A330A0100 International Business Strategies

M.Sc. in International Marketing Management/School of Business/LUT

Autumn 2013

Dr. Olli Kuivalainen

Professor, Lappeenranta University of Technology

Dr. Anssi Tarkiainen

(Simulation) Associate Professor, Lappeenranta University of Technology

REPORT

UNIVERSE I, BLUE TEAM

Monika Shrestha (0407266)

Georgios Ballas (0415258)

Andreas Bouris (0415339)

Matti Mäenpää (0314986)

20th November, 2013.

EXECUTIVE SUMMARY

Blue is a global handset manufacturing company which operates in three major markets (USA,

Europe, and Asia). The main objective was to be a global player being first-mover to gain the

benefits of price premium as well as market. The production was located in USA and Asia from

where it was supplied to Europe as well in order to meet the market demand.

The main objective of this paper is to examine the different strategies adopted by Blue during the

last 7 year period. Technological innovation was the unique characteristic of the company due to

which it stood in top three highest sales revenue generating firm. Blue is currently ranked second on

the basis of cumulative total shareholders return which is 16.603% per annual among the ten

competitors. We have introduced all four technologies in all the markets, but from the 6 th fiscal year

we continued only with Tech 3 and Tech 4 which were the highly developed and advanced

technologies during this transaction period. One of the important strategies was to continuously

invest in Research and Development (R&D) and develop innovative products earlier than

competitors which could help to gain competitive advantage. In case of production, we considered

learning curve as the main strategy in the start-up phrase but as we reached the end of the growth

phase we tried to maintain lower production cost strategies, including outsourcing. Promotion is

taken as the key weapon for increasing the sales volume, whereas high wages and continuous

training, provided to the employees, lowered the HR turnover and increased the efficiency of firm.

Year 6 and 7 could be considered as the most favorable time for Blue since we achieved the highest

profit and the shareholder's value started to rise. Initially Pear Inc., Navy, and Hermes Tech were

taken as the strongest competitors among the 9 competitors. Pear Inc., Navy, and Blue shared

similar strategies of providing advance and innovative technologies handsets for the consumers.

Whereas, Hermes  Tech is considered as similar company but having different strategy such as

providing handsets with basic technologies (Tech 1 and Tech 2) with low price product.

Increasing the shareholders' value was always taken into consideration, through dividend payments

and share buybacks. Share buybacks were done continuously from year 6 onward when there was

no more scope for innovative (R&D and buying licenses and features) development. Blue decided

to drop Tech 1 and Tech 2 early on and make Tech 3 and Tech 4 as the core of the product

portfolio. As a result, from Year 6 Blue started to make the highest profit among the industry

players and increase the shareholders’ value which showed that the strategies adopted by company

were fruitful. So, in near future we would mainly focus on highly advanced technologies and also

invest in the infrastructure development of Asian market due to its growing nature.

ii

Table of Contents1. LETTER TO SHAREHOLDERS......................................................................................................................1

2. COMPANY OVERVIEW..............................................................................................................................1

3. REVIEW OF FINANCIAL PERFOMANCE......................................................................................................2

4. MANAGEMENT DISCUSSIONS AND ANALYSIS..........................................................................................6

4.1 Marketing and Sales:..............................................................................................................................6

4.1.1 Product Decision:.............................................................................................................................7

4.1.2 Market Selection (Place) :................................................................................................................8

4.1.3 Promotion Decisions:.......................................................................................................................8

4.1.4 Price Determination:........................................................................................................................9

4.2 Production..............................................................................................................................................9

4.3 Research and development..................................................................................................................11

4.4. Human Resource management...........................................................................................................12

5. COMPETITOR ANALYSIS..........................................................................................................................13

6. LEARNING OUTCOMES...........................................................................................................................15

REFERENCES...................................................................................................................................................17

APPENDICES

APPENDIX 1. Earnings before Interest and Taxes - Ratio (%)

APPENDIX 2. Profit

APPENDIX 3. Return on Equity

APPENDIX 4. Outstanding shares

APPENDIX 5. Equity Ratio (%)

APPENDIX 6. Sales Contribution in Global Market

APPENDIX 7. Network Coverage Forecasts

APPENDIX 8. Product Selection and Market Share

APPENDIX 9. Capacity utilization

APPENDIX 10. Tech 3 and Tech 4 Production and Outsourcing (k units)

APPENDIX 11. Inventory Average Management Costs (k USD)

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1. LETTER TO SHAREHOLDERS

When we took the reins from the previous management team 7 years ago we had to face a changing

environment in the mobile industry and we knew that we would face serious challenges. However,

our only goal was and remains the same, long-term sustainability and profitability and after 8 year

of managing this company we are now able to say that we achieved it. As you know we achieved to

have the second best cumulative total shareholder return in the mobile industry (16.6%).

