B. Competitive Strategy
I chose a multi-regional, focused differentiation strategy tailored to match the differing competitive conditions and actions of rivals in the North America, Europe-Africa, Asia-Pacific, and Latin America regions. In years 11 through 16, my strategy focused on “upscale buyers wanting products…with world class attributes.” (Thompson, Peteraf, Gamble, & Strickland, 2012) I chose this strategy because the cultures represented in my demographic are radically different, thus I believed we needed a strategy that catered to those differences. This focused strategy concentrates on Internet sales to online end-use customers, and wholesale sales to footwear retailers, in each of our regions. We differentiated our product based on exclusivity, with a higher price point both at the internet/retail and the wholesale level, until year 17.
I’ll discuss that decision, and the consequences, a bit later. I built the following actions into my strategic plan to achieve competitive and financial success with my chosen strategy. I sought to develop “a specialized ability to offer niche buyers an appealingly differentiated offering that meets their needs better than (my) rival brands” did. I offered features “tailored to the tastes and requirements” of my market segments. (Thompson, Peteraf, Gamble, & Strickland, 2012) I provided support to my wholesale market to enable them to better market my shoes.
I hired celebrity representation to broaden the appeal of our product line. The results are as follows: As we can see in the following graphic, overall this strategy was effective from year 11 through year 16. With the exception of year 14, EPS increased every year through year 16. ROE and stock prices yo-yoed in years 11 through 16, but remained higher than investor expectations. Credit rating increased to A+ in year 13, and with the exception of year 17 that rating was maintained. Image rating exceeded investor expectations in all years except 11 and 13.
At the end of year 16, I lost my mind, and my competitive advantage. Two companies consistently out-sold me, and I decided I wanted to increase market share and catch up with them. I decreased my retail price to $70 in year 16, from a high of $81 in year 14 for all markets. Market share increased in all markets in year 16 after my price lowered. I decreased my wholesale price in the Asia/Pacific market to $50 in year 17, from a high of $55 in year 15, yet I lost wholesale market share in this market from then on. I think, however, that two decisions led to the tanking of my EPS/ROE/Stock prices in years 17 and 18. In year 17, I decided to enter the private label market. I committed 312,000 pairs to this market that I could have, and in retrospect should have, sold in the wholesale/retail markets. I priced these pairs too high for private label, and did not sell any. At the same time, I underbid celebrity endorsements and lost all but one.
Due in large part to these two decisions, I lost exclusivity, market share, and financial standing. I corrected those decisions in year 18 in that I did not bid in the private share market, and did bid enough to win additional celebrity endorsements. However, my financials did not recover. According to Crafting and Executing Strategy, when using the focused differentiation strategy, one should never “blur the firm’s image” by changing strategies mid-stream, particularly strategies that are working. (Thompson, Peteraf, Gamble, & Strickland, 2012) I did that, to my detriment. Additionally, I miscalculated the impact a celebrity endorsement would have on my financials.
In my world, celebrities are people whose faces you see a lot. I don’t identify with them, and seeing one on a commercial has no impact on my buying decisions. Apparently, not many people live in my world. All analyses discussed further will deal with years 11 through 16, and I followed a consistent strategy in those years. Years 17 and 18 are a clear example of what happens when you veer from a strategy that is working. Had the simulation gone on longer I may have been able to grow the company; however, I do not know if I would have re-captured the momentum of the first 7 years.
C. Competitor Evaluation
One of my biggest competitors was company G. While they did not win the game, they did come in second. They also had the highest weighted EPS and ROE. One of their strengths was the shear volume of pairs sold. Without exception, they sold over twice my volume in every market until year 18. In year 18, I finally outsold them in the Asia/Pacific and Latin America markets. They increased production immediately and continued to increase production as the game progressed. This increased production, combined with their lower retail and wholesale price points, allowed them to consistently realize a higher than average percentage of market share across all segments. They kept costs down by keeping materials costs low, as indicated by their SQ rating of 5. They also offered more models than the industry average, 252 by year 18.
