MGT 4903 Business Strategy BSG Group Writing Report 2009/2010 Semester B By Ms. Jody Wong
Gager II Company
Liang Jim How Peter, ID: 5053 3039
Lo Siu Ping Anita, ID: 9719 6568
Lo Shuk Mei Susana, ID: 9719 5420
Lo Heung Wa, ID: 5028 8158
Gager II Company (Company G) – Business Strategy Analysis Report
Table of Contents
1. Analyze and evaluate evaluate Gager II II Company Strategies Strategies (Company G)
-
Financial Strategy Production Strategy Segment Strategy Marketing & Advertising Advertising Strategy
2. Explanation of the company’s company’s strategy performance performance achieved the company company vision.
3. Why the winner wins wins the game? game? Why the loser loses loses the game?
- Explanation and Evaluation Evaluation of the Winner Winner & Loser’s Successful and and Unsuccessful strategies.
4. Conclusion
-
Prob Proble lem m & Imp Impro rove veme ment nt Stra Strate tegy gy
2
Gager II Company (Company G) – Business Strategy Analysis Report
1. Analyze and evaluate Gager II Company Strategies (Company G) We have used various strategies in terms of financial, pricing, segment & production, marketing and advertising strategies to achieve our company vision and also aim to above or maintain investor expectation in terms of earnings per share, return on equity, stock price, credit rating or image rating within this footwear industry.
There are some successful strategies and decisions we made as follows.
Financial Strategy
Good Cash Flow We understand it is very crucial to maintain a good and positive cash flow to run a business, we were able to achieve good financial position every year except the Year of 13, the cash flow shown as zero because the overdraft is applied for clearing the unsold inventories. Year
11 12 13 14 15 16 17 18 19 20
USD’000 (Cash on hand) 11,953 3,767 0 5,079 19,260 67,561 66,140 69,897 26,489 81,984
Dividend Payout Since we have sufficient cash flow throughout the entire period, therefore we applied dividend payout approx. from the range of 5% to 38.5% of our annual net income from Year 13 to Year 20. We believe the dividend payout strategy would likely assist to increase company corporate image. Please see below chart for details. Year
USD’000 Net Revenue
Dividend amount per share
Payout Ratio
3
Gager II Company (Company G) – Business Strategy Analysis Report 11 12 13 14 15 16 17 18 19 20
243,479 296,392 304,611 343,346 387,367 382,824 354,878 446,442 392,903 486,593
0.00 0.00 0.76 0.40 0.50 1.00 1.20 0.40 0.50 0.50
0% 0% 21.7% 26.8% 9.9% 16% 38.5% 5.1% 10.0% 7.0%
* Net Revenue of Gager II Company (G)
Credit Rating We were able to keep our credit rating on A+ from the Year 15 to Year 20 and we thought we would leverage the credit facility whatever applies and the cost of borrowing would help to achieve the lower cost, however we ever borrowed loans hroughout the entire business years.
4
Gager II Company (Company G) – Business Strategy Analysis Report
Repurchased Common Shares We repurchased our company shares during the Year 13, 15, 18, however we repurchased 500 no of shares due to sufficient cash flow during the Year of 19.
Stock Price (US $ per share) Repurchased Common Shares (’000)
Year 13 31.63
Year 15 23.01
Year 18 44.18
Year 19 114.75
100
700
1,200
500
Total no. of shares repurchased (’000): 2,500
Production Strategy
Plant upgrade Due to our conservative production strategies and expected macroeconomic view on global situation, we decided not to consider a new production plant, however we thought to upgrade our existing production plants in North America (NA) and Asia Pacific (AP) plant are relatively appropriate to our production strategies.