Implementing carefully our plan, which is being the first-mover in new technologies and providing

innovative products, we gained an accountable global market share (13.14%). Specifically, we

achieved to be the leading company in Tech 3 acquiring 7.4% of the market and we remained in the

forefront in Tech 4 acquiring 5.74% of the market. Our share price is the higher in the mobile

industry reflecting the high stability of our firm which is also strengthened by the fact that we have

a very low debt ratio.

In the future we will continue to be innovative and provide advanced technology and high amount

of features to our customers. Additionally we will exploit the fact that we have already achieved

economies of scale in Tech 3 and we will sell as cheap as we can this technology to our customers

in order to increase our market share. We will try to achieve the same with the Tech 4 products as

we want to produce only these technologies in the future and win the competition in both

technologies. This will be strengthened by the high amount of money that we will plan to invest in

promotion in both technologies. Another aspect that we will take into consideration is to build new

plants especially in Asia in order to satisfy the growing global demand for mobile phones and

reduce the transportation costs. Finally we will continue to buyback shares and we will also pay

dividends in order to increase the value of your shares when we have a sufficient amount of cash

and retained earnings because we do not want to risk by taking loans.

2. COMPANY OVERVIEW

When we took over as the new management team 7 years ago, BLUE was a small mobile handset

company competing among another 9 similar companies. All of them had similar products, prices

and strategies in general. In our effort to compete with the other companies we encountered serious

challenges, however, we managed to remain on top. Our guidance through these challenges was our

vision motto: “Inspire people, Connect the world”.

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Our main strategy was to be the first-mover of new technologies in all three key markets (USA,

Asia, and Europe). We largely achieved this goal especially for Tech 3 and Tech 4 mobile handsets.

Specifically we were first-movers for Tech 3 in Asia and USA and for Tech 4 in Asia and Europe.

In most of the circumstances though, other competitors joined us in introducing those new

technologies in the same financial year. As it comes to innovation we can say that we were

continuously ahead of our competitors in Tech 3 meaning that we were providing more features

than our competitors in all markets. Unfortunately, we cannot say the same for Tech 4. To keep up

with our main strategy, being the first-mover, and also be innovative we invested a lot in R&D. Our

mission was to provide everyone with World’s best mobile handsets using cutting edge technology

and advanced distribution network. We are dedicated to make people’s life more convenient by

providing handsets of the future with innovative features. After the first 7 years of managing this

company we are able to say that we accomplished our mission in a large scale.

Our main goal is to maximize accumulated shareholder's return. In the first 4 years we did not give

any dividends or buyback shares because we invested the money in the expansion of our company.

We decided that it is for the best of our company to expand and reap the benefits of the uprising

possibilities. So we invested our profits in R&D by buying licenses and paying a lot for wages and

training of our R&D personnel in order to keep up with our main strategy, being the first-mover.

From the 5th financial year the company had a lot of accumulated cash and our R&D had reached

high standards so we decided that we should distribute some dividends to our shareholders. From

that time we continued to pay dividends and buyback shares in order to increase the return to our

shareholders. Finally, we reached a cumulative total shareholder return ratio of 16.6% which is the

second best in the industry.

3. REVIEW OF FINANCIAL PERFOMANCE

The factor that contributed the most in our success was our sales revenue. Since the first year in

managing the company we were in the top three companies when it comes to sales revenue as

shown in Figure 1. Specifically from the second fiscal year till the fourth we were the second in

sales revenue behind our main competitor being Pear Inc. At the fifth fiscal year we managed to

take the lead from Pear Inc. and we remained at the top until today increasing our sales revenue

year by year and achieving a sustainable growth for our company.

2

1 2 3 4 5 6 7$0

$500,000$1,000,000$1,500,000$2,000,000$2,500,000$3,000,000$3,500,000$4,000,000$4,500,000$5,000,000$5,500,000

Sales Revenue (k USD)

HermesTech Red Blue MobiTech Grey Ochre Pear Inc. Navy MALT Colombia Connection

Fiscal Years

Figure 1: Sales Revenue (k USD)

Our company can be characterized as a Global company as per Rugman and Verbeke (2004) using

the sales of the last fiscal year. According to them and the triad power concept when a company's

sales are between 20% and 50% in each region of operation the company is global. This applies to

our company as our sales are : USA (21,5%), Asia (42%), Europe (36,5%).

It is also interesting though to see how much of these sales are transformed into profit, so we will

talk about Return on Sales. In Figure 2, one can see that Blue was continuously trying to increase

the company's ROS and finally reached the top at the last fiscal year having a hardly increasing

trend except the third fiscal year were the company experienced heavy losses. On average of the last

seven years, our company had the third higher ROS ratio (13.1%) after Pear Inc.(18.04%) and

MALT(15.35%). Something similar is also shown in Appendix 1 where we cite the EBIT%

indicator which is the Operating Profit (EBIT) divided by the sales revenue.

