Simulation Exercise on Companys Competitive Strategy, Industry Life Cycle Analysis - Report Example

DRAFT 2 Individual Report on Simulation Exercise 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. The rough the experience, we were also able to learn a series of critical and important factors in running a company in a real world setting. Immediately we were put in charge of B Company, we began operations and formulating strategic decisions aimed at boosting the company performance to the top. Business started on a sloppy start in year 11 because of some unproductive decision that we made. 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. Our decisions in the following year 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. 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. 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 back 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 back 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. 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. For example, 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 the company still faced some disadvantages because of its location in Asia and North America. There are tariffs to be 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 are 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. The company also faced low sales in countries from the Europe-Africa region, because of government instability especially from African companies. Our strategy to operate set from all four regions with manufacturing plants situate in Asia and North America, offered a hedge over this risks and we were able to maintain our operations without incurring larger costs. 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 operant 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. During operations, our competitive strategy saw us moving from a low quality shoe with a standard price, to low price shoe with standard quality and later to a high perceived value shoe range with premium prices. Through this strategies, the sales volumes went down, up, and back to a medium. These movements can help explain the economic conditions of our target market segment. It is evident that buyers showed significant reactions in terms of purchases on price and quality changes. The average consumer, was willing to pay a premium price for a good quality shoe, although the sales volume were reduced. Low prices with a standard quality shoe produce admirable results, however this could not be maintained as it required a very large supply with minimal profits, a position we were not willing to operate within. This is what led to the change of strategy, focusing on a reduced market share, but with favorable economic state to maintain repeat purchase at higher prices. 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 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 is now being boosted by technological advancements. On the positive side, our company was able to use this technological advancements in coming up with new shoe designs that are of superior quality. We also able to use latest technological upgrades in enhancing efficiency in terms of production and delivery. Other benefits, include the use of online marketing. With the use of internet, we were able to advertise and sell a significant number of our shoe brands through online marketing. On the flip side, technology also offers its disadvantages and one of them being that competitors are also adopting similar or superior technology to the one used by company. In this sector, there was need to be very keen on decisions made as some would end up costing the company unnecessary costs with little benefits. This called for more research and critical assessment of the type of technology to be adopted in company operations, since it had direct impact on company performance. 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 are tasked with Corporate Social Responsibility. The decisions made in this sector have significant impact on the product quality rating (P/Q) of footwear produced. It also has significant effects on the company’s performance in terms of competitiveness and market share factors. Low P/Q rating negatively affects the company’s overall rating in the market, which further affects 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 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 depending on the decisions made. For example, sales go down, markets become saturated, market prices go down, and stock prices also decline during this stage. 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. 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. 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 the fear to lose its customer to the competitors who might offer low prices. The companies also 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 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 is 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 Slightly increased prices, Sales dropped more than twice of 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. Increase Market share Year 12 Grow Earnings per share Grow market share by applying hybrid strategy Increase image rating to above 70 Year 13 Increase company rating to B+ or higher Achieve stock price gains Changed strategy to focused differentiation to improve company image rating Year 14 Year 15 FINAL RESULTS 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 back 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 back 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 KEY LEARNING POINTS ABOUT STRATEGY CONCLUSION REFERENCES: 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