The United Parcel Service has been in business since 1907. Over 100 years of delivery services must be a result of a certain method of management and business that has….
Business Strategy Simulation Analysis
The actions build into my strategic plan to achieve competitive success with my strategy were to: 1. Offer a wide variety of products in order to give consumers more choices and appeal to the diverse preferences of a larger consumer base. This was to be accomplished by increasing the number of models produced at both the North American (NA) and Asia-Pacific (AP) plants for sale in the internet and wholesale segments in all four regions. 2. Offer attractive, high-quality products that will hold up to wear and tear in order to provide consumers with increased value.
This was to be achieved by using a higher percentage of superior materials versus standard materials for production, incorporating more enhanced styling features into the products, and investing heavily in Six Sigma/TQM programs to improve the quality of the workmanship that went into the products and to reduce the number of defects. 3. Offer products at a price that is reasonable and considerably lower than that of rivals offering shoes of similar style and quality.
This was to be accomplished by managing production costs and setting a lower profit margin. To manage production costs, the majority of the products were to be produced at the AP plant and shipped to the other regions. Due to the lower production costs at the AP plant, the company would still be able to achieve the target profit margin even with the additional costs of shipping the products to the other regions. Since the costs of production in the NA plant were significantly higher, the additional costs of shipping to the other regions would not allow the company to offer the products at the lower cost. Therefore, most of the product from the NA plant were to be sold in that region to avoid the additional shipping costs.
Additionally, production costs were to be managed by increasing the number of products produced per employee and reducing the number of rejects through investment in best practices training, higher base wages, and increased incentive pay to the employees for improved and increased production. The selling price for each product was to be kept the same and increase only slightly each year in order to increase and maintain a loyal customer base through consistently reasonable pricing.
The actions built into my strategic plan to achieve financial success with my strategy were to: 1. Reduce production costs through improved efficiency of operations. This would be accomplished by investing heavily in Six Sigma/TQM programs in order to improve the quality of workmanship that went into every product. Better quality production reduces the likelihood that customers will end up with defective, low-quality products that could severely damage the company’s image.
Additionally, by investing in best practices training for the employees and offering higher base wages and incentive pay, the plan was to increase the number of products produced per employee and reduce the number of units ultimately rejected. Increasing employee production allows the company to create more product with the same amount of resources and improving the quality of their work reduces the amount of resources wasted on rejected units. 2. Take a conservative approach in financing operations. This was to be achieved by reducing the amount of debt and not taking any unnecessary financial risks.
To reduce the amount of debt, the plan was to have the company pay off loans early in order to save monthly interest expenses. To avoid taking financial risks, the company was to use financial resources to improve the capacity and performance of the existing NA and AP plants rather than invest in new plants in other regions. The other objective of these action plans was to increase the company’s financial rating so that future financing could be obtained at reduced interest rates should the need arise to finance the construction of a new plant.
• Why you selected the strategy you used
The reason I selected the Best-Cost Provider Strategy for Kix Footwear was two-fold. First, the competitive strategy of offering a wide variety of attractive, high-quality shoes was based on what consumers, such as myself, would like to see from a shoe manufacturer. As a middle-income consumer, I work hard to earn the money I have and my disposable income is limited. When I shop for shoes I want to have a variety of shoes to choose from that are well-made and will last without sacrificing style or having to secure a loan to purchase them.
The large majority of consumers are also middle-income and I wanted to target the largest market. Therefore, I decided that my strategy would be to provide consumers more value for their money. I planned to achieve this by producing and offering a large number of models to satisfy the need for more choices and to incorporate more enhanced styling features into each model, use higher quality materials, and invest in Six Sigma/TQM programs in order to improve the attractiveness and quality of the shoes produced.
My strategy to maintain reasonable prices was to invest in best practices training and offer higher base wages and incentive pay to employees in order to increase the number of pairs produced per employee and reduce the number of rejected pairs, thereby reducing the production costs per pair.
Secondly, the financial strategy of reducing production costs and taking a conservative approach to financing operations was based on improving profit margins and managing risks. Therefore, my strategy to reduce production costs and improve profit margins was to invest in best practices training and offer higher base wages and incentive pay to employees in order to increase the number of pairs produced per employee and reduce the number of rejected pairs, thereby reducing the production costs per pair.
With lower production costs per pair, the company would be able to retain more of the revenue generated from sales resulting in an increased profit margin. My strategy to manage risks was to reduce the company’s debt obligations by repaying loans early and not incurring any further debt unless absolutely necessary. To avoid further debt, the strategy was to maintain a cash flow sufficient to pay expenses as they came due without having to obtain short-term financing and to increase production capacity by improving or expanding existing production facilities rather than by constructing new facilities in other regions.