3

1 2 3 4 5 6 7-80.00

-60.00

-40.00

-20.00

0.00

20.00

40.00Return on Sales (%)

HermesTech

Red

Blue

MobiTech

Grey

Ochre

Pear Inc.

Navy

MALT

Colombia Connection

Fiscal Years

Figure 2: Return on Sales (%)

As it comes to profit generation Blue had continuously increasing trend except from the third fiscal

where we experienced heavy losses mainly due to the simultaneous launching of Tech 3 and Tech 4

which cost us a lot and the fact that we promoted heavily in order to introduce those new products

to the market. After that downturn we managed to go back to profitability and increased our profits

a lot year by year. The sixth fiscal year we had the biggest profit in the industry and we were the

first company to be able to announce more than 1 billion profits in a fiscal year. The last two fiscal

years our company remained the most profitable in the industry having a big difference from our

competitors. The profits of each company can be shown in the Appendix 2.

We are happy because our shareholder’s money was invested well. That is depicted by the fact that

we had the third best average ROE for the last 7 fiscal years in the industry (31.69%). First is Pear

Inc. with a percentage of 60.09% and second is MALT with 34.09%. Return on equity measures a

corporation's profitability by revealing how much profit a company generates with the money

shareholders have invested. In Appendix 3 there is a graph showing the ROE by company for every

fiscal year.

Our company achieved the highest market capitalization in the last fiscal year being approximately

13.6 billion USD when our main competitor had approximately 12.3 billion USD. Our share price

at the end of the last fiscal year has reached sky high levels being 532.3 USD when our outstanding

shares were 25,514,000. The very high share price and also market capitalization show the value

that the market attributes to our company which is of course explained by its astonishing

4

performance. As shown in Figure 3, the share price of the company is continuously increasing

except the third fiscal year where we experienced heavy losses and that was immediately depicted

on the share price. The last two fiscal years our share price increased very much and surpassed our

competitors’ share price. The main reasons for the very high share price are of course the strong

profitability, especially at the last two fiscal years where the rapid increase of our share price took

place, the dividend payments that we made and also the share buybacks.

As it comes to dividend payments, at the fifth fiscal year we decided that we had a lot of cash and

no investment possibilities so we paid a dividend of 150 million USD to our shareholders. This was

the opposite of our starting project plan where we said that we will prefer to buy back shares instead

of paying dividends but we reconsidered it and decided to pay dividends in order to reap the

benefits of the dividend yield which apply also in the long-run. We continued to pay some

dividends also at the sixth (200 million USD) and the seventh fiscal year (731 thousand USD). Also

at the sixth and seventh fiscal year we bought back shares because we thought that the share price of

the company was undervalued and the market could not foresee the upcoming growth of our

company. At the Appendix 4 is shown the number of shares for every fiscal year.

1 2 3 4 5 6 70.0

100.0

200.0

300.0

400.0

500.0

600.0Share Price (USD)

HermesTech

Red

Blue

MobiTech

Grey

Ochre

Pear Inc.

Navy

MALT

Colombia Connection

Fiscal Years

Figure 3: Development of Share Prices (USD)

Our plan was to have an equity ratio of 70% in order for our company to keep low levels of

borrowing and achieve sustainability. As shown in Appendix 5 we experienced difficulties in

retaining that level of equity ratio because of the short term and long term loans we had to take at

the third, fourth and fifth fiscal year despite the fact that we used internal loans to transfers cash to

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different areas in order to prevent that scenario. However, the last two years we managed to bring

the equity ratio to the desirable levels due to the high profitability. Internal loans have been also

used to transfer money across regions when one region had accumulated cash and another region

experienced a shortage. As Hamel and Prahalad (1985) said, when a company uses financial

resources accumulated in one part of the world to fight a competitive battle in another, it is pursuing

a strategy called "cross-subsidization".

We also used transfer pricing to benefit from tax reductions. Most of the times we tried to transfer

profits to Asia where the corporate tax rate was lower. There were also years were we had losses in

specific regions like USA or Europe so we transferred profits there to benefit from the deduction of

losses from the taxes.

4. MANAGEMENT DISCUSSIONS AND ANALYSIS

While playing the simulation, lots of strategies and decisions need to be made so that the company

performs effectively and could achieve the objectives. This section mainly deals with major

management discussions and the analysis of the results took place during the 7 years transactions in

different functional sectors.

4.1 Marketing and Sales:

One of the most important strategies of Blue was to be a first-mover with new technologies in the

global market. It got success of being a first-mover in the first year by introducing Tech 2 since

Blue was among those four companies which introduced tech 2 in all market. It continued same

strategy and introduced tech 3 and tech 4 at same time in year 4, it was an identical firm which

introduced two advanced technologies in particular time. As a result, it helped for the growth of

market and sales in long run. In addition, if round 1 is considered as the 1st year of operation where

export took place then Company Blue could be consider as Born Global firm. According to Knight

& Cavusgil (1996), "A born global is a firm, that has reached a share of foreign sales of at least

25% after having started export activities within three years after its birth. "The large portion of

Blue's sales were from foreign market; such as in Year 1, only 26% of sales was from USA market

remaining were covered from foreign market (Asia-40% and Europe-34%). The sales revenue

contribution of Blue in Global market is shown in Appendix 6 which says that it is a born global

firm and a global player. From the beginning, Blue has always tried to increase its global market

share and was able to achieve 10.33% in year 1 which reached to 13.14% in year 7. So, Blue can

also be considered as an important player in global market.

