Analysis of StratSim

The StratSim is a growing and a wider spread industry around the global among the automobile sellers. Notwithstanding the economic and energy instabilities, that led to decreased vehicle demand, sales revenues strongly increased as Gross Domestic Products (GDP) increase from period 1- 4, and remains constant in period 5, and inflation rate decreased from 2.5% period 1 to 1.0% in period 3. However, in some circumstances, sales were increased and/or decreased since firms started making decisions. These 7 competitors were; firm A, firm B, firm C, firm D, firm E, firm F and firm G.

In StratSim, there are 7 vehicle classes; Minivan (M), Family (F), Sports (S), Luxury (L), Utility (U) Economy (E), and Truck (T). Vehicle attributes being; performance, styling, quality, interior and safety.

Furthermore, advertisement plays a significant role especially when firms striving to create brand image, awareness as well as interests to target customers. Dealerships contributed in generating revenues through sales of ranges of vehicles which in turn enabled the firm to increase its market share while maximising shareholders wealth.

Firm B has had 3 vehicle classes;

Boss -Truck

Boffo – Family

and Buzzy – Economy.

2.0 Strategic Analysis

According to (Johnson et al, 2006, p 9), 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 with the aim of fulfilling shareholder expectations.

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 performance and customer satisfaction.

2.1 Firm B’s Strategic Intent

Firm B’s mission was to become the leader in automobile industry worldwide by offering highly innovative vehicles to diverse customer segments that will consistently satisfy their dynamic needs.

2.2 Objectives

2.3 Basic Strategy

Our strategy was to provide good quality vehicles at premium price trying to differentiate our vehicles from incumbents while avoiding price war from our competitors. By doing so, we became the leader twice in economy (Buzzy) car, period 2 and 5. To meet diverse customer taste and preferences, we made minor upgrades to our vehicles during decision periods, e.g. technology, promotion, advertising, etc.

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2.4 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 analysis comprises;

The Michael Porter’s five forces.

PESTEL analysis.

Opportunities and Threats (OT) from SWOT analysis,

And Critical Success Factors (CSF).

2.4.1 PESTEL framework

PESTEL framework is a useful tool that is used by organisations to analyse the complexity of macro-environment variables. It also provides a picture on how these key factors may influence firms’ success or failure of its particular strategies in future, so that managers can find ways of overcoming. PESTEL refers to; political, economic, social, technology, environment and legal.

Figure 2 the 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 automotive industry (Highfill et al, November, 2004). Political changes may favour or hinder the firm’s production since anti-pollution laws and taxes may be imposed, so, firm B should continuously pay special attention to any rules, codes and regulations regarding 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 firm profitability.

Social

Due to increased health awareness, people tend to change their lifestyles, while turning to low-emission vehicles, also income distribution and demographic population both affect vehicle production either positively or negatively.

Technology

Rapid change in technology has provided both opportunities and threats to the automotive industry. Those who employ it effectively, it facilitates them in enhancing firms’ efficiency by producing vehicles that appeal to customers whilst lowers costs. So far, internet and firm websites as part of technology have been used by many buyers as a reference tool before making purchases decisions.

2.4.2 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 excels 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 customer values mostly, and they are likely not to buy a product or service that lack one among them. In StratSim industry, threshold features are; quality, performance, safety and size.

Differentiators

These are customised or added qualities some customers may/may not consider before purchasing a service or products. During our simulation, price, styling and interior were regarded as differentiators.

In reality, differentiators have had given a difficult moment to distinguish what they prefer most, since many vehicles were similar among competitors after modifications being made during decisions.

Lastly, firms should take it seriously, creative and keep innovating in these CSF in order to outwit its competitors through customer satisfaction.

2.4.3 Porter’s Five Forces model

The 5 competitive forces model was developed by Michael Porter in 1980 (Johnson et al, 2006). Since then, the model is used by firms as a tool to analyse the attractiveness (profit potential) while determining the intensity of competition (threats) of an industry, and finally come 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 amount of start-up capital required. Moreover, incumbents have; adequate experience curve, distribution access, economies of scale, strong research and development (R&D) and even brand and customer loyalty. These become difficult for new entrants to manage as Incumbents can produce at mass to cover potential and existing customer needs.

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 not found in one supplier, it is easy to switch from one supplier to another finding a substitute for the required input due to low switching costs.

Threat of Substitutes

Substitute threats in this industry is likely to be moderate and depends much on customer geographic location, other customers like walking, taking train or riding 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 that, buyers can easily shifts to an alternative producer as well as products.

Competitive Rivalry

The intensity of competition in automobile industry is high due to lack of differentiation strategy and innovation among incumbents especially to the three vehicle classes, i.e. “family, economy and truck” because most of the firm use similar strategies like price, this reduces market growth as well as profitability.

2.4.4 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 advantages to an automobile firms since they can set input prices, and hence be able to enjoy cost advantages while offer 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 internationally and also locate the firms near raw materials where they can enjoy location economies.

Differentiation strategy

In order to sustain customers, after satisfaction is being 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 buyers associated with low switching costs to alternative products, force suppliers to 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 also 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; these prove difficult in making decisions on how to create demand in order to enhance market shares as well as profits. Each firm was competing.

