MGMT 4650 - 03 Strategic Management
Executive Summary :
Through the Capsim’s business simulation, we had an opportunity to understand business principles under the competitive environment. Each group managed a company that they must keep on a clear strategic path, build a product portfolio, manage costs, analyze the market, develop forecasts and make decisions in R&D, Marketing, Production, HR, Finance, and TQM.
Digby engaged in the sensor industry, operating six divisions and provided several products. The company has five market segments and five major competitors. Digby’s business strategy focused on low cost and differentiation. The company effectively manages R&D, marketing, Finance, and Production. The mission of Digby is to strive for innovation, open-mindedness and communication. Our goal long term goal is to establish a strong hold on the market in every category. Currently, we have 35.6% market share, and we will continue to execute our business strategies to capture an even larger share of the market.
In the beginning of 2016 our company Digby, was established in the electronic sensor industry. At this time, five other companies also established themselves within the industry. We along with Andrews, Baldwin, Chester, Erie and Ferris all began with an equal market share of the industry. Equally an industry conditions report was provided to inform us of customer’s preferences which included age, performance, size, price, and mean time before failure (mtbf) every year. Within a given time frame of eight years and resources needed to grow our businesses, the environment was set for us equally. Well aware of drift rates and customer’s ideal spot (calculated using Exhibit 1) on the perceptual map, set the industry conditions. Industry trends included five product segments -Traditional, Low End, High End, Performance and Size. Where each company’s products would place on the perceptual map each round was solely based on each company’s individual strategies which we will discuss Digby’s internal strategy to achieve external results.
Digby’s intended strategy was to dominate two to three product segments by using low cost and differentiation. With the given preferred customer price points and knowledge of the annual price decrease, our company remained firm in keeping products on the lower end of the price range. To differentiate ourselves and dominate the intended product segments, we planned to release a new product once the opportunity was given. In order to do this, loans were taken out early on to invest into R&D for current products and future development of new products. By doing so, we avoided the risk of running into emergency loans. We made sure to keep our products in stock and based our forecasting on market share and the growth of the market, utilizing automation and TQM.
The source of our competitive advantage came from our core competencies. Our research and development (R&D), marketing, production and finance departments carried our company plans out successfully. In our R&D section, we made sure that we catered to each segment based on what their preferences were. After we made a couple educated calculations, we moved onto marketing. In this department, we made sure that we had an appropriate price. We had to make sure the customers in each segment were willing to pay this amount, while we were making a profit off of the items sold. We noticed that we stocked out a lot, so we had to make sure we added more capacity.
In production, we made sure we invested in capacity and automation. We were preparing for the later rounds by investing in these two areas early in the starting rounds. In the finance section, we invested in long term debt so that we may have a buffer to experiment or prepare for mistakes. We paid our vendors earlier to ensure that they are satisfied. As the latter rounds entailed, we adjusted our decisions accordingly. An example would be our forecasting; we would produce more than actual forecasts because we were stocking out often.
This leads to Digby’s sweet spot, which would be our high automation and superior financing. These two aspects help us dominate our market. Our corporate level strategy was value-creating. We wanted to edge out our competition in as many categories as possible. We created new products in segments, and that helped us sell more products and gain more market share. The only section we weren’t as aggressive in was the traditional market because it was too heavily saturated. We made sure we kept our prices competitive though, so that we can still sell products within that section. Our business level strategy was to ensure we had everything running smoothly and effectively. We monitored how each segment reacted, based on the previous rounds and would adjust accordingly. This is where our R&D, marketing, production and financing departments did extremely well.
The strategic management concepts we used during this simulation were goal setting, analysis of strategic form, strategy re-forming, strategy implementation and strategy monitoring. Some of the tools we used were brainstorming, internal & external analysis, VRIO testing, S.W.OT analysis, industry trends, strategic intent & strategy, and many more.
Our team member strengths immensely contributed to Digby’s success. Mark and Dang would take the lead on R&D. Thai and Audrie would handle the marketing area. Zong and Jaspreet would take care of our company’s financials. We would come to decisions as a group, and would push each other in order to make the company better.
Going into this industry we knew we would be competing against competitors with similar products. In our R&D department, we wanted to avoid consumers’ viewing our product as the inferior when compared to the competitors. So, we invested heavily in R&D, which allowed us to stay ahead of the competition in offering the best products. Even though this didn’t exactly follow a low-cost strategy we know that without investing in R&D we wouldn’t have been able to compete in the market. However since we did, this allowed us to take significant market share from competitors in various market segments. As for the Marketing department, we wanted to lower cost as much as possible. We figured that if we invested in promoting our products early we could maintain brand awareness. Therefore, we invested in marketing early on so that we could lower the cost of promoting our brands in the future. We wanted to differentiate ourselves and follow a low-cost strategy. These strategic positionings were best accomplished in our Production department. In this department, we invested in automation to lower production cost and allowed us to differentiate in pricing. Allowing us to have lower prices but able to maintain a good profit margin. Another aspect of production we looked into was capacity. Increasing our capacity early allowed us to keep up with consumer demands and lower overtime cost. Since we invested a lot of capital early on we needed to be financially capable of performing the strategy. This area we issued stocks nearly every year and took out enough long-term debt to cover any potential of dipping into emergency funds.
