical patterns are critical to understanding the present. In Round 2 and Round 3, the business looked toward the historical problems with improper accounting recognition occurring in Round 1 and attempted to allocate costs properly in the following Rounds. Furthermore, the high overhead in Round 1 largely followed into Round 2 without any significant learning that by this point branding could have been considered that reduced a high dependency on research and development and marketing promotions. The business could have significantly reduced overhead in later Rounds, while reducing overhead in promotion costs, which would have led to higher profit. Pricing could have been further increased for inflation and brand loyalty occurring in the marketplace which would have generated a higher profit realization. Nutt and Backoff (1987) acknowledge that in order for a strategic plan to work effectively, the individual must examine all histories of business performance to make a competent strategic plan of action. The business leader must examine all externalities that are pertinent to achieving market and sales success (Nutt and Backoff). Upon reflection, the business realises that it should have taken more lessons from the rather dismal failures to achieve growth or even sustainability in Round 1 as was characterized by poor sales forecasting, poor acknowledgement of actual costs of overhead (they were extremely inflated) and the real aspects of consumer adoption and decision-making behaviours in marketing before adjusting gross margin. If this had been a real-world scenario, the business would have conducted market research o buyer behaviours and lifestyles before setting an appropriate price and making legitimate estimates of market efficiency through sales. Because learning is emergent, these lessons were not fully understood until Round 3 and Round 4 after significant adjustments to product line and overhead costs were made to assist in profit generation. Cash flow, as a learning associated with finance, is clearly the best choice to understand the viability of decision-making that occurred throughout all four Rounds. Cash flow analysis was an excellent control and evaluation resource when making adjustments round by round to measure total business solvency, create a targeted production philosophy and structure, to recognize employment needs and costs, as well as units of automation feasible in the process flow for manufacture. Cash flow analysis assisted in reflecting back to what occurred in terms of cash inflows and outflows round by round to look for opportunities to reduce cost through a total cost recognition program of evaluation. Cash flow statements and analyses illustrated that the business was losing financial resources associated with the high cost of goods sold, but also not selling the Lugano car to expected levels thus not being able to offset these costs. The figures allowed for a factual and logical regression of production volume that led to the first profit achieved since Round 1. Not all of the costs associated with cash outflows, as one example, were fixed and rigid and thus the business could have worked around them and, by Round 3, did exactly that. Fixed restraints in cash outflows must be respected, but flexible costs in outflows can be better managed by reviewing past inflow performance with future projections (CASB 2002; Fairholm, 2009). By identifying total cost outflows, such as manufacturing cost of goods sold and overhead issues, the business was able by Round 3 and Round 4 to work around these flexible restraints to cash flow and determine where leaner philosophies of financial management could be allocated. Cash flow also assisted in developing the methodology of creating the luxury vehicle with a much higher price tag than the Citizen model and the Lugano. The Discovery launch was based on being able to reduce the high costs of options for each of the smaller cars produced and thus these savings could be applied to a new manufacturing line devoted to high margin unit production. As identified previously, sales income projections could have been enhanced and moderately inflated if the business had taken into consideration all of the dimensions of real-world business that occur in gaining customer loyalty, trust and perceptions of quality. If the business had considered differentiation as a possible lower-cost strategy, it would have removed not only some large overhead in Round 2, but would have also guaranteed a higher output of units with a higher consumer acceptance and thus revenue increases. Another key learning, which was also a strength of the group as it relates to analysis, was considering the practical application of labourers and wages that would be appropriate for this type of manufacturing environment. Upon reflection, it is likely that the production lines would require much less labour talent which contributed highly to cash outflows in the business. Such automation capabilities in this type of manufacturing environment can consolidate the roles of workers and also improve rapid efficiency as well as quality control. The business, if playing the game again, would have likely from the beginning reduced the labour volume and chose a more consolidated method of structuring the organisation so that all needs were satisfied in all functional areas of operations and technical support (i.e. research and development and production). The labour necessity shown on the forecast does not reflect the real-world practical application of labourers in the production environment and could have been adjusted downward, which would have represented payroll savings of approximately ?150,000 just in payroll. Though in relation to the game and its outcomes this is marginal, in the real-world this is significant when payroll is much higher than what was forecasted in the game along with benefits payments and bonuses for performance. The importance of human resources and strategic analysis to