Industry – Is a group of firms producing the same principal product or more broadly, a group of firms producing products that are substitutes for each other. (Johnson et al, 2009). This report is about the Simulation exercise which took place as a part of Strategic management subject. It starts by explaining what the simulation exercise was about and how the firm in which I was involved as part of my group performed.
The Simulation exercise took place for the Automobile industry. The industry is very profitable but competitive too. All the firms involved need to be well informed about what’s going on in the market and come up with various strategies so as to make sure that the business keeps moving ahead.
In this simulation exercise, our firm was Firm G. we were three in our group. Naima, Christine and I. There were a total of seven firms in this industry, Firm A to Firm G. Each firm had its own members to run it.
All the firms initially started with the identical situation or scenario. All had same amount of income, sales, market value, stock value and also production capacity. And all had the same vehicle classes too; they were The family, The Economy and The truck. There were other vehicle classes as well like Minivan, Sports, Luxury but this was up to the owners of the firm to introduce them during the simulation period.
The simulation exercise took place for the duration of four periods in which all the groups had to make various decisions for their respective firms. The decisions were to be made on the marketing, distribution, manufacturing, technology, concept creation and product development areas.
The objective of this game or exercise was to develop and implement a comprehensive strategy that enables the firms to maintain long term profitability in the context of an increasingly competitive and changing environment.
Before making any decision, a business has to do some research on its industry’s business environment. There must be some kind of industry analysis to help the owners of the business to make a wise decision that would help the business expand. Hence the automobile industry is no different. The following is the industrial analysis of the Automobile industry:
This tool usually helps people to analyze the external environment or in other words the MACRO environment of a particular industry. It helps the firms to know what’s taking place in the market and assists them in creating strategies that go hand in hand with these factors. The below is the PESTEL of the Automobile industry:
Changes in the required age to apply for driving license.
Taxes and duty on the manufacture of vehicles.
Changes in the fuel prices.
Changes in the exchange rates.
Disposable income of the people in the society. (increase or decrease)
Different people having different tastes and preference.
Different people opinions about car culture. What type of car goes with their image.
Different age groups like different vehicle models like teens would like sports and a business person would want a luxury.
Availability of E-commerce to let people get more information
The plant capacity and efficiency in production process.
The safety of the vehicles manufactured.
Waste management for the scrap from production.
Pollution control from the fumes produced by the cars.
Energy consumption of the vehicles.
Noise created by the cars. (engines, exhaust pipes)
Laws and regulations like the minimum wage and health and safety of the workers.
Laws on mergers and acquisition in the automobile industry.
Control on the type of competition like monopoly.
Michael porter’s five forces framework was originally developed as a way of assessing the attractiveness (profit potential) of different industries. (Johnson et al, 2009)
This tool is really helpful in analyzing whether the industry is attractive enough and profitable enough to enter. As there are many players (the seven firms), it is good to know the key players power so as to plan a strategy that helps to overcome these influences. The following are the five forces analysis of the Automobile industry:
As this automobile industry is already on the run and the firms are already the established ones which already have a market share, their suppliers, distributors and their own customer segments, it is difficult for a new firm to enter the market until and unless it is ready to incur high costs to be in a position which is currently enjoyed by the existing firms (Firms A to G). So the threat to entry is low.
The cars provided can be substituted by the available public transport, however most people consider having their own private transport which is also convenient for them and their families. And the automobile industry provides them with the opportunity to have a safe and efficient transport at their hand. Hence the threat of substitutes is low.
The power of the buyers or customers in this industry seems to be high. As there are many firms producing the same products, the customers have a choice to choose the product and the firm that satisfies its preference the most like the price, quality, speed, interior, discounts offered.
As this Automobile industry consists of limited number of firms i.e. seven firms in total, the suppliers don’t have that much power as the firms are few. The firms have an influence on the suppliers because they know that they are the only ones to which these suppliers are providing their supplies.
The overall intensity of the competition is high. All the firms in the industry are targeting the same customer segments. And all of them monitor each other’s performance closely so as to plan and be ahead of the competition. There is existence of price wars as each firm try to adjust its prices to attract customers and there is also the introduction of new products as well. Therefore the competitive rivalry is high.
The SWOT analysis helps the firms to know their strengths and weaknesses. It tells them about what threats they have to overcome and what opportunities are available to it. The below is the SWOT analysis for the Firm G.
Already established name and brand.
