The StratSim is a growing and wide spread industry around the global among automobile sellers. Notwithstanding the economic and energy instabilities that led to decreased vehicle demand, sales revenues slowly grew as Gross Domestic Products (GDP) increased from period 1- 4, and remained constant in period 5, and inflation rate decreased from 2.5% in period 1 to 1.0% during period 3. However, in some circumstances, sales were increased and/or decreased as firms started making decisions. The 7 competitors were; firm A, B, C, D, E, F and G.
Seven vehicle classes include Minivan (M), Family (F), Sports (S), Luxury (L), Utility (U) Economy (E), and Truck (T). Attributes considered were; performance, styling, quality, interior and safety.
Furthermore, advertisement plays a significant role especially when firms are striving to create brand image, awareness as well as interests to target customers. Dealerships contributed in generating revenues through sales of a range of vehicles which in turn enabled the firm to increase its market share while maximising shareholders wealth.
Firm B has had 3 vehicle classes, namely; Boss -Truck, Boffo – Family and Buzzy – Economy.
2.0 Strategic Analysis
Strategy is the direction and scope of an organisation over the long term, which achieves advantage in a changing environment through the use of resources and competence aiming to fulfil shareholder expectations (Johnson et al, 2006, p 9).
Figure 1, processes by which strategy is described and executed
Source:http://www.12manage.com/description-deliberate-strategy.html.
In a competitive business environment such as StratSim, analysing firm’s strategies is vital in order to enhance firm performance and customer satisfaction.
2.1 Strategic Intent
Firm B’s mission was to become the leader in automobile industry worldwide by offering highly innovative vehicles to diverse customer segments aiming at consistently satisfying their dynamic needs.
2.2 Basic Strategy
Firm B strategy was to provide high quality vehicles at premium price while trying to differentiate its vehicles from incumbents to avoid encouraging price war. By doing so, firm B was the leader twice in economy (Buzzy) car in period 2 and 5. To meet diverse customer tastes and preferences, the firm made minor upgrades to its vehicles during decision making periods, e.g. technology, promotion, advertising, etc.
2.3 External Analysis
Scanning the macro-environment is vital since there are several factors that hinder firm’s performance and growth. In order for managers to come up with effective and suitable strategies that will enable the firm exploit overt and hidden opportunities while overcoming threats, those factors need to be thoroughly tackled before decisions are made.
The external analyses considered were;
The Michael Porter’s five forces.
PESTEL analysis.
Opportunities and Threats (OT) from SWOT analysis,
And Critical Success Factors (CSF).
2.3.1 PESTEL
PESTEL framework is a useful tool that is applied by organisations to analyse the complexity of macro-environment variables. It also provides a picture on how these key factors may influence firm’s success or failure of its particular strategies in future in order that managers can find ways of overcoming them. PESTEL refers to; political, economic, social, technology, environment and legal.
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Figure 2, PESTEL Framework
Source: (Johnson et al, 2006. p 68)
The
Organisation
Political
– Taxation policy
– Government stability
– Social welfare policies
– Foreign trade
regulations
Legal
– Health and safety
– Competition law
– Product safety
– Employment law
Economic factors
– Business cycle
– Inflation
– Interest rates
– Unemployment
– GNP trends
– Money supply
– Disposable
income
Environmental
– Environmental
protection laws
– Waste disposal
– Energy
consumption
Sociocultural factors
– Population
Demographic
– Socio mobility
– Consumerism
– Income
Distribution
– Lifestyle changes
– Level of
Education
– Attitudes to work
and leisure
Technological
– Government spending on
research
– Speed of technology transfer
– New
discoveries/developments
– Government and industry
focus on technological effort
– Rates of obsolescence
Political/Legal
Since 1960, laws and government regulations have affected the automobile industry (Highfill et al, November, 2004). Political changes may favour or hinder the firm’s production because anti-pollution laws and taxes can be imposed, and hence firm B should continuously pay special attention to any rules, codes and regulations that dwell on carbon-dioxide emissions.
Economic
During simulation, firm B had experienced unstable economic growth. Its variables like inflation, interest rates, gas prices, and material costs were fluctuated. These have affected the firm’s profitability.
Social
Due to increased health awareness, people tend to change their lifestyles, while turning to low carbon emission vehicles. Also income distribution and demographic changes both affect vehicle production either positively or negatively.
