The aim of the Competition and Strategy course is to provide students with deep knowledge on strategic decision-making in a business environment and the strategic principles behind it. Within this course my team members Kristijan, Yaniv, George and me (Team KUGY) had the opportunity to apply our academic and theoretical understanding and knowledge in an online business simulation game, wherein we created our own car business and competed on the European car market fictionally. This paper aims to elucidate the advance of our strategic decision-making, observes the reasoning behind it and examines the following implementation of our approach. Founded on the definition of strategy being “A plan of action designed to achieve a long-term or overall aim”, we questioned ourselves in the commencement of the game what our strategy would be (Andrews, 2010). Subsequently, after considering the theories studied in class we decided that we needed to express our own and coherent strategy in less than 40 words, fitting to the restrictions objective, advantage and scope (Tregoe, Zimmerman, Schuster, 2008).
“Attaining maximised profitability by carefully trying to get to know our customers’ needs, consequently adapting our products to suit their expectations to an extent where we would stop serving and start appreciating, so as to charge a premium price” (Yaniv, George, Kristijan and Ugo). The theoretical model we chose to establish our strategy was Porter’s generic strategy, that led us to a differentiation-focused strategy. Given to Porter, a competitive strategy is about differentiation (Andrews, 2010). Thus we thought that we should differentiate our business best by concentrating on a narrow target, hence, few market segments and decided that differentiation would be our competitive advantage. Furthermore Porter claims that decent strategic decision-making necessitates compromises and is slightly about what not to do rather than what to do (Porter, 1997). Based on this statement and our differentiation-concentrated strategy we decided to serve only 4 out of 16 offered market segments, medium cars for 25 to 40 year old customers, medium cars for 41 to 55 year old customers, large cars for customers over 55 year old and finally luxurious cars for 41 to 55 year old customers.
So as opposed extending our products over the whole market to realise maximised revenue KUGY decided to concentrate on three different segments with customers sharing similar needs, form three strategic business units whose goal it is to get to know the customer’s wants and needs to offer greater customer value and allow us to charge premium prices. Regarding finance, KUGY’s started position was up to £500 million in the bank. In the first three rounds, KUGY took out two loans in the first 3 rounds so as to have enough capitals to finance our very cost concentrated strategy. Our expenses for research and development, competition market research, product, and marketing were considerable over all five years, which is replicated in significant fixed cost figures over all five years. However the data acquired on market perception and competition allowed us to get more familiar to our customers but also to design our products and put marketing efforts in harmony with their needs, by either adding and dropping product features, replacing research investments and distinguishing our products from the competition.
Furthermore, KUGY increased the prices of all four models every year, which allowed us to increase revenue progressively over the five years of the game. KUGY has preferred to limit its production to small quantities because a limited target market is one of the most fundamental parameters of a focus strategy (Andrews, 2010). In the segments KUGY served, quantities demanded tend to be small in comparison with segments whose customers demand is based on less price demanding cars. Hence, if revenue is defined as R = Q * P, price was definitely the main factor in creating revenue instead of selling important quantities. KUGY tried to adapt production to such a level where our team would not have any car in stock at the end of each business year and normally succeeded in this concern with minor exceptions. Moreover KUGY tried to decrease its labour cost and invest in automation instead. Our team decided it will suit our company strategy and image and to have three extremely technologized production plants, with small but very skilled labour forces. We achieved further trade-offs concerning our marketing efforts.
In regards to the four Ps, including price, product, place and promotion, KUGY took the decision to focus on all four would have opposed our strategy implemented in the beginning. Hence, we focused our marketing strategy on product and promotion. As previously mentioned, we have invested significant sums in the development of our products, by investing in research and development over the rounds of the game, but also by adding and dropping features into sectors that seemed to be of significance to our customers and hence rose perceived benefits of our products from year to year. In addition to this advertising expenses were similarly high too, because of the fact that KUGY recognized communicating the benefits of both our efforts and our products to generate superior customer value as a first priority. George constantly highlighted that even the greatest product in the car market would not sell if its ascendancy or predominance were not communicated effectively.
Given to Porter if a corporation decides upon a generic strategy, the corporation is best informed by thoroughly sticking to this strategy so as to remain differentiated (Andrews, 2010). According fact that we decided to focus on a relatively narrow target market, KUGY decided that trying to study more segments could jeopardize our current business. When presenting a new model KUGY stuck to segments whose customers’ needs are comparable so as to avoid “being stuck in the middle” as Porter cites it (Andrews, 2010). We all agreed that changing our strategy could lead our team to fail. Regarding the company decisions and overall performance we decided to stick to this strategy. Nevertheless, according to the fact that we defined every model to be one separate market based strategic business unit, the production and marketing activities achieved within the business units varied to an extent. The strategy used to every SBU was also a focus strategy.
