Business Strategy Final Report

MGT 4903 Business StrategyBSG Group Writing Report

2009/2010 Semester B

By Ms. Jody Wong

Liang Jim How Peter, ID: 5053 3039

Lo Siu Ping Anita, ID: 9719 6568

Lo Shuk Mei Susana, ID: 9719 5420

Lo Heung Wa, ID: 5028 8158

Gager II Company

Gager II Company (Company G) – Business Strategy Analysis Report

Table of Contents

1. Analyze and evaluate Gager II Company Strategies (Company G)

- Financial Strategy - Production Strategy- Segment Strategy- Marketing & Advertising Strategy

2. Explanation of the company’s strategy performance achieved the company vision.

3. Why the winner wins the game? Why the loser loses the game?

- Explanation and Evaluation of the Winner & Loser’s Successful and Unsuccessful strategies.

4. Conclusion

- Problem & Improvement Strategy

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1. Analyze and evaluate Gager II Company Strategies (Company G) We have used various strategies in terms of financial, pricing, segment & production,

marketing and advertising strategies to achieve our company vision and also aim to

above or maintain investor expectation in terms of earnings per share, return on

equity, stock price, credit rating or image rating within this footwear industry.

There are some successful strategies and decisions we made as follows.

Financial Strategy

Good Cash Flow

We understand it is very crucial to maintain a good and positive cash flow to run a

business, we were able to achieve good financial position every year except the Year

of 13, the cash flow shown as zero because the overdraft is applied for clearing the

unsold inventories.

Year USD’000(Cash on hand)

11 11,95312 3,76713 014 5,07915 19,26016 67,56117 66,14018 69,89719 26,48920 81,984

Dividend Payout

Since we have sufficient cash flow throughout the entire period, therefore we applied

dividend payout approx. from the range of 5% to 38.5% of our annual net income

from Year 13 to Year 20. We believe the dividend payout strategy would likely assist

to increase company corporate image. Please see below chart for details.

Year USD’000Net Revenue

Dividend amount per share

Payout Ratio

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11 243,479 0.00 0%12 296,392 0.00 0%13 304,611 0.76 21.7%14 343,346 0.40 26.8%15 387,367 0.50 9.9%16 382,824 1.00 16%17 354,878 1.20 38.5%18 446,442 0.40 5.1%19 392,903 0.50 10.0%20 486,593 0.50 7.0%

* Net Revenue of Gager II Company (G)

Credit Rating

We were able to keep our credit rating on A+ from the Year 15 to Year 20 and we

thought we would leverage the credit facility whatever applies and the cost of

borrowing would help to achieve the lower cost, however we ever borrowed loans

hroughout the entire business years.

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Repurchased Common Shares

We repurchased our company shares during the Year 13, 15, 18, however we

repurchased 500 no of shares due to sufficient cash flow during the Year of 19.

Year 13 Year 15 Year 18 Year 19Stock Price

(US $ per share)31.63 23.01 44.18 114.75

Repurchased Common Shares

(’000)100 700 1,200 500

Total no. of shares repurchased (’000): 2,500

Production Strategy

Plant upgrade

Due to our conservative production strategies and expected macroeconomic view on

global situation, we decided not to consider a new production plant, however we

thought to upgrade our existing production plants in North America (NA) and Asia

Pacific (AP) plant are relatively appropriate to our production strategies.

We upgraded the aassembly production line to reduce reject rate by 50% (NA Plant &

AP Plant); Equipment upgrade to boost S/Q rating by 1 star (NA Plant only) and

facilities upgrade to boost worker production by 25% (AP Plant only)

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Purchased Capacity from a Competitor

During the Year 19, we found one of the competitors - Champion Company which

have sold the 2,000,000 capacity in NA Plant, we purchased 700,000 capacity from

Champion Company. Since our cash flow is pretty sufficient, we did not leverage any

credit facility from bank.

Segment Strategy

Internet Segment

We were always applied a pricing strategy of relatively below the average of industry

price in order to capture market share throughout the entire business years (except

Year 19). See below tables for price comparison (Company Price Vs Industry

Average Price among peers)

North America Plant (NA)Year 11 12 13 14 15 16 17 18 19 20

CompanyPrice(US $)

65 64 72 65.5 66.99 70.3 74.99 66.99 78.88 70.28

Ind. AvgPrice(US $)

73.66 73.67 74.05 74.17 73.35 74.67 75.90 75.43 75.82 71.48

Market share

19.3% 23.6% 14.6% 19.6% 17.8% 14.4% 13.8% 20.5% 13.3% 14.9%

S/Q Rating

5 6 7 8 7 7 7 6 5 4

Europe-Africa Plant (EA)Year 11 12 13 14 15 16 17 18 19 20

CompanyPrice(US $)

