Eabys Fundamental Strategy - Case Study Example

Business Report Table of Contents Introduction 3 2.Competitive strategy 3 3.Industry overview 4 3 PEST analysis 4 3.2.Porter’s five forces 6 3.3.Opportunity and threat assessment 6 4.Company overview 7 4.1.Strength and Weakness Assessment 7 5.Decisions made 8 5.1.Year 11 8 5.2.Year 12 8 5.3.Year 13 8 5.4.Year 14 8 5.5.Year 15 8 6.Final results 9 7.Underlying strategic principles 9 8.Key learning points about strategy 10 9.Conclusion 10 Reference List 11 1. Introduction Formulating and implementing effective business strategies is extremely important for the survival of an organization (Henry, 2008). It requires managers to consider several aspects related to operations, finances, opportunities, strengths, weaknesses and future goals so that an appropriate business plan is applied (Hitt, Ireland and Hoskisson, 2009). Business strategies are mainly aimed towards the achievement of short term and long term objectives which in turn helps managers to maximise the value for the shareholders (Dess and Lumpkin, 2009). Keeping in mind such importance of business strategies, the researcher has participated in a virtual game called corporate lobby where a fictitious company had to be managed. The researcher was amongst a team of four participants who were also given the responsibility to manage a virtual company that goes by the name of Eaby. The participants had to manage the company by making several key business decisions and implementing growth strategies over a course of five years in order to fetch the maximum benefit. The scope of this project lies in its capability to imbibe a deeper understanding of business management and managing strategies to the participants. It helped the participants to garner valuable experience by comprehending the impact of a particular strategy on the company. In doing so, they were able to adjudge the viability of a business strategy under a particular strategy. This project mostly involves the preparation of a business report that will highlight the company’s decisions and performance over the five years as noted in the game. The business report will also involve a brief overview of the industry in which the company operates. In addition the underlying principles behind the strategies will also be discussed within the report. 2. Competitive strategy Companies are facing intense competition from their rivals and the intensity of this competition has increased at an exponential rate regardless of the type or size of industry (Dobson, 2009). Companies in all industries have strived to attain competitive advantage and this aspect has been considered by many as the fundamental ingredient of success (Gershon and Gershon, 2008). Such has been the same for the footwear manufacturer Eaby. The managers of Eaby has emphasized a lot on increasing the company’s market share by manufacturing footwear products in different categories in order to appeal to a large base of customers spread over five continents. Alongside that, Eaby’s managers also continuously thrive to set an affordable price for their products. The underlying reason behind this fact is that the managers understand that they are targeting customers from different geographical regions around the world. The purchasing power of these customers varies from region to region (Jansson, 2011). Therefore, an affordable price has to be set for all the products so that they can be availed by people belonging to different levels of purchasing power. It is with regards to this fact that the managers at Eaby had decided to implement a global cost leadership strategy for footwear sold to online buyers and a global cost differentiation strategy for branded footwear sold to retailers. First of all, managers of Eaby had decided to extend the physical presence of this brand in the digital world as well. That is why Eaby footwear was sold through different online shopping portals. This helped the managers to target a large base of online customers which in turn contributed towards the incessantly growing revenues of the company. Eaby’s fundamental strategy between year 11 and year 15 has been to keep the variable cost and fixed cost of production at minimal level. The underlying rationale behind this strategy is to ensure that the price of product is kept at a lower level which in turn will not only increase the company’s revenue but will also contribute towards an increasing margin of profit. Eaby’s variable and fixed cost of manufacturing stands at $39.08/pair (BSG, 2015a). This goes to show the effort made by the company in keeping the cost at minimal level. As far as the internet segment is concerned, the selling price per pair of footwear has stayed at an average of $75 between year 11 and year 15 (BSG, 2015b). The selling price has been set at a good margin considering the fact that the manufacturing cost per pair is as low as $39.08/pair (BSG, 2015a). As far as the wholesale segment is concerned, the selling price per pair of footwear has stayed at an average of $50 (BSG, 2015b). The number of footwear sold in both internet as well as the wholesale segment has increased gradually over the past five years. This has allowed the managers of Eaby to increase the company’s market share between year 11 and year 15. By following a global cost leadership strategy, Eaby was able to gain competitive advantage by keeping the products comparatively lower than the competitors. This has allowed the managers to target more and more customers both in the wholesale domain as well as in the online domain. In addition to that, the managers of Eaby also tried to bring uniqueness in their products at a fairly low cost. However, this is one particular aspect where the company failed miserably. The managers failed to foster innovation in their product which is why they were not able to sell desired number of footwear products. This affected the company’s market share in both online and wholesale segment over the last three years. This is evident from the company’s financial position which shows that the market share of Eaby fluctuated significantly between year 13 and 15. 