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The management strategies for marketing function can be more clearly discussed by considering

four major Ps' of marketing which are as follows:

4.1.1 Product Decision:

Blue is among the handset manufacturing companies which believe in introducing advanced and

developed mobile handsets to the ultimate consumers. To support its mission, "to provide everyone

with World's best mobile handsets using cutting edge technology", it manufactured all the four

technologies which were possible according to the suitable time frame and acceptability of the

market. It adopted product standardization approach in order to maintain brand image as well as to

enjoy other benefits of standardized product (Theodosiou & Leonidou, 2003). The base of

introducing product decision was on basis of network coverage graph which was provided in the

simulation (Appendix 7) and competitive environment. As a result, the management team decided

to continue with tech 1 till Year 3 in USA and introduce Tech 3 and Tech 4 in Asia and Europe

respectively so that they could match with the potential increase growth demand of markets. On the

similar way, Tech 2 was decided to be dropped from year 5 (end of year 4) because the global

market share of it was decreased and reached to 1.16%. As a result, it was decided to continue with

Tech 3 and 4 in near future.

While discussing about the features allocation in the products, the main two indicators adopted were

its market share, and competitors’ situation. In Year 1, Tech 1 and Tech 2 were allocated by 4 and 1

features respectively which helped to gain very good market shares in all the markets. So, in Year 2

the features were increased and reached to 5 and 4 respectively but the global market share of Tech

1 decreased whereas in case of Tech 2, it increased. As a result, increasing features in Tech 1 was

not supportive so it was dropped with 5 features in Year 3. In Year 3, highly advanced and

developed products were in demand so Tech 3 and tech 4 were introduced and it brought cut-throat

competition in all the market. Tech 3 was introduced with 2 features in Asian market and it

succeeded to obtain 5.18% market share and Tech 4 in European market with same numbers of

features could not obtain as much market share as Tech 3. It might be due to high price of Tech 4 in

comparison to Tech 3, as well as network coverage also played a vital role. From the next year of

introduction, the features were increased and allocated as per the competitive situation of the

market. In Year 7, both Tech 3 and Tech 4 products had full features i.e. 10 features. The detail

information about the features allocated in technologies during the operation period could be

obtained from the table (Appendix 8). The table includes 4 major information in each cells which

are technologies supplied in each market, numbers of features allocated, its price, and market share

achieved by the particular technology respectively in last 7 years. 7

4.1.2 Market Selection (Place) :

Another important decision that should be critically made is the perfect selection of market. The

main markets for Blue were America, Europe, and Asia. The key role of management team is to

decide which product needs to be supplied in which market and in which year. As per the pre-

survey, it was informed that the Asian market is very price sensitive in comparison to USA and

European market. Europe and USA market prefer to have highly advanced technologies rather than

Asia. Europe is less price sensitive in comparison to USA and Asia. The management team gave

equal priorities to all the market although each market was different from one another. In the initial

years, there was no product diversification due to lack of infrastructure and R&D. So, till Year 3

Tech 1 and Tech 2 with similar features were supplied in all markets. From Year 4, Blue improved

its R&D and infrastructure due to which it started to diversify its products.  As a result, it

considered Asian market as the key market for Tech 3, and European and USA market for Tech 4.

As it has been already said, Tech 3 was very successful in Asian market might be due to the cheaper

price in comparison to Tech 4. And, Tech 4 was highly accepted in Europe and USA might be due

to its advance nature of technology.

4.1.3 Promotion Decisions:

In real business, promotion plays a vital role for the success and failure of the business. Promotion

is the tool which brings awareness and provides information about the technologies available in the

market as well as the competitive advantage of the company among the similar firms. In the initial

phase, the management team decided not to invest more percentage of the sales revenue in the

promotion. It was nearly 3-5% in the beginning since it was the introduction and development

phrase where the infrastructure development cost was increasing very rapidly. Management decided

to invest in promotion only after Year 2 because in Year 3 it invested its huge capital in purchasing

licenses and R&D to launch Tech 3 and Tech 4. Launching Tech 3 and Tech 4 made Blue as the

first-mover so it analyzed that Year 3 to be the suitable time to invest in promotion which would

help in increasing revenue and setting premium price in each product and also could support for

long run in the future. The importance of promotion was well known to the management team but

the circumstance changes very frequently due to which it could be inappropriate to maintain fixed

percentage so it was decided as per the competitive environment. While looking through the market

response to the promotion, the management team decided to promote high in USA, then Europe,