65.0 64.0 72.0 65.5 66.99 70.3 74.99 66.99 78.88 70.28

Ind. AvgPrice(US $)

73.66 73.67 74.05 74.17 73.35 74.67 75.9 75.43 75.82 71.48

Market share

20.1% 28.0% 16.8% 17.9% 22.3% 16.0% 12.0% 19.2% 11.2% 14.8%

S/Q Rating

5 6 6 7 7 7 8 6 5 4

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Asia Pacific Plant (AC)Year 11 12 13 14 15 16 17 18 19 20

CompanyPrice(US $)

65 64 72 65.5 66.99 70.3 74.99 66.99 78.88 70.28

Ind. AvgPrice(US $)

73.66 73.67 74.05 74.17 73.35 74.67 75.9 75.43 75.82 71.48

Market share

20.5% 26.0% 15.9% 23.4% 20.4% 16.1% 13.3% 17.5% 11.2% 17.1%

S/Q Rating

5 6 7 8 7 7 8 6 5 4

Latin America Plant (LA)Year 11 12 13 14 15 16 17 18 19 20

CompanyPrice(US $)

65.0 64.0 72.0 65.5 66.99 70.3 74.99 66.99 78.88 70.28

Ind. AvgPrice(US $)

73.66 72.61 73.2 74.17 73.35 74.67 75.9 75.43 75.82 71.48

Market share

20.5% 23.5% 14.8% 19.2% 16.4% 13.8% 10.7% 18.8% 9.9% 13.9%

S/Q Rating

5 6 7 8 7 7 7 6 5 4

Wholesale Segment

The pricing strategy we have been used in wholesale segment was depended on the

S/Q rating and celebrity appeal availability. We set higher price than industry average

when we successfully bided celebrity appeals in particular regions. Otherwise we

preferred to use relatively lower price (use industry average as our benchmarks for

pricing strategy). Please see below tables for details in pricing comparison.

North America Plant (NA)Year 11 12 13 14 15 16 17 18 19 20

CompanyPrice(US $)

57.0 56.0 57.0 60.0 49.99 56.49 57.99 60.99 59.99 56.48

Ind. AvgPrice(US $)

52.99 55.3 56.76 56.88 56.88 57.62 58.55 58.07 57.37 57.1

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Market share

8.8% 10.1% 10.4% 8.7% 12.8% 9.6% 10.1% 9.4% 9.5% 11.2%

S/Q Rating

5 6 7 8 7 7 7 6 5 4

Europe-Africa Plant (EA)Year 11 12 13 14 15 16 17 18 19 20

CompanyPrice(US $)

48.0 57.0 58.0 53.48 51.99 54.99 56.99 58.99 57.99 57.48

Ind. AvgPrice(US $)

52.26 55.25 57.32 58.01 58.17 58.18 59.59 57.52 56.74 55.54

Market share

14.0% 13.1% 12.3% 12.8% 15.0% 14.2% 11.8% 10.4% 7.9% 9.6%

S/Q Rating

5 6 6 7 7 7 8 6 5 4

Asia Pacific Plant (AC)Year 11 12 13 14 15 16 17 18 19 20

CompanyPrice(US $)

41.0 48.0 49.0 54.0 49.99 43.99 51.99 54.99 54.99 54.48

Ind. AvgPrice(US $)

44.39 46.71 49.23 51.05 51.07 50.77 53.03 54.0 53.85 53.13

Market share

10.8% 11.8% 12.2% 12.2% 11.8% 13.7% 11.1% 8.9% 8.1% 12.0%

S/Q Rating

5 6 7 8 7 7 8 6 5 4

Latin America Plant (LA)Year 11 12 13 14 15 16 17 18 19 20

CompanyPrice(US $)

50.0 58.0 59.0 56.0 53.99 45.99 54.99 54.99 54.99 51.48

Ind. AvgPrice(US $)

47.39 56.6 54.65 56.9 54.03 51.34 54.54 54.63 54.11 53.18

Market share

7.2% 8.7% 5.4% 10.8% 8.9% 10.2% 6.9% 9.8% 9.3% 13.0%

S/Q Rating

5 6 7 8 7 7 7 6 5 4

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(Sourced from NA Plant)

(Sourced from EA Plant)

(Sourced from AP Plant)

(Sourced from LA Plant)Private-Label Segment

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We found the profit margin in Private Label Segment was pretty low and market

shares were not reasonable achieved in the first few years even recorded “zero” in

Year 14, therefore we immediately shifted our key focus to internet and wholesale

segments exclusively (except Year 19). Please see below chart for details.

