Simulation Exercise: Cost Leadership and Differentiation Strategies - Essay Example

Simulation Exercise: Cost Leadership and Differentiation Strategies Introduction Our main goal in the first year of management of our Claude was based on building our market share. However, as we progressed, our attention was diverted to emergent issues which prompt us to review our strategy and plans. The company deployed two strategic approaches for both our major categories of products. On the branded footwear, we deployed global cost strategy where as the private-label footwear we used the global differentiation strategy. According (Julie, 2014) companies that use both cost leadership and differentiation strategies become more completive as they are able to win customer from high and low scales. This aspect of strategy is known as hybrid and is used in markets that are very competitive. On branded footwear, it was necessary to use cost leadership strategy as this is the area that generates much revenue for the company. The private label footwear needed a unique strategy, slightly different from the first one. We deployed global differentiation. The fact that we were dealing directly with large scale retailers gave us a chance to take recommendations on how best we would modify the products as a way of making the footwear more competitive. Kelchner & Media (2013) says that differentiation strategy creates customer loyalty to particular brands and products. This is important to the manufacturing company as the customer will be looking out for more modification. Both of these strategic approaches were motivated by stiff competition in the market and played key role in putting the company on top of the industry. With huge varieties of products from other companies, these strategies uniquely distinguished our products and hence the reason why we decided to work with global cost leadership for our labeled footwear and global differentiation for the private labeled footwear. INDUSTRY OVERVIEW PESTEL POLITICAL The fact that our operations were based in four major geographical regions (Europe-Africa (E.A), Asia-Pacific (A.P), Latin America (L.A) and (North America)) we were directly affected by political policies such as; type of government and it s stability, import duties, and taxes. The import tariff was averagely at 6% in all the four major markets. However, Free Trade Treaty of the Americas allows tariff-free movement of footwear between all the countries of North America and Latin America. ECONOMIC Sports footwear is regarded as a leisure commodity and therefore was in market competition with other manufacturers of footwear that is traditionally used for all seasons like the leather shoes. Nonetheless, people are buying them considering the changes in lifestyle. In doing this, we had to analyze national GDPs of target nations, inflation, unemployment levels, interest rates and economic cycles to determine the operations of our company. The other important political factor was the international borders which allowed us to know areas we are allowed to operate. SOCIAL The use of athletic footwear is being embrace by all people. Children and teenagers were our main target. They are known to put these shoes and this gives them sense of admiration by other people. Adults are also target customers as most of them use the footwear during recreational activates and mainly over the weekends. During the operations, we noticed that moves that are full of holiday like December, gave us high sales in all regions. People’s lifestyle was also an important social factor we considered. This determined what designs were more acceptable in certain regions. TECHNOLOGICAL Technology has become a driving force for all competitive companies. The internet has revolutionized the way people do business. With technology in place, the world has literally become a village market where one can view, order and purchase products at the comfort of their homes. As a global company, we used the internet for marketing our products globally. We also used the internet to create an online platform where clients can purchase our footwear online. We also maximized the internet to monitor all the operations in the four major plants. This helped save time and resource for handling management. ENVIRONMENTAL The environment is an important factor for any company. Environmental conservation helps protect the future. The company was involved in this through use of “Green” footwear materials and recycle boxing. The company was also involved in energy efficiency initiatives. Apart from protecting the environment, this activities and steps were vital in making sure the company participates in the Corporate Social Responsibility. This is good for business as it helps in the S/Q rating of our products. PORTER’S FIVE FORCES SWOT ANALYSIS COMPANY DECISIONS YEAR 11 OBJECTIVE STRATEGIC ACTION OUTCOME To increase our net revenue Increase production of private labeled is N.A and A.P Stopped Internet marketing Reduced our models from 151 to 118. To improve our image rating Use of green footwear material The company’s image was slightly improved. To minimize low operation profits Focused on production in most effective plants in N.A and A.P Increased production from N.A and A.P with capability to supply to all the markets. In year 11, we put much of our attention in trying to learning and analyzing the market. We didn’t make many investments in marketing as this would be risky and would pose a danger in our next year’s revenues. Majority of the other companies were making new policies to try keep up with competition. This was an advantage for us to learn their previous strategies and predict their next moves. In the process, we were able to maximize our time in improving our brand image which is critical. We therefore embarked on using green footwear material. Geller (2013) explains that when working on improving brand image, enough time should be focused on that activity. But the most important aspect is to maintain