Business Strategy Game - Projected Demand for Athletic Footwear - Coursework Example

Business Strategy Game - Projected Demand for Athletic Footwear Table of Contents Business Strategy Game - Projected Demand for Athletic Footwear 1 Table of Contents 1 1.Introduction 1 2.Industry Overview 1 3.Initial Strategic directions for Company F 2 4.Rationale for Decisions and their impact on the results 4 4.1.Year 11 4 4.2. Year 12 6 4.3.Year 13 7 4.4.Year 14 8 4.5.Year 15 9 4.6.Year 16 9 5. Final Results and Self-Evaluation 10 6. Underlying Strategic Principles 11 7. Learning Outcomes from the Simulation Exercise 11 Bibliography 12 Appendices O Exhibit-1 – Porter’s Five Forces Model 1 Exhibit-2 – Projected demand for Athletic Footwear – Year 10 to Year 20 2 Exhibit-3 – Performance Parameters from FIR 3 Exhibit-3 (Continued) – Performance Parameters from FIR 4 Exhibit-4 – Determinant Factors for Market Share – Internet Segment 5 Exhibit-5 – Determinant Factors for Market Share – Wholesale Segment 6 1. Introduction This report presents an analysis of the decisions taken by Group F in the Business Strategy Game simulation exercise, trying to explain the rationale behind the decisions taken in successive rounds in the game. Initially an overview of the industry is presented together with an analysis of the opportunities and threats in the athletic footwear industry as of the end of Year 10. Subsequently this report dwells on our understanding of the results of each round, based on the management reports, and how our Group responded with the decisions for the subsequent years. The report concludes with an analysis of the learning outcome from the BSG simulation exercise. 2. Industry Overview At the beginning of the simulation game, we analysed the industry essentially from two perspectives: a) Competitive forces perspective b) Demand Forecast perspective based on expected growth projections Exhibit 1 in the Appendices shows the competitive forces in this industry using Porter’s Five Forces model (Jarvis and Natasha, 2008). The industry is characterised by intense competition amongst the rivals within the industry with no established leader commanding a high market share, and a fair amount of product differentiation allowing several players to corner shares in different segments. With quality and niche being major criteria, and with switching costs being very low, the industry is very competitive. Although there is an element of brand loyalty, price sensitivity being high imposes a high bargaining power in the hands of the buyers. Suppliers’ bargaining power, entry barriers and substitutes do not impose major threats. From demand perspective, the market can be viewed from three major sources of demand: Direct demand for branded footwear from individual buyers over the internet Demand from the retail market for branded footwear, and Demand from private label manufacturers. As of Year 10-end the global demand was around 63 million pairs of footwear, with branded footwear accounting for nearly 54 million pairs (86%). Around 5% of the branded footwear sales were from the internet channel in Year 10. Exhibit-2 shows the projected demand, based on the growth projections given in the game for the four geographic regions upto Year 20. It can be seen that the demand is expected to double from 63 million in Year 10 to over 125 million pairs by Year 20. Thus, the major opportunities in this industry could be viewed as: Substantial growth prospects, given the increasing demand for products high on styling and quality, and for products which are viewed as being environment-friendly Scope for successful performance by competitors with the necessary financial muscle to augment production capacity to meet the growing demand in all segments Innovative products catering to certain niche market segments could afford high profitability since the customers in this segment are not price sensitive Against this backdrop, the major threats in this industry are: Intense competition can easily erode the market share and profitability of the laggards Increasing emphasis laid by buyers on product quality and image, may throw some players out of the market if they do not respond to market needs Unfavourable Government policies towards imports and manufacturing facilities in the developing economies may deter market growth in those countries Fluctuating foreign exchange rates can impact costs 3. Initial Strategic directions for Company F As our group took over the company at the end of Year 10, we commanded a market share of 8.3%, having sold 5.2 million pairs in the four regions together with the internet segment. The manufacturing operations were distributed between two plants – a 2 million-pair plant in North America and a 4 million-pair plant in Asia Pacific – which together could meet a demand of upto 7.2 million pairs with the possibility of 20% overtime production. As indicated in the Supply-Demand analysis of the Y10 FIR report, the total industry capacity available was 72 million pairs (without overtime) against the projected Year 11 demand of 68 million pairs, indicating that the overall industry capacity is sufficient to meet the global demand. The needs of the wholesale segment were being addressed through distribution networks covering around 3,000 retail outlets each in the two stronger regions of North America and Europe-Africa; and with a network of 1,500 retail outlets each in Asia-Pacific and Latin America