Managing Strategy - Footwear Industry - Case Study Example

Individual Report on Simulation Exercise Company B Managing Strategy: Footwear Industry Contents Introduction 3 Competitive Strategy 3 External Overview: Industry Analysis 5 PESTEL Analysis 5 Porter’s Five Forces 10 Internal Overview: Company Analysis 12 SWOT Analysis 12 Decisions Taken 13 Final Results 16 Strategic Direction 18 Underlying Strategic Principles 18 Learning Outcomes 19 Conclusion 20 Bibliography 22 Appendix 23 Introduction Strategic management is a very key factor that any business or entrepreneur planning to achieve success in the current competitive world, must employ. It is very fundamental, especially for new companies, to carry out a thorough market research, to enable them make good choices of strategies that will mean good to them. Companies can either employ strategies that will enable them enter an already captured market, or those that will make them thrive in the competitive environment as already established businesses. This report will be focusing on our Company: Company B, and how we applied various strategies to help us enter and gain a market share proportion of the four markets that we targeted. The report illustrates the strategies employed and how they were employed to achieve our main mission of providing the best quality footwear at competitive prices. The report proceeds to analyse the internal and external environments of the company including the industry analysis that we had to deal with. We then move ahead with the report to discuss various decisions that we made as we progressed with the business operations. We then will discuss the strategies we employed to stay focused in the direction of the strategy as well as the results that we realised after the implementation. The underlying strategic principles are then briefly explained that brings the report to a conclusion by looking at the learning outcomes. Competitive Strategy When we started up as Company B, our aim was to employ the best strategies that will enable us enter the four markets successfully. The four markets we targeted included North America, Europe-Africa, Asia Pacific and Latin America. To achieve this, we employed two sets of strategies. The first set of strategies was employed during the entry time to provide us with competitive advantage against our competitors that were already enjoying the whole market share. The second set of strategies we employed were those that were geared towards propelling us in the market to achieve a higher percentage of the market share as we increase our popularity and ultimately gain the larger share of it. To achieve the first set of entry strategies, we employed cost leadership strategies that will enable us to reduce our product costs lower than our competitors’, without reducing the value. This gave us a better entry point as we could attract a large mass of customers to familiarise themselves with our products. To be able to able apply this strategy in a way that the company could not make losses due to reduction of prices, factors that cause costs were made efficient to reduce cost involved On the other hand, to enable us achieve thrive in the business and capture a larger portion of the market share, we employed product differentiation strategies. This strategy enabled us to formulate our products with better designs, quality and packaging styles of different classes, which would make a difference between our products and the competitors’. We were able to produce footwear products of premium quality with a touch of class, which fetched higher prices in the market than our competitors’. At the same time, we begun focusing on SQ ratings from year 12 (2nd year) to enable us different our products from our competitors’. With our focus on the strategies, we were able to increase our SQ ratings for each year, enabling us to achieve SQ rating of 8 by the year 15, (5th year). Our main aim was to enter these four markets and stay focused towards achieving our mission at the same time. Our mission was “to be the best quality footwear product for the most competitive price.” To achieve this, we applied the same strategies while entering and operating in the four markets for us to stay uniform and focus better. As such, we were hoping to become the global cost leaders as well as differentiators as we achieved our competitive advantage in the industry. External Overview: Industry Analysis To enable us apply our strategies and take the business further, there was a requirement of analyzing the external environment of the business. This included analysing the main factors that take to play in the footwear industry around the environment where the business was located: the four markets. PESTEL analysis then took center stage to analyse the main factors including political, economic, social, technological, environmental as well as legal issues around the business environment. Porter’s five forces were also analysed to provide us with the main forces of entry that were major in the industry. PESTEL Analysis Political Operating a company in various regions welcomes the likelihood of being political influence that may control issues to do with taxes, import and export duties, as well as the trade agreements and linkages among countries and regions. At the same time, political stability of a government and the type of the government can also affect the operations of a business. As mentioned, the major geographical areas of operation for Company B include Latin America, Asia Pacific, North America and Europe-Africa. Most of the countries in these regions where we operate are very peaceful and with minimal political interferences. In most cases, our operations selected those counties with favorable policies to international trade and are have government that promote international investment. We had to incur an import duty of less than a dollar per bunch of footwear in most of these countries, though, this amount varied with the particular policies of a country. Most of our competitors do not have their manufacturing plants around, meaning, they also have to import the products they sell. This, at least, put us on a level ground with them for fair