1. Evaluate the effectiveness of your strategy.
The effectiveness of my Best-Cost Provider Strategy to provide consumers with a wide variety of attractive, high-quality products at an affordable price by using better materials, improving efficiency, and taking a conservative approach to financing operations was fairly successful. With the exception of the first and final years, Kix Footwear was one of the top three companies in the industry.
As the game began, Kix started out in 5th place overall with slight increases in Earnings Per Share (EPS) of $0.02, Return on Equity (ROE) of 1.3%, and Stock Price of $0.42/share. By the end of the second year (Year 12), the company had more moderate increases of $2.33 in EPS, 8.3% in ROE, and $56.15/share in Stock Price, putting me 3rd place overall with a +13 point change from Year 11.
Kix maintained its standing in 3rd place throughout the game until the final year, occasionally sharing it with Company E. The final EPS for Kix Footwear at the end of the game (Year 18) was $9.08, an increase of $6.39 overall; ROE increased 4.2% to a final score of 19.2%; and the Stock Price in the final year was $172.67/share which was an increase of $140.67/share.
While my strategy for Kix Footwear was fairly successful, I believe that the company’s performance could have been better if I had been more willing to take financial risks. My attempts to increase production capacity were not as effective as I had hoped, causing my company to lose many sales to my competitors with the foresight to build additional capacity at the onset of the game.
Additionally, I underestimated the competition’s aggressiveness in obtaining celebrity endorsements and was too risk-averse to bid high, which resulted in my initial bids to be incredibly low compared to those of my competitors. Ultimately, I was not able to obtain celebrity endorsements immediately due to my low bids, which hurt my image and cost me sales.
Due to my setbacks in failing to adequately increase capacity and obtain celebrity endorsements, I lost focus on my original deliberate strategy and began implementing a reactive strategy based on mimicking the actions of the 1st and 2nd place competitors. I reduced the number of models I offered and raised my prices substantially, both of which are directly in conflict with my initial strategy. Mimicking the strategy of a rival is rarely successful and did not prove to be so in this situation.
As a result of this change in strategy, the company slipped slightly in Year 14, with EPS falling from $5.08 to $4.57, ROE decreasing from 20.4% to 16.0%, and Stock Prices slipping from $96.87/share to $83.20/share. I immediately realized my error and returned to my original strategy by offering more models at lower prices. The outcome was that I was able to regain my competitive advantage the following year (Year 15) and my scores reflected this as EPS rose to $6.03, ROE to 18.7%, and Stock Prices to $105.63.
C. Evaluate your ability to identify competitors’ strengths, weaknesses, and strategies during the simulation.
My ability to identify my competitors’ strengths, weaknesses, and strategies during the simulation were at first not as good as I had hoped they would be. My focus at the beginning of the game remained only on those companies that were ahead of me or directly below me. The other companies did not factor into my strategic decision-making and, as a result, I lost out on a vital purchase of additional capacity at the beginning of the game which set me back slightly.
Additionally, because of my failure to monitor my external environment, I was taken by surprise when Company E gained ground in Year 13, coming from 6th place to being tied for 3rd place with me. I realized at that point, that it was necessary to watch all of my competitors, not just the ones that I wanted to surpass. An ambitious company can make significant changes to their strategy and overcome rivals quickly. For a company to maintain a competitive edge, it is important to closely monitor the external environment in order to identify competitors with the ambition, capabilities, and resources necessary to pose a real threat and prepare a strategy to protect against that threat.
As the game continued my ability to identify competitor strengths, weaknesses, and strategies improved. I watched the behaviors of all of the companies, not just the most successful ones, and made strategic decisions based on taking advantage of weaknesses in my competitors in order to gain their market shares and adjusting my strategy to take advantage of consumer preference trends. For example, I noted that there were a lot of sales in the wholesale segment were lost in all of the four regions by companies that were offering products for the private-label segment. I decided to avoid the private-label segment because the profit margin was less than in the internet and wholesale segments and to provide as much product as I could to those segments in order to gain the market shares of those companies supplying the private label segment.
Additionally, there was more production capacity available than there was demand and this continued to be more pronounced each year. Therefore, rather than create more capacity through new construction, I decided to increase my capacity by purchasing it from other companies. With this increased capacity, I was able to better meet the demands of the wholesale and internet segments in all four regions without the monthly interest expense of a construction loan. The results were that I had fewer lost sales in the wholesale segment than those companies offering product for the private-label segment, achieved higher levels of sales revenue, and received an A+ credit rating.