and few percentage in Asia since it response very low to the promotion. It was maintained to make

sure that it would support the firm to keep the customer track toward the product of Blue and not to

diverse towards competitors’ products.8

4.1.4 Price Determination:

Price of the product is the key comparative factor which attracts the consumer towards the product

from the competitors’ products. Consumers have lots of options in the market, especially in our

markets since all the firms were manufacturing and supplying similar products.  When the products

were firstly launched in the market such as Tech 3 and Tech 4, Blue assigned a premium price. But,

as the products are already introduced in the market then it needed to set the price as per the

competitors, and the market's acceptable and affordable rate. Asian market was highly price

sensitive so from Year 5, there was a high price competition in Tech 3 and the competitors were

providing low features along with cheap price. As a result, Blue supplied products with high

features but in low price and this strategy helped Blue to gain quite good market share. In case of

Tech 4, all the competitor firms were offering full features so the competition was only on setting

low price. In this situation, the management needs to set the price very critically so that it would not

lead to loss the market share as well as the shareholders’ value (profit).

4.2 Production

When we started we had 12 production plants in USA. We evaluated the future needs of the

company and decided that we should build production plants in Asia. From the first fiscal year of

our duty we made a huge investment building 5 plants in Asia which helped us to fulfill the

increasing demand for our products and reduce our logistic costs because we would not have to ship

all the products from USA. We continued investing in Asian production plants building 2 more at

the second fiscal year and another 2 at the third fiscal year, summing up to 21 production plants in

both USA and Asia. These plants were able to cover the demand until now but we plan to build

more in the next fiscal years to satisfy the unexpectedly increasing demand for our products.

As it comes to capacity utilization efficiency we did well in general as shown in Appendix 9. The

first two fiscal years we had only plants in USA and we used approximately 90-94% of our capacity

without having very huge inventories. At the third fiscal year we had the first five Asian plants

ready to use and we produced at an average of 83% of our capacity but it turned out that our

estimations were high so we ended up having large inventories. Large inventories plus the

decreased demand due to the plane crash resulted in low capacity utilization at the fourth fiscal year

especially in USA where the inventory was held. The low capacity utilization was also influenced

by the fact that we chose to outsource a lot of Tech 3 handsets because of the high manufacturing

cost at that time. Finally, during the last three fiscal years we were becoming more and more

efficient in terms of capacity utilization mainly due to the increased demand for our products. The

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fact that we used 100% of our production capacity at the last fiscal year strengthens our view that

we should build more production plants in the future.

Our main strategy was to be the first-mover in new technologies that's why after buying licenses for

Tech 2 we were producing both Tech 1 and Tech 2 already by the first fiscal year. We also

outsourced Tech 2 units from Asia to avoid the transportation costs. From the third fiscal year we

started producing both Tech 3 and Tech 4, and stopped the production of Tech 1 handsets. As

shown in Appendix 10, we produced Tech 3 in Asia and Tech 4 in USA using also some

outsourcing. At the fourth fiscal year due to the large inventory especially in Tech 2 and Tech 4 we

had to decrease our production a lot. Specifically, we did not produce any Tech 4 that year because

we predicted that our inventory would cover the demand. The last three years we produced only

Tech 3 and Tech 4 both in USA and Asia. We used outsourcing only for Tech 4 because we were

able to produce relatively cheaper Tech 3. In figure 4 it is shown the production and outsourcing

magnitude of the last seven years both in Asia and USA. It is also interesting that the last three

years the production was rapidly increasing depicting the high demand for our products.

1 2 3 4 5 6 70

2000

4000

6000

8000

10000

12000

14000

16000Production and Outsourcing (k units)

ASIA OutsourcingUSA OutsourcingASIA ProductionUSA Production

Fiscal Years

Figure 4: Production and Outsourcing in USA and Asia (k units)

We aimed to cover the regional demand with regional production as possible to reduce logistic

expenses. The products sold in Europe were produced both in USA and Asia depending on where

the total cost of production and transportation was lower. However, the demand in Asia at the last

years was very high and sometimes we could not produce there for Europe or even cover the

regional demand. Despite the difficulties we managed to successfully minimize our logistic

expenses paying an average of 2.04% of our sales for logistics which was the lowest in the industry.

In order to calculate the logistic expenses of sales ratio we divided Transportation and Tariff cost by

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the sales revenue for every round. In figure 5 it is shown that throughout the period of the last seven

years we hardly always had the lowest logistic expenses relatively to our sales.

1 2 3 4 5 6 70.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%11.0%12.0% Logistic Expenses of Sales - Ratio

HermesTech Red Blue MobiTech Grey Ochre Pear Inc. Navy MALT Colombia Connection

Fiscal Years

Figure 5: Logistic Expenses of Sales -Ratio

As it comes to inventories we tried to keep minimum inventory in every fiscal year but sometimes

due to miscalculations of our expected demand we ended up with high inventories. Sometimes we

produced more than we needed, on purpose, because we thought that it would be better to have

some more inventories, which can be sold next year, than losing profits from unsatisfied demand.