competition. With the various trade agreements within these geographical area, the import duty is regulated by the agreements, therefore, it is fair and non-exploitative. Different countries also have different tax policies that enable us enjoy some low taxes on a number of countries. Few countries, especially in Europe-Africa regions experience some political instabilities and terrorists’ attacks, which make it hard to operate around, however, we try to avoid operating in such regions. Economic Footwear industry dealing in products that nearly everyone uses, there is high and continuous demand for the products. However, the demand and consumption in this industry is also influenced by some economic factors including disposable income, employment rate, inflation, GDP as well as money supply. For instance, those with high disposable income may have very many pairs of shoes, say ten and above. However, those with less or no disposable income may only have a pair or two. When the employment rate is high in the region or a country, many people will at least have an income, hence being empowered economically to purchase the footwear. With this rate being different in the various regions in which we operate, it will impact on the number of footwear we will have to sell, hence a major factor to use in making production, supplies and marketing decisions. With inflation rates being high in many of the African countries, it means the exchange rate will be affected, reducing money value of money in that country. However, this will also make the dollar have a powerful command in that region if it stays more stable than the currency in the country. To our company since we use dollar, sales from such countries with high inflation rates will reduce our aggregate sales. With high GDPs, individuals from the areas may become more empowered economically, hence, increasing our sales and profits from such regions. On the other hand, low GDP will decrease our sales, hence profits. The footwear industry is a very reliable market as consumers purchase footwear frequently. The footwear market is, therefore, approximated to have a growth of 15-20% within the next five years, worldwide. However, as various countries possess different national factors affecting their economies, this growth may vary within the range of 2% according to various geographic regions. Such uncertainties that exist in the footwear market will also affect the financial operation of the company as the company operates in various regions. Social Footwear deal in products that are consumed by all individuals from small babies to old people. Both male and female put on shoes whether at work, school, or home. Ladies, however, tend to have higher affinity to footwear than gents. One can find that ladies have at least ten pairs of shoes in their racks, with others having as high as over 100 pairs. On the other hand, gents usually do not care much about fanciness, fashion or changing shoes frequently. They usually have very few pairs of shoes like one, two or several. Such gender differences in as far as consumption of footwear is concerned, must be considered as it affects decision making during differentiation and market focus. The rate of growth in children in very high and they do not consume the product as such. A child may have a new shoe today, after two months or so, their legs have grown, and therefore, they need new ones. The rate at which children consume the products is, therefore, very high. This will also help in making production, distribution and differentiation strategies that need to be adhered to meet the market demand. There are specific footwear products for various social activities such as sports and recreation. An analysis of involvement of individuals in sports in various regions will be important to make differentiation decisions as well as marketing and production. As there is an increase in the income levels of many of the developed and developing countries, many people tend to gain the power to own more than the necessary pairs of shoes, especially ladies. Increase in the involvement in fashion and cultural practices has also increased the consumption of shoes as shoes, most of the time, form part of fashion, and there are some shoes that conform to the cultural beliefs of some individuals. All these factors will help in making potential decisions when designing, supplying and marketing products in the footwear industry. Technological There are various technological advances that have downed in the footwear industry. Such advances are mostly experienced in the production sector where more advanced and efficient equipment and machineries are being employed. This means, there is increased economies of scale that reduces the cost of production. This aspect has a multiplier effect in the sense that, when the production costs reduce, the final consumer must enjoy some reduction in the prices. More to that, the advances in technology has also made it possible to have more better and modern footwear designs that can fetch premium prices due to their premium qualities. More fashionable and higher quality products can be produced, hence, competition can be based on the differentiated products. Technological factors, therefore, affects greatly most of the decision making during operation, which, in turn, affects the sales and profits in the Company. Where the company will use technology to differentiate its products into different designs that are much different from the competitors’, the company will apply more price to the products than the competitor. Similarly, technological advancement has brought about the internet that the consumers are able to use to checkout a companies set of products and do a comparison before they make the buying decision. The company will use this potential for marketing purposes as well as wining the trust of consumers. Internet use by the company can help increase sales in the footwear industry. It is therefore an important factor that will need to be considered as a player in the footwear industry. Environmental Companies are adversely affected by the environmental factors of in the industry. Some of these factors, in the footwear