1. Discuss how successful you were in predicting your competitors’ next moves.
My success in predicting my competitors’ next moves was initially very good and then began to lag as the game continued. I believe that my initial success was due to the fact that every company was starting out in exactly the same position and faced with identical market conditions. Therefore, I
simply predicted that my competitors, in reviewing and analyzing the same market conditions as I, would come to the same or similar conclusions and react in much the same way as I would. Regardless of the strategy each company wanted to execute, the fact remained that production costs were less in the AP plants than in the NA plants.
So I predicted that most of the companies would concentrate their production in the AP region and ship to the other regions. I also assumed that most of the companies would raise their prices, a few would keep them the same, and that none were likely to lower prices. My predictions were accurate enough during the first two years that I received bonus points for being so close.
As the game progressed, I was not as successful in predicting the moves of my competitors. I believe the first cause for this outcome was the fact that I was focusing only on the actions of the companies that were ahead of me of just below me rather than monitoring the entire external environment. I failed to recognize the importance of watching all of my rivals in order to identify potential threats to my market share.
My predictions, therefore, were essentially my predictions for only those 3 or 4 successful competitors as a group, not the entire industry as a whole. Additionally, as the game continued, I found it difficult to find enough time to analyze each company properly given the time constraints. There was very little time between years for analysis and decision-making and, coupled with working full-time and family obligations, I only had enough time to perform a cursory review and analysis before entering my decisions in order to meet the deadlines. I believe that given more time, I would have been able to more accurately predict my competitors’ moves within the game. D. Discuss how sustainable the most dominant competitive advantage achieved by any company within your industry was.
I believe that the most dominant competitive advantage achieved by any company within the industry was very sustainable. The top company within the industry, Company B, achieved competitive advantage by building capacity within the first two years and continuing to build throughout the game in all four regions; winning and maintaining celebrity endorsements year after year; and by investing significantly in advertising.
This strategy was about taking significant risks and it resulted in increased buyer demand, product differentiation, and perceived value. Company B had the capability of producing more product in all four regions than any of the other companies in the industry and enabled them to better meet the increasing demand for their product due to their successful advertising campaigns and celebrity endorsements. They were also able to eliminate all costs associated with shipping product from one region to another, which the other companies were not able to do. This company was able to maintain a 1st place standing overall throughout the game, with the exception of Year 13.
By immediately increasing capacity and doing so in all four regions, Company B was able to increase production to meet increasing demand and eliminate the additional operating costs of shipping product from one region to another, keeping production costs down and increasing profit margins. The company also managed to successfully win bids for celebrity endorsements by the second year and maintain a high level of celebrity contracts throughout the game by bidding high. These celebrity endorsements, along with significant investments in advertising campaigns, allowed the company to boost consumer demand, increase product differentiation, enhance consumer perceived value, and command a higher price for their product.
This company shot to the top of the industry immediately by taking advantage of market conditions through aggressive strategy and risk-taking. Once at the top, the company was able to sustain their competitive advantage by building on their strengths of increased capacity and demand. Increased capacity allowed the company to gain market shares from those companies unable to meet demand and demand for their product was created through numerous celebrity endorsements and considerable advertising.
E. Compare the selected strategy to three following tests of a winning strategy:
The generic competitive strategy that I selected for Kix Footwear was to provide consumers with a wide variety of attractive, high-quality products at an affordable price by using better materials, improving efficiency, and
taking a conservative approach to financing operations. A winning strategy can be determined by applying three tests; The Fit Test, The Competitive Advantage Test, and The Performance Test.
The Fit Test
To pass The Fit Test, a company’s strategy must fit the current situation, both internally and externally. Internally, the company must be able to execute the strategy with their available resources and current capabilities. For a good external fit, the strategy must be aligned with the current market conditions.
I believe that my strategy passed The Fit Test because it was a good fit internally and an adequate fit externally. Internally, my strategy was based on improving the resources available to me and building on our capabilities, such as existing facilities and current employees. My strategy consisted of investing in improvements to existing facilities in order to increase capacity and investing in enhancements to my labor force through best practices training and higher base wages and incentive pay in order to retain their valuable knowledge and experience.
My strategy from an external standpoint was only adequate. As it turned out, industry demand rose much higher than I expected and my strategy to increase capacity through improving existing facilities was not enough to keep up or get ahead. As a result I lost sales to those competitors with enough courage to take risks and build additional capacity.
The loss of sales due to being out of stock damaged my company’s image and affected future sales. My reactive strategy to loss of sales due to insufficient capacity was to purchase capacity from other competitors in the industry. This allowed my company the ability to better meet demand and lose fewer sales due to being out of stock. As a result, my company was able to regain the 3rd place position in the industry and remain there until the final year. • The Competitive Advantage Test
For a strategy to pass The Competitive Advantage Test it must be capable of helping the company achieve a sustainable competitive advantage. To be considered sustainable, a company’s competitive advantage over rivals must be long-lasting and not just a brief period of exceptional performance. My company’s strategy throughout the game was to provide a wide variety of high quality shoes for a reasonable price, which was followed each year with the exception of Year 14. During this year, I lost focus and changed my strategy to mimic those of the companies ahead of me, resulting in considerable losses.