Tech 1 and Tech 2 inventories were kept despite not needing them because we decided that Tech 3

and Tech 4 had larger profit margin and we should not try to deplete Tech 1 and Tech 2 inventories

as the inventory costs were not that high. In Appendix 11, there is a graph with the average

inventory management costs per company.

4.3 Research and development

In the mobile handset sector R&D investments are needed to introduce new innovative products that

are built around the latest technologies and to improve the existing products with more features.

These benefits can be achieved either by in-house development or through licensing agreements.

The risks around R&D investments revolve around consumers rejecting the new technology

because of competing technology or simply because of higher price due to increased production

costs of new products.

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Investing heavily in R&D is essential in making the first-mover strategy of Blue successful. Since

our goal from the start of our operations was to be the first company to introduce latest technologies

across all major markets we ended up being among the top investors in R&D. While our intention

was to focus on in-house development, we ended up spending a lot of money on licenses to be able

to match our competitors in new product launches. Looking back, we lacked focus and planning in

our R&D strategy early on, as we tried to develop new Tech 3 and Tech 4 products at the same time

while continuously increasing the amount of features in our existing Tech 1 and Tech 2 product

lines. Because of this we spent so much of our resources on R&D that we lacked funds to properly

promote our products during the first and second fiscal year. This issue will be discussed in more

detail in the competitor analysis – chapter.

As can be seen from Figure 6, our R&D expenditure was fluctuating every year despite us having a

relatively steady number of employees in the R&D department. This was caused by licensing

agreements, as our strategy was to keep up with our competitors across all technologies in all major

markets. The expenditure level of fiscal year three is especially notable, as that is when we launched

our Tech 3 and Tech 4 products.

1 2 3 4 5 6 7$0.00

$100,000.00$200,000.00$300,000.00$400,000.00$500,000.00$600,000.00$700,000.00$800,000.00$900,000.00

$1,000,000.00$1,100,000.00

R&D Expenditure (k USD)

HermesTech Red Blue MobiTech Grey Ochre Pear Inc. Navy MALT Colombia Connection

Fiscal Years

Figure 6: R&D Expenditure (k USD)

4.4. Human Resource management

Blue’s first-mover strategy means that as an organization we have to constantly stay innovative.

This means that as a company we have to be able to attract new innovative employees and have the

ability to keep them in the company in the long term. This requires human resource strategy that

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emphasizes employee turnover and efficiency of the work force, which is crucial when developing

new technologies and features. In practice this means that we wanted to offer our employees the

highest wages in the industry while keeping our training budget above the industry average.

Overall, we have succeeded to achieve these goals, which have resulted in us having 0% HR

turnover year after year.

As soon as we started our operations, we wanted to establish strong and efficient R&D department,

so that we could maximize the long term potential of in-house development. Compared to our

competitors, our employees’ numbers stayed very stable throughout the years. This helped us plan

our R&D better and have continuous upgrades for our products.

5. COMPETITOR ANALYSIS

The mobile handset market consists of 10 major manufactures. Competitor analysis is an essential

tool that we use to forecast the strategies of our competitors, and through that knowledge attempt to

gain a competitive advantage. The most important thing for us is to identify our direct competitors,

meaning companies that are reaching for the same target group as we are. After that we can further

analyze our direct competitors and look how their performance compares to ours. While we in Blue

had a clear vision from the beginning on what we want to do regarding our overall plan, we aren’t

afraid to make adjustments to our strategy if we see our competitor performing better with a

different strategy. In practice this means adjusting the pricing, promotion and the amount of features

of the products so that we can maintain a healthy market share and keep making profits.

There seems to be three prevalent strategies that companies use in the mobile handset markets. One

is to be the low cost manufacturer of Tech 1 and Tech 2 products, the second is to be the high-tech

manufacturer of Tech 3 and Tech 4 products and the third is to focus on just one of the high-tech

products while continuing to manufacture either both or one of the low-tech products. We in Blue

follow the high-tech manufacturer strategy along with Pear Inc., which seems to be the prevailing

strategy as both of us are having great success with it.

During the first two fiscal years all the companies competed in the Tech 1 and Tech 2 markets. To

figure out which companies were potentially going to be our direct competitors, we looked at the

amount of resources each company was investing in R&D. We assumed that low investments in

R&D meant that the company was going to focus on low tech products. At this stage the only four

companies that we could rule out as being a direct competitor at least in the short term were Ochre,

Colombia Connection, MobiTech and HermesTech. The main thing the first 2 fiscal years taught us

13

was the importance of promotion. Due to high promotion Pear Inc. was able to invest heavily on

R&D while still making large profits thanks to their high sales revenues in highly competitive

markets.