3. Industry overview 3.1. PEST analysis Political factor: The political landscape in the UK is considerably stable which is why it serves as a favourable business location for companies all over the world (Jeannet and Hennessey, 2010). The government welcomes any new business and the authorities support local development that happens through the establishment of business. The political regulations in the UK are largely in favour of home country business organizations as well as foreign business organizations. This is precisely the reason why companies often try and extend their physical presence in many places across the UK. The decreasing rate of corporate tax as stipulated by the government in this part of the world has also worked in favour of majority of the businesses. However, some political regulations have invariably caused certain economic imbalances which in turn may affect the financial performance of certain businesses. Nonetheless, these imbalances are temporary and will subside with time after which businesses can adopt effective strategies that are aimed towards achieving competitive advantage (Jeannet and Hennessey, 2010). Economic factor: The economic factors are largely stable in the UK. However, there have been recent fluctuations in certain economic factors that have proven to be detrimental for the financial health of many businesses. For instance the price of raw materials has augmented substantially due to inflation. Alongside that, inflation has also resulted in an augmentation in the operating cost of the company. Rising labour cost is one of the major contributors of the increasing operating cost of companies. These increases in the cost of raw materials as well as labour rates have equivalently translated into an increasing cost of sales. As a result of the increasing cost of sales, the profit margin has decreased substantially for companies. That is why, in order to compensate for the decreasing profit margin, managers had to set higher price for their products which in turn made certain products unaffordable to customers. This affected the revenue stream of many companies and thereafter deteriorated their market share severely (Nolan, 2010). Inflation has also contributed to the increase in interest rate across the economy. As a result of the rising rate of interest, the cost of capital increased drastically for both home country and foreign country companies. This is precisely because of the constant increase in the interest expenses of the companies. The incessantly increasing interest expenses of the companies plugged a hole in the companies’ stream of profits. Therefore, if the last three or four years are concerned, the economic factors have been largely unfavourable to both home country and foreign country companies. The government in the UK, the managers of big corporations as well as the analysts in the market believe such economic imbalances to be temporary. According to them, the economic imbalances will subside within a short timeframe after which the economic scenario in this part of the world will be largely favourable for business organizations regardless of the type and size of their industry (Paley, 2009). Social factors: The UK is considered as a cosmopolitan region where people belonging from various ethnic backgrounds reside. People in the UK hail from various cultural and social backgrounds and belong from various income groups. Purchasing power of people varies across age and income groups. This in turn provides ample scope to companies like Eaby to target a wide range of customers and prepare products according to their tastes and preferences. Targeting and segmentation becomes relatively easy in such a big market. Eaby has ample opportunities to target customers from both high income groups as well as middle income groups by offering them with footwear products that are premium priced as well as the ones that are moderately priced. They have to be mindful of the fact that tastes and preferences of people vary largely according to their culture and social background. Therefore, it becomes extremely important for a company like Eaby to conduct a thorough market research before placing its products (Saloner and Shepard, 2010). Technological factors: The rapid development of technology has made it relatively easy for companies like Eaby to induce innovation in their products. UK is a country that has brought unprecedented developments in the field of technology. Eaby can make use of the modern technology and create technologically advanced footwear products that make walking and running comfortable for customers. They can design footwear products that come with some degree of health quotient. For example, technology can be used to manufacture footwear products that improvise the blood circulation of people who wear it. Moreover, the same technology can be used by Eaby to design footwear products for different purpose such as casual wear, gym and exercise wear, jogging wear and so on and so forth. Technology can also be used by Eaby in order to increase the number of footwear products that are manufactured in its different operational facilities. This will allow the company to meet the constantly growing demand for footwear products in the upcoming years (Kourdi, 2009). 3.2. Porter’s five forces Threats of new entrants: HIGH- This is precisely because stamping a foothold in the footwear industry is relatively easy than any other industry. However, one must consider the fact that tastes and preferences of footwear products vary from customer to customer. Hence, the company that can best fulfil the needs and requirements of the customers will always become the market leader (Mazzucato, 2012). Threat of substitute products: HIGH- The underlying rationale behind this is that there is virtually no switching cost for consumers in this industry particularly. Customers can easily switch between brands if they are not satisfied by the price and quality of a particular brand (Marcer, 2012). Bargaining power of suppliers: LOW- in this industry precisely because of the presence of a large base of suppliers all over a particular country. Companies in the contemporary business environment have also started sourcing raw materials from foreign country suppliers who offer them at a cheaper rate. Therefore, Eaby has the option of procuring raw materials from suppliers based in countries such as Thailand, Indonesia and China. The high intensity of competition has decreased the bargaining power of suppliers (Jeannet and Hennessey, 2010). Bargaining power of customers: HIGH- This is precisely because of the extensive presence of several footwear brands. Consumers can easily switch from one brand to another depending on the price and quality offered by a particular brand (Gershon and Gershon, 2008). Competitive rivalry: HIGH- With the presence of existing players like Adidas, Reebok and Nike, smaller companies like Eaby may find it hard a stamp a foothold in the market. This makes it necessary for the company to induce innovation in their products and adopt effective strategies that are aimed towards the attainment of competitive advantage (Hitt, Ireland and Hoskisson, 2009). 