- Market position
As for the market position, Firm C’s market value is 11.4% which is much less than that of Firm A (27.9%), Firm D (28%) and firm E (23%), but its Minivan Car (Camini) occupies the whole market. Another two cars (luxury Climax and family Cafav) are not very outstanding. The leader firm of family car market is Firm E which occupied nearly one-third market. As for the luxury car market, Firm B accounts for over half of whole market. Additionally, both the Cafav and Climax are dog products in the BCG matrix (Appendix 1) which means low relative share and low growth. However, the Camini belong to the cash cow. As for customer analysis in BCG matrix, the customers of these three cars are located in the Cash Cow. Therefore, the three cars have a good potential to grasp market and make profit. In terms of its distribution areas, there are not many differences among its four areas. The number of dealers is in the range between 80 and 95 in the four areas respectively.
In general, its weaknesses include poor liquidity, as for its advantage, its profitability and debt ratio s good. As for its opportunity, Camini has a good potential in earning great profit. Finally, as for the threat, the competition in family car market is furious.
- Initial business strategy
Strategy is defined as “a method or plan chosen to bring about a desired future, such as achievement of a goal or solution to a problem”. (businessdictionary.com, n.d). Evidently, a goal for the Firm C needs to be made in this simulation. Based on the performance analysis of Firm C in period 0, the final goal for Firm C is to be the leader who is with the highest market value and stock price in this industry. As for the strategy, the focus strategy would be used in selling high-edge luxury Climax; the low-cost strategy will be used for selling family Cafav which is in the most competitive market; and the differentiation strategy would be used by Canimi who occupied the whole minivan market.
3. Strategies, tactics and plan
Because the stock price account for up to 40% of final mark, therefore, salving the problem that how to increase the stock price is the most essential one. For the stock price, the earning per share (EPS), rice to earnings ratio and dividend per share (DPS) are the significant internal indexes in deciding the value of stock ((Davies.T and Boczko.T, Pp169). The formulations of these three indexes are as following.
- EPS=net profit after interest and tax / number of shares
- Rice to earnings ratio = market price / EPS
- DPS=dividend / number of share
It is very easy to know from above formulations that the net profit and market price are main elements affecting the indexes. The sales volume and each product’ profit contribution would decide the net profit and market share directly. Therefore, all the decisions making would be based on the sales volume and product’ profit contribution in each period.
Net income, market value and stock
As the showing of the three charts above, the change trends are similar. There are two main kick points in these three charts, separately; they are in the period 4 and period 7. The net income decreased from 2,116 million in period 4 to only 159 million in period 7, and then sharply increased to 908 million in period 8. As for the change trend of market value of Firm C, it is totally same with that of stock. The highest values of net income, of market and of stock are in period 4 respectively, the bottoms of them are in the period 7. Therefore, the strategies, tactics and plans have been used would be told about in three different span of time in the following paragraphs.
3.1. Period 0 --- Period 3 “Development”
In this span of time between Period 0 and Period 3, the market value, net income and the stock keep increasing. The main tactics include product development, increase of advertising and promotion, outstanding selling theme and appropriate production. Major changes are not adapted in this span of time because I want to know what will happen, and what actions would be taken by competitors in the next periods.
As for the production, it is calculated according to the increase/decrease rate of sale from Period X to Period (X+1). Take the production of Camini in Period 2 for example, , its sales in period 0 and period 1 was 174,000 and 181,000, so the increase rate is 4%, namely, (181,000-174,000)/174,000, which was used to predict the production in period 2. And then the inventory in period 1 would be deducted as well. Therefore the production of Camini in period 2 is 173,240 units, namely, 181,000*(1+4%) – 15,000. As for the product development, it is decided by the inventory in each period. If the inventory is too much, the improvement would not be adopted because the development would result in a huge profit loss. In the period 3, the inventory of Climax is 30,000 units, which would lead to a nearly 40 million profit loss if the development is applied. Therefore, the development is cancelled.
As for the increase of advertising and promotion and the change of advertising theme, the purpose of that is to make differences with competitors. Take the family car - Cafav for example, its main target customers are families who are likely to focus on price sensitive, safety and flexible storage. Therefore, the promotion and the advertising theme of safety or quality can be used to attract target customers.
In general, the consequence in this span of time is satisfactory, not only as the increase of net income, market value and stock, but also as its stock is the highest in this industry.
3.2. Period 4 --- Period 6 “Recession”
In this span of time between Period 4 and Period 6, Firm C is in the recession. The reasons include the external and the internal ones. Because of the sharp decrease, the original strategy was changed to be that to release the recession situation and try to increase the net profit and stock price.