From third fiscal year on, we could see different strategies emerging regarding the product portfolio

and target markets. While Pear Inc. and Navy were challenging our Tech 4 product in Europe, Malt

was competing against our Tech 3 product in Asia. Both we and Navy took heavy losses during the

third fiscal year due to overoptimistic sales forecasts and too heavy R&D investments. The cost of

launching Tech 3 and Tech 4 during the same year was a heavy, but we managed to reap the

benefits of it later on by establishing ourselves early on in the lucrative Asian Tech 3 markets.

Pear Inc. had taken the safe road and invested at one technology at a time while delaying their Tech

3 launch. Due to focusing initially on Tech 4 products, Pear Inc. was also able to establish

themselves firmly in Europe, where the demand and network coverage of Tech 4 products was

growing rapidly. In the following years both we and Pear Inc. were constantly setting new sales

revenue records. Pear Inc. was making a fortune in the European Tech 4 markets and while we were

doing the same in the Asian Tech 3 markets. Eventually Pear Inc. moved also in Asian Tech 3

markets, but at the same time we had almost caught up with them in the European Tech 4 markets.

At this point markets had grown significantly compared to the first fiscal year, which meant that

many companies had to rely on outsourcing to cover the demand for their products. Pear Inc.

seemed to have significant problems addressing the situation as they had built only 5 new factories

in Asia compared to the 9 that we had built. We assume that this was the reason why they launched

their Tech 3 products first in Asia before USA and Europe. However, things stabilized for them and

other teams after market started to mature with the combination of rising outsourcing capacity.

Grey emerged as one of the more serious competitors during the sixth fiscal year. Using low prices

they managed to grab the largest market share in Tech 4 products globally while still making decent

profits in Tech 2 markets. Companies like HermesTech and MobiTech who were committed to their

strategy of low cost manufacturing of Tech 1 and Tech 2 products did very well during the early

years, but eventually their profits plummeted as market demand was shifting toward higher

technology products.

In conclusion, we faced high level of competition in all major markets and in all product categories.

The competition was most intense during the first 2 fiscal years among Tech 1 and Tech 2 products.

After that the product portfolio of companies operating in the mobile handset market started to

14

differentiate which gave some opportunities for companies using first-mover strategy to establish

themselves in the emerging Tech 3 and Tech 4 markets.

6. LEARNING OUTCOMES

Taking part in the simulation game was a very interesting experience because for most of us it was

the first time we did something similar. Our group consisted of four members of three different

nationalities and every week we made a meeting in order to make the decisions for the round. The

cooperation in the beginning between us was difficult and took a long time. We were not familiar

with the decision making procedure of the game so many times we had to go back to previous steps

and change our decisions. After a couple of weeks we managed to communicate with each other

easier and make the decisions in less time than the first weeks. Sometimes each team member was

making his/her own decisions by himself/herself and when we were meeting we were discussing

and forging a unique plan. We also benefited a lot from working in a multicultural team where

people from different nationalities and with different educational background contributed to the

teamwork with their special knowledge.

Concerning the game, we learned how to plan different stages and aspects of a company's

operations. For example, we had to think and decide about the demand of our products meaning our

predicted market share, decide about marketing issues like promotion and pricing and also allocate

our production capacity in the most cost efficient way. We also learned how to make decisions

concerning logistics, finance, R&D and human resources, how to interpret our and our competitors'

performance at the end of each round and how to adjust our plan in order to line up with our goals.

All this procedure helped us to understand how to put theory in practice and how the knowledge we

acquired from books can be used in something similar to the real world as Cesim simulation game.

We now know from the firsthand how complex the decision making procedure is in a company.

After the active participation in the simulation, our team felt some areas which were quite different

from the real world and they are as follows:

Within a box limitation: The features those could be developed were limited due to which

the efficient human resources need to be fired and could not use their ability in near future.

In addition, promotion was not specific i.e. it was only about spending some portion of sales

but not about creating own image may be on the basis of quality or price.

Corporate Social Responsibilities: One of the rising trend in current business is the role of

CRS which is totally ignored in this program.

15

Network Effect: Network plays a vital role in success and failure of any business.

Identifying and developing new as well as maintaining the existing network could be an

important strategy of a high-tech company.

Inter-Cultural Issue: It is a global firm so it need to consider about the inter cultural

differences and its value.

Long-term financing system: The long term financing was only possible from the parent

country which could be a big restriction in the real business.

Merger and Acquisition facilities: M&A facilities were not available due to which the firm

having excess cash could not use them in beneficial manner.

16

REFERENCES

Hamel, G. and Prahalad, C.K (1985) Do you really have a global strategy? Harvard Business

Review, 63, July-August, 139-148.

Knight, G. and Cavusgil, S.Tamer. (1996). “The born global firm: a challenge to traditional

internationalization theory”. Advances in International Marketing, JAI Press, 11-26.

Rugman, A.M., & Verbeke, A. (2004). A perspective on regional and global strategies of

multinational enterprises. Journal of International Business Studies, 35, 3-18.