industry, are ecological in nature. For instance, regions that are prone to floods, such as most Asian and African countries, will require more supply of specific types of footwear that are used mainly in wet areas. The consideration of this factor in the region will enable the company to make production and differentiation decisions in to supply more such footwear products in the most affected regions. Secondly, as the industry relies much on the environment to produce both synthetic and animal products such as leather, as raw materials used in production, the company must also give back to the environment to maintain or achieve a sustainable business. The company must involve in corporate social responsibility (CSR) activities that are aimed at improving its environment, including those people forming the environment. The CSR, has been established to affect the total profitability of a company. As a result, its applicability in the industry must be a considerable factor. Similarly, consumers use CSR reports of particular companies to influence their continued purchase of their products. Those companies that do not support or give back to the environment usually receive fewer customers than those that participate in the same. Legal The company, with its operations in different regions, there are various legal establishments depending on the region that will affect its performance. Legal advice will be sought to help during establishment and in sorting out various disputes that will affect the company. Various regions have different legal requirements. It, therefore, means that some legal standings in the various regions may allow or not allow industry practices. The national footwear industry controllers within a particular country will be the controller of the activities in the industry. This might affect the company in away, as some legal requirements might not be easy to meet. The company’s operations, as well as profitability will therefore be dependent upon the legal framework of particular regions. Porter’s Five Forces Threats to New Entrants Due to new players in the industry, there is a lot of threats to the new entrants in the market. To be able to set into the market as a new player, there must be the use of economies of scale and huge dispensation of capital (Porter, 2005). In this case, brand image will also help in the market to increase popularity. It is, therefore, easy for the company to involve in differentiation of its products to help it succeed. As the already existing players in the market have taken their proportions of the market share, it is hard for new players to enter. In this case, Company B will need to position itself well strategically to achieve a portion of the market share. It will need to have high investment capital, use economies of scale, cost leader strategies as well as differentiation to enter the market easily. Bargaining Power of the Suppliers The footwear industry experiences a high bargaining power as there are many buyers as well as many suppliers. There are, therefore, more differentiation of the products in various forms to fit various buyer segments. The industry is also marked with the suppliers who have integrated further into the industry. Bargaining power of the Buyers The industry is characterized with both many buyers as well as sellers. The buyers, therefore, have a lot of power to bargain for better products at fair prices. This leads to high differentiation into to provide low cost footwear products (Porters, 1985). Many buyers have access to a lot of information about footwear products. They will, therefore, have the power to choose among the various footwear brands available and decide to purchase one depending on the quality and prices. Threats of Substitutes In the footwear industry, there are little, or no substitutes. It’s either one uses the footwear products, or they go without. Therefore, the threat to go without putting on shoes or use alternative products that can serve as shoes is very low. The consumers are, therefore forced to use footwear products, thereby, there is less competition brought about by the substitute products. Intensity of Rivalry There are very many players in the footwear market offering various brands of footwear products. The intensity of rivalry in this industry is, therefore, very high. This is supported by the ease to access information about various brands of footwear everywhere, making the customers to make choices of which ones to purchase depending on price and quality. Many competitors are left to pursue aggregate growth strategies. Internal Overview: Company Analysis SWOT Analysis Strengths We have strong strategic position in both North America and Europe-Africa regions In Latin America, there is good retail coverage and this applies to part of Asia pacific region Good sales are made from almost all the regions Weaknesses There is much expenditure on recurrent operations Promotion and thorough marketing of the brand is still required in most parts of Africa and Asia During the entry time, high cost was used Opportunity There is the growing opportunity in the fashion industry giving us a challenge to produce more Many ladies continue increasing the number of pairs they keep With the continuing increase in population, there is an increasing number of consumers Threats Many players in the industry Cost leadership strategy might lead to losses Possibility of our competitors also moving with speed ahead to exploit the new opportunities in the market Decisions Taken 2011 Objective (Why we did it) Strategic Action (What we Do) Outcome (What was the outcome?) To create competitiveness in the existing market and also increase profit margin Invest into celebrity endorsement (Two Years). Increase price from $75 to $90. Reduce marketing budget by $4,000 in N. America and Asia Pacific. Increase the wholesale price by $17 from $41 to $58. Reduce the SQ rating to increase profit margin. Decrease the model offering from 180 to 151. -Due to the intensively of the competitiveness, the market share decreases. (Competitors were offering a cheaper alternative) -Yr11 revenue £216,592 net £49,644. Yr10 revenue £239,147, net profit 25,000. The revenue decreased by 9.43% ($22,555) however the profit margin increased by 98.58% (24,644) To increase Stock price We increase the prices in all of the market by 20% and increased the model availability of the product -Increase the stock price to 76.55 To increase earnings per share Increased the prices from $75 to $90 at the internet segment and the wholesale segment from $41 to $58 by keeping the same SQ 5 Yr11 the EPS was4.21 in the Yr12 we increased the EPS to 4.66. 