Marketing & Advertising Strategy

We believe the essential advertising strategy to boost our sales volume are highly

correlated to the total amount of advertising expenses, so we decided to allocate our

advertising budget in the very first beginning and even increased significantly in the

later stage. We spent approx of 16% of net revenue from the Year 11 to Year 16 and

raised historical high to 34% in Year 19.

We were successfully appointed four celebrities in later stage to boost our sales and

continuously promote our company & product image. As a result, the marketing &

advertising strategy really helped to raise the net revenue and more importantly

maintain our market share among the keen competitors.

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2. Explanation of the company’s strategy performance achieved the firm vision - “To Be Customer’s Premier Footwear Company in The World”

We would like to explain in greater details on how our successful strategies achieved

the firm vision.

With reference to the ‘selected balance sheet data’ in the last year (year 20), we were

eventually able to possess the greatest amount of ‘liquidity’ against other competitors

in the industry.

Since we had sufficient liquidity, we were allowed to contribute more in marketing

expenses than other competitors did. Please see ‘selected financial and operating

statistics’. We spent in marketing expenses by 32.6% of our net revenue, which was

more than the average number (24.7%), and even more than other competitors’.

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Especially, we signed contracts with ‘4 celebrities’ in the expenditure of our strong

liquidity. In comparison with other competitors, the firm owned the greatest number.

i.e. we gained competitive advantage by having our shoes promoted by the greatest

number of celebrities. Please refer to ‘celebrity endorsements’ table.

Remarks: Gager II (Company G) bided 4celebrities

We have the strongest liquidity so able to gain the greatest support from celebrities,

and contribute most in marketing expenses, and hence to promote and boost our sales.

Our products were therefore generally recognized by public in the result of the

greatest market share we had on internet. Please see ‘company G’s market share’ chart

below:

According to data on http://www.bsg-online.com/users/flash/index.html# , the average

market share per each firm on internet was about 10%(only in year 10)-12.5%(rest of

years). We were proved to be the market leader on internet since our market share was

about 16% on average and even beyond 20% in some years due to the greatest

recognition in public.

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http://www.bsg-online.com/users/flash/index.html#


We adopted ‘in-the-middle-ground’ strategy (i.e. intended to be ‘stuck in the middle’

in internet/wholesale). Please see 2 diagrams below:

We benefited from the abovesaid strategy which drove us not to accidentally fall

behind other competitors in the industry although we could not be the number one

there. This strategy helped us to be positioned in the ‘middle’ of market (see

scoreboard below):

Based on our firm’s strategic performance in various perspectives that we mentioned

previously, we can conclude that we already achieved the firm’s vision, which is ‘T o

be customer ’ s premier footwear company in the world ’ .

3. Evaluation of Winner’s Strategies

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Financial Strategy

Strong balance sheet

We believe that a strong balance sheet is very important for running a business. Our

game show that the winner has a reasonably strong balance sheet in its financial

situation, i.e. at Year 20, Group B had a debt-assets ratio of 22%. It was in good

position to cover its interest and principal payments on loans outstanding. The winner

do not fall within the blind spot of the conservative which resulting that the company

development will be limited due to no loan made.

Consistent Dividend Payout Plan and Stock Purchase Plan

A consistent plan of dividend payout and stock purchases will help to enhance the

company’s earning per share and also stock price. The winner will redeemed the

stocks at quite low price. At the same time, the winner also applied dividend payout

ratio theory to decide the dividends which is 10% of our annual net income.

Good Capital Budgeting

To stimulate the sales and maximize the profit with limited resources, a well designed

capital budgeting with production, marketing, warehousing & administration is a

criteria., i.e. in Year 20, Company B have a good position of financial and operating

statistics. It shows that they are carefully determine various expenses in the budgeting

to attain the highest profit possible.

With the adoption of good financial strategies, the credit rating of company B is the

highest one among others.

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Production Strategy

Building plant capacity at overseas

The winner (Company B) has the largest plant capacities for production. They have a

total of 13,800 capacities compared with the loser having 6,000 capacities. Having

built more production capacities, the winner had enjoyed the economies of scale in

face of keen competition, i.e. in Year 20, Company B had captured more than 20%

market share in all 4 markets.

Flexible Strategies

To win the game, the production strategies must be flexible to adept with different

market pattern (e.g. level of competition, exchange rate issue, warehousing expense

issue). For example, Company B had an adopted differentiated strategies in the

production with different S/Q rating for different market. During Year 15 to 20, , they

produce the footwear with 10 S/Q rating in Latin America whilst the footwear for

other 3 markets have only 2 S/Q at the same period. It suggests that they applied a

flexible strategy in its production.