Already have the market share in the industry.
Technological capabilities.
Less experience in the automobile industry.
Less aggressive to competition.
A chance to introduce new products in the market. (concepts)
A chance to upgrade the existing products.
Able to reduce prices and market the firm by using advertisement and promotion.
Able to add development centers to be used in future production.
Competition from other existing firms.
Capability of others firms to introduce new products and lessen their prices.
To make decisions on how much to spend where or in which areas like advertisement or production.
The fluctuation of market share in the industry.
Our Firm had three vehicle classes:
Gas, a Family car.
Go, an Economy car.
And
Gone, a Truck.
The below is the performance summary with which our firm started operating:
Firm G
Sales ($)
$15,278.3
Sales (000's units)
945
Market Share ($)
14.3%
Market Share (units)
14.3%
Net Income
$523.5
Cum. Net Income
$523.5
Stock Price
$26.60
Market Value
$13,302.5
Return on Sales
3.4%
Return on Assets
6.4%
Firm Preference
14.3%
Dealer Rating
58
COGS
76.1%
Capacity Utilization
92.4%
Debt
$5,553.0
Stock Issue/Purch. %
0.0%
Note: Dollar amounts are in millions.
In the first decision making, the aim was to increase the firm’s product awareness and so the main aim was marketing our products through advertising and promotion.
Hence the corporate marketing in all the four regions (North, South, East and West) was increased. Our firm also increased PR (Public relations) and targeted the value seekers and families segments for mail targets. The direct mail service was also increased.
In the Product’s decision we adjusted the Manufacturer’s suggested Retail Price (MSRP), reduced the discount rate increased promotion and advertising. For the family class, our theme was safety. Quality for Economy class and Style for the Truck class.
The dealers in each four regions were increased and their training and support activities also went up.
As our firm was advertising more, it was forecasted that sales would go up and hence we increased our firm’s production capacity by 500 and also the vehicle production.
As our firm had increased the awareness of the vehicles in period 1, there could be seen increase in the sales of our firm. The product performance and summary are attached at the end.
For the second period, the same objective was applied, to increase awareness of our vehicles and so we again increased our budget on the advertising and promotion.
There was also a minor upgrade of the Family class vehicle Gas. A little adjustment was done on the size and the performance and also the attributes of the car in terms of the interior, styling, safety and quality.
As our firm was going through the industry news, we got the information that there were new customer segments and also vehicle classes in the market and hence we took this opportunity and created a new concept or added a new vehicle class in our portfolio. The new class was the Minivan and our target customers were the family. We named our vehicle as Goofy- The perfect family car for all. It would take 3 years to introduce it in the market.
As we had introduced a new concept, we also decided to add one development centre to help in manufacturing the vehicles.
In the third decision our firm had to seriously consider the expenditure. It was found out that as the firm was spending more on the advertising and promotion, the expenses were becoming more and hence this affected our income. We had managed to increase our market share but on the other hand we had an income which was showing a negative signal.
And so in the third period of the simulation exercise, we decided to enter some decision on the financing section so as to raise some capital. We issued bonds for $ 3 M and stock for $ 2 M.
We also paid our dividends for $ 80.
In the marketing section, we adjusted some prices and discount rates for our three vehicle classes and increased our dealers in the four regions.
This was the last period in which decisions had to be entered. As our Firm had introduced a new vehicle class in the market, Goofy, the minivan, the performance of the firm looked to be promising.
The marketing of the new vehicle was decided and also the other three existing vehicles. The family vehicle Gas was really doing well in the market as the sales were showing a positive trend or growth.
After the fourth round was played, the simulation game came to an end. When viewing the results, I found out that our firm had performed well. It had a large market share than it’s competitors and also had four vehicle classes. It was the only firm having introduced the minivan and hence it was enjoying the customer segments related to the vehicle.
The overall performance was good as the sales were increasing. However as our firm was spending heavily on the advertisements and promotions, our firm had gone into a negative income. But as the trend of our products is increasing and with the new vehicle introduced, our firm will be able to cover up those costs.
This simulation exercise was a really interesting exercise for me. At first I had no idea of what we as a group are supposed to do or how to go about making decisions. But once I read the manual and our tutor explained, I found out that it was a very good way of learning and putting our theories into practice.
I really enjoyed making various decisions with my colleagues and now I have an idea how the business people have to think and decide on what strategies to choose to keep their business on the run.
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