Technology
Advanced technology has provided both opportunities and threats to the automobile industry. Those who employ it effectively, it enables them to enhance firm’s efficiency in producing vehicles that appeal to customers whilst lowering costs. So far, internet and firm websites as part of technology have been used by many buyers as a reference tool before making their purchase decisions.
Environmental
Environmentalists stress on minimising carbon-dioxide emissions, noise as well as air pollution, in order to keep the environment clean. This move no doubt affects vehicle production as well as firm profitability.
2.3.2 Critical Success Factors (CSF)
Johnson et al (2009) defined CSF as those product features that are particularly valued by a group of customers and, therefore, where the organisation must excel to outperform competition. CSF comprises; threshold features and differentiators.
Source: Johnson et al (2009)
CRITICAL SUCCESS FACTORS (CSF)
THRESHOLD FEATURES
DIFFERENTIATORS
Threshold features
These are features that the customer values mostly, and is not likely to buy a product or service that lacks one of them. Firm B, threshold features were; quality, performance, safety and size for all of its three vehicles; family-Boffo, economy-Buzzy and truck-Boss.
Differentiators
These are customised/added qualities which some customers may or may not consider before purchasing a service or products. Firm B regarded price, styling and interior as differentiators to its vehicles.
Differentiators gave difficult moments when trying to distinguish what was preferred most, as many vehicles were similar to competitors after modifications had been made.
Innovations are necessary for firms to meet CSF features and outwit their competitors through customer satisfaction.
2.3.3 Porter’s Five Forces Model
The model was developed by Michael Porter in 1980 (Johnson et al, 2006). Since then, the model is applied by firms as a tool to analyse the profit potential while determining the intensity of competition (threats) of an industry, and finally coming up with the right strategies that will support in exploiting opportunities, neutralise threats and hence grow.
Figure 3 Porter’s Five Competitive Forces Model
SUPPLIER POWER
– Switching costs of firms in the industry
– Presence of substitute inputs
– Threat of forward integration
– Supplier concentration
– Importance of volume to supplier
– Impact of inputs on cost or differentiation
– Differentiation of inputs
– Cost relative to total purchase in industry
BARRIERS TO ENTRY
– Government Policy
– Capital requirements
– Access to distribution
– Economies of scale
– Switching costs
– Proprietary learning
curve
– Access to inputs
– Expected retaliation
– Brand identity
– Absolute cost
advantages
– Proprietary products
BUYER POWER
– Price sensitivity
– Threat of backward integration
– Substitutes available
– Bargaining leverage
– Buyer concentration vs
industry
– Buyer information
– Buyer volume
– Buyers’ incentives
– Brand identity
– Product differentiation
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DEGREE OF RIVALRY
– Brand identity
– Exit barriers
– Switching costs
– Product differences
– Industry growth
– Fixed cost/ value added
– Diversity of rivals
– Industry concentration
– Corporate stakes
– Intermittent overcapacity
RIVALRY
THREAT OF SUBSTITUTES
– Buyer inclination to
substitute
– Switching costs
– Price-performance
trade-off of substitutes
Threat of New Entrants
The threat of new entrants in automobile industry is low, since barriers to enter are very high, such as high start-up capital required. Moreover, adequate experience curve, distribution access, economies of scale, strong research and development (R&D) and even brand and customer loyalty all of which the incumbents have. It therefore becomes difficult for new entrants to manage compared to incumbents.
Bargaining Power of Suppliers
Suppliers’ power in automobile industry is low, since producing a car/vehicle requires a range of inputs (parts) from diverse suppliers. If some inputs are not available in one source, they will be sought from another supplier due to low switching costs.
Threat of Substitutes
Substitute threats in this industry are likely to be moderate and depend much on customer geographical location. Other customers prefer walking, taking train or riding on a bike. But in Dar es Salaam city for example, people prefer public transport, motorcycles (BAJAJ, known as rickshaw in India) as alternative means to automobile due to increased congestion.
Bargaining Power of Buyers
In this industry, buyers’ power is a bit high. Low switching costs from one firm to another seeking for substitutes since most of the customers are price sensitive. For the case of the simulation game we played, most of the products were undifferentiated, so, buyers can easily shift to an alternative producer as well as products when seeking satisfaction.
Competitive Rivalry
The intensity of competition in automobile industry is high due to lack of strong differentiation strategy and innovation among incumbents, especially in the case of the three vehicle classes, i.e. “family, economy and truck”, because most of the firms use similar strategies like price; this reduces market growth as well as profitability.
2.3.4 SWOT- Opportunities and Threats
Opportunities:
Advanced technology
Firms can use it more efficiently in enhancing product features that can appeal to the eyes of customers.
