Simulation - Make it a REAL Business World of Dinnerware!!!

Even though simulation is just an online model, but we could view it as if we are in a real business, because we run all facets of a business venture. From applying the strategic management concepts which we have learned through out the semester, we could see how theses strategies work in operating our simulated company just like a real business of the Dinnerware Industry.

Since we are competing with one another in the chosen market environment, and the start point is the same for everyone, then it is essential to position our company in this Dinnerware Industry.

The mission statement is the first step to be considered in the development of our company's strategic direction. In order to have a sound mission statement, we need to identify the organization's business, to determine the target market and provide the values to them. At the start of the simulation, our mission is to gain a large market share and then become the dominant player in the Dinnerware industry.

Having the mission in mind, the question is how are we going to succeed?

First, we look at all the people who affect our business. We need to identify the main stakeholder groups for our company and the claims they placed on the company. A stakeholder is any party who affects, or can be affected by, the company's actions. In the simulation, our main stakeholders include: shareholders, investors, creditors, employees, customers, suppliers, and competitors. Since the company’s purpose of doing business is to maximize profits, which means only those stakeholders who bear direct financial risk - the shareholders - should have the claim right of voice to determine policy, and the creditors have the right to recover the debts. Other stakeholders have the right of exit: customers can stop buying the product, and suppliers can stop doing business with the firm, and workers leave for a better job. Our strategy formulation was mostly impacted by two groups: our customers and competitors. The company’s goal is to attract customers to buy our products, and what the competitors do would also affect our sale.

Second, we have to perform both internal and external analysis, and we identify each of the following carefully:

- Industry’s Attractiveness/Opportunities/Threats
- The Porter’s Five Forces
- Resources
- The company’s Capabilities and Competencies
- Competitive Advantage

Porter’s Five Forces of the Dinnerware Industry

1. Threats of new entries---> High
-low capital requirements needed to enter the industry since all you need are equipments and capacity to start up
-low brand loyalty of existing firms because the customers are price sensitive
-no government regulation
-there is no switching cost for the customers
-high access to key supplies

2. Degree of rivalry among existing firms ---> Medium to High
-if there is a change of price of one firm, it is very likely the others will follow
-the demand in this industry is somewhat constant
-there are currently 7 competitors: 6 domestic firms and 1 foreign firm
-the firms can easily exit market without much cost
3. Bargaining power of suppliers ---> Low
-there are many suppliers available and all we need is two types of raw materials, so the suppliers have little influence over this industry

4. Bargaining power of buyers ---> High
- it is up to the customers' decision of whether or not to buy dinnerware from you because they have the ability to turn to someone else without cost a penny to themselves.

5. Threat of substitute products ---> Low
-customers can choose to buy alternatives or substitute products such as plastic plates, even though plastic plates are much cheaper but they don’t last long and don’t look nice.

Overall, according to the Porter's Five Forces Model, we can conclude that the attractiveness of the Dinnerware Industry is Medium.


Internal Analysis

Having the mission in mind, we started to analyze what the company needs to achieve our goal- to gain a large market share and become the dominant player in the industry. Obviously, we need to have a high level of sales to gain a large market share. We ask ourselves the following questions:

-How can we increase our sales?
-What are the major costs/expenses?
-Are there enough resources?
-Do we have the capability or competency to produce a large amount of output?
-Do we have any competitive advantages?

To address the above issues, the first step is to know the reason for the loss the company had incurred in Q4 of year 2004. Looking at the firm’s report, we figured out the problem- the company’s sale was too low and had a huge inventory on hand. The company sold less than 2,000 units of P1 in Area 1 and a little more than 1,000 units in Area 2. On the other hand, the finished goods of P1 on hand were more than 8,000 units in each Area. Now we know what the problem is, and the next step is to fix it. There are many things we can do to increase our sales level: spend more on advertising, hire/train more salesperson and pay them sales commission, and improve our product with R&D investment and quality control.
With the successful sales we had in Q1 of 2005, the company was able to sell almost all of the finished goods on hand from last year, and we had a great profit for the quarter. We also noticed that COGS accounted for half of the Sales Revenue. To solve this problem, we adopted a new strategy – to gain a competitive advantage through cost leadership- a focus on the cost of running our business not just offer the customer a lower price. Our company can sustain profits that exceed the average in this industry with a lower cost. The only ways to cut cost for production were to invest in engineering study and to expand our capacity. Because P2 require a lot of both Raw Material and Human Resource, our focus is on P1.

With both shifts available and overtime, the company did not have enough capacity to produce such a huge output for Q2 because the expansion takes two quarters to be effective. The labor hours we had was only enough to produce about 5,000 units of P1, and we had to make subcontract of the remaining 10,000 units to achieve the increase in the sales volume which cost 1.9 times more. The COGS alone accounted for more than 70% of the Sales Revenue for Q2, even with high sales revenue of nearly $1 million, the company’s Net Income was only $4,768, and a few competitors had a huge loss. Seeing this, we were more certain of continuing to increase our capacity.

To reach the maximum expansion for couple of periods, a lot of cash is needed. To avoid running out of cash or getting special loan, we decided to raise capital through selling bonds. We wanted to have a debt/equity ratio close enough to 1, so we can utilize the use of capital and assets to grow and expand our company.

Way to Success!

In order to achieve our mission, we also take considerations of credit policy, production costs, quality control, sales personnel, advertising, sales price changes, and inventory on hand. We also forecast our production units by looking at current economic index, Next qtr/Next yr. forecast included in the Industry Report provided for each simulation period.

With the new capacities available, and with careful monitor of what our competitors do, our company was able to gain a large market share and made sustainable profits and has become the dominant player in this industry by the end of year 2005.

Our Firm’s Future…

If the simulation continued for additional periods, we would position not only to have the most market share, but also to provide the customers improved quality dinnerware, and expand our business further to enter into the foreign markets!