They did have some weaknesses. Their SQ rating was consistently 5, below the industry average of 6. Company F, the game winner, had an SQ rating of 8. They did not offer free shipping with their Internet orders. I consider this a customer service weakness; however, their retail price point was very low, and this did not seem to impact their sales numbers. Celebrity appeal was sporadic at best, with several years showing no celebrity endorsements.
Strategically, Company G seemed to rely solely on volume sales with a low price point in all markets: Internet, wholesale, and private label. Their “basis for competitive advantage is lower overall costs than competitors…finding ways to drive costs out of their businesses and still provide a product…that buyers find acceptable.” (Thompson, Peteraf, Gamble, & Strickland, 2012) With an SQ rating of 5, quality was not a distinguishing factor; low costs were.
Overall, Company G’s strategy made it relatively easy for me to predict their next moves. As discussed, they very consistently priced their Internet, wholesale, and private label shoes below industry average. They steadily built production volume. They chose the low cost provider strategy, and they stuck to it. (Thompson, Peteraf, Gamble, & Strickland, 2012)
Company G will serve as my example of a company that achieved a sustainable dominant competitive advantage. Company G’s most dominant competitive advantage was its overall production capabilities. Company G sold 17,123,000 pairs of shoes in year 18, far outselling its closest competitor, Company F, which sold 13,828,000 pairs of shoes in the same year. The ability to produce shoes in larger quantities is certainly competitively valuable. This production capability enabled Company G to strengthen its market share and company profits with high volume sales. This resource was rare in that most rival companies did not have the production capabilities of Company G. Company D was the closest, with 14,307,000 pairs sold, followed by Company F which sold 13,828,000 pairs.
This production capability, while not ‘hard’ to copy per se, is certainly costly and time consuming to copy. Capital outlay for production upgrades is substantial – I made some myself – particularly to reach this level. Company G ended our game with the highest weighted average EPS (9.64), the highest weighted average ROE (28.5), and the second highest stock price at the end of year 18 ($98.16). Company G’s choice to increase their production capabilities achieved a sustainable dominant competitive advantage that gave them the potential for long-term profitability. (Thompson, Peteraf, Gamble, & Strickland, 2012)
E. Strategy Tests
My chosen strategy was the focused differentiation strategy. I will apply the three following tests of a winning strategy to my choice, to determine if it was, indeed a winning strategy. The first test is the fit test. This test helps me determine how well my chosen strategy fits my company’s current situation, my industry’s competitive conditions, my company’s marketing opportunities, and my company’s ability to effectively execute my chosen strategy in a profitable manner. (Thompson, Peteraf, Gamble, & Strickland, 2012) I chose the focused differentiation strategy to distinguish myself from the competition. This did fit with my company’s situation in year 11, as I was able to establish our products as ‘exclusive’. My prices were higher than my competition, both at the retail and wholesale level. We produced 200 different models, and increased our production in year 16 to keep up with demand. This strategy also fit my industry’s competitive conditions in that we all began the simulation with exactly the same metrics. This strategy allowed me to distinguish the company as exclusive, must-have footwear.