Also use e-commerce to advertise and sell globally.
Bargaining power of suppliers.
Low supplier power is an advantage to automobile firms since they can set input prices, and hence be able to enjoy cost advantages while offering good quality products that will satisfy customers.
European Union (EU)
Automobile manufacturers can use the EU to sell their products.
Diversification
Diversification can be done to widen the market to other untapped segments like high income earners or go internationally and also locate the firms near raw materials sources where they can enjoy location economies.
Differentiation strategy
In order to sustain customers, after satisfaction has been met, differentiation strategy can be used as a weapon in delivering a range of added values that surpass those of competitors, since most of the firms use similar strategies.
Threats:
Bargaining power of buyers
Strong bargaining power of buyers associated with low switching costs to alternative products, force suppliers to face an increased competition in order to provide the best that will satisfy their customers.
Increased gas prices
Gas being one of the operating energy, increased price will affect firms’ production as well as profitability e.g. in simulation that we played, period 1 $/gal was 3.15 rise to 3.50 in period 5.
New laws
New rules and regulations on carbon-dioxide emissions in environmental protection hinder production of cars that use petrol engines.
World economic recession
Recession discourages consumption of luxury goods, and streamlines production while people turn to public transports.
High competition
Initially, all firms in the StratSim industry were in similar position e.g. financially and other resources; however, this proved difficult when making decisions on how to create demand in order to enhance market shares as well as profits. Each firm was competing.
Inflation
Inflation started to increase in period 4 from 2.0% to 2.5%, this rise affected consumer prices.
Fuel price instability.
Rapid change in technology
This poses a threat to vehicle production since other substitutes to vehicles may be produced.
2.4 Internal Analysis
2.4.1 Resources and Capabilities
These are those which will create a strategic fit in order for the firm to survive and prosper even in a competitive business environment.
Lucino Noto, (2007, p 125)
Analyzing resources and capabilities:
The interface between strategy and the firm
THE FIRM
Resources and Capabilities
Goals and Values
Structure and System
STRATEGY
THE INDUSTRY ENVIRONMENT
Customers
Competitors
suppliers
The firm-Strategy Interface
The Environment-Strategy Interface
Resources
Organisation resources are divided into two categories (Johnson et al (2009);
Tangible Resources
These are firms’ physical assets. Firm B tangible resources were;
Three vehicle classes, each of these represents a unique configuration while targeting different customer segments like value seekers, families, singles, high income and enterprisers (the StratSim Case, 2010).
Financial resources, at period 0, each firm were given sales amounted to $ 15.5 billions (the StratSim case, 2010).
Manpower, firm B had 4 competent human resources who made diverse valuable decisions and hence became twice the leader of economy car (Buzzy).
Intangible Resources.
These are non-physical resources such as; information, reputation and knowledge i.e. intellectual capital. (Johnson et al, 2008). Firm B holds a number of unique competences over its rivals.
Firm B capabilities were;
Quality.
Safety.
Performance.
Style.
Interior.
2.4.2 V.R.I.O
Are criteria that are used to assess the sustainability of an organisation’s resources and capability that will enable the firm to achieve durable competitive advantage. V.R.I.O stands for Value, Rarity, Inimitability and Organisation. (Johnson et al, 2008).
Value
As the game started, firm B had enough resources and capabilities i.e. unique brand name that facilitated it in formulating and implementing different strategies to meet customer needs. But due to increased market demand, demand exceeded production throughout the periods as the firm lacked efficiency.
Rareness
At the beginning, all firms had a similar starting point which led them to have a low degree of rarity. This positioning by StratSim, made firm B to create more appealing strategies like vehicle enhancements and improvements in terms of its attributes which allowed it to come up with things which turned out to be less common among the firms.
Inimitability
During simulation game, product imitation was very high since previous results and almost all modifications and other statistics were openly published for other firms to see. This means that competitors could possibly copy other firms’ techniques.
Organisation
In StratSim industry, there were 7 firms producing identical vehicles, because they used similar strategies that lacked differentiation. Due to these, it therefore became easy for customers to switch from one firm to another if satisfactions were not yet met.
2.4.3 SWOT- SW
SW is a tool that is used in identifying or analysing firm’s internal strengths and weaknesses and enables it to use the available strengths to minimise or turned those weaknesses to strengths. SW means Strengths and weaknesses.
Strengths:
Unique brand name “Best Motor Works”.
