The Business Strategy Game

23 – 24 July 2009

Present to you by

Sakchai Jarernsiripornkul MBA

The College of Graduate Study in Management,

Khon Kaen University

2

Objectives of the course

Learn how to make strategic decision and

exercise good business judgement

Gain a deeper understanding of relationships

between management functions inside a firm

Enhance understanding of the strategies for

competing successfully in business

competition

3

Customers and Distribution Channels

Independent footwear retailers

Company owned Megastores

Online sales at the company’s web site

Private-label sales to NA Chain Store Accounts

Branded Market

4

At the openning

Joining the senior management team at a

$100 million company making athletic footwear

Competing in four major geographic markets

and the internet market

Challenging to develop and execute strategy

that will propel the company into a prominent

and profitable position in the global athletic

footwear industry

5

How your company’s performance will be judged

Growth in revenues

Growth in Earnings per share (EPS)

ROI – Return on investment

Market Capitalization

Bond rating

Strategy rating

6

Markets to compete…

Branded market North America,

Europe, Asia, and Latin America

Private - label market

Internet market

7

Weapons of competitive rivalry

1. Wholesale Selling Price

2. Product Quality

3. Use of customer rebates

4. Product line breadth

5. Advertising

6. Celebrity endorsement and product image

Branded Market

8

7. The number of retail outlets

8. Service level to retailers (Service Rating)

9. The number of company owned Megastores

10. Customer Loyalty

11. The effectiveness of the company’s online sales

effort

Branded Market

Weapons of competitive rivalry

9

Quality Rating

% of Long wear material

QC expenditures / pair produced (current year)

Cumulative QC expenditures / pair produced

Styling/features budget per model

Branded Market

10

Memo on Quality Rating

Quality Rating ranges between 0 – 250

Quality Rating of unsold shoes would be

reduced each year

5 pts. in the P-label Mkt.

10 pts. in the Branded Mkt. of each zone

Branded Market

11

Use of customer rebate

Manufacturers have the option of offering

buyers a rebate on each pair purchased from

retailers

Rebate can range from $1-$10 per pair

Branded Market

12

Product line breadth

Product line breath can range between

50 to 250 models

Branded Market

13

Image Rating

Image Rating range between 0 – 250

Image Rating is a function of:

Cumulative advertising expenditures (up to 125 pts.)

Celebrity Endorsements (up to 125 pts.)

Branded Market

14

Retail Outlets

The more retail outlets selling your shoes, the

more market share you could gain

At the opening, each retail outlet costs $100

per year to service

Branded Market

15

Service Rating

Ranges between 0 – 250

The four factors that determine the service rating are:

Stockouts in the previous year

The delivery time achieved in the previous year

The resources devoted to handling customer service

in the current year

The desired delivery time in the upcoming year

Branded Market

16

Customer Loyalty

Brand, which have more market share,

would gain higher Customer Loyalty

Branded Market

17

Internet Trading

Volume of sales in the internet depend on: Global factors

The number of models offered in the web The company’s average retail sales price

Speed of delivery (next day, 3 days, 1wk., 2wk.)

Regional factors Quality Rating Image Rating Advertising in the region

18

Private – label marketing Qualified specification

Quality Rating > 50 Model availability > 50 Bid price < or = $2.50 of average

branded wholesale price in NA Unsold pairs

Storage costs + Quality Rating reduced by 5

Option to liquidate P-L inventory

19

Operations

There are 2 plants, situated at North America (cap. = 1 mil. pairs)

Asia (cap. = 3 mil. pairs)

Production in North America costs

higher than in Asia

20

Operations

Raw material costs in year 11:

Normal-wear = $9 / pair

Long-wear = $15 / pair

* Material prices are expected to fluctuate according to worldwide utilization of

footwear plant capacity and the percentage use of long-wear materials

21

Worldwide shoe production < 90% of capacity

Price drop 1% for each 1% below 90% of capacity

>100% of capacity

Price rise 1% for each 1% exceeds 100% of capacity

Global usage of long-wear mat. > 25%

Long wear mat. price rise 0.5% for each 1% exceeds 25%

Normal wear mat. price drop 0.5% for each 1% below 75%

Fluctuation of Material Prices

22

Worker Productivity

Depends on:

% increase in annual wage

% Incentive in the compensation package

Total compensation comparing with regional rivals

Employment Climate – Hiring or Firing

Expenditures to improve production methods

23

Compensation decisions

Workers are paid by: Annual wage

• Minimum annual wage in NA = $18,000

Incentive per pair produced

24

Production methods improvements

Reduce material costs

Reduce plant supervision costs

Increase worker productivity

Company needs 5 years to wait for full effect

25

Actions to reduce the Reject Rate

Reject Rate is a function of:

Annual QC expenditures per pair produced

The size of the piecework incentive per pair

produced

The number of different models

“Random factor”

* Standard reject rate is 5% at the NA plant and 5.5% at the other plants

26

Temporary Plant Shutdowns

Enter a zero for pairs to be manufactured on the

manufacturing screen and a zero for the total number of

workers employed (you may also eliminate QC budget,

Styling/Features budget)

Variable Costs = 0, but still have to pay Fixed Costs

Reopen, worker productivity = 90% of previous year

27

Plant Upgrade Options

6 options available

Could select only 1 option per plant in each year

Each plant could have only 3 options

Upgrade options come on line the year after being ordered

Payment must be made the year the option comes on line

28

Plant Construction and Expansion

S, M, L (price list on p.56)

Construction of a new plant takes 1 yr.

Max. expansion = 5 mil./ yr

Payments are due the year the facilities

are available

29

Plant Closing

Liquidation value = 75%

All plants can be shut down immediately

30

Warehouse and Shipping

All shoes will be shipped directly to

Memphis, Brussels and Singapore

(Sao Paulo) – No shipping can be made in Y11

Shoes made for P-label are sent directly to

North America after production

Goods shipped to any warehouse cannot

be reshipped

31

Currency Exchange

It is forecasted that in the next several years,

Euro > $ > Yen > Real

32

Bond Rating

Is considered fromdebt-to-assets ratio

Y10 = 0.46 (< 0.25 is good; > 0.50 have progressive negative impact; >0.65 results in BB or worse)

The times-interest-earned coverage ratio Y10 = 3.25 (ratio of 2.0 is considered minimum)

The strategic risk factor (> 7 negative)

If Bond rating = C; no further debt would be allowed.

33

The Strategic Risk Factor

Is considered from

1. Company’s plant capacity

The bigger the capacity, the more the market share needed

2. Percentage of P-label sales in total sales

3. The number of geographic regions in which your

company has plants

34

Corporate Financing Options

Short – Term Loan

Bond – 10 year term; max. 12 bond issues ( 3

of which have already been used);

Common Stock – current share price = $7.50

35

Factors affecting Stock Price

1. Revenue Growth

2. The 3-year trend in company’s EPS

3. The annual ROI

4. The 3-year trend in ROI

5. EPS growth

6. Growth in the annual dividend

7. whether the company’s dividend payout ratio exceeds 100%

8. Bond rating

9. Strategic Risk Factor

36

Strategy Rating Score

Does not assess how good a company’s strategy is.

The rating is designed to measure what a company

is known for and how much a company stands apart

from rivals.

Companies with few strategy rating points generally

are “stuck in the middle” or suffer from competitive

disadvantage.