Competitively, through year 16 only two other companies outperformed my company. Both these companies increased their production capabilities early on, and both offered lower price points than mine in the retail and wholesale segments. They also sold private label shoes, which I did not. While I was third behind these two companies, I was solidly ahead of the other seven. The focused differentiation strategy was definitely in sync with my company’s best market opportunities. Three of my four markets had vastly different cultural mores and buying expectations. (The U.S. and Europe I considered similar in both culture and finances.) I was able to tailor both wholesale and retail pricing to be most effective in these markets, as well as tailor footwear styles and attributes to what sold best I these markets. Through year 16, my company was able to execute the strategy with no problems. The second test is the competitive advantage test. This test analyzes whether or not my chosen strategy will help my company achieve a sustainable competitive advantage. (Thompson, Peteraf, Gamble, & Strickland, 2012)
In order to have competitive advantage, a company must be consistently different from the competition, be difficult for the competition to imitate, and constantly improve processes and products. (Olsen, 2015) My company had a different focus than my competitors, but in retrospect I can’t say it was appreciably different. I spent enough on superior materials to garner an SQ rating of 7, which was above average for my industry; one other company had an SQ rating of 7, and two competitors had an SQ rating of 8. I offered 200 different models; four competitors offered more. I expanded production, as did several other competitors. The only appreciable difference was my performance strategy. Thus, my company did not pass this part of the test. As far as difficulty of duplication, I do not think it would have been difficult at all for my competitors to duplicate my products, and some did duplicate my services (free shipping). In the real world, I would have had greater control of what went into the shoes. I would have been able to patent advances in sneaker technology, much as Nike has been able to do. (Cheng, 2014)
In the simulation world, my company did not pass this part of the competitive advantage test. I did improve both the facilities and assembly line in my North American plant, and the facilities and equipment in my Asian plant, as well as expand the Asian plant’s production capacity. I expanded the SQ rating of both plants to 7, but I did the bare minimum that would result in a 7 rating. I would say that my company did pass this part of the test, though just barely. The third test is the performance test. This test analyzes whether or not my chosen strategy produces good company performance by looking at my company’s profitability, financial strength, and market standing. (Thompson, Peteraf, Gamble, & Strickland, 2012) Company profitability grew from revenues of $299,145 in year 11 to $495,376 in year 16, fell to $361,930 in year 17, and rebounded to $489,679 in year 18. Through year 16, the years I focused on the focused differentiation strategy, revenues consistently increased each year.
Through year 16, my company passed this part of the test. The financial strength of my company grew through year 16. With the exception of image, all metrics were above investor expectations through year 16. I was able to grow with no long-term debt, give through corporate donations, as well as buy back stock, pay a dividend, and increase our credit rating to A+. Through year 16, my company’s market standing was solidly in 3rd place. By this I mean that I came in 3rd each year through year 16. My company dropped to 4th place in the game-to-date scoreboard in year 17, and tied for 4th in year 18. This speaks to a couple things.
The focused differentiation strategy employed in years 11-16 worked well enough that, when I lost my mind and shifted focus in year 17 and 18, we were financially strong enough to withstand my temporary insanity. Would it have been best to not shift focus? Absolutely. Momentum was beginning to pick back up in year 18; however, I don’t know if we ever would’ve reached the same levels that staying the course with the strategy would’ve taken us. The second interesting thing to consider is that, while our market standing dropped, it did not crash-and-burn. The focused differentiation strategy definitely impacted my company in a positive way, and passed the performance test.
F. Value Chain Analysis
I used benchmarking as “a tool for assessing whether the costs and effectiveness of (my) value chain activities are in line.” (Thompson, Peteraf, Gamble, & Strickland, 2012) The following graphic illustrates my numbers on several key indicators, as well as how high, or low, they are compared to industry averages. Discuss how effectively I applied value chain analysis during the simulation.
As the strategy I used was focused differentiation, I surmised that the value-creating activities were those that advanced the exclusivity of my product. (Jurevicius, 2013) Based on that assumption, I added both superior materials and product features sufficient to attain an SQ rating of 7 by year 15. Additionally, I increased TQM/SixSigma activities well above industry averages for all years except year 11. The table above shows our value chain management relative to our industry averages. As we can see, costs as a percentage of net revenues were below industry average even through the insanity years. Average total manufacturing was below industry average in all years except year 17.
Warehouse and administrative costs were less than industry average in all years; the only exception was warehousing at equal to industry average in years 11 and 18. Marketing costs were higher than industry average every year except year 12. Both operating profit and net profit were higher than industry average beginning in year 12. I included operating and net profit because “tracking the profit margin along with the value-creating activities is critical because unless an enterprise succeeds in delivering customer value profitably (with a sufficient return on invested capital), it can’t survive for long.” (Thompson, Peteraf, Gamble, & Strickland, 2012) I watched these metrics yearly to make sure they were lower than industry average where appropriate. Marketing was my biggest expense. Even though I did spend more than industry average, I think this helped make the company financially viable enough to withstand my late-game bad decisions.