The external reasons
Apart from Firm C, the stocks of Firm A, Firm B and Firm D have already decreased to only $12.69, $27.53 and $10.69 respectively. However, both the market value and stock price of firm E go up dramatically to $ 42,444 million and $95.25. What is more, it occupied over 50% market share. The main reasons for this increase can be attracted as that Firm E launched two new cars. One of them is a family car, which is with the best performance and cheapest retail price in current industry. Furthermore, the inflation, prime rate and gas price have some increase in this span of time as well. In other world, customers have to pay more money if they want to purchase a car, or chose the cheap cars. For the family who care about the price and quality extremely, they would tend to buy better quality car at good value in this period. Firm E’s new family car exactly meets customers’ demand. In addition, Firm E provides a huge quantity of promotion and advertising to raise awareness and then attract more customers. Therefore, most of customers coming from other 4 firms turn to Firm E.
The internal reasons
As for the internal reasons, the main one is that the economic outline is ignored. In actual, the inflation is increase, and the GDP is decrease in this period. These two economic indicators influence customer’s consumption. In this span of time, customers would tend to buy economy and family cars whose price is cheap in industry. Therefore, promotion and decrease price are effective ways to attract customers. However, the decisions made by Firm C are not effective enough.
Tactics
Based on the analysis of vehicle class and customers BCG matrix, Cafav and Climax are dog products, which are with low growth and low relative share, but their customers are located in the star matrix. Therefore, the increase of advertising and promotion, product development and decrease of MSRP are adopted in the beginning of this span of time, meanwhile, the number of dealers also have an increase in 4 selling areas. However, these actions do not release the recession. In the period 5, Cafav still is dog product; moreover, its customers also down to the dog matrix. In other words, Cafav is in the decline phase of product life cycle. In order to extend the maturity time of family car and increase the market share, a new family car and a economy car ware developed. The performance and MSRP of this new family car are similar with those of Efizz. Moreover, the size and Hp of it are better than those of Efizz. As for the new economy car, its performance is similar with Alec, but the MSRP is more expensive than that of Alec. The price of those two cars was indentified on the basis of concept test.
Source: http://www.2081.org/photo/view.aspx?keys=product+life+cycle+curve
In general, the result in this span of time is not good. The used actions are not effective enough. The stock decreased to the lowest point $22.
3. 3. Period 7 --- Period 8 “Resurgence”
In this span of time, Firm C is in the resurgence. All the data has improvement. The main reason is the effective usage of international market. Meanwhile, economic indicators also have improvement. For example, the GDP went up quickly and the inflation also went down in this span. Therefore, it is a good opportunity for Firm C to improve its recession.
International market
The strategy of international sourcing is that buying low from international market and selling high in domestic market. As for the strategy of international marketing, it should insist on selling high to international market. In order to reduce the marketing and sourcing risk, the negotiation with alliances is used in this market. For example, the Firm C achieved contracts with pacific Firm X and Atlantic Firm M in exporting Climax at $50,000 and $58,899 for each car respectively in period 7. However, its basic cost is only $ 27,655. Therefore, the difference between basic price and contract price would be Firm C’s income. As for the sourcing, for example, Firm C imports economy car Xing at the $13,000 of contract price and then sell it at $17,588 in domestic price. The reasons why Xing would be imported are because the excellent performance which is much better than current domestic economy car market, and the cheap price.
Domestic market
The decrease of MSRP and increase of advertising and promotion are still the main ways to attract customers. As for the MSRP, there is a significant decline. For example, the MSRP of Cafav declined by $1000 from $ 29,999.
4. Discussion on the eventual outcome
Based on the formulations introduced above, the final current ratio is 65%; the debt ratio is 38%; and the net income ratio and margin rate are 3.6% and 22.1%. Among them, only the current ratio and debt ratio have been improved. The rest one is worse than before. In other words, Firm C still has problems in liquidity and profitability. Even though the stock price rise again, the net income in final period is just as half as before one period. In addition, the return on sales and return on assets are very low, which means the investment is not effective enough. The main reason for it is because of wrong decisions made in period 7. The price of imported product is too high for domestic market; most of customer cannot accept this price, so there is a huge quantity of inventory finally. Moreover, their product contribution is the negative. In other words, those imported cars are at a loss. In general, the outcome is not good. In the future, the international market should be still paid enough attention. In specific, a plant can be built in Pacific market because of its adequate and cheap labour. This action can help Firm C to save manufactory cost. As for the domestic market, technology should be improved. The improved technology also could help Firm C to decline cost.
5. Conclusion
In summary, this simulation is a good opportunity for me to learn the business. It is also an integration of knowledge such as financial analysis, marketing and management. In the whole process, the knowledge on financial analysis and marketing is used in decisions making. In addition, the macro environment such as the change of GDP and competition played significant roles in making decision as well. Even though the final result is not as good as what I expected, I still learned a lot, such as how to a comparison with competitors.
Reference
- Davies, T. and Boczko, T. (2005), Business Accounting and Finance, 2nd Edition,McGraw Hill
- zeromillion.com (n.d), Financial ratio analysis, [www] zeromillion.com, Available from: http://www.zeromillion.com/business/financial/financial-ratio.html (19th July)
- businessdictionary.com (n.d), Definition of reference [www] businessdictionary.com, Available from: http://www.businessdictionary.com/definition/strategy.html (19th July)
Appendix
BCG Matrix
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