Business Simulation Game - Performance of a Footwear Company - Report Example

Individual Report on Simulation Exercise Table of Contents Table of Contents 2 INTRODUCTION 3 COMPETITIVE STRATEGY 3 INDUSTRY OVERVIEW 4 PESTEL ANALYSIS 4 Political 4 Economic 4 Social 5 Technological 5 Environmental 5 Legal 6 INDUSTRY LIFE CYCLE ANALYSIS 6 PORTER’S FIVE FORCES 7 Supplier Power 7 Threat of new entrants 7 Buyer Power 7 Substitution Threat 8 Competitive Rivalry 8 Opportunities 8 Threats 8 COMPANY OVERVIEW 9 Decisions Made: 9 FINAL RESULTS 12 Strategic direction 13 Underlying strategic principles 14 KEY LEARNING POINTS ABOUT STRATEGY 14 CONCLUSION 15 REFERENCES: 16 APPENDIX 17 INTRODUCTION This is my final report on the performance of a footwear company (B Company) for the last five years that my colleagues and I were assigned while it was in its 10th year. As managers of the company, we were tasked with several key decisions that potentially affected the company to perform impressively or perform poorly. Although the experience was tough, we were able to learn a series of critical and important factors in running a company in a real world setting. COMPETITIVE STRATEGY On resuming operations in year 11, our first task was to gain a competitive advantage over our rivals. We decided to maintain matters and make very little adjustments to the company operations, which led us to apply a low value with a standard price strategy (Bowman & Faulkner, 1997, p. 27). Our plan was to reduce costs while maintaining high revenues as we believed the consumers were content with the standard price. The results of year 11 decisions took us back to the drawing board, and we were forced to develop and implement a new competitive strategy in order to win our market share and gain a new market share. At the start of year 12, we settled on a hybrid strategy and applied it in order to win our market share and increase our sales. In year 13, we decided to change our strategy to, focused differentiation, this meant we would produce a perceived higher quality footwear, at a higher price to target markets (Bowman & Faulkner, 1997, p. 31). Our plan was to maintain an average market share, with high returns in terms of revenue. INDUSTRY OVERVIEW PESTEL ANALYSIS Political B Company operates in four global market regions these are North America, Asia Pacific, Europe-Africa, and Latin America. As a result of operating in these regions, the company’s operations were significantly affected by differing political policies across these regions. Among the political issues that the firm had to deal with included taxation policies, government stability, import duties and types of government. The company faced both negative and positive policies across the distribution regions, because of import duties. The free trade treaty was advantageous to the company as footwear distributed across north and Latin America was tariff free. On the other hand, tariffs were paid on shoe exports from Asia-Pacific into Latin America markets at $6 per pair the same tariffs are also applied on exports to Europe-Africa at $4 per pair. Tariffs were also paid on exports from Latin America moving to Europe-Africa markets at $4 for each pair and to Asia-Pacific markets at $8 per pair (Thompson, et al., 2010, p. 8). Economic There were various economic factor that were bound to impact the company’s operations and outcomes. These factors include, money supply within the economy of the regions we were operating in, inflation, families’ disposable income, unemployment, interest rates, countries’ GDP, and cycle of the economy. Footwear, is perceived differently from different regions, some regions see it as a luxury, some a necessity while others view it as a status symbol. Poor economic regions, were consistent with poor sales volumes, while well performing economies produced better results in terms of sales for the company. Social In the modern world setting, shoes have become a necessity that is currently owned by a majority of individuals across the world. From childhood children are introduced to shoes as a basic commodity and as they grow into their junior years and interact with their peers, shoes become an important asset. As time moves by, shoe designs and quality continue to, evolve and become sophisticated as demand rises. Different social situations are now defining the type of shoes individuals where. Shoes are being categorized according to numerous social settings. For example, shoes are now being defined in terms of sports, travelling needs, gatherings, and other social interactions such as dancing. The current social setting is therefore, favorable to our products, and it offers a lot of opportunities that we can tap into depending on demand. Technological One thing that the current businesses cannot survive without is technology. This is why, B Company embraces technology towards all its operations and management. There are a lot of technological advancements going on throughout the world, and in different industries, including footwear industry. More sophisticated machineries are being produced that are much more efficient than what was used a few years earlier. Designs and quality in the shoe market are now being boosted by technological advancements. Environmental Environmental factors are a key concern for any company in today’s business environment. This is why all the company’s operating in the footwear industry is tasked with Corporate Social Responsibility. The decisions made in this sector have a significant impact on the product quality rating (S/Q) of footwear produced. It also has significant effects on the company’s performance in terms of competitiveness and market share