Unique product names like Buzzy, Boffo, and Boss.
Twice leader of Buzzy-Economy car, period 2 and 5.
Reliable dealerships.
Innovation, almost every decision period, firm B upgraded its vehicle attributes to meet emerging customer needs.
Weaknesses:
Weak financial position.
Unstable growth of market shares.
Limited product lines, this means that firm B did not exploit the available opportunities of unsatisfied and potential new customers to launch any new vehicle that would satisfy their needs.
3.0 Decisions
3.1 Technology
Firm B upgraded its technology capabilities during decision periods considering dynamic business environment and customer tastes and preferences, while special attention was given to economy (Buzzy) and family (Boffo) cars. Investment in technology facilitated firm B in enhancing its production capacity as well as vehicle attributes that appealed to target customers and hence satisfying their emerging needs (see appendix 2.1)
3.2 Marketing
Firm B’s marketing mix was to create leverage with customers and build strong brand loyalty which would enable customers purchase our products even in intense competition as in StratSim industry. Firm B’s unique selling price “USP” was quality. Quality being the key in our vehicle while charging premium price that enabled Buzzy (economy) car to become the leader in period 2 and 5. Despite this success, it was hard for firm B to survive in just a success of one car brand and become the market leader. Though the marketing mix was thoroughly applied by adding or reducing the number of dealers in each area, increasing dealer discounts and product promotions to attract customers, firm B’s market share was increased and decreased during decisions due to overspending and other factors. (For more marketing and distribution details for period 5, see appendix 2.2 & 2.3)
3.3 Finance
During simulation, firm B’s financial performance was somehow weak despite a slight increase in sales ($). Net income was negative during period 2 and 5 results. It was discovered that one of the problems could possibly have been overspending, however, unit market share increased and total debts continued to decrease (Firm B financial and performance summary period 5, see appendix 3.0).
3.4 Production
Throughout all the decision periods, production was increased as well as vehicle attributes to meet customer demand. Though Boss (truck) and Buzzy (economy) vehicles were upgraded in period 4, there were some shortages with regard to Boss vehicle model; this means that if the firm was given a chance to continue making decisions, it could probably increase production to meet the demand (see appendix 4.0).
4.0 Conclusion
Firm B’s mission was to become the leader in automobile industry worldwide by offering highly innovative vehicles to diverse customer segments aiming at consistently satisfying their dynamic needs.
Unfortunately, firm B did not meet its expectations. Though it became the leader twice in Buzzy (economy) car, this means that its strategies fit in the economy car brand market, having had success in one vehicle does not guarantee survival, and this is why firm B’s income and market share fluctuated. The firm was not yet pretty sure of what contributed to the unstable financial performance, though the firm speculated that overspending was one of the major problems.
4.1 What I Have Learned
I learned that, in practical business, taking risks is only way to achieve success. In StratSim industry, for each time period, market research had identified some potential new customers whose needs were not yet satisfied by current vehicle (the StratSim case, 2010). But firm B overlooked this market potential to timely take advantage of launching new vehicle models in order to exploit these opportunities and hence increase its turnover and profit margins.
5.0 Reference and Bibliography:
Johnson G, Scholes K, and Whittington R, (2006), Exploring Corporate Strategy,
7th Edition, Prentice Hall.
Johnson G, Scholes K, and Whittington R, (2009), Exploring Corporate Strategy,
Prentice Hall.
Highfill D, Baki M, Copus S, Green M, Smith J and Whineland M, (November, 2004). Automotive Industry Analysis-GM, DaimlerChrysler, Toyota, Ford, Honda, overview of industry analysis, available at http://www.academicmind.com/unpublishedpapers/business/management/2004-11-000aaa-automotive-industry-analysis.html. Accessed on 19/11/1010.
The StratSim Case (2010), Automobile industry.
Lucino Noto, (2007), Analysing resources and capabilities: the interface between strategy and the firm, available at. http://www.blackwellpublishing.com/grant/files/CSAC05.pdf .
Figure , Porter’s Five Forces
Available at www.scribd.com/doc/16998313/Diagram-of-Porters. Accessed on 20/11/2010.
6.0 APPENDIXES:
1. DECISION SUMMARY FIRM B, FOR PERIOD 5
Product Development
Dev
Ctr
Project
Class
Status
Size
HP
Int
Sty
Saf
Qua
Curr
Exp
1
Buzzy
Economy
upgr:
launch Now
10
120
2
2
2
2
$275
2
Boss
Truck
upgr:
launch Now
70
200
3
3
2
2
$275
3
(unused)
Total (mill.)