the standards that have been achieved in building the brand image. In the same year, we decided to use the strategy that was in place from the previous management. This was a big risks as we sluggard behind as other companies were making new policies and operational plans that would give them a better market share. YEAR 12 OBJECTIVE STRATEGIC ACTION OUTCOME Implement cost leadership strategy Reduced wholesale marketing Reduced models from 151 to 118 Rise in revenues from the previous year. To improve online orders Invested more on internet marketing Increase in online orders. To expand production of labeled footwear in E.A and L.A Increase product production in E.A and L.A High number of product production that sustained all retailers within the regions. This year started with a challenge from the competitors. We therefore focused on implement a new strategy that would place the company at par with them. The use of cost leading strategy called for an increase in our production from all the plants. E.A and L.A got a boost in their production. The cost leadership particularly worked best with the labeled footwear. We increased the production and slightly reduced the prices. The economies of scales helped us recover for the funds used in cutting the prices down. We also focused on improving our clientele by targeting clients who do purchases and orders online. We invested more on internet marketing. This was an effort to ensure that we capture clients from all possible sources. Year 13. OBJECTIVE STRATEGIC ACTION OUTCOME To Implement Global differentiation strategy Increase production of private labeled is N.A and A.P Increase in revenue from large scale retailers To increase price of shares We purchased more shares. Increased cost shares Improve the quality of products Increased investment in marketing Increased the S/Q of the products from 4 stars to 5 stars but maintaining the cost of the products. This year, we focused on implementing the differentiation strategy which allowed us to increase the number of clients from large scale retailers. Most of these retailers came mainly from the N.A and the A.P. We also channeled our recourses to improving the quality of our products. With stiff completion, a better rating would ensure that we beat the rest of the companies in the industry. The rating increased our sales as many buyers use the ratings in determining the product to buy. In an effort to increase the prices of shares in the company, we purchased more shares to ensure we were the determiners of the market price of the shares. This was vital because eventually the prices increased leading to increase in investor’s cost price. Year 14 OBJECTIVE STRATEGIC ACTION OUTCOME Increase bids for private labeled footwear Assume that all bids will be accepted in making projections for the following year. Increase in revenue from large scale retailers Reduce net cost of marketing. Cut down budget for marketing. The revenues increased from the previous year. Reduce operations cost and improve profits. Cut down on marketing. Cut down on incentives for workforce Substantial increase in revenue and profit In an effort to expand the market, we once again increased our bidding in production of private labeled footwear. This ensured that we were able to supply to our regular distribution areas and still supply to new markets through large scale retailers. We also cut cost used in marketing. Fewer budgets were allocated for wholesale marketing to retailers. These retailers had already become regular clients and there was no threat from other companies. We were sure that they would still make orders for our products. The operations cost also had to be reduced. By cutting down on incentives given to our work force, we were able to increase our revenue and maximize on our profits. We also cut down the budget for marketing. REMAINING WITH THE INITIAL STRATEGY We started implementing our strategies in our second year (Y11). The decisions made in Year 11 and 12 were closely related. In year 13 we had a slight shift from the initial strategy as we focused on emergent market requirements. This led to a slow pick with sales from all the markets. Despite that, we were able to incorporate changes with our strategies. The other companies in the industry were in their second phase of their strategies. To some extend this was an advantage to us because eventually we realised the changes we made helped in building our clientele. The growth pattern of our company has not been consistent over the years but within the five years, a drastic raise in net revenue was attained. The other competing companies have had drops in their revenue for implementing wrong strategies. Observing Table 6. in the appendix indicates how growth dropped in the second and third year. This is due to the fact that we were working on increasing prices of our shares. The benefits were realized in the fourth year. Verweire (2014) says that the main challenge facing strategy implementation is emergent strategies, poor management team, lack of consistency with company policies and other external influences. Implementation of emergent strategy in the second year helped the company build its production capacity in all four plants. The four plants recorded high production the following year. This gave each plant independence in supplying to their regions. THE FINAL RESULTS From Table 9. In the appendix, it is clear that the company did not achieve its projections in the first three year but results were positive in the last two years. The company did not perform as expected but it performed relatively well comparing with the rest of the companies in the industry. Table 12 in the appendix shows the final year’s industry report which ranked our company second with and overall positive performance. The competiveness in the industry was distinguished by strategy implementation. UNDERLYING STRATEGIC PRINCIPLES The views and points about strategy which rose from the strategic principles used during the simulation