determine proper and effective staffing levels is a major learning lesson in this project. Also related to human resources was a significant overhead total in relation to training of labourers in the Round 1 and Round 2. Training is usually a one-time investment that occurs when new hires are brought into the organisation or when changes occur with process or policy. The forecast, in reflection, put far too many resources into training costs that served to reduce the total profit maximization capability of the business. These totals could have been compared, through secondary research, to determine what types of training overhead that a business of this size, in the real-world, allocates toward training costs. Review of overhead in Round 1 and Round 2 could have cut this training budget significantly and thus made a profit target of being in the black more realistic (despite not acknowledging certain accounting issues such as the bank loan in Round 1). Training does not, in the real world, apply with figures of this magnitude and capital investment. Segmentation required psychographic-based approaches, competitor analysis to determine market position, and how much investment would be required in research and development as well as marketing promotion. Two segments were identified in Round 1, with features and benefits included for Lugano versus Citizen models designed to recognise cost capabilities along with market characteristics. Reflection indicated that the business could have broadened the target market in Round 1 and Round 2 instead of isolating only a certain segment. The affordable prices could have been extended to other lifestyle values consumers of different age brackets to, thus, improve sales volumes. An initial Round 1 investment in promotion and advertising could have been reduced in Round 2 after an assumption that the business had built a solid brand reputation. Expansion of target market would have assisted in cash inflows. What further eroded from sustaining profitability in Round 2 were the excessive costs of investment in other important components of sales, production and promotion. Normally, this would not have been a significant problem, except that there was not enough strategic rationalization for these cost allocations based on the low volume of cars that were being produced. Round 1 had many Luganos being manufactured but reduced. If these numbers had been kept stable for unit output volumes between the two Rounds, with the assumption of higher sales by expanding the target market, it would have provided better profit and sales results. Some of the costs allocated to overhead function were deeply inflated after review of various production company annual reports, thus this contributed to first round losses that could have been more properly forecasted against gross margin expectations. All factors related to production and sales of options remained constant from Round 3 since these were successful in generating profit in the previous round. Market share estimates were changed from Round 2 to two percent for Citizen model, 2.3 percent for Lugano and 1.8 percent for the luxury Discover. This time around, overhead was substantially reduced by removing funding for research and development since these cars were well-engrained in production methodology and seemed to satisfy customers through sales volume analysis. In reflection, it would seem that the group as a whole was over-interested in market share volumes rather than simply considering the ratio of consumer demand versus production output capacity. The business should have been more concerned with operational capabilities and cash inflows when determining the volume of output (Porter 1987). These were lessons that were not fully understood until Round 3 and Round 4 that would have radically changed company performance efficiency in the first rounds. If played again, market share as a justification for output volumes in manufacturing would have been less critical to analysis. Finally, the business recognised that the price for luxury Discover might not necessarily be sustainable since there was such a high volume of unsold Discover vehicles left in inventory at the end of the Round 3. Promotion investment was considered as a means of improving position and sales. It is clear, though, that introducing the luxury car into the market was the only viable solution based on Rounds 1 -3 and the data related to overhead, labour and other cost factors, unless the aforementioned adjustments in thinking, assessment and forecasting had been accomplished. Discover selling price might not have had to have been as high to offset inaccurate forecasting figures in overhead (etc.) and therefore would have been a more attractive auto option for an expanded target market. The organisation believed this would be most efficient, the large production of the Discover, to ensure that profit was achieved when, in reality, there were alternative options upon reflection to ensure better capital and cash inflow management. Assessment of Team Performance The team performed competently in terms of teamworking and cooperation as the data achieved in different rounds was accessible through knowledge-sharing practices to develop reliable charted analyses that provided genuine data with no financial discrepancies. This could not have been accomplished without dedicated group working focus and accurate ledger/note-keeping. Each member of the team understood the rationale for each rounds’ adjustments before launching the scenario and therefore there was quality and unity of purpose for all strategic planning, direction and financial allocations. Conclusion Though the business did not achieve all of its intended objectives outlined in the introduction, it did learn about the nature of competitive advantage and how to put real-world reflection and practice into theoretical forecasting to find balance and better alignment. 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