We upgraded the aassembly production line to reduce reject rate by 50% (NA Plant & AP Plant); Equipment upgrade to boost S/Q rating by 1 star (NA Plant only) and facilities upgrade to boost worker production by 25% (AP Plant only)
5
Gager II Company (Company G) – Business Strategy Analysis Report Purchased Capacity from a Competitor During the Year 19, we found one of the competitors - Champion Company which have sold the 2,000,000 capacity in NA Plant, we purchased 700,000 capacity from Champion Company. Since our cash flow is pretty sufficient, we did not leverage any credit facility from bank.
Segment Strategy
Internet Segment We were always applied a pricing strategy of relatively below the average of industry price in order to capture market share throughout the entire business years (except Year 19).
See below tables for price comparison (Company Price Vs Industry
Average Price among peers)
Year Company Price (US $) Ind. Avg Price (US $) Market share S/Q Rating
Year Company Price (US $) Ind. Avg Price (US $) Market share S/Q
North America Plant (NA) 13 14 15 16 17 72 65.5 66.99 70.3 74.99
11 65
12 64
18 66.99
19 78.88
20 70.28
73.66
73.67
74.05
74.17
73.35
74.67
75.90
75.43
75.82
71.48
19.3 %
23.6 %
14.6 %
19.6 %
17.8 %
14.4 %
13.8 %
20.5 %
13.3 %
14.9%
5
6
7
8
7
7
7
6
5
4
17 74.99
18 66.99
19 78.88
20 70.28
11 65.0
12 64.0
Europe-Africa Plant (EA) 13 14 15 16 72.0 65.5 66.99 70.3
73.66
73.67
74.05
74.17
73.35
74.67
75.9
75.43
75.82
71.48
20.1 % 5
28.0 % 6
16.8 % 6
17.9 % 7
22.3 % 7
16.0 % 7
12.0 % 8
19.2 % 6
11.2 % 5
14.8%
6
4
Gager II Company (Company G) – Business Strategy Analysis Report Rating
Year Company Price (US $) Ind. Avg Price (US $) Market share S/Q Rating
Year Company Price (US $) Ind. Avg Price (US $) Market share S/Q Rating
Asia Pacific Plant (AC) 13 14 15 16 72 65.5 66.99 70.3
11 65
12 64
17 74.99
18 66.99
19 78.88
20 70.28
73.66
73.67
74.05
74.17
73.35
74.67
75.9
75.43
75.82
71.48
20.5 % 5
26.0 % 6
15.9 % 7
23.4 % 8
20.4 % 7
16.1 % 7
13.3 % 8
17.5 % 6
11.2 % 5
17.1%
12 64.0
Latin America Plant (LA) 13 14 15 16 72.0 65.5 66.99 70.3
11 65.0
17 74.99
18 66.99
19 78.8 8
20 70.28
73.66
72.61
73.2
74.17
73.35
74.67
75.9
75.43
75.8 2
71.48
20.5 % 5
23.5 % 6
14.8 % 7
19.2 % 8
16.4 % 7
13.8 % 7
10.7 % 7
18.8 % 6
9.9%
13.9%
5
4
4
Wholesale Segment The pricing strategy we have been used in wholesale segment was depended on the S/Q rating and celebrity appeal availability. We set higher price than industry average when we successfully bided celebrity appeals in particular regions. Otherwise we preferred to use relatively lower price (use industry average as our benchmarks for pricing strategy). Please see below tables for details in pricing comparison.