regions. The needs of the internet segment were being met through stocks in the respective regions. Given these facts about the Company and the above analysis of the industry, and given the corporate objectives of: At least 7% growth in EPS Sustenance of at least 15% ROE Credit rating of B+ or higher Image rating of 70 or higher, and Stock price gain of at least 7% we had decided on the following strategic directions for the company: a) Adopt cost leadership through a best-cost provider strategy to ensure improved market share together with EPS and ROE growth b) Aggressive penetration in the Internet segment through cost leadership and innovative schemes c) Enhanced commitments towards corporate social responsibility 4. Rationale for Decisions and their impact on the results 4.1. Year 11 Based on the directions mentioned in the above paragraph, our Group took the following decisions for Year 11, the first year of our simulation exercise, with the rationale for each decision as mentioned below: a) Under CSR and Citizenship Implement recycled boxing and packaging in line with our environmental awareness commitment Spend on Training for Managers only, to improve production management No spends on “Green” footwear-making materials, Worker diversity programs, charitable contributions and Energy Efficiency initiatives so as to keep costs lower and hence ensure better EPS and ROE b) In the Internet segment Reduce the retail price from $75 to $65 per pair with a view to penetrating the market globally and increase market share Extend the product line breadth from 180 to 200, again for improved market share and image c) Under wholesale segment Increase the wholesale price marginally from $48 to $50 per pair in all regions. Our assumption was that the wholesale segment will not be very sensitive to this small increase, and this will improve our topline and profitability substantially, considering our forecast of around 4.5 million pairs from all 4 regions, implying an increase in revenues of $9 million, with practically the entire amount going into our gross profit. Settle for a marginal reduction in the S/Q rating from 5 to 4, assuming that the impact of this on total revenues may not be high enough, and will be more than offset by the price increase in the wholesale segment. Extend the product line breadth from 180 to 200 in this segment also, again for improved market share and image Reduce the advertising budget by $500,000 to $6.5 million in the North American and Europe-Africa regions, while retaining the Year 10 budget of $3.5 million in Asia-Pacific and Latin America regions. The rationale for this again was that the impact of reduced advertising in these regions may not be high. One more conscious decision was to increase the delivery time from 3 weeks to 4 weeks, basically to understand its impact, this being the first simulation year. We were hoping this will not affect us very adversely d) Under Private label segment again we settled for a drop in S/Q rating offered to 3 from 4 e) Left all other decisions pertaining to capacity, production, shipping, celebrity endorsement, and Finance and Cash flow unchanged from Year 10 When the results of Year 11 were declared, we were immensely happy to see that our strategy had paid off, as could be seen based on substantial improvements on all parameters as seen on the FIR, Market snapshot, and the Operating reports: Achieved Rank 4 with an overall score of 95 (scores for Ranks 1, 2 and 3 were 105, 104 and 100 respectively) EPS grew by 28.8 % from $2.50 in Year 10 to $3.22 in Year 11 against the target of 7%, and our IE score was 22 ROE improved from 17.3% in Y10 to 19.2% in Y11 (11%) with our IE score being 23 Stock price grew from $30 to $41.96 (40% increase) with IE score of 24!! Credit rating of A- was better than the target Only on image rating we needed to improve since we clocked a rating of only 59, with an IE score of only 17 Achieved a market share of 10.5-10.8% in the internet segment, and 8.0-8.2% in the wholesale segment from all 4 regions. But this was way below our expectation, since Company G had taken a big lead in the internet segment with a share of 21-22% and in the wholesale segment Company C had grabbed 12% in NA, while Co A had grabbed 12.9% in EA 4.2. Year 12 Our first task before taking the decisions for Year 12 was to understand what we needed to do to improve our market shares. Hence we analysed the decision parameters of Companies A and C based on the Market snapshot reports, and figured out based on a visual study of the reports that we had taken a beating because of higher delivery lead time and lower advertising budgets in North America and Europe-Africa. Hence for Year 12, we decided on the following to improve our performance: a) Revert back to a delivery lead time of 3 weeks, in line with Companies A and C b) Reduce the Internet retail price down from $65 to $55 per pair. Since $65 itself had improved our market share to over 10%, we expected an improvement to around 18-20% with $55 c) Restore advertising budgets in NA and EA back to $7 million to improve market share d) Cut down the rebate offer to $1 per pair in order to ensure EPS and ROE are not affected When the results of Year 12 were announced, we were again delighted to see that our decisions had had the necessary impact: Internet segment market shares in all regions jumped to between 15.8%-17.2%, way ahead of competition, as seen in the market snapshots