Strategic Assessment of Simulation

The simulation project was overall very challenging and fun. When we first started, we played a game based on game theory, in which we have to base our decision on what we think the other teams going to do. Would they hold up an X or an Y, and how would that impact us? Although the game sounded very simple, it’s the foundation of many businesses running in the corporate world. Competitors have to predict the next move of each other, and work it to their own benefits. This stays true in the simulation project we did through out the semester, even though we can’t jump right into running a business in the real world on our own based on what we learn from it, it gives us a very basic idea.

Mission and Stakeholder Identification:
We derived our major goal of the company by looking at the way our grades are evaluated, which are ROI, stock price, EPS, D/E ratio, current ratio, credit rating, cost factor, sales growth, total asset, and total RE. We identified the major factors that affect each of them, and the amount of sales and profit has the greatest impact. Our goal from this point on was to provide satisfying products to customers to maximize on sales and profits, and turn those profits into higher returns to our investors. We also identified our major stakeholder groups as the customers and stockholders. As our goal can be separated into two steps – maximize profit and maximize return, our simulation decisions are also separated into two steps.

Porters’ 5 Forces:
As with many businesses, we can’t come up with a strategy until we have an understanding of the market first. This is exactly what the trial simulation was there for. The trial simulation gave us an idea of the total market demand, the competitors’ preliminary strategy, and other market forces.

Threat of New Entrants: Medium
There wasn’t any regulation in the industry. The manufacturing process was very simple as it only takes two steps. Raw materials and labor are readily available at affordable costs. Only a factory, some necessary raw materials, labor and a sales force are needed to start running this business. In addition, since dishware are generic products, it wouldn’t be too hard for a new company to capture market share by pricing them at an attractive level. A major concern might be the high cost of building and expanding a factory. Therefore, the attractiveness level based on this force is: Low.

Rivalry: High
There are 6 domestic and 1 foreign competitor identified in the industry. The market identified in the trial simulation turned out to be very small too. The total market demand was approximately 128000 for dishware type 1 (product 1). This means we are competing against 7 competitors in a relatively small market in selling a very similar product. Therefore, the attractiveness level can be assessed as: Low

Supplier Power: High
The production of the dishware is based completely on two raw materials. The cost of producing our dishware is highly dependent on how the prices of those materials. When suppliers raise the prices, we also need to raise the prices of our dishware in order to maintain the same gross profit margin. This means suppliers have a high impact on how we run our business. Attractiveness level is therefore: Low

Buyers Power: High
Customers have a choice between dishware from 7 companies. There’s almost no switching cost involved, if they realized the quality or the price of dishware at one company unsatisfying, they simply buy from another. Therefore attractiveness level is also: Low

Threat of Substitutes: Low
There are two products in the whole market - Product 1, the regular dishware, and Product 2, the premium dishware. Therefore, there aren’t that many choices in choosing the different types of dishware. The two products also utilize the same raw materials, so every company producing product 1 can also produce product 2, so even though the customers would choose one over the other, the company can easily sell more of one over the other based on which one has higher demand. Attractiveness level is: High

Our Strategy:
After we got a general idea of what our goals are and how the market of the industry is doing, we began to form our strategy.In order to not reveal to the others any idea of how we will run our simulation, we purposely gave the market a false picture of our strategy. From the trial simulation, we realized most of our competitors didn’t change the prices set by the previous management that much, and all their dishware were competing at comparable prices. So in order to avoid such fierce competition, we must differentiate our products, through either cost leadership or by product differentiation.

We realized that it would be difficult to compete against the importer in terms of cost leadership, so we decided to follow the second path – selling high premium dishware. We believe by differentiating our product, we can avoid the fierce rivalry and influence buyers to come to us rather than any of our competitors. We put in a large amount of quality control and R&D to enhance the quality of our products, and in order to build a better brand image, we invested more than the others in advertising. We hoped this will change the customers’ perception of dishware from how it was before when it was under the previous management team. We also build a capable sales force by encouraging them to bring the products to more potential buyers through a higher commission based compensation structure.

We diversified our focus on different areas of operating management instead of strictly generating highest earning in each quarter. We also implemented rapid expansion on our current capacity for the first few quarters. This allowed us to have a competitive advantage on low production cost and avoid the subcontract charges. Having this advantage, we were able to greatly reduce our unit cost, and with that saving, we were able to put more into enhancing the quality of the products without jeopardizing our profit margin too much in comparison to the competitors. To maximize the return to stockholders, we took a different approach from other competitors. We noticed that many of the groups issued dividends to increase stock price, and we decided a better way to do that was to continuously reinvest our cash to buy back treasury stocks. This will not only build up a higher corporate value to stock investors, but also allow us to maintain a better financing structure.

Possible Future Strategic Changes:
Based on our company's current position in the simulation market, we believe that our strategy has been working effectively. Due to the fact that our simulation is only for eight quarters, we discontinued to invest in R&D, engineering studies and expansion to reduce cost since it takes a minimum of two quarters to take effect. If we are to continue with the simulation, then we will continue to implement our strategy by investing higher than average amounts in R&D, engineering, QC, advertisement and continue to expand our capacity

Evaluation of Our Performance:
We believe we were successful in achieving a high profit margin by selling high premium dishware. By lowering our cost per unit through expansion and engineering, we achieved significant savings which were invested into quality control, R&D and advertising to build up on our brand image. It seemed we were not as successful in achieving satisfying sales growth, due to the fact that most customers still saw dishware as a generic product, lower prices still affected their choice. However, we think that wasn't a significant problem as our goal of maximizing profits and returns was primarily achieved through a high profit margin.

Strategic Problems

Too many customer complaints -

Customer is the key to succeed for every business. Nowadays, the market is tailor to fulfill the customer needs and to maintain a long lasting relationship with them. If a company can keep customer satisfied with their products or service, this would lead to increase revenues and eventually more profits for the company. On the other hand, if the company does not provide any quality service or products. It will lead to customer complains and this stage is unavoidable. Companies should perceive customers complain as a warning sign to problems. A quick and efficient responds are need to solve this issue. Most of time if company did not handle excessive complains by the customer would lead to a deteriorating company/brand image. For instance, Sprint wireless service lost large amount of customers and permanently damaged the brand image; for not providing quality customer service. Before the merger of Sprint and Nextel, both individual companies were top ranking in fulfilling customer needs. After the merger, the new business changed the focus, customer services were no long their priority target. As result, they announced to cut 4000 jobs and close out 125 retail stores early this year.

A deteriorating company/brand image –

A brand image plays an important factor in determine a company’s success. Have a good brand image will allow the business to run smoothly in the market. Clients and investors will automatically attach higher values to the companies with positive brand image. The process of building a strong brand image can takes few years but it would only takes few seconds to deteriorate. For example, Bear Stern Company used to be the fifth largest financial corporation in the US. Collapses of two multi-billion dollar hedge fund in the summer also indicated the beginning of failing of brand image. Bear Sterns was blamed for starting the Subprime and Liquidity crisis. In just few months, Bear Stern when from the top and most prestigious financial institution to facing the threat of bankruptcy, due to lack of liquidity. Many investor and banks are refused to lend them money because the company lost their most important asset - Brand image!