Year Company Price (US $) Ind. Avg Price
11 57.0
12 56.0
North America Plant (NA) 13 14 15 16 17 57.0 60.0 49.99 56.49 57.99
52.99
55.3
56.76
56.88
56.88
57.62
58.55
18 60.99
19 59.99
20 56.48
58.07
57.37
57.1
7
Gager II Company (Company G) – Business Strategy Analysis Report (US $) Market share S/Q Rating
Year Company Price (US $) Ind. Avg Price (US $) Market share S/Q Rating
Year Company Price (US $) Ind. Avg Price (US $) Market share S/Q Rating
Year Company Price (US $) Ind. Avg Price (US $) Market share S/Q Rating
8.8%
10.1 % 6
10.4 % 7
10.1 % 7
9.4%
9.5%
11.2%
6
5
4
12 57.0
Europe-Africa Plant (EA) 13 14 15 16 58.0 53.48 51.99 54.99
11 48.0
17 56.99
18 58.99
19 57.99
20 57.48
52.26
55.25
57.32
58.01
58.17
58.18
59.59
57.52
56.74
55.54
14.0 % 5
13.1 % 6
12.3 % 6
12.8 % 7
15.0 % 7
14.2 % 7
11.8 % 8
10.4 % 6
7.9%
9.6%
5
4
11 41.0
12 48.0
Asia Pacific Plant (AC) 13 14 15 16 49.0 54.0 49.99 43.99
17 51.99
18 54.99
19 54.99
20 54.48
44.39
46.71
49.23
51.05
51.07
50.77
53.03
54.0
53.85
53.13
10.8 % 5
11.8 % 6
12.2 % 7
12.2 % 8
11.8 % 7
13.7 % 7
11.1 % 8
8.9%
8.1%
12.0%
6
5
4
11 50.0
12 58.0
Latin America Plant (LA) 13 14 15 16 59.0 56.0 53.99 45.99
17 54.99
18 54.99
19 54.9 9
20 51.48
47.39
56.6
54.65
56.9
54.03
51.34
54.54
54.63
54.1 1
53.18
7.2%
8.7%
5.4%
8.9%
9.8%
9.3%
13.0%
6
7
10.2 % 7
6.9%
5
10.8 % 8
7
6
5
4
5
8.7% 8
12.8 % 7
7
9.6% 7
8
Gager II Company (Company G) – Business Strategy Analysis Report
(Sourced from NA Plant)
(Sourced from EA Plant)
(Sourced from AP Plant)
(Sourced from LA Plant) Private-Label Segment
9
Gager II Company (Company G) – Business Strategy Analysis Report We found the profit margin in Private Label Segment was pretty low and market shares were not reasonable achieved in the first few years even recorded “zero” in Year 14, therefore we immediately shifted our key focus to internet and wholesale segments exclusively (except Year 19). Please see below chart for details.
Marketing & Advertising Strategy
We believe the essential advertising strategy to boost our sales volume are highly correlated to the total amount of advertising expenses, so we decided to allocate our advertising budget in the very first beginning and even increased significantly in the later stage. We spent approx of 16% of net revenue from the Year 11 to Year 16 and raised historical high to 34% in Year 19.
We were successfully appointed four celebrities in later stage to boost our sales and continuously promote our company & product image. As a result, the marketing & advertising strategy really helped to raise the net revenue and more importantly maintain our market share among the keen competitors.
10
Gager II Company (Company G) – Business Strategy Analysis Report
2. Explanation of the company’s strategy performance achieved the firm vision - “To Be Customer’s Premier Footwear Company in The World” We would like to explain in greater details on how our successful strategies achieved the firm vision.
With reference to the ‘selected balance sheet data’ in the last year (year 20), we were eventually able to possess the greatest amount of ‘liquidity’ against other competitors in the industry.
Since we had sufficient liquidity, we were allowed to contribute more in marketing expenses than other competitors did. Please see ‘selected financial and operating statistics’. We spent in marketing expenses by 32.6% of our net revenue, which was more than the average number (24.7%), and even more than other competitors’.
11
Gager II Company (Company G) – Business Strategy Analysis Report Especially, we signed contracts with ‘4 celebrities’ in the expenditure of our strong liquidity. In comparison with other competitors, the firm owned the greatest number. i.e. we gained competitive advantage by having our shoes promoted by the greatest number of celebrities. Please refer to ‘celebrity endorsements’ table.