Wholesale market share had improved marginally to 8.4% in NA and 9.1% in EA though Co C and A were still ahead at 11.7% in NA and 14.6% in EA respectively FIR reports revealed that we had done extremely well as summarised in Exhibit-3. We had gone up to Rank 3 with an overall score of 100; EPS had jumped by a whopping 153% to 4.91; ROE had jumped to 23.5%; Stock price had almost doubled to $82.01; Credit rating had improved to A and image rating to 64 (from 59). Thus it was essentially a very successful year, with the impacts of our decisions being very much in line with our expectations and rationale. We still had to address the less-than-expected performance in the wholesale segment, and come to grips with the strategies of Companies C and A. 4.3. Year 13 Our Group reviewed our performance in Y11 and Y12, and concluded that, essentially, our strategic directions were right, but we needed to fine tune our decisions in mainly two areas We needed to improve market shares in the wholesale segment, since Companies A and C were ahead of us in both years on market share, and We needed to address our Image rating, which though not poor, offered ample scope for improvement. Company D had been scoring high on this parameter in both years, and was achieving overall Rank 1 primarily because of this. We therefore undertook a more detailed analysis of the factors affecting market share in both the Internet segment and the wholesale segment. Exhibit-4 and Exhibit-5 give the factors and the corresponding market shares, based on figures extracted from the Market Snapshot reports covering all 12 companies. The data are for North America and Europe-Africa regions. A covariance analysis was carried out which revealed that the most significant factors in the internet segment were price and product line breadth, while in the wholesale segment, Advertising, the gap between demand and sales, S/Q rating and delivery time had the most significant impact on market share, besides price and product line breadth. Based on these findings, and to meet the need to improve image rating, we took the following decisions for Year 13: a) Use of “Green” footwear-making materials as a CSR measure b) Training for all employees to improve productivity and reduce rejection rates c) S/Q rating increased to 6 with a view to increasing market share and improve image rating d) Internet price reduced further to $50 per pair, and wholesale segment price restored to $50 per pair – aggressive measures to improve market shares e) Increase rebate offer to $2 per pair f) Increase Advertising budget in North America to $7.5 million g) Set aside $6 million towards Charity contributions; $8 million towards enhanced styling and $800,000 towards Energy efficiency initiatives h) Increase the superior material component to 57%, again with expected increase in corporate image The results as evinced in the FIR reports and the Market snapshot reports were more or less in line with our expectations: We retained the overall rank at 3 with a score of 100; EPS jumped to 5.67 (+15%); ROE fell slightly from 23.5% in Y12 to 21.7% in Y13; Stock price went up to $94.38; Credit rating improved further to A+; Image rating went up to 73 (next only to Co D at 81) While market shares in Internet segment improved to nearly 20-22% in all regions, the impact on the wholesale segment was not as encouraging, staying at 8.3%-8.4% in NA and EA 4.4. Year 14 Considering the overall encouraging performance in Year 13, we decided to continue with more or less similar decisions, increasing the spend on Energy Efficiency initiatives to $10 million, adopting Worker diversity programs, increasing the spend on enhanced styling to $25 million, and going in for $75,000 in North America. Besides these decisions, we also decided to sell $500,000 worth of stock so as to offset the drop in ROE. We were extremely happy to see that our decisions had paid rich dividends, taking us to the Top Spot in overall score as per the FIR report. Our overall score in the FIR report increased to 106. On the other parameters there were drops from Y13 in EPS, ROE and Stock price; EPS dropped from $5.67 to $5.30; ROE dropped from 21.7% in Y13 to 16.4% in Y14; Stock price dropped from $94.38 to $80.37. However, these drops for our company were much less in percentage terms as compared to the leading competitors, and that was the prime reason why we could displace the market leaders and make it to No 1 position. Credit rating was retained at A+, and Image rating improved from 73 to 78. Thus Year 14 turned out to be an excellent year in terms of overall performance. The drop in Stock price, we suspect must have been due to general conditions in the equity market, and the drops in EPS and ROE were not of major concern since we had met the corporate objectives for these parameters on a cumulative basis for the period from Y11 to Y14. 4.5. Year 15 Given the stupendous performance in Year 14, we decided to retain most of our decisions and not to make any drastic changes in Year 15. We reduced the number of retail outlets utilised to 1,000 in NA and EA, and simultaneously reduced the wholesale price to $50 per pair from $55 in Y14, the rationale being that the reduced price should bring in better volumes, and the reduced no of outlets should reduce our total costs. The results for Year 15 showed that these steps again paid off, with our market shares in the wholesale segment rising to 9.2% in North America, though still behind Companies A, C and G. On the parameters related to corporate objectives, EPS increased by 26% to $6.67; ROE was maintained at 16.4%; Stock price went up by 14% to $91.59; Credit rating and Image rating were maintained at Y14 levels of A+ and 78. However, to our utter shock, our rank in the Y15 overall score in FIR had dropped to rank 5, with the score dropping by 14 points, down to 92!! 