G. Competitive and Financial Advantage
Evaluate how effectively I addressed three important issues in order to achieve competitive and financial success for my simulation company. Three important issues I had to deal with in order to achieve competitive and financial success for my simulated company were value creation, marketing, and financial management. (Ingram, 2015) I addressed value creation by addressing both real (tangible) value and perceived value. I had two production plants, one in North America and one in the Asia/Pacific region. To create tangible value, I used 80% superior materials in my N.A. plant, and 54% superior materials in my A/P plant. I enhanced styling by spending $20,000 per model in N.A., and $22,000 per model in A/P, as well as funding the TQM/SixSigma program with $1.30 and $1.90 per pair, respectively. This allowed me to earn an S/Q rating of 7* for both plants, which was higher than the industry average. Additionally, I completed facility upgrades at both plants, an assembly line upgrade at the N.A plant, and an equipment upgrade at the A/P plant.
Thus, I continually examined my current products to ensure they were all above industry standard. (Ingram, 2015) All these things combined to add tangible value to my footwear, and helped me achieve competitive advantage over all but two of my competitors until year 17. As far as perceived value, I purposely priced my shoes, both at the retail and wholesale level, higher than my competitors to achieve a feeling of brand exclusivity. Additionally, I hired celebrities to feature in my marketing efforts. At the beginning of year 17 I made two very costly errors: 1) I under-bid for celebrity endorsements, and ended up with only one who was not very popular, and 2) I decided to court market share and lowered the prices of my footwear in both the wholesale and retail markets. While those decisions didn’t affect my tangible value, they destroyed my perceived value. My footwear was no longer exclusive. It cost the same as most everyone else’s, so it was no longer ‘special’. And there were no popular celebrities telling my prospective clients how cool it was to wear my shoes.
I think that I addressed value creation very well until year 17. I addressed marketing with money and celebrity endorsements. I consistently out-spent most of my competitors in marketing dollars and, with the exception of year 17, hired enough celebrities to hawk my wares. I offered rebates as part of the retail experience, as well as free shipping most years. This worked well for years 11-16. Even though I outspent the industry average in marketing dollars by 17.43% in year 17, I did not have popular celebrity endorsements. I knew endorsements were important, but watching Pierce Brosnan in a car commercial doesn’t make me want to buy the car.
The impact my lack of endorsements had on the bottom line was shocking to me. I did not manage marketing well in the simulation as I failed to understand a key factor in what motivates consumers to buy certain products. I addressed financial management by making debt repayment a priority and increasing the company’s credit rating in order to decrease potential interest payments. I re-purchased stock when I could. This worked well until year 17, when I didn’t have enough in the bank to cover the shortfall caused by the aforementioned really bad decisions. My stocks lost over half their value. I think I addressed financial management fairly well, as the company rebounded in year 18. Even though stock prices did not rise in year 18, I had $1.1 million in cash, owned more stock, and had no long-term debt.
Cheng, A. (2014, April 17). Nike was awarded 540 patents in 2013: Here’s what that means for investors. Retrieved April 22, 2014, from Behind the
Storefront: www.blogs.marketwatch.com/behindthestorefront/2014/04/17/nike-was-awarded-540-patent-in-2013-heres-what-that-means-for-investors/ Ingram, D. (2015, April 28). Retrieved April 28, 2015, from Small Business by Demand Media: www.smallbusiness.chron.com/key-components-competitive-success-business-604.html Jurevicius, O. (2013, April 25). Value Chain Analysis. Retrieved April 25, 2015, from Strategic Management Insight: www.strategicmanagementinsight.com/tools/value-chain-analysis.html Olsen, E. (2015, April 22). Strategic Planning: How to Test Your Competitive Advantage. Retrieved April 22, 2015, from For Dummies: www.dummies.com/how-to/strategic-planning-how-to-test-your-competitive-ad.html Thompson, A. A., Peteraf, M. A., Gamble, J. E., & Strickland, A. J. (2012). Crafting and Executing Strategy. NY: McGraw-Hill Irwin.