MGT 4903 Business

Strategy
BSG Group Writing
Report

2009/2010 Semester B

By Ms. Jody Wong

Gager II Company

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

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 11,953
12 3,767
13 0
14 5,079
15 19,260
16 67,561
17 66,140
18 69,897
19 26,489
20 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’000 Dividend amount Payout Ratio
Net Revenue per share

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

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

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 19

Stock Price 31.63 23.01 44.18 114.75
(US $ per share)
Repurchased
Common Shares 100 700 1,200 500
(’000)
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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Gager II Company (Company G) – Business Strategy Analysis Report

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
Company 65 64 72 65.5 66.99 70.3 74.99 66.99 78.88 70.28
Price
(US $)
Ind. Avg 73.66 73.67 74.05 74.17 73.35 74.67 75.90 75.43 75.82 71.48
Price
(US $)
Market 19.3 23.6 14.6 19.6 17.8 14.4 13.8 20.5 13.3 14.9%
share % % % % % % % % %

S/Q 5 6 7 8 7 7 7 6 5 4
Rating

Europe-Africa Plant (EA)

Year 11 12 13 14 15 16 17 18 19 20
Company 65.0 64.0 72.0 65.5 66.99 70.3 74.99 66.99 78.88 70.28
Price
(US $)
Ind. Avg 73.66 73.67 74.05 74.17 73.35 74.67 75.9 75.43 75.82 71.48
Price
(US $)
Market 20.1 28.0 16.8 17.9 22.3 16.0 12.0 19.2 11.2 14.8%
share % % % % % % % % %
S/Q 5 6 6 7 7 7 8 6 5 4

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

Rating

Asia Pacific Plant (AC)

Year 11 12 13 14 15 16 17 18 19 20
Company 65 64 72 65.5 66.99 70.3 74.99 66.99 78.88 70.28
Price
(US $)
Ind. Avg 73.66 73.67 74.05 74.17 73.35 74.67 75.9 75.43 75.82 71.48
Price
(US $)
Market 20.5 26.0 15.9 23.4 20.4 16.1 13.3 17.5 11.2 17.1%
share % % % % % % % % %
S/Q 5 6 7 8 7 7 8 6 5 4
Rating

Latin America Plant (LA)

Year 11 12 13 14 15 16 17 18 19 20
Company 65.0 64.0 72.0 65.5 66.99 70.3 74.99 66.99 78.8 70.28
Price 8
(US $)
Ind. Avg 73.66 72.61 73.2 74.17 73.35 74.67 75.9 75.43 75.8 71.48
Price 2
(US $)
Market 20.5 23.5 14.8 19.2 16.4 13.8 10.7 18.8 9.9% 13.9%
share % % % % % % % %
S/Q 5 6 7 8 7 7 7 6 5 4
Rating

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
Company 57.0 56.0 57.0 60.0 49.99 56.49 57.99 60.99 59.99 56.48
Price
(US $)
Ind. Avg 52.99 55.3 56.76 56.88 56.88 57.62 58.55 58.07 57.37 57.1
Price

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

(US $)
Market 8.8% 10.1 10.4 8.7% 12.8 9.6% 10.1 9.4% 9.5% 11.2%
share % % % %
S/Q 5 6 7 8 7 7 7 6 5 4
Rating

Europe-Africa Plant (EA)

Year 11 12 13 14 15 16 17 18 19 20
Company 48.0 57.0 58.0 53.48 51.99 54.99 56.99 58.99 57.99 57.48
Price
(US $)
Ind. Avg 52.26 55.25 57.32 58.01 58.17 58.18 59.59 57.52 56.74 55.54
Price
(US $)
Market 14.0 13.1 12.3 12.8 15.0 14.2 11.8 10.4 7.9% 9.6%
share % % % % % % % %
S/Q 5 6 6 7 7 7 8 6 5 4
Rating

Asia Pacific Plant (AC)

Year 11 12 13 14 15 16 17 18 19 20
Company 41.0 48.0 49.0 54.0 49.99 43.99 51.99 54.99 54.99 54.48
Price
(US $)
Ind. Avg 44.39 46.71 49.23 51.05 51.07 50.77 53.03 54.0 53.85 53.13
Price
(US $)
Market 10.8 11.8 12.2 12.2 11.8 13.7 11.1 8.9% 8.1% 12.0%
share % % % % % % %
S/Q 5 6 7 8 7 7 8 6 5 4
Rating

Latin America Plant (LA)

Year 11 12 13 14 15 16 17 18 19 20
Company 50.0 58.0 59.0 56.0 53.99 45.99 54.99 54.99 54.9 51.48
Price 9
(US $)
Ind. Avg 47.39 56.6 54.65 56.9 54.03 51.34 54.54 54.63 54.1 53.18
Price 1
(US $)
Market 7.2% 8.7% 5.4% 10.8 8.9% 10.2 6.9% 9.8% 9.3% 13.0%
share % %
S/Q 5 6 7 8 7 7 7 6 5 4
Rating

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

(Sourced from NA Plant)

(Sourced from EA Plant)

(Sourced from AP Plant)

(Sourced from LA Plant)

Private-Label Segment

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

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

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

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

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

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

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

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

3. Evaluation of Winner’s Strategies

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.

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

With the adoption of good financial strategies, the credit rating of company B is the
highest one among others.

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

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

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

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

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

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

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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