3.3. Opportunity and threat assessment Opportunities: With the rapid development of technology and the intensity of globalisation, Eaby has ample of opportunities to expand its business over the digital dimension and target a larger base of customers. The managers of Eaby can also consider expanding internationally into developing countries like India, Brazil, China, Thailand and Indonesia. The underlying reason behind this fact is that these emerging economies not only provides Eaby with a large base of potential customers but also offers them with the opportunity to avail cheaper sources of labour. This will allow the managers to reduce the operational costs of the company and translate this reduction of operational cost into greater profit margin (Hitt, Ireland and Hoskisson, 2009). Moreover, expanding into the emerging economies will allow the managers to attain a sustainable stream of revenue which in turn will pave way for generating greater profit Dobson, 2009). Incorporation of modern technology will allow the managers in Eaby to boost the company’s operational efficiency drastically. As a result, Eaby managers will be able to increase the amount of production done in a particular period thereby generating higher revenues. Threats: The invariable economic conditions all over the world may pose a threat to the survival of Eaby. Provided that the company does transaction in manifold currencies, it is exposed to foreign exchange risk. Moreover, the cost of operations in different countries as well as margin of profit is not stable owing to the fluctuations in foreign exchange rate of several currencies (Nolan, 2010). The intense competition in the footwear industry is another threat to the survival of small companies like Eaby. The presence of existing big players like Nike, Reebok and Adidas offer technologically advanced products and that too at a competitive price. As a result, they are able to lure more customers in favour of buying their products as opposed to Eaby’s products. 4. Company overview Eaby is a footwear manufacturing company based in London, England, United Kingdom. The company is primarily engaged in the design and manufacturing of casual and formal footwear products, slippers, converse, jogging and exercise footwear products. Eaby is regarded as one of the best new companies due to its innovative product design as well as a competitive price positioning of each of its products. The company has its presence both in the physical as well as digital domain. It operates through its retail, wholesale as well as its internet segment. There are 175 brick and mortar stores of Eaby spread all across the UK. The company also has an extensive international presence as its has its manufacturing and retail bases across Asia, North America, South America as well as Africa. The company serves as a direct source of employment for nearly 25,000 employees who work across the world. The company’s market share has increased drastically during the first three years of its operations. However, it decreased over the last two years because of the increasing manufacturing cost of the products. 4.1. Strength and Weakness Assessment Strength: Eaby’s brand image as one of the best new footwear manufacturers has worked in favour of the company. The brand has sold increasing number of products through its retail, wholesale and internet segment. The number of products manufactured and sold in all these segments increased drastically over the last five years. The highly skilled and experienced workforce is another reason behind the company’s success till date. It is the constant endeavours of the company’s workforce that the managers have been able to induce innovation within their work. Access to cheaper source of raw materials as well as labour has also worked in favour of the company’s healthy financial position (Jeannet and Hennessey, 2010). By tapping into lesser expensive markets in Asia and South America, the managers of Eaby have been able to reduce the operating costs relatively. Weakness: Eaby’s supply chain management has proven to be one of the major weak links in an otherwise very efficient organization. Due to ineffective supply chain management strategies, the procurement cost of Eaby has increased considerably over the last few years. This has decreased the profit margin of the company to some extent. 5. Decisions made 5.1. Year 11 Eaby managers decided to improve the company’s brand image by introducing a number of corporate social responsibility initiatives. In this year, the company invested a considerable amount of money in order to provide ethics training to all its employees. The underlying reason behind this fact is to convey the importance of conducting ethical business to the employees thereby preventing them from indulging in wrongful activities that might smudge the company’s reputation. 5.2. Year 12 In this year, managers of Eaby decided to use Green Footwear Materials in order to reduce the company’s carbon footprint. The use of green footwear materials raises the cost of standard materials by $0.50 and superior materials by $1 (BSG, 2015c). Alongside that, the company also invested $500,000 for energy efficiency initiatives (BSG, 2015c). The company also donated $203,000 for charity purposes (BSG, 2015c). 5.3. Year 13 The managers in Eaby started to use recycled boxes and packages in order to pack its products and sell them through their wholesale, retail and internet segment. However, this strategy raised the shoe packaging cost by nearly $0.20 per pair (BSG, 2015c). 