factors. Low S/Q rating negatively affects the company’s overall rating in the market, which further affects a customer’s purchase decisions. Therefore, in running the company we are required to make smart corporate social responsibility decisions that would ensure, the company maintained or improved its competitive advantage in the market as well as increase customer satisfaction. Legal Similar to political factors affecting the company, its operations in multiple markets across the world are also affected by legal issues. Each country and the market has legal standards that all companies operating in their regions have to abide to, failure to do so may lead serious legal problems, thus affecting its performance. There are differing laws and policies enforced in different regions and countries that directly affect trading and manufacturing of footwear products. Following and abiding to these laws saves the company legal costs and raises its overall rating. If we take, for example, the company’s history in repaying outstanding loans, then this will significantly affect its credit rating. The credit rating is important because it directly impacts the company’s borrowings and how much interest it gets charged. INDUSTRY LIFE CYCLE ANALYSIS We took over management of B Company in its 10th year of operation. It had already set up its manufacturing plants, identified and tested target market, competed with other companies, and established a status in the market. Therefore, the company was at its maturity stage, and every decision to make was supposed to be from this standpoint. We were all aware of the risks and issues associated with company operations at its maturity stage. The company was specifically at stable maturity because, all other competing companies were also at the same stage when we were appointed managers. At this stage, several things can happen to depend on the decisions made. For example, sales go down, markets become saturated market prices go down, and stock prices also decline during this stage (King & Kramer, 1984, p.470). Therefore, all our decisions were very critical in trying to make the company a leader in a very competitive environment. PORTER’S FIVE FORCES Supplier Power There are about 250 different suppliers from across the world capable of furnishing the company and its competitors all the required materials. The suppliers also confirmed their ability to supply sufficiently to an increased demand in case plant capacity increases. Because, the supply ratio is higher than the demand, suppliers do not have much power to control prices, therefore, there threat is considered low (Porter, 2008). Threat of new entrants It would be hard for new entrants to enter this industry because of the competitive advantage and cost factors that the existing companies have already acquired. It will be difficult for a new entrant to set up a company to match the existing companies because of the costs associated (Porter, 2008). Furthermore, there are barriers in the market, as the market can only accommodate up to 12 companies, however, currently there are only 9 companies and all of them are at the maturity stage having been in operation for the last 10 years. Buyer Power The existence of 9 competing companies gives the buyers potential power to drive prices down. A company is unable to hike prices because, of fear to lose its customer to competitors who might offer low prices. Furthermore, the companies may be forced to reduce their prices in order to attract more buyers and thus earn a larger market share. Substitution Threat Substitution rate is low since the buyers do not have alternatives to shoes. A very small segment of the market could resolve to walk barefoot, but it is a rare case and thus minimal threat in terms of substitution. The only major threat is the existence of competitors whereby buyers may resolve to abandon one company to another for a better deal. Competitive Rivalry Competition is high for the company since it is operating in an industry with nine other companies that have similar capabilities as B Company. As of year 10, all the companies were at the same level and had the same potential to compete against each other. This makes it tough because the company can only rely on making smart decisions in order to beat its competition. Opportunities Availability of a larger market share across four regions in the world Improve on profits Capitalize on competitor mistakes and take over their market share Improve company rating through corporate social responsibility Acquire and utilize the latest technology in its operations to boost efficiency Have the ability to differentiate our products in order to attract more buyers Threats The change in entire management system may slow down business as we have to adjust The fact that we have eight other competitors located in the same market as our company Our competitors have similar resources and opportunities as our company A lapse in decision making may give our competitors an advantage that will be difficult to recover COMPANY OVERVIEW B Company is a footwear producing company that owns two manufacturing plants in North America and Asia. The company has a worldwide market share composed of retail sellers, online buyers and private label companies. In its 10th year, the company had reached sales of 5.2 million pairs, while its two plants are able to supply up to 7.2 million pairs if the demand rises. The company has a variety of suppliers who are capable of delivering materials on a daily basis. The company also has the capacity to, constantly ship the readymade footwear products to its four distribution centers that are Milan for the Europe-Africa market, Bangkok