$551
Consumer Marketing
Budget
(mill.)
Regional Corp. Adv.
$48
Direct Mail
$6
Public Relations
$12
Total
$66
Direct Mail Targets: Value Seekers(1), Families(2), High Income(4), Enterprisers(5)
Product Marketing
Vehicle
Platform
MSRP
Dealer
Disc.
Adv.
(mill.)
Adv.
Theme
Promo.
(mill.)
Boffo
No Change
$20,400
15.0%
$34
Safety
$29
Boss
Upgraded
$20,499
13.0%
$28
Perform
$15
Buzzy
Upgraded
$11,550
12.0%
$33
Quality
$20
Total
$95
$64
Plant Capacity
Current Capacity (000’s)
1,350
Capacity Change (000’s)
0
Vehicle Production
Vehicle
Previous
Sales
(000’s)
Current
Inventory
(000’s)
Scheduled
Production
(000’s)
Flexible
Production
Retooling
Costs
(mill.)
Boffo
646
25
671
X
$0
Boss
200
*13
213
X
$80
Buzzy
298
*109
345
X
$123
Total
1,144
147
1,229
$203
*Vehicle being upgraded: this inventory will be written off. Be sure to produce enough to match forecast.
Dealerships
North
South
East
West
Total
Dealer Inc./Dec.
10
9
11
12
42
Training and Support (mill.)
$34
Financing
Amount
($ mill.)
Bonds Issued
$0
Stock Issued
$0
Dividends Paid
$100
StratSim Ind:ind1 Firm:b
Period 4
2. RESULTS FOR PERIOD 5
2.1 Technology Capabilities – Period 5
Firm Ratings (1=low capability)
Dev.
Centers
Interior
Styling
Safety
Quality
Max. Feasible
5
11
12
11
12
Firm A
3
4
6
4
7
Firm B
3
4
6
5
7
Firm C
2
4
7
6
6
Firm D
2
4
6
5
6
Firm E
2
6
8
6
8
Firm F
2
4
6
4
6
Firm G
3
5
8
7
9
Tech Dim
Considerations
Interior
flexibility of cargo space
Styling
general curb appeal, styling, handling, finish
Safety
structural design, braking system, safety features
Quality
overall reliability, durability, consistency of products
StratSim Ind:ind1 Firm:b
Period 5
2.2 Marketing Detail – Period 5
Consumer
Budget
(mill.)
Company Owned
/Fleet
Budget
(mill.)
Regional Corp. Adv.
$48
Direct Sales Force
$0
Direct Mail
$6
Direct Mail
$0
Public Relations
$12
Total
$66
Total
$0
Vehicle
Val Mkt
Share
MSRP
Dealer
Disc.
Avg Sell
Price
Adv.
(mill.)
Adv.
Theme
Promo.
(mill.)
Days
Inv.
Buzzy
2.4%
$11,550
12.0%
$10,572
$33
Quality
$20
18
Boffo
9.4%
$20,400
15.0%
$18,749
$34
Safety
$29
0
Boss
3.2%
$20,499
13.0%
$19,859
$28
Perform
$15
0
Total
$95
$64
StratSim Ind:ind1 Firm:b
Period 5
2.3 Distribution Detail – Period 5
North
South
East
West
Total
Full Coverage
200
250
150
200
800
Established Dealers
137
137
133
133
540
Coverage
69%
55%
89%
67%
68%
Planned Openings
10
9
11
12
42
Support/Dealer (000’s)
$150.6
$150.6
$153.2
$153.2
$151.9
Units/Dealer
2,187
2,284
2,389
2,756
2,401
Sales/Dealer (mill.)
$36.9
$38.9
$40.2
$46.3
$40.5
Service/Dealer (mill.)
$1.4
$1.5
$1.6
$1.7
$1.5
Gross/Dealer (mill.)
$3.3
$3.6
$3.6
$4.1
$3.7
Dealer Rating
59
60
60
61
60
StratSim Ind:ind1 Firm:b
Period 5
2.4 Product Contribution – Period 5
Firm B Product Contribution
Vehicle
Units
(000’s)
Dealer
Sales
(mill.)
Direct
Sales
(mill.)
COGS
(mill.)
Gross
Margin
(mill.)
Adv
Promo
(mills.)
After
Mkting
(mill.)
Boffo
734
$12721
$0
$9797
$2924
$63
$2861
Boss
234
$4179
$0
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