process were vital developing strategic approach. Bust still, concisely having the ability take into consideration the external influences was really important. Trying to implement new and emergent strategies can easily divert a company's attention and this gives the competitors an upper hand. Time and resources are used in trying to deal with new strategies. Diverting from original strategies means that some operations are likely to be pending as emerging issues are dealt with. However, immanent strategies helped the company to maximize in profitability and production. Consequently we found ourselves two steps ahead of our competitors. As they worked on the emergent strategies, we had embarked on our initial strategy. Hill & Jonesl (2008) explains that emergent strategies are survival measurements that companies use to keep up with competitive market. Changes in trends of operations call for immediate change and adoption of new plans. These plans ensure that companies have not been affected and that they are able to go back to their original strategies. While analyzing strategies to be sued, companies should consider emergent strategies as they are uncertain. Uncertainty in business means losses because business rely much of projections. KEY LEARNING POINTS ABOUT STRATEGY Strategy is long term direction of an institution which considers changes, both internally and externally by configuring resources and competence and achieving shareholders expectations. According to Mintzberg, Ahlstrand, Ahlstrand, & Lampel (2005), strategy in business is a long term plan controlled by policies that a business uses to achieve success. Strategies help business to remain focused on their goals and objectives. They help businesses to remain competitive and relevant in the market. Companies work with different strategies depending on factors such as market, products and services, competitors among other factors. Strategies help companies set long-term goals that eventually bear success. But at the same time, the company should be able to adapt to new and urgent changes. The market requirements change irregularly depending on needs. A company should be on the lookout for such changes. These changes help the company remain relevant in the market. According to Morris (1996) to strategies is important drive force for company’s success. Integration of company policies with its strategic goals equally vital and together they help move companies towards their goals. Strategic planning involves a lot of risks as there are factors that are only based on projections. Political, social, economic and technological changes can occur unexpectedly and this might affect the long term plans of a company. A company should be able to quickly adopt into these changes when they occur. Enough research should be put before a company embarks on using a particular strategy. External influences are unpredictable and can change anytime. Elements of strategic management should be promised in ensuring that the strategy to be deployed is as good as perfect. CONCLUSION In the beginning of the simulation, we took time to understand all aspects of the industry. We took time to develop and work on potential strategic directions to be in the next five years. By the beginning of the third year, we had implemented two strategic directions. Global cost leadership for labeled footwear and global differentiation strategy for private labeled footwear. In the second year we had to incorporate emergent strategies to cope up with rising changes and challenges. Cost leadership is a plan to produce products and services at low prices that are accepted by the majority in a competitive market. The use of cost leadership strategy works in markets with stiff competition. They strategy helps a company distinguish itself from the rest of the competitors. Moreover, differentiation strategy is effective in a competitive environment with big companies. The strategy works best in markets where companies are producing almost similar products. The strategy helps consumers differentiate the product by look at extra modifications done to the products that are not in the competing product. Cost leadership strategy helped the company gain a substantial market share due to favourable prices of labeled footwear. This called for an increase in our production from the four plants. This strategy played an important role in trying to counter competition against our competitors. Differiation strategy on the other hand helped us improve our supplies. The fact that we already had distributors of labeled footwear from other regions ensured that private labeled footwear generate revenue from large scale retailers. References list Henry, W. (2013). Management and Strategy implimentation. New York,NY: Washingon,DC. Hill, C., & Jonesl, G. (2008). Essentials of Strategic Management. Boston,MA: Cengage Learning. Hitt, M. (2014). Strategic Management: Concepts: Competitiveness and Globalization. Boston,MA: Cengage Learning. Mintzberg, H., Ahlstrand, B. W., Ahlstrand, B., & Lampel, J. (2005). Strategy Safari: A Guided Tour Through The Wilds of Strategic Mangament. New York,NY: Simon and Schuste. Morris, D. (1996). Market Power and Business Strategy: In Search of the Unified Organization. Portsmouth: Greenwood Publishing Group. Verweire, K. (2014). Strategy Implementation. New York,NY: Routledge. http://www.forbes.com/sites/loisgeller/2012/05/23/a-brand-is-a-specialized/ Kelchner, L., & Media, D. (2013, April 23). The Advantages of a Product Differentiation Julie. (2014, May 7). Cost Leadership and Differentiation; An Investigation of the Fundamental Strategy. Retrieved March 15, 2015, from Chron: http://smallbusiness.chron.com/advantages-product-differentiation-strategy-17691.html Geller, L. (2013). Why A Brand Matters. Retrieved March 16, 2015, from Forbes: Trade-Off. Retrieved March 16, 2015, from Scribd: http://www.scribd.com/doc/51608620/Cost-Leadership-and-Differentiation-An-Investigation-of-the-Fundamental-Trade-Off#scribd Read More