2012 Objective (Why we did it) Strategic Action (What we Do) Outcome (What was the outcome?) Improve Image Rating to meet the stockholder expatiations of 70 Increase the quality of the product. Increase the labour pay by 2% in N. America and Asia plant (factory) Increase the cost of the superior materials by 1$ per trainer Image Rating rose to 62 from, 53. The increase made our image rating the expected amount for the stockholders. Increase market share in all operating industry Reduce the price from $90 to $74 on the internet segment for all operating market. Reduce the price from $58 to $52 at the wholesale segment in all operating market. Increase the SQ rating from 5 to 6. Increased marketing budget and signed a celebrity for 2 years. -from all operating market the average market share increased from 3.5% to 13.7% - increase the pairs sold on internet and whole segment 2013 Objective (Why we did it) Strategic Action (What we Do) Outcome (What was the outcome?) Increase the cost of goods by %43 (153,572 -218,890) to differentiate with the SQ rating Increase superior materials to 100% Enhanced styling and features by $34k in N. America and $38K. Increase annual base wages by 4% -Our net profit decrease from $54,982 to $41,677 - To increase the productivity of the plan operation to meet its full capacity utilisation rate Best practice training for each employer in N. America $400 and Asia $300 The plant utilisation was up by 5.8 point from yr12. Overall average reject was 5.3% compared to 8.5% from yr12 2014 Objective (Why we did it) Strategic Action (What we Do) Outcome (What was the outcome?) Enter Out Asia Pacific Market We stopped all operations in Asia pacific, internet segment and wholesale segment. Our market share was decreasing due the price fluctuation from Asia Pacific Increase market share in N. America and Europe-Africa Increase price by $0.66 Decreased the model of offering to 172 Increase marketing budget by 3,000 Increase celebrity appeal by 70 Our market share increase to 16.5% in the internet segment. (we hold the largest market share compare to our competitors) Our market share increase to 19.8% in the wholesale segment. (we hold the largest market share compare to our competitors) 2015 Objective (Why we did it) Strategic Action (What we Do) Outcome (What was the outcome?) To improve profitability by entering out of Latin America We stopped all operations in Latin America, internet segment and wholesale segment. Our market share was decreasing due the price fluctuation from Latin America Reduce debt We have reduce the debt by $52,000 We used the debt equity ratio to analyse the debt In yr15 our debit ratio has on down from 0.38 to 0.0275 Final Results By increasing the price during the first year from $75 to $90 with the aim of increasing competitiveness as well as profit margin, we lost a large market share. It is clear that this was not a good decision to make as increasing the price sends the consumers away to purchase the competitors’ products that may be cheaper. Also by increasing our wholesale prices from $17 to $41 to $58, we gave our competitors a better competitive platform since they were offering cheaper prices. Decreasing the North America marketing budget also reduced the sale revenue by 9.3%. However, increasing the prices made us realize an increase in the profit margin by 98.58%. Although the increase of prices in all the markets by 20% increased the stock price to 76.55, the earnings per share increased only with a small percentage from 4.21 to 4.66. We then realized that increasing the price was the worst decision we ever made as it affected our performance by a huge percentage. Looking at the ratios of the company in the appendix below, it is clear that the company has been doing very well in all these years apart from year 11 (the first year) when the company was the only one with the least amount of revenues. The strategies applied afterwards aimed at increasing the revenue and increasing other ratios. When the firm again increased the superior materials in the third year and enhanced styling and features by $34,000, there was a reduction in profits, though revenue increased to $350,931,000 from $297,491,000. The objective here that was to increase the cost of goods by 43% was not also met. Generally, Company B as shown by the ratios, maintained impressive performance throughout the years, apart from the first year when we reduced the revenue due to increasing price decision we made. The tables in the appendix, therefore, show a healthy growth rate exhibited by Company B in this industry over these years. The fact that the company stopped its operations in some of the regions does not, in any way, mean that it failed to deliver and achieve its objectives. This was just part of the strategy set out to handle certain situations. Strategic Direction As we can see from the summary of the decisions taken by the company, the strategy we set out from the beginning was employed in the second year of operation (year 2012). Most of the activities, therefore, that we applied during year 2 were closely implementing our initial strategies. During the third year (2013), we begun to wonder away from our strategic direction, thereby taking us to losing a lot of profits as can be seen from the tables in the appendix. Because of failing to adhere to our initial strategies, we began stopping our operations in some regions. In year four (2014), we stopped our operations in Asia Pacific followed by Latin America in the year five. During the fifth year we were busy trying to reduce the debt ratio, thereby, applying other strategies that were not in our list. Despite all the ups and downs, we still managed to remain financially healthy and run healthy