However the methods used to attain differentiation varied. For instance, we decided to reveal our luxurious car model by using newspapers and dealer incentives instead of TV advertising that we used for our medium and large car models. Additionally, we decided upon less radical price rises for our medium and large cars in comparison with our luxurious model. KUGY’s achievement can be measured thanks to its profits. Furthermore, in the second year, our corporation’s profits have been rising yearly, which signifies a good tendency in achievement. When looking at our overall profit calculation, as Pr = (P*Q – Q*VC – FC), with P (Price), Pr (Profit), Q (Quantities demanded), FC (fixed cost) and VC (variable cost), the most significant factor on revenue was the constant annual price rises as contrasting to quantities demanded that raised regularly. Concerning the cost, overall cost was mostly defined by elevated fixed costs for marketing/advertising, product research and development, and competition and market research. KUGY’s competitive advantage was based on these considerable investments that allowed us to raise prices.
According to the fact that we were making profit, our strategy appeared to work quite well, but it was unexpected to what extent price was receptive when comparing to all the efforts we put into our marketing and products. We were amazed how little we could raise the price keeping in mind how much money and effort we put into perceived customer value/benefits and the quality of our products. It would not have been fair to contest the elasticity used for profit calculations by the creators of the game, according to the fact that we lack the mathematical understanding to do so. Though it was quite disappointing when realising how little difference measures such as increased research and development, optimised marketing efforts and improved features made in comparison to changes in price. After comparing this business game with the real life, businesses that obey to the differentiation focus strategy such as Porsche or LVMH are making a lot of profits.
Nevertheless, these firms have been into their business for decades and have invested considerable resources and efforts to attain their profit margins and their position within the market. I assume that if we would have played this business game for a longer period of time, applying a differentiation-focused strategy could have possibly resulted to a higher profit margin overall. However, theory and practice are very different. Particularly in very competitive industries such as the car industry and especially in times of considerable economic fluctuations, price seems to be the main factor when it’s about making purchasing decisions. Moreover, in my opinion, trying to attain maximised profitability by a cost leadership method in this business game is perhaps easier and less time consuming in comparison to KUGY’s strategy according to the fact that the players do not have to change the same amount of parameters and pay as much attention to few variables besides quantities demanded and price differences. While observing the data from both competition and market reports, trying to draw conclusions and also conducting endless amounts of test was sometimes very exhausting but at the same time very addictive.
I have to admit I have very benefited from contributing in this business game experience. My group work with George Yaniv and Kristijan was on of the rare first good teamwork experience I had in the last three years at Richmond University and even if we ran into some problems over the simulation game, we always took time to talk about it and try to find solutions to those issues. The fact that we were meeting on a regular basis has really facilitated the cohesion into our group. Moreover, everyone has contributed equally to the overall outcome, concerning creative inputs, estimating data, drawing conclusions and essentially trying to put it into decisions. I sincerely appreciated working with my group members and after every round of the game we sometimes had extra discussions on this topic. We all agreed that the key issue with implementing a strategy was that there is no right answer and hence no fundamental truth in this topic area.
There are a lot of different methods to attain profitability and uncountable factors within the ever-changing industry environment that can affect a company’s profitably. When implementing a strategy all those factors need to be taken into consideration so as to allow the company to react properly to modifications in its environment. The theoretical part of implementing a strategy remained difficult, while the practical achievement were even harder. When KUGY understood that we could not be able to raise prices to the extent we hunted so as to to attain estimated profit margins, we started to question our approach and wondered if the decisions we took in the beginning were still suitable. We finally decided to stick to our strategy and accomplished a reasonable work with it even if it could have been better, but especially after we ended round three with a important loss, I really felt like we were not applying the good strategy and after brainstorming with our team and while everyone was trying to convince each other what to do we finally decided to stick to our first plan.
I believe that managers in real firms who need to communicate and defend their strategic decision to their superiors, board of directors or employees cope with real difficulties. However, contributing in this business simulation game was a fun and very addictive experience and I really think I benefited a lot from it. I also hope that the experience I gained from it will at some point be useful in the future me when I will have to take my first strategic decisions.
Tregoe, B., Zimmerman, J., Schuster, S., 2008. Top Management Strategy? Harvard Business Review April 2008. Available at: http://www.nickols.us/strategy_definitions.pdf/ [Accessed 13 April 2014] Andrews, K., 2010. The Concept of Corporate Strategy, 3rd Edition. Financial Times Prentice Hall. [Accessed 13 April 2014] Porter, E., 1997. What is Strategy? Harvard Business Review Nov-Dec2008. Available at: http://www.nickols.us/strategy_definitions.pdf [Accessed 13 April 2014]