Here at Digby, we strive for innovation, open-mindedness and communication. What this allow us to do is to take in many different ways of thinking and combine them into what we believe would be best for our company. Communication is big in our company. Open communication and being open minded allows for all parts of the department to come together on a decision. This also allows for any innovative and interesting ideas to be heard and implemented. In our organization, we have delegated various areas to fit the expertise of our staff. Even though departments are separated, any one of our staff can still have input in other areas. The way our organization structure is set up allows for our culture to be practiced for every decision we make. No single member is the central decision maker and every input is important and helpful.
Strategic Financial Analysis
Our goal was to establish a strong hold on the market in every category, from traditional to high end products while developing multiple new products. Exhibit 2 portrays how we instituted ourselves by the 8th year throughout the market. The first couple of years, our aim was to not look for immediate profits, but to invest into the future of our company by expanding production and capacity. Exhibit 3 shows how in our first two years, our sales were slightly above the industry average. The growth of our sales increased at a consistent rate, and comparing to other companies, we established ourselves as a dominant firm in our industry. So, while we were committing our company to look towards the future, we sustained and surpassed industry averages in many ways. Next, taking into account the expenses for our multiple products and research and development, we calculated our total profits and compared them to the industry. Exhibit 4 shows this comparison. This is where you can see that our investments were much higher in first couple of years because we made less money than other firms who were looking for more of a quick initial profit. Our eventual profits reached over $100 million more than the industry averages by year 8.
The growth has been resounding and the future looks to be even more promising and profitable. Exhibit 5 shows how profitable our firm has been relative to our total assets. Our management team has efficiently used the assets at our disposal to generate earnings for all our investors. With much of the industry failing in this aspect, we thrived reaching a high of 35.34% return on assets while the industry dove into the negatives. Exhibit 6 portrays each company's stock price. With a trend of higher stock prices, our prior investors have been very pleased especially this last year where our share prices increased by $107.67.
The investment that we are needing is $100 million. With this extra capital, we will buy out Andrew and consolidate our products. The financial outlook of this firm is clearly visible. We have never looked for quick profits, but instead looked to continue our investments for the future, while generating industry leading profits. Our company is a clear front runner with respect to R&D, production, marketing, and market share. So investing in Digby is not a question of why, but more of how long will you wait before realizing that this company is going to continue to thrive and can be a very lucrative investment?
What’s your promise for investors?
We, the management team of Digby, plan to acquire smaller firms within the industry. With more products in the market share, we project that Digby will own over 50% of the market, and continue to pay dividends. With 35.64% of the overall market share in only our 8th year of operating, we believe we can deliver on our word of 50% of the market. Next year we plan to have at least 37.65% of the overall of the market since we have been steadily growing by an average of 2% each year. By acquiring industries within the market, our goal to continue to dominate the industry would solidify.
The market has been growing at a steady pace of 13% in unit demand each year, with an expected total unit demand on the entire industry set around at 68971 units. Now to keep up with this growing demand we have set a roadmap in which we tend to follow. Therefore, to accomplish the task of obtaining 50% of the overall market share, in 2026, we plan to acquire businesses in the industry, such as Andrews and/or Chester. Chester is one of lower performing industry that is having trouble keeping up with consumer demands. Since they currently hold 3 products with a market share of 23.89% in the traditional segment, we would hold 48% of that market segment if acquired. In the following year, we tend to increase R&D spending to better suit consumer needs and invest more into the traditional and low-end segments. These two segments consist of 60% of the whole industry. Therefore investing in these two segments, which we currently don't hold the most market share for, would be beneficial. As for the following year, we tend to offer new products in the marketplace. We currently hold the most market share in the high-end (50.52%), performance (45.52%) and size market (44.9%). By offering new products in any of these or the ones we currently don’t dominate in would only help in achieving 50% of the overall market. Lastly, we will continue in investing in various areas such as R&D and Production to further grow our company and in maintaining our dominant position in the industry.
Success & Failure Evaluation:
During our time running Digby we were successful. Although we were able to attain the highest market share overall while control 50% of the markets in High, Performance, and Size, however, we still have areas that we can make changes, allowing us to improve the health of Digby.
Invested in automation and capacity:
We believed that early investment in capacity and automation would be a key to success in the later rounds. Capacity requirements take a year to become operational, so we always had to invest in capacity before we actually needed it. We noticed that each market segment grew approximately 10-20% each year, so we focused on the long-term stability and growth of the company instead of the current year. Towards the end of the simulation (rounds 5-8), we were able to produce more than 20,000 which was nearly more than double than the next closest competitor (Exhibit 7). Automation also allowed us to keep the cost and need of human labor to be decreased. At the end of the simulation we had three products that had reached the automation maximum while all other products were eight or above (Exhibit 8).
Introduction of 3 New Products:
We launched a total of three new products between rounds 2-4: Daisy, Doot, and Duff. Launching these products during the early years allowed us to have 40-50% market share in the segments high,size, and performance, while we still maintained a 30% market share in the traditional and low end markets (Exhibit 2). Having so many products, a total of 8, allowed us to monopolize the market, and earn cumulative profits of over 300 million.
The biggest failure/challenge we faced was the forecasting sales. During the earlier rounds our management team noticed stock outs of certain product segments. Our team would always produce more product(s) we would stock out of, and conversely when we didn’t stock out of a product, we would cut back production. Forecasting correctly is important since there are two problems overproduction, labor and carrying costs. If, we could go back and redo anything, we would have forecasted a bit more conservatively, and would have trusted our calculations. IF we would have forecasted correctly, we would have been able to reduce unnecessary cost, which leading to increased profits.
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