Remarks: Gager II (Company G) bided 4celebrities
We have the strongest liquidity so able to gain the greatest support from celebrities, and contribute most in marketing expenses, and hence to promote and boost our sales. Our products were therefore generally recognized by public in the result of the greatest market share we had on internet. Please see ‘company G’s market share’ chart below:
According to data on http://www.bsg-online.com/users/flash/index.html# , the average market share per each firm on internet was about 10%(only in year 10)-12.5%(rest of years). We were proved to be the market leader on internet since our market share was
12
Gager II Company (Company G) – Business Strategy Analysis Report about 16% on average and even beyond 20% in some years due to the greatest recognition in public.
We adopted ‘in-the-middle-ground’ strategy (i.e. intended to be ‘stuck in the middle’ in internet/wholesale). Please see 2 diagrams below:
We benefited from the abovesaid strategy which drove us not to accidentally fall behind other competitors in the industry although we could not be the number one there. This strategy helped us to be positioned in the ‘middle’ of market (see scoreboard below):
Based on our firm’s strategic performance in various perspectives that we mentioned previously, we can conclude that we already achieved the firm’s vision, which is ‘To be customer’s premier footwear company in the world’.
13
Gager II Company (Company G) – Business Strategy Analysis Report
3. Evaluation of Winner’s Strategies Financial Strategy
Strong balance sheet We believe that a strong balance sheet is very important for running a business. Our game show that the winner has a reasonably strong balance sheet in its financial situation, i.e. at Year 20, Group B had a debt-assets ratio of 22%. It was in good position to cover its interest and principal payments on loans outstanding. The winner do not fall within the blind spot of the conservative which resulting that the company development will be limited due to no loan made.
Consistent Dividend Payout Plan and Stock Purchase Plan A consistent plan of dividend payout and stock purchases will help to enhance the company’s earning per share and also stock price. The winner will redeemed the stocks at quite low price. At the same time, the winner also applied dividend payout ratio theory to decide the dividends which is 10% of our annual net income.
Good Capital Budgeting To stimulate the sales and maximize the profit with limited resources, a well designed capital budgeting with production, marketing, warehousing & administration is a criteria., i.e. in Year 20, Company B have a good position of financial and operating statistics. It shows that they are carefully determine various expenses in the budgeting to attain the highest profit possible.
14
Gager II Company (Company G) – Business Strategy Analysis Report With the adoption of good financial strategies, the credit rating of company B is the highest one among others.
Production Strategy
Building plant capacity at overseas The winner (Company B) has the largest plant capacities for production. They have a total of 13,800 capacities compared with the loser having 6,000 capacities. Having built more production capacities, the winner had enjoyed the economies of scale in face of keen competition, i.e. in Year 20, Company B had captured more than 20% market share in all 4 markets.
Flexible Strategies To win the game, the production strategies must be flexible to adept with different market pattern (e.g. level of competition, exchange rate issue, warehousing expense issue). For example, Company B had an adopted differentiated strategies in the production with different S/Q rating for different market. During Year 15 to 20, , they produce the footwear with 10 S/Q rating in Latin America whilst the footwear for other 3 markets have only 2 S/Q at the same period. It suggests that they applied a flexible strategy in its production.
15
Gager II Company (Company G) – Business Strategy Analysis Report
Efficient Allocation Of Production Capacity The management of production capacity must be efficiently evaluated and allocated to match with the sales forecasting with its price setting, the adjustment of the delivery and warehousing expenses incurred, and the movement of the exchange rate difference.
Marketing Strategy
Aggressive Advertisement Campaign in Latest Years As it is generally believed that the competition is not keen in the early stage of the simulation, the expenses on advertisement had only raise up slowly. For example, the advertising expense of Company B had only grew from 11,000 to 14,500 until Year 16, however, the expenses had been increased significantly to 23,000 thereinafter and when in Year 20, the advertising expenses for all 4 markets had reached 25,000 maximum. It reflects that they raised advertising expense significantly after Year 16 to fight over the keen competition.