I returned to my original strategy in Year 15 and saw significant increases, returning my company to its former position in 3rd place where it remained until the final year. The ability to remain within the top 3 companies in the industry for the bulk of the game and have steadily increasing sales revenues each year speaks to the sustainability of my company’s competitive advantage and, therefore, I believe that my strategy passed The Competitive Advantage Test.
The Performance Test
The Performance Test requires that a winning strategy result in strong company performance. Indications of strong company performance are profitability and market standing. I believe my company’s strategy passed The Performance Test because it resulted in excellent profitability and good market standing. In terms of profitability, my company experienced consistent increases in net revenue each year and, with the exception of Year 14, showed a steady increase in EPS. Additionally, ROE met or exceeded investor expectations every year and unit sales in both the internet and wholesale markets increased steadily each year with the exception of the final year. In terms of market standing, my company maintained a global market share of between 8% to 10% throughout the game, met or exceeded investor expectations for image rating every year starting in Year 14, and remained one of the top 3 companies in the industry until the final year.
F. Explain how effectively you applied value chain analysis during the simulation.
My effectiveness in applying value chain analysis during the simulation was
fairly good, but I failed to recognize the reasons for my competitor’s success in the beginning and it cost my company image points, resulting in less market share.
As the game began, I analyzed what my competitors were doing to add value for their consumers and my conclusion was that they were increasing capacity so that they could provide more product in each region without the additional costs of shipping from one region to another. What I failed to realize is that, in addition to building capacity, they were also building demand for their shoes through product differentiation and increasing consumer perceived value. This was accomplished by investing heavily in advertising and placing high bids for and winning celebrity endorsement contracts.
Since I was unable to secure any celebrity endorsement contracts immediately and my competitors were offering the same number of models with the same S/Q rating as my company, I tried to create more value for my customers by increasing the number of models I produced, increasing the amount of enhanced styling, and raising my product’s S/Q rating.
My analysis of my competition also revealed that they had an advantage in that they were able to provide better value to consumers by producing locally in order to avoid shipping charges and costs lower. To create more value for my consumers in this activity, I purchased more capacity in the AP region because the production costs there were much lower than those in the NA region and, even with the additional costs of shipping product to the EA and LA region, I would still be able to provide my customers with high quality shoes at a reasonable price as well as achieve a healthy profit margin.
G. Evaluate how effectively you addressed three important issues in order to achieve competitive and financial success for your simulation company.
My effectiveness in addressing model availability in order to achieve competitive and financial success for Kix Footwear was very good. I
initially kept the number of models consistent the first year (Year 10), but quickly realized that without the advantages of having celebrity endorsements I needed to offer something to consumers that would differentiate my product, provide more value to my customers, and give me a competitive edge. To achieve these objectives, I increased the number of models I produced and offered for sale as well as increased the style and quality above that of my competitors. As a result, despite not being able to obtain very many celebrity endorsements, consumer demand and sales rose enabling Kix Footwear to come from 5th place in Year 11 to 3rd place in Year 12, remaining there until the final year, and showed steady increases in sales revenue throughout the simulation. Corporate Citizenship
My effectiveness in addressing corporate citizenship in order to achieve competitive and financial success for Kix Footwear was dismal at first and improving only slightly by the end of the simulation. When I began the simulation I did not pay much attention to the corporate citizenship aspects of decision –making, but due to my falling image rating and inability to obtain celebrity endorsements, I turned my attention to corporate citizenship.
I invested in using recycled materials throughout the simulation, then began making small charitable donations, increasing it slightly each year. Towards the end of the simulation, in an attempt to further boost my image rating I began investing in ethics training and enforcement. While the efforts did boost my company’s image slightly, I believe I could have demonstrated better corporate citizenship and realized better competitive and financial success by increasing my attention to this area.
My effectiveness in addressing fiscal responsibility was very good during the simulation, but not excellent. I was very focused on eliminating all outstanding debt to avoid the monthly interest expenses and achieve an A+ credit rating in preparation for the possibility of needing capital in the future at a lower interest rate. While this aspect of my strategy was quite effective and I believe that my credit rating helped boost the company’s attractiveness to investors in that the credit risk was very low, my company should have been putting the available capital to use to increase investment earnings. Rather than simply sitting on the available capital, the company should have invested it in order to increase investor’s return on equity. In that respect, I feel that I was not effective in addressing fiscal responsibility.