Capsim Presentation – Strategic Modifications

Main Strategy
Although we had our main strategy all planned out, everything does not always go according to plan. We neglected to come up with plans of how we were going to react to unexpected changes in the industry.

Slow Start, 4.1% ROS, 17% low-tech market share
We had a slow start in round 1, only receiving a 4.1% ROS, and a 17% low-tech market share. Although these are not bad percentages, the rate at which we were growing at this point was not keeping up to par with our vision statement. This was the first instance where we had to rethink how we were going to execute our strategy as a group to obtain our goal of being a leader of market share in the low-tech segment.

Improvements, 9.9% ROS, 20% market share
Our slow growth continued until round 3, where we noticed great improvements with our ROS increasing to 9.9%. This was the second highest area of growth throughout the industry. Our low-tech market share also increased to 20%, placing us as the 3rd greatest low-tech market shareholder.

New product problems
During round 3 we implemented a new product aimed for the low-tech segment, however we made a costly mistake and forgot to purchase capacity and automation for the new product a year prior to its release, so it was left stagnant in our factory for 1 year. Although it only cost us around $800,000, the market share that we could have gained from this product would have helped us greatly.

Implications leading to our first emergency loan
A problem that resulted from this error was that the following round (Round 4) we had to take an emergency loan out. We anticipated that the profit generated from Elbow would keep us away from an emergency loan, but due to our slip up, the lack of profit in the round resulted in us needing an emergency loan of $3.1 million ($3,121,755).

Liquidity crisis, drop in stock price
Another problem we faced throughout the competition was that our stockholders saw our emergency’s loans as a liquidity crisis, and this in turn affected our stock price, dropping it from $21.87 to $18.91 from round 4 to round 5. In round 4, our first product, Eat, stocked out. This was very costly to us, and cost us a 2% decrease in our low-tech market share, settling at 18%. We had the potential to reach 20% low-tech market share, but instead due to our stock out, that percentage was forfeited.

Second emergency loan, inventory carryover
In round 5 we were forced to take out another emergency loan of $7.2 million ($7,258,633). This was because of a number of different things. Firstly, we misread the cash for the next year as having accounted for the amount of debt due this year, which included the emergency loan from last year. Secondly, we had inventory carryover of 321 units, which cost us around $950,000 to house over the year, while this was not our greatest carryover, which was 12% in round 8, it is still much higher than our goal of keeping it to below 5%. One of the reasons we had our emergency loans was due to our attempt at using all of our cash on hand to re-invest in the company. An ongoing problem that we faced throughout the competition was our inability to obtain our potential market share.

Potential Market share issues
Rounds 1 through 7 we did not meet our potential low-tech market share, while in round 8 we surpassed our potential low-tech market share, but only by 0.1%. While the majority of these potential losses in low-tech market share were only 1-2%, this would have added up, and could have greatly increased our final low-tech market share.

COST REDUCTION STRATEGIES

Low tech company
We understand that as a low-tech company, we must keep our production, R&D, and raw material costs to a minimum, enabling us to compete in cost leadership and achieve strategy alignment.

Low variable costs, High contribution margins
Each round, we incrementally lowered the price of our product by $0.50 throughout eight fiscal years as customers buying from low-tech expect a drop in prices each year. We also decided to set the MTBF of our products to the lower end of the customer specification, because as a buying criterion it was not a major concern to the customer. We also remained quite frugal with our allocated expenses to marketing (promotion and sales budget). This was done to save money in variable costs and also to keep our contribution margins high.

TQM Initiatives
Throughout the 8 rounds, we invested a total of $10320 into TQM initiatives. The 3 main initiatives that we invested in were CPI Systems, Quality Initiatives training, and Channel Support Systems. These investments proved to be extremely helpful throughout the competition as they lowered our material costs by 9.14%, our labour costs by 11.95%, and increased our demand by 13.13%. These changes lead to a significant increase in our contribution margin.

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