Theodosiou, M. and Leonidou, L.C. (2003). Standardization versus adaptation of international

marketing strategy: an integrative assessment of the empirical research, International Business

Review, 12, 141-171.

17

APPENDICES

APPENDIX 1. Earnings before Interest and Taxes - Ratio (%)

1 2 3 4 5 6 7-50.00

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

50.00EBIT (%)

HermesTech Red Blue MobiTech Grey Ochre Pear Inc. Navy MALT Colombia Connection

Fiscal Years

APPENDIX 2. Profit (k USD)

18

APPENDIX 3. Return on Equity

1 2 3 4 5 6 7-400.00

-350.00

-300.00

-250.00

-200.00

-150.00

-100.00

-50.00

0.00

50.00

100.00Return on Equity (%)

HermesTech Red Blue MobiTech Grey Ochre Pear Inc. Navy MALT Colombia Connection

Fiscal Years

APPENDIX 4. Outstanding shares

1 2 3 4 5 6 723,000

24,000

25,000

26,000

27,000

28,000

29,000

30,000

31,00030,000 30,000 30,000 30,000 30,000

29,500

25,514

Outstanding Shares - Blue (k shares)

Fiscal Years

19

APPENDIX 5. Equity Ratio (%)

1 2 3 4 5 6 70

10

20

30

40

50

60

70

80Equity Ratio (%)

Fiscal Years

APPENDIX 6. Sales Contribution in Global Market

1 2 3 4 5 6 7

0%10%20%30%40%50%60%70%80%90%

100%

Sales contribution in Global Market

EuropeAsiaUSA

Years

Sale

s in

%

APPENDIX 7. Network Coverage Forecasts

20

APPENDIX 8. Product Selection and Market Share

Year USA T1 USA T2 Asia T1 Asia T2 Europe T1 Europe T2GlobalMarket Share

1

Tech 14

$299

(6.48%)

Tech 21

$379

(3.36%)

Tech 14

RMB 2199

(7.85%)

Tech 21

RMB 2499

(1.77%)

Tech 14

€189

(9.67%)

Tech 21

€299

(2.09%)

10.33%

2

Tech 15

$299

(6.68%)

Tech 2

4

$389

(2.91%)

Tech 15

RMB 2189

(5.64%)

Tech 2

4

RMB 2349

(3.27%)

Tech 15

€195

(8.02%)

Tech 24

€325

(7.01%)

10.71%

3

Tech 15

$299

(4.67%)

Tech 26

$410

(4.67%)

Tech 32

RMB 2899

(5.18%)

Tech 26

RMB 2419

(3.74%)

Tech 42

€599

(2.66%)

Tech 26

€419

(6.88%)

9.18%

4

Tech 33

$450

(3.76%)

Tech 27

$410

(3.75%)

Tech 33

RMB 2939

(7.51%)

Tech 27

RMB 2419

(2.59%)

Tech 43

€599

(4.33%)

Tech 27

€419

(3.77%)

8.95%

5

Tech 36

$419

(4.48%)

Tech 46

$419

(4.39%)

Tech 36

RMB 2749

(9.43%)

Tech 46

RMB 3199

(1.16%)

Tech 46

€499

(4.39%)

Tech 27

€299

(4.56%)

9.78%

6

Tech 38

$370

(5.88%)

Tech 48

$479

(8.34%)

Tech 38

RMB 2549

(7.98%)

Tech 48

RMB 2849

(3.63%)

Tech 48

€419

(5%)

Tech 38

€299

(4.21%)

11.52%

7 Tech 310

$340

Tech 410

$399

Tech 310

RMB 2249

Tech 48

RMB 2749

Tech 410

€369

Tech 310

€279

13.14%

21

(2.42%) (9.46%) (10.21%) (3.30%) (8.24%) (8.24%)

APPENDIX 9. Capacity utilization

1 2 3 4 5 6 70.00%

10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%

100.00%Capacity Utilization

USAASIA

Fiscal Years

APPENDIX 10. Tech 3 and Tech 4 Production and Outsourcing (k units)

22

1 2 3 4 5 6 70

100020003000400050006000700080009000

10000Tech 3 Production and Outsourcing

(k units)

Asia OutsourcingUSA OutsourcingAsia ProductionUSA Production

Fiscal Years

1 2 3 4 5 6 70

100020003000400050006000700080009000

Tech 4 Production and Outsourcing (k units)

Asia OutsourcingUSA OutsourcingAsia ProductionUSA Production

Fiscal Years

APPENDIX 11. Inventory Average Management Costs (k USD)

$0.00

$1,000.00

$2,000.00

$3,000.00

$4,000.00

$5,000.00

$6,000.00

$7,000.00

$8,000.00

$9,000.00

Inventory average management costs (k USD)

HermesTech Red Blue MobiTech Grey Ochre Pear Inc. Navy MALT Colombia Connection

23