5.4. Year 14 The managers in Eaby decided to spend $100,000 behind charity as opposed to an investment $203,000 done in year 12 precisely as a means to enhance its brand image as a company that emphasizes a lot on bringing about development in the community (BSG, 2015c). In addition to that, Eaby managers also decided to introduce workforce diversity program in order to provide the workforce with ample scope to attain all round development. 5.5. Year 15 In this year, Eaby managers decided to spend $250,000 for providing ethics training to the senior managers of the company in order to make sure that they are aware of the ethical codes of conduct stipulated by the company (BSG, 2015c). The managers also decided to stop expenses behind energy efficiency initiatives and charity in order to focus on more on earning higher profits. 6. Final results Eaby’s financial performance was not at all up to the mark. Even though the company’s market share increased for the first three years of its operations, the values eventually decreased over the last two years. Table 1: Eaby’s market share Segments Year 11 Year 12 Year 13 Year 14 Year 15 Wholesale 13.7% 14.6% 11.7% 10.3% 5.2% Internet 11.9% 13.8% 12.6% 14.8% 7.8% (Source: BSG, 2015a) Eaby’s deteriorating performance is also evident from the company’s slumping return on equity that has been realized between year 11 and 15. In fact, the company realized negative return on equity over the last two years of its operations. The managers were not successful in keeping their promise of maximizing the value for the shareholders. Table 2: Eaby’s ROE Year 11 Year 12 Year 13 Year 14 Year 15 15.1 5.6 12.7 -20.7 -22.7 (Source: BSG, 2015d) A similar performance was noted in case of the company’s earnings per share. The strategies adopted by Eaby’s managers proved to be highly ineffective which is why the company’s earnings per share decreased over the last five years of its operations. The company realized negative earnings per share in year 14 and year 15. Table 3: Eaby’s earnings per share Year 11 Year 12 Year 13 Year 14 Year 15 2.44 0.98 2.39 -3.56 -3.05 (Source: BSG, 2015d) Even though Eaby has been regarded as one of the best new and innovative companies, the company is not very well placed in the market due to the presence of much effective existing players like Nike, Reebok and Adidas. The competitors have posed an intense competition to Eaby which is why it has been relatively difficult for the latter to influence the buying behaviour of the customers. 7. Underlying strategic principles The corporate lobby simulation as pointed the importance of selecting an effective strategy as a means to attain competitive advantage. It is extremely important for companies to select an optimal strategy that is aimed towards boosting the operational efficiency. This in turn will help the mangers to increase productivity, thereby, augmenting the stream of revenues for the company. Nonetheless, managers have to be mindful of the fact that the business strategies that they adopt need to be flexible and dynamic. They should not be dependent on a single strategy. Managers face dilemma while trying to resort to a single strategy. This is because of the incessantly shifting business dimensions in the modern environment. Managers need to have the ability to change strategies according to circumstances. They need to have reactive response to competition so that strategies can be modified according to the need of the hour. In addition to that, it is extremely important for managers to balance the requirement to achieve sustainability and meeting the needs and demands of the stakeholders. 8. Key learning points about strategy The simulation has also highlighted the importance of assessing a company’s macro environment, industry and the competitors. While assessing the company’s macro environment allows managers to have an understanding of the market in which they are operating, assessment of the industry and the competitors enables managers to have an idea of their strengths, weaknesses, opportunities and threats. By gaining an in-depth insight about the industry and the competitor’s managers are able to incorporate different industry wide factors within their business model. The researcher was also able to have a fraction of an idea about the degree of complexity involved in running a company. The researcher was able to comprehend that a manager needs to consider several factors before formulating and implementing a business strategy. Running a company requires a manager to be extremely skilled, highly experienced and intensely competitive. Managers need to conduct frequent strategic analysis in order to maintain their competitive position within the industry. As mentioned above managers need to harmonize the requirement to meet the stakeholder’s expectations and achieve sustainability. 9. Conclusion Overall, the simulation revealed that it is extremely important for organizations to ensure that their products are competitively positioned. The fundamental reason behind this fact is that competitive positioning is very important when it comes to achieving competitive advantage. Managers have to be intensely competitive and constantly look for opportunities to beat the competition in the market. It is extremely important for them to incessantly work their way towards achieving innovation in their work as this will help them to establish a sustainable business. Furthermore, managers do not have the option of resorting to a single strategy. They have to be very flexible in their approach and be reactive in responding to the competition that they face from their rivals. Managers need to have the ability to adapt to invariably changing circumstances and modify their strategies in order to suit the requirement of the hour. Lastly, managers have to promote coordination and collaboration among their subordinates as this will help them to enhance the efficiency of the team. Reference List BSG, 2015a. Branded Production. [online] Available at: [Accessed 2 April 2015]. BSG, 2015b. Company Analysis. [online] Available at: [Accessed 2 April 2015]. BSG, 2015c. Corporate Social Responsibility and Citizenship. [online] Available at: [Accessed 2 April 2015]. BSG, 2015d. 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