Inflation

Inflation has started to increase in period 4 from 2.0% to 2.5%, this will affect consumer prices.

Fuel price instability.

Rapid change in technology

This threatens vehicle production since other substitutes to vehicles may be produced.

2.5 Internal Analysis

2.5.1 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

Organisation resources are divided into two categories (Johnson et al (2009);

Tangible Resources

These are firms’ physical assets. Firm B physical assets 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), which enabled firm B to diversify into different segments.

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.

2.5.2 V.R.I.O

Are criteria that are used to assess the sustainability of an organisation resources and capability that will enable the firm achieve durable competitive advantages. 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 in the periods around since the firm lacked efficiency.

Rareness

At the beginning, all firms had 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 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 can possibly copy other firms’ techniques.

Organisation

In StratSim industry, there were 7 firms producing identical vehicles, because they used similar strategies, lacking differentiation. Due to these, it became easily for customers to switch from one firm to another if satisfactions have not met.

2.5.3 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 will 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 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 satisfy their emerging needs.

3.2 Marketing

Firm B’s marketing mix was to create leverage with customers and build strong brand loyalty which will enable customers purchase our products even in intense competition as in StratSim industry. Firm B unique selling price “USP” was quality. Quality being the key in our products while charging premium price enable Buzzy (economy) car to become the leader in period 2 and 5. Despite this success, it was hard for firm B survive in just a success of one car 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 attracting customers, firm B marketing share was increased and decreased during decisions due to overspending. (For more marketing and distribution details for period 5, see appendix 1 & 2)

3.3 Finance

During simulation, firm B financial performance was somehow poor despite a slightly increase in sales ($), net income was negative during period 2 and 5 results. We discovered that one of the problems could possibly be overspending, however, (Firm B performance summary period 5, see appendix 3).

3.4 Production

In the year around, 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 on Boss; this means that if we were given a chance to continue making decisions, we could probably increase production to meet the demand (see appendix 4).

4.0 Conclusion

Firm B’s mission was to become the leader in automotive industry offering highly innovative vehicles to different customer segments that will satisfy their emerging needs. Unfortunately, firm B did not meet its expectations. Though it became the leader twice in Buzzy (economy) car, this means that its strategies fits in economy market, having success in one vehicle does not guarantee survival, thus why firm B income and market share fluctuated. We were not pretty sure of what contributed in unstable financial performance, though we speculated that overspending was one of the problems.

4.1 What I Have Learned

I learned that, in the business, taking risks is the way of success. In StratSim industry, almost each period, market research has identified some potential new customers whose needs were not yet satisfied by current vehicle (the StratSim case, 2010). But firm B overlooked to take advantage of launching new vehicle in order to exploit these opportunities and hence increase our turnover and margins due to being risk averse.

5. 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. APPENDIXES

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. Marketing Detail – Period 5

Firm B

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

2.1 Product marketing period 4

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

2.3 Distribution Detail – Period 5

Firm B

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

$3262

$916

$43

$873

Buzzy

329

$3342

$0

$3319

$24

$53

$-29

Total

1,297

$20242

$0

$16378

$3864

$159

$3705

Note: Dollar amounts are in millions.

StratSim Ind:ind1 Firm:b

Period 5

2.5 Vehicle Classes – Period 5

Class

Mfr

Sales

Retail

Sales

Unit

Sales

%Chg

(units)

Num.

Veh.

Leader

Economy

$17,296

$17,904

1,726

+5%

7

Buzzy

Family

$84,734

$91,128

4,816

+4%

7

Efizz

Luxury

$0

$0

0

NA

0

Sports

$0

$0

0

NA

0

AEV

$0

$0

0

NA

0

Minivan

$4,950

$5,421

220

NA

1

Goofy

Utility

$0

$0

0

NA

0

Truck

$29,506

$32,278

1,669

-1%

7

Ace

Total

$136,486

$146,732

8,431

+6%

22

Efizz

Note: Dollar amounts are in millions, units in thousands.

StratSim Ind:ind1 Firm:b

Period 5

3. Performance Summary – Period2- 5

Firm B

Per. 2

Per. 3

Per. 4

Per. 5

Sales ($)

$14,800.9

$17,418.6

$18,244.8

$20,242.1

Sales (000’s units)

912

1,088

1,144

1,297

Market Share ($)

13.5%

14.9%

14.2%

14.8%

Market Share (units)

13.6%

15.0%

14.4%

15.4%

Net Income

$-897.1

$249.1

$494.4

$-239.3

Cum. Net Income

$-373.6

$-124.5

$369.9

$130.6

Stock Price

$18.95

$22.74

$26.42

$26.46

Market Value

$9,472.5

$11,370.3

$13,208.4

$13,232.1

Return on Sales

-6.1%

1.4%

2.7%

-1.2%

Return on Assets

-10.0%

2.6%

5.1%

-3.3%

Firm Preference

15.2%

14.9%

13.5%

15.0%

Dealer Rating

57

58

60

60

COGS

74.4%

76.2%

77.7%