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Efficient Allocation Of Production Capacity

The management of production capacity must be efficiently evaluated and allocated to

match with the sales forecasting with its price setting, the adjustment of the delivery

and warehousing expenses incurred, and the movement of the exchange rate

difference.

Marketing Strategy

Aggressive Advertisement Campaign in Latest Years

As it is generally believed that the competition is not keen in the early stage of the

simulation, the expenses on advertisement had only raise up slowly. For example, the

advertising expense of Company B had only grew from 11,000 to 14,500 until Year

16, however, the expenses had been increased significantly to 23,000 thereinafter and

when in Year 20, the advertising expenses for all 4 markets had reached 25,000

maximum. It reflects that they raised advertising expense significantly after Year 16 to

fight over the keen competition.

Monitoring on Sales versus Sales Expenses

Expenses like celebrity and advertising costs a lot but they help to boost sales.

Therefore the winner needs to balance the benefit and the cost of expenditure. It must

be ensured that the sales return growth more than cost. With the increasing production

capacity, the marketing expenses must be spending to ensure that they are spending a

good value of money.

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Too Focus on Corporate Citizenship

In the game stimulation, Company D had been awarded “Gold Star Award” 4 times

for Corporate Citizenship. It was a bad move with a good intention. It is because it

will pull down the business profitability as it seems too focus on image building,

rather than the production strategies or marketing strategies. The spending on

Corporate Citizenship will take out of the resource for expanding the production

capacity and/or making more advertisement or celebrity. This may be the reasons

why Company D have not done any building up new capacity and have any celebrity

taken.

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Evaluation of Loser’s Strategies

The following explains what have gone wrong with the loser’s strategies.

Financial Strategy

Conservative Mind

One of the major reasons was the loser being too conservative in making financial

decisions, the most obvious phenomenon is that they did not borrow bank loan to

extend the business, this is because they think it is too risky to borrow loan for

investment. However, they will lose the chances for expanding the business due to

conservative mind. For example, Company D had not spent any for expand production

plant with zero L-T debt.

Production Strategy

High Production Cost

Firstly, from the beginning of the game started, Company D had recorded a higher

production cost (i.e. 63.6%) than the competitors with the same segment as us. Even

for some companies with the highest quality and the best feature of goods, they can

always produce with lower production cost. It may be due to the higher cost of pairs

sold

Unsold Inventories ( Poorer Inventory Control )

Without precise on sales forecasting, the inefficient allocation of production capacity

may lead to unsold inventory which it in turns will adversely penalize the S/Q rating

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of the existing product. Also, the unsold inventory affects the financial status by

showing in the statistics of “Days of Inventory”. To clear the unsold inventory, its

sales price will be set at a discount. It will harm the profitability.

For example, Company D had a figure of 365 “Days of Inventory”.

Marketing Strategy

P ricing Strategy with Unclear Objective

It is undeniable that the loser company did not do a good job in price setting. The

price adjustment could not meet with the movement of cost (production, marketing,

etc) for most of the time, showing that they did not even covering the increase in

production cost. If we tried to make more sales by bargain price to cover the

production cost, the higher sales have no conflict with high S/Q product strategy but

the incentive of buying should not be driven by low price. This is one of the worst

strategies performed in the simulation.

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4. Conclusion

After the game, we learn the suffering from the Unsold Inventories (Poor Inventory

Control) and also realize the importance of Construction of additional capacity in our

company business strategy among the peers. Why?

Unsold Inventories

We considered to upgrade our S/Q rating to 7 or 8 star in Year 13 under the Branded

Production, since our “unsold inventories” were accumulated and exceeded to

5,247,000 capacities, therefore the S/Q rating was downgraded, our selling price has

to lower significantly in order to clear the inventories, thus the net revenue dropped

and also our cash on hand was reached to zero unexpectedly. Consequently we lost

our competitive strength and thus weaken our overall position in terms of market

share, EPS, corporate rating during the Year 13.

Self Construction of Additional Capacity

We have been discussed few times to consider whether a new plant should be built in

order to achieve “economies of scale”. Since our business strategy is relatively

conservative at the first beginning years and we preferred not borrow heavy debts to

run the business and operation, so we never built a new plant to increase production

capacity during the first few years. As such, we found the cost of production is pretty

high and profit margin is relatively lower among the keen competitors. At the later

stage, we have to lower our price to gain market share, even we tried hardly to boost

the sales. It has been difficult to lower the cost of production even we tried with all

possible ways.

We realize the importance of constructing of an additional plant would be a crucial

business strategy to lower the overall cost of production and increase production

capacity. We believe it should one of the key business strategies to compete with

competitors and strength the leading position to maintain in a long run survival in the

footwear industry.

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Documents

Business Strategy Final Report