for Asia-Pacific market, Rio de Janeiro for Latin America market and Memphis for North America. The company faces 8 other competing companies with the same potential to gain a better competitive market share. From year 11 of its operations, the company will be taken over by new management who will take over and manage company decisions. The management has to focus on its competitor activities and also customer demand, which is determined by the styling, purpose of the shoe, and prices. Decisions Made: Strategic Thinking Decisions made Actual outcome Impact on competitors Year 11 Improve operating profits A high increase in internet and wholesale segment prices, by more than 25% Sales dropped more than twice compared to the previous year, net revenue decreased, and global market share dropped significantly This drop in sales and market share saw us drop to the last position against our competitors. Increase Image rating above 70 Used Green footwear materials. Used recyclable packaging. Invested in Ethics training for all employees. Undertook workforce diversity program. Image rating dropped significantly in opposition to the investor’s expectations (table 6) Our products did not match our competitors quality hence ours poorly performed in the market Increase market share Offered free shipping to attract internet buyers, Increased advertising budget in all regions, Reduced delivery time to 1 week Year 12 Grow Earnings per share Reduced prices to standard levels in order to attract more buyers, Increased revenue by increasing sales through advertising, Very high global units sales, A high increase in net revenues Despite a significant growth in key areas, the company credit rating was a C, which was lowest against competitors Grow market share by applying hybrid strategy Reduced price, Increased product quality Almost five times growth of market share compared to year 11 Increase image rating to above 70 Improved product quality, Invested in corporate social responsibility Almost double increase in image rating from the previous year Year 13 Increase company credit rating to B+ or higher Improve operating profits through increase in price A reduction in global unit sales, Slight loss of market share Overall credit rating increased to C+, but still low in comparison to competitors Achieve stock price gains Make improvements in company’s credit rating, Increase supply Increase in credit rating but not to investor expectations Changed strategy to focused differentiation to improve company image rating Made adjustments to the product to create perceived value, Invested in advertising Reduction in net revenue, Drop in EPS, Year 14 Maintain a Return on Equity (ROE) of 15% or more annually Increase operating profit, Increase revenue by increasing supply A grand increase in ROE surpassing investor expectations Company’s credit rating increased from a C to an A, the company still performed poorly compared to its competitors but it had made positive progress Achieve an Image Rating of 70 or higher Increase quality of shoes to 5 star rating, Increase in EPS, Slight drop in image rating but met shareholder expectations Maintain global unit sales Maintain prices, Maintained quality at 5 star, Maintained high advertising costs Global unit sales were maintained Year 15 Maintain a B+ or higher Credit Rating Reduced overall operating costs across the regions A high increase in credit rating surpassing investor expectations The company made a significant leap to position three against its competitors with a credit rating of A+ Maintain a Return on Equity (ROE) of 15% or more annually Reduced overall operating costs across the regions, Increase sales through market penetration, A drop in ROE but met shareholder expectations Grow earnings per share Maintained previous year price, Reduced overall operating costs across the regions Slight drop in EPS compared to previous year, but still managed to surpass investor expectations FINAL RESULTS Our last year as managers with B Company, gave us very promising results as we were able to reach most of our targets and achieve the top three position. Looking at table 1-8, they clearly highlight how we managed to learn from our mistakes to achieving one of the top positions. Through planning and devising strategic steps take, we were able to maintain the investor expectations and achieve high standards for the last two years. We were able to beat the expected performance targets for EPS, credit rating, ROE, image rating, and stock price appreciation. In some areas, such as credit rating and ROE, the company was able to surpass investor expectations by a larger margin (Table 3 and Table 5). The company was also able to secure a favorable market share for its focused differentiation product and thus maintained a high revenue through a considerable global sales (Table 1 and Table 7). Because of these high global sales and significant net revenues realized, the company was able to score highly in accordance to best in industry standards. To be on the top three position the company produced good results on the industry performance, which is through a high EPS, stock price, image rating, and ROE. The company also achieved set a target by the board of directors in terms of the ROE, image rating, stock price, and EPS. We were also able to achieve a credit rating of A+. Strategic direction From the time we took over B Company into year 15 we took three strategic decision over the last five years that saw us crumbling down into the last position and climbing back up to the top three competitive companies in the market. On resuming operations in year 11, our first task was to gain a competitive advantage over our rivals. We