The intended goal of our company for the simulation was to make the most profitable returns. We wanted to have a high stock price and make the greatest revenue by selling at a price that was either close to the industry’s average or below average.
The main stakeholders for the company were the investors/shareholders of the company. It was also us, the “managers” of the company, making the decisions for the company. We had the responsibility to help them earn the most profits. This influenced our strategy formulation because we knew the strategy we decide to take will impact our performance and will therefore impact investor’s confidence in us.
Using Porter’s 5 forces, the industry seemed relatively unattractive.
The threat of entry by new competitors is medium. If a new competitor wants to enter, their firm must be able to have large economies of scale because production is very costly. They also need a lot of capital to buy the raw materials, machinery, pay for the salaries of their workers, and so forth. In terms of customers’ switching costs, they don’t incur any switching costs, which also mean they don’t necessarily need to be brand loyal.
The degree of rivalry among existing firms is high. We operated in a consolidated industry in which there were only 7 firms. Customers only had us and the importer to choose to purchase from. Thus, the competition among the 7 firms was high. It was also difficult for an existing firm to exit because firms invested capital on the machinery for producing these products. Also, firms had to make decisions whether or not to purchase raw materials, they also invested money in new expansion –all of which will not make it easy for a firm to exit quickly.
The bargaining power of suppliers is relatively high. They are able to charge higher prices for firms who need to purchase raw materials from them in that quarter (or a little lower if firms purchased futures for the raw materials). Firms must purchase the raw materials because it is necessary for the production of their product 1 and product 2, this makes the bargaining power of suppliers high.
The bargaining power of buyers is also high. There are firms in the industry offering product 1 and 2 at different prices. For the product 1 the “cheap” price was about $55 and the most expensive one was “ “. Buyers have different options of where they want to purchase their products 1 and 2. If they feel one product is too expensive, they can switch to a lower cost one. Or if they feel the cheaper products are inferior, they can buy the more expensive one. Thus, there really isn’t much loyalty from the customers.
There are alternatives to plates. There are disposable ones. The washing dish machine makes it easier for people to wash their dishes, which is also an alternative because instead of buying new plates, people can reuse the old ones. Customers can easily find alternatives products from this industry.
From Porter’s 5, we see that this industry is unattractive.
There were changes in the macro environment that had an impact on the industry. For instance, there were changes in the economic index. The economic index for the industry fluctuated; there were periods of decline which caused customers to purchase fewer products and periods in which the economic index increased, which indicated the customers would purchase more. The economic index also influenced the firm’s decision to purchase raw materials, how much the forecasted sales will be, and basically the forecast of sales. Also, the importer was another factor in the macro environment because they sold at lower prices compared to the rest of the industry, which posed as a competition to the industry as a whole.
Our firm had quite a few disadvantages in the industry. One of the disadvantages was that we did not invest in new capacity early enough. We were selling product 1 at a relatively low to moderate price and when we realized we needed to produce more products, we found that we went into overtime and subcontracting, which was very costly. Another disadvantage our firm had was that we did not invest in more sales representatives. We relied too heavily on the 5 representatives we had, until we started to train more trainees and increased the number of sales reps we had. Also another disadvantage our firm had was because we did not spend enough on advertisement. Advertisement is important because it communicates and exposes our customers to our products. When our firm realized this, our strategy was to spend more on advertising and increase our sales reps’ commission. We also changed our strategy to expand our capacity because we wanted to increase the number of sales reps and potentially lower our prices if we knew the cost of our goods sold wouldn’t be as high.
Strategic thinking helped us realize the problems our firm was facing and the new strategies we needed to take to make our team more efficient. By thinking strategically, we were able to reorganize our goals to try to develop distinctive competencies to gain a competitive advantage in the industry. When we realized that our revenues and stock price wasn’t too strong, we thought strategically how we would able to make our firm stronger; we attempted to build new competencies to help our firm gain a competitive advantage. For example, when we realized we had a lot of returns, we spent more money in engineering studies and R & D to try to make our products better. When we realized we spent a lot of money on cost of goods sold, we expanded our capacity to try to spend less on future quarters. The new strategy we took helped our firm gain more revenues as well as a higher stock price, although it didn’t put us on top of the industry.
I think some of the barriers to growing the distinctive competencies in the beginning of the simulation were because of our high cost of goods sold which limited our budget on other factors such as advertising, paying higher commissions, hiring more sales reps, spending more on R&D, engineering studies, etc. Our firm didn’t invest in new capacity until towards the middle of the simulation, which was a major barrier. This put us at a disadvantage towards the end of the simulation as well because our firm was put in the position to limit spending on other important factors while worrying that we would end up with a negative net income. This was evidence that our company found was really difficult to adapt to changing industry conditions because when the economic index was forecast to be lower, we had to price our goods lower in hopes of having more customers purchase our products but at the same time, we wouldn’t have been able to make enough profits to cover the costs of goods sold and come out with positive earnings; earnings that were good compared to other firms in the industry.
The corporate strategy we pursued was to keep our company profitable with a high stock price. We wanted our customers to return to us, that was why we wanted to spend more money to make sure our products were good quality. We wanted to make sure our sales reps were satisfied with their compensations. For example, when we realized we had some sales reps who quit, we decided to pay them a higher salary. When we realized our sales volume was low, we raised their commission. Our overall strategy was to adequately compensate our sales reps, keep our customers satisfied with the quality and price of our products and to try to keep our company profitable.
I don’t think our company was too successful in implementing our strategies. (“Successful” would be to ace the simulation). Our firm ended in a mediocre spot in the industry. There were times when it seemed our company was declining; however, we were able to gradually make our company better. It seemed difficult for our firm to come to decisions we all agreed. I felt that our strategy for the simulation wasn’t consistent. We knew what we wanted but we had different ideas as to how to achieve that goal; so when one strategy didn’t work for us, we switched to the second idea. By the time we realized we needed just one set strategy to follow, we were able to make some successes, but we didn’t have enough time to implement our new and focused strategy with success, as the simulation was already over.
If the simulation continued for additional periods, I would continue to expand our capacity, make more products and sell it at a relatively lower price compared to that of other firms in the industry. I would also spend more money on advertising, increase the number of sales reps, and raise their commission so they have more incentives to sell more. I would also continue to sell more of product 2. We would have the material and labor requirement to be able to sell product 1 and product 2, without worrying that product 2 would be too costly on our operations.
If there were any changes I would make for the future, I would make sure we will have enough labor needed to fulfill how much products we want to make without incurring too much cost. I will also spend more money on advertising for both products. I will also consider purchasing our company’s shares back when the time is right to increase the company’s stock price. Most of all, I would make sure our firm will have one strategy in which we will follow and an alternative strategy and how to transition from strategy 1 to strategy 2 in case strategy 1 is not meeting our goals.
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