Monitoring on Sales versus Sales Expenses Expenses like celebrity and advertising costs a lot but they help to boost sales. Therefore the winner needs to balance the benefit and the cost of expenditure. It must be ensured that the sales return growth more than cost. With the increasing production capacity, the marketing expenses must be spending to ensure that they are spending a good value of money.
16
Gager II Company (Company G) – Business Strategy Analysis Report
Too Focus on Corporate Citizenship In the game stimulation, Company D had been awarded “Gold Star Award” 4 times for Corporate Citizenship. It was a bad move with a good intention. It is because it will pull down the business profitability as it seems too focus on image building, rather than the production strategies or marketing strategies. The spending on Corporate Citizenship will take out of the resource for expanding the production capacity and/or making more advertisement or celebrity. This may be the reasons why Company D have not done any building up new capacity and have any celebrity taken.
17
Gager II Company (Company G) – Business Strategy Analysis Report
Evaluation of Loser’s Strategies The following explains what have gone wrong with the loser’s strategies. Financial Strategy
Conservative Mind One of the major reasons was the loser being too conservative in making financial decisions, the most obvious phenomenon is that they did not borrow bank loan to extend the business, this is because they think it is too risky to borrow loan for investment. However, they will lose the chances for expanding the business due to conservative mind. For example, Company D had not spent any for expand production plant with zero L-T debt.
Production Strategy
High Production Cost Firstly, from the beginning of the game started, Company D had recorded a higher production cost (i.e. 63.6%) than the competitors with the same segment as us. Even for some companies with the highest quality and the best feature of goods, they can always produce with lower production cost. It may be due to the higher cost of pairs sold
Unsold Inventories (Poorer Inventory Control) Without precise on sales forecasting, the inefficient allocation of production capacity may lead to unsold inventory which it in turns will adversely penalize the S/Q rating
18
Gager II Company (Company G) – Business Strategy Analysis Report of the existing product. Also, the unsold inventory affects the financial status by showing in the statistics of “Days of Inventory”. To clear the unsold inventory, its sales price will be set at a discount. It will harm the profitability. For example, Company D had a figure of 365 “Days of Inventory”.
Marketing Strategy
Pricing Strategy with Unclear Objective It is undeniable that the loser company did not do a good job in price setting. The price adjustment could not meet with the movement of cost (production, marketing, etc) for most of the time, showing that they did not even covering the increase in production cost. If we tried to make more sales by bargain price to cover the production cost, the higher sales have no conflict with high S/Q product strategy but the incentive of buying should not be driven by low price. This is one of the worst strategies performed in the simulation.
19
Gager II Company (Company G) – Business Strategy Analysis Report
4. Conclusion After the game, we learn the suffering from the Unsold Inventories (Poor Inventory Control) and also realize the importance of Construction of additional capacity in our company business strategy among the peers. Why? Unsold Inventories We considered to upgrade our S/Q rating to 7 or 8 star in Year 13 under the Branded Production, since our “unsold inventories” were accumulated and exceeded to 5,247,000 capacities, therefore the S/Q rating was downgraded, our selling price has to lower significantly in order to clear the inventories, thus the net revenue dropped and also our cash on hand was reached to zero unexpectedly. Consequently we lost our competitive strength and thus weaken our overall position in terms of market share, EPS, corporate rating during the Year 13.
Self Construction of Additional Capacity We have been discussed few times to consider whether a new plant should be built in order to achieve “economies of scale”. Since our business strategy is relatively conservative at the first beginning years and we preferred not borrow heavy debts to run the business and operation, so we never built a new plant to increase production capacity during the first few years. As such, we found the cost of production is pretty high and profit margin is relatively lower among the keen competitors. At the later stage, we have to lower our price to gain market share, even we tried hardly to boost the sales. It has been difficult to lower the cost of production even we tried with all possible ways.
We realize the importance of constructing of an additional plant would be a crucial business strategy to lower the overall cost of production and increase production capacity.
We believe it should one of the key business strategies to compete with
competitors and strength the leading position to maintain in a long run survival in the footwear industry.
20