decided to maintain matters and make very little adjustments to the company operations, which led us to apply a low value with a standard price strategy. Our plan was to reduce costs while maintaining high revenues as we believed the consumers were content with the standard price. Our decisions were not viable in such a competitive environment, and at the end of the 11th year we realized we had lost a significant market share to our competitors, from 11% in year 10 to 2.5% in year 11. The results of year 11 decisions took us back to the drawing board, and we were forced to develop and implement a new competitive strategy in order to win our market share and gain a new market share. At the start of year 12, we settled on a hybrid strategy and applied it in order to win our market share and increase our sales. This strategy proved fruitful as we were able to match our competitors’ wits earning us a significant market share and boosting our sales revenue. Although the results of this decision were desirable, we were still not content with our earning per share, credit rating, and stock price. We therefore, had to devise a different strategy that would address this factors while at the same time maintaining our market share. In year 13, we decided to change our strategy to focused differentiation, this meant we would produce a perceived higher quality footwear, at a higher price to target markets. This being the introductory year for this strategy, our sales dropped, which affected our revenues, market share, company image, and equity. However, we understood the shift was temporary and maintained the strategy through the following years, which proved fruitful as the years went by as there was significant growth in accordance to investor expectations. Underlying strategic principles In theory, selecting the best strategy to run a business comes as an easy choice. However, in an actual environment, there are several factors that may affect these decisions. When carrying out real time practice as a manager one is tasked with the need to think fast and react towards a certain strategy changing it whenever the need arises. For example, during the operations, we were very confident with our initial strategy in hopes securing a larger market share and maintain a high company rating. However, this proved wrong through critical analysis and forecasting future expectations we were able to adjust our strategies in order to achieve better company performance. We were able to learn how competing in a large market with several competitors can prove tough towards little adjustments such as slight changes in prices to bigger decisions such as undertaking initiatives towards corporate social responsibility or adjusting the quality of products. KEY LEARNING POINTS ABOUT STRATEGY Participating in the exercise showed us the importance of defining and understanding a chosen strategy. A clear understanding of the chosen strategy enables us as managers to perform the required tasks diligently in order to realize sales, increase market share and overall meet shareholder expectations. The importance of planning before executing the chosen strategy. This stage enables a manager to analyze and understand all the important aspects to consider towards the company operations. Therefore, ensuring that each sector or area is catered in order to achieve desirable results. Executing the planned strategy is another important stage same as the planning stage. Poor execution is expected to achieve poor results, and this are such areas that competitors use for their advantage to defeat the company. CONCLUSION As we can see from the above report, business started off on a sloppy start. We emerged out last against our competitors in the market, with a very poor reputation to the investors, a situation that made us reconsider our strategic decisions in order to be on the winning streak. However, by the time we were reaching our fifth year in charge we had already started making significance progress and got the company back to its feet. Our decisions from year 11 proved to be fruitful with our company starting to show some major improvement in its competitive market and significantly meeting investors’ expectations. This jogged our minds, and we started embracing the idea of well thought out ideas that we invested in the company leading to its impressive recovery in the remaining four years of operation. Unfortunately, we did not emerge out as the top company in the market, but our performance was impressive enough earning as the number 3 position against other companies. However, the exercise offered us a lot to learn from and I am confident that with the experience, adopting to a real world situation, I will be able to adapt fast. REFERENCES: Bowman, C. & Faulkner, D., 1997. Competitive and Corporate Strategy. London: Irwin. King, J. L. & Kramer, K. L., 1984. Evolution and organizational information systems: an assessment of Nolans stage model. Communications of the ACM, 27(5), p. 466–475. Porter, M. E., 2008. The Five Competitive Forces that Shape Strategy. Harvard Business Review, pp. 86-104. Thompson, A. A., Stappenbeck, G. J. & Reidenbach, M., 2010. Business Strategy Game: Players Guide. Burr Ridge, IL.: McGraw-Hill/Irwin. APPENDIX Table 1: Trends of Net Revenues for year 10 to 15 Table 2: Earnings per share for years 10 to 15 Table 3: Company’s Return on Equity for years 10 to 15 Table 4: Stock price overview for years 10 to 15 Table 5: Company’s credit rating for the last 6 years Table 6: Company’s Image rating over the last six years Table 7: B Company’s global unit sales from year 10 to 15 Table 8: B Company’s market share trend across the last six years Read More