operations in the industry. Underlying Strategic Principles From the simulation, it is important to note that a company should have major strategies guiding its operations set out clearly. However, it is also worth noting that, no business environment is ideal (Govindarajan & Shank, 1992). Therefore, in as much as a business will try to stay focused on its underlying strategies, it should be able to adopt other strategies on the way to help in fixing the turbulence in the environment. As situations arise, companies can be faced with drastic decision making scenarios where they are required to adopt emergent strategies. However, it is wise noting that these strategies have both their benefits and bad effects to the company. For this reason, there should be frequent observation of the business performance with the strategies applied to ensure that it stays on course. Just like in our case, we started by making decisions that were detrimental to our company. However, with a quick evaluation, this was realized and rectified to improve the subsequent results of the company. Learning Outcomes From the simulation, it is clear that companies need to have a clear focus on their strategy. As such, it is important that companies have and maintain a clear strategic direction or an overall strategy (Johnson, et al., 2009). However, in as much as it should stick to the overall strategy, companies must be aware of the turbulence that is present in the business environment. As a result, there is sometimes a need by the company to go out of its strategic way and implement other emergent strategies to help in sorting issues that the main strategic cannot solve. Strategies help us achieve long-term goals or the overall goals of the company, for this reason, for us to stay on course, there must be ups and downs. When ultimately, the overall goals are achieved, the strategy is said to have been successfully applied. Analyzing both the external and internal environment of a business helps us to know what factors we’re hoping to meet in the environment and how they will affect our business. We also try to find the advantages and opportunities that we may exploit when we get into the business (Lord, 1996). The analysis also guides us and tells us whether the business we’re trying to get into, could be viable or not. The uncertainties in the business environment can also be depicted by the features analyzed in the environment. We, can therefore, strategically position our companies in the best way possible to deal with the industry and company conditions we’ve found from the analysis. This way, we will know which strategies to employ. Another learning outcome is in the complexities of running a company. Some of the complexities include decision making. In most cases, we should use the strategies we apply to help us make good decisions for the companies (Shank, 1989). However, some strategies are very complex to apply just like some decisions hard to make. While running a company, sometimes you might be forced to make a decision of stopping your operations in a giver region. This might be due to failure to capture a market as expected. Similarly, some decisions strategic decisions may not bear positive fruits. However, the most important thing is to stay focused and achieve the goal. With the knowledge of different stakeholders’ expectations from the company, we need to stay in the business and make it going to fulfil its objectives. We can do this by focusing on the overall strategy of the business. Conclusion In a nutshell, just as we began with two sets of strategies, without focusing on a single strategy, we were easily swayed to take up the emergent strategies. From the simulation, we learnt that competitive positioning requires an analysis of both the external and internal environment of the company. To beat the competition, a company’s management must act smart. Decision to run a company must be made and such decisions must be guided by some objectives to be achieved. To achieve the overall objectives of the company, act of flexibility must be applied. The company must be accommodative enough to allow the emergent strategies also to effect some changes. As a team, we need to work together in making decisions that are aimed at guiding the company. Joining together in decision making helps in going through the hard times when the effects of the decision made become negative. Similarly, making interdependent decisions is very important. This enables individuals not to consider the decisions made by the competitors, but stay focused on their own decision. It is important since we’re guided by different objectives. For the experiential experience of running a business, the simulation helps us learn that we need an overall strategy for our businesses. However, we need not to stay strictly on the strategies. We must be flexible when applying these strategies. Again, the simulation helps us learn that, for one to successfully enter a market, it is very necessary for them to carry out company as well as industry assessment. Bibliography Govindarajan, V. & Shank, J., 1992. Strategic cost management: Tailoring costs to strategies. Journal of Cost Management, Volume Fall, pp. 14-24. Johnson, G., Scholes, K. & Whittington, R., 2009. Fundamentals of Strategy.. United Kindgdom: Prentice Hall. Lord, R. B., 1996. Strategic management accounting: the emperors new clothes. Management Accounting Research, Volume 7, pp. 347-366. Porter, M., 2005. Competitive Advantage. 1st ed. New York: New York Free Press. Porters, M., 1985. Competitive advantage: Creating and Sustaining superior performance. New York: The Tree Press. Shank, K. J., 1989. Strategic cost management: New wine, or just new bottles?. Journal of Management Accounting Research, Volume 1, pp. 48-65. Appendix Table 1: Summary of Year 11 Results Table 2: Summary if Year 12 Results Table 3: Summary if Year 13 Results Table 14: Summary of Year 14 Results Table 5: Summary of Year 15 Results Table 6: Historical Exchange Rate Table 7: Internet Segment Table 8: Wholesome Segment Table 9: Company Performance Overview TABLE 10: Return on Equity Table 11: Stock Price Table 12: Credit Rating Table 13: Image Rating Read More