4.6. Year 16 Considering all the steps we had taken in the previous years, we looked upon a substantial improvement in our image rating as the best option to get back into the lead position, which could consequently help us improve our market share by addressing the niche market segment. Though this does not imply a change in our overall strategy, we took the following decisions for Year 16, keeping the image rating improvement objective as the key criterion: a) Invest a further $1 million in Energy Efficiency initiatives b) Set aside $10 million towards Charity contributions in Y16 c) Increase the superior material component in our inputs aggressively to 82% with a view to creating the perception of our being a niche market player When the results for Y16 were available for all competitors, we could rejoice that our Image rating had gone up to 80, leading to an IE score of 21, just below Company D at 22. But, this strategy of over-concentration on image rating had taken its toll on us with respect to the other parameters. On overall Y16 score our rank dropped to 7; EPS was down to $4.67 from $6.67(-30%); ROE was down to a dismal 9.7% in Y16 compared to 16.3% in Y15 (-41%); our stock price plummeted to a 5-year low of $50.23. The only consolation was that our credit rating was still at A+ since we had not initiated any new loans. 5. Final Results and Self-Evaluation The final results of the entire period from Y10 to Y16, giving the performance with respect to the corporate objectives are presented below: Parameter Y10 Y11 Y12 Y13 Y14 Y15 Y16 EPS ($) 2.50 3.22 4.91 5.67 5.30 6.67 4.67 ROE (%) 17.3 19.2 23.5 21.7 16.4 16.4 9.7 Stock price 30.00 41.96 82.01 94.38 80.37 91.59 50.23 Credit Rating - A- A A+ A+ A+ A+ Image Rating - 59 64 73 78 78 80 It is clear the there has been a drastic decline in the first three measures after Y15, while we had done well only on credit rating and image rating. A deeper analysis of this fluctuation in performance leads us to conclude that this has resulted from the following main strategic errors: We had concentrated excessively on image rating, and hence had invested heavily in non-core activities, leading to a fall in the profitability measures, and the stock price On the operational front, our decisions were largely directed towards improving market shares in the Internet segment and in the wholesale segment in North America and Europe-Africa. The impact of the decisions on price, advertising, product line breadth, rebate, retail outlets, and delivery time on revenues, costs and profits had not been objectively studied We had not looked at the options available in production decisions, plant upgrade decisions, distribution decisions and financing decisions at all, and hence have paid the price in the form of increased costs 6. Underlying Strategic Principles It is important to realise that Strategy is a combination of 5 P’s – Plan, Ploy, Pattern, Position and Perspective (Campbell, Stonehouse and Houston, 1987, 8-10). As players in the BSG game, we were perhaps looking at Strategy mainly as a Ploy intended to outwit competition, and lost out on the other P’s. Equally important while crafting strategy is the need to understand the value chain in the product or service being offered (Thompson and Strickland, 2005, 348). With such an analysis, we could easily have identified the cost elements at different stages of value addition, including production, distribution, marketing, and administration. The role played by core competences and unique resources is another element to be considered while taking strategic decisions (Barney), which we overlooked while laying excessive emphasis on image building. 7. Learning Outcomes from the Simulation Exercise In conclusion, this BSG simulation exercise has really acted as an excellent platform to make the students think strategically, putting together all the disciplines we have learnt in areas like Marketing, Operations, Finance, Human resource Development etc… The other important learning outcome has been the ability to learn from past decisions, both favourable and unfavourable, and this as we can realise is true in the real world as well. Bibliography Thompson Arthur A, and Strickland A.J. Strategic Management: Concepts and Cases. 13th ed.: McGraw Hill 2003. (p 348) Barney R V. “Resource Based View of the Firm”. . 12 Feb 2010. Campbell David, Stonehouse George and Houston Bill. Business Strategy: An Introduction. 2nd ed.: Butterworth Heinmann. (pp 8-10) Jarvis Michael and Perry Natasha. Chain Store Guide. Aug 2008 Appendices Exhibit-1 – Porter’s Five Forces Model Jarvis Michael and Perry Natasha. Chain Store Guide. Aug 2008. Exhibit-2 – Projected demand for Athletic Footwear – Year 10 to Year 20 Exhibit-3 – Performance Parameters from FIR Exhibit-3 (Continued) – Performance Parameters from FIR Exhibit-4 – Determinant Factors for Market Share – Internet Segment Covariance Analysis of above data Exhibit-5 – Determinant Factors for Market Share – Wholesale Segment Covariance Analysis for above data Read More