At the beginning of the Simulation I think we were not 100% sure how to define our goals and what is our unique mission statement for a dinnerware company. After analyzing what matters the most to customer and shareholders we came to the conclusion that we need to provide customers with high quality products at reasonable price and for shareholders we need to have high ROI and ROE plus pay dividends to maximize their returns.
As a group we assessed the dinnerware industry and conclude that the industry is not very attractive. Starting with competition, which was extremely high. All seven groups plus the imported sold the same product and competed in the same markets. Continue with the power of buyers, which was also very high, since all the products were essentially identical and the price was more or less in the same range it was hard to attract and keep the customers. We decided that spend more money on research and development that would help us to create a different better product. On another hand, the power of suppliers was low, since labor and materials was easily available. In addition, the threat of substitute products was low, since there were only eight in total companies selling the dinnerware in this markets, thus the consumers had no choice of alternative products. Although, in a real environment the threat of the substitutes is high, since there are no switching cost to the consumers and many different options available to buy if one needs a dinnerware, such as different kind/price/quality/bran names and so on. I believe the barriers to entry were not in a scope of the simulation since there were no new entries. Similarly, in a real environment, barriers to entry would be low, since this is not a high capital required industry and there are no strict regulations that would protect from a new entry. Therefore, by looking at each point for the simulation assessment, competition has a low attractiveness, power of buyers has a low attractiveness, the power of suppliers has a high attractiveness, and the threat of substitutes has a high attractiveness. Overall, the industry is not very attractive.
Closer to the end of the simulation we noticed that economy seem to improved over the course of the simulation and this could be a signal that customers would want a better more expensive products such as second product. Our group chose to concentrate on only one product and make sure that our costs are kept at the minimum while market share and sales were increasing.
As a group we decided to differentiate our product by higher quality and eventually charge higher price for our product. Therefore, we invested heavily in quality control. As the beginning of the simulation it was not clear how much money we would need to invest in order to have higher quality than our competitors because they were no indicator of dollar amount other companies had spent on quality control. After the first few quarters, we learned how much to spend for quality control and by the end we had the highest spending on quality control than all the other groups. I believe this was our advantage that helped us to increase the sales, especially in quarters 5 and 6 where we had an 83% growth in sales.
Our group also concentrated on achieving the lowest cost factor, which we achieved by the last quarter. However, I believe we did not have a chance to really benefit from this advantage given the fact that this was our last quarter. Also, during the simulation our company was investing a lot of money in expansion, which was in our opinion, very pricey but necessary thing to do. I believe in the end of the first year we had realized that we were not expanding enough on the second stage of manufacturing and this lade to many back orders and higher labor costs since we were forced to use more expensive labor of subcontractors. We fixed this problem closer to the end of the simulation by investing more in the second stage manufacturing, however, it was not talking effect as quickly as we would like because the expansion were taking two quarters to come to effect.
Overall, I am happy with our performance in the simulation. We accomplished a few of our goals, which were to have the highest quality and lowest cost factor. In addition our stock increased in price over the course of the simulation and we were paying a dividend to our shareholders.
On another hand, I believe that we were not consistent with our pricing strategy. As I mentioned in the beginning our goal as to manufacture highest quality products and eventually charge customers higher prices then our competitors. However, during the simulation we were always a mid-priced company because we wanted to make sure that we sale enough products and our sales continue to grow. Even though, we were increasing our price gradually by $2 each quarter this was still not enough to be a highest price product because every other group were doing similar increases. On the same note, I believe or sales were especially hurt during the last quarter when all other groups lowered their price to increase the sales and we just continued to our $2 more strategy, which probably drove customers away.
As for the future, we would definitely introduce our second product as the bull-bear economic index is projected to be 132 for the next quarter and the economy seems to be in a condition to want and handle higher priced luxury products. Also, we would continue increase our spending on research and development to try to gain the extra differentiation in our products.
Tuesday, May 20, 2008
Diagnosing Strategic Problems:
There are many symptoms that can be taken into account when diagnosing strategic problems that a firm may be facing. Two of such symptoms are: (1) too many customer complains; and (2) too much dept.
Too many customer complaints:
Satisfied customer is the key to succeed for every business. Companies are aiming to satisfy customers with products, services, and atmosphere to maintain long lasting relationships with them. More customers are leading to more sales and eventually higher profit. On the other hand, if the company does has many customer complaints it will lead to decreasing number of satisfied customer, deteriorating sales and eventually lower profit. Therefore, companies should perceive customers complain as a warning sign to problems. The company must quickly and efficiently respond to solve this problem. If the company failed to address the problem promptly it will lead to deterioration of company’s brand image. For instance, there was a small fruit and vegetable store on the corner where I resident in Brooklyn. It was very dirty inside, products were not fresh and there was always a long wait time when customers are ready to check out. Of course people complained about everything but management did not seem to care. Overtime, the store was forced to close because there were no more customers that were willing to spend their moneys in that store. A few months later someone reopen this store again after renovation and changing the name. I personally still do not shop in that little store because I believe the guys who reopen it is the same owners and this store will go down the same path. This is an example that shows that brand name can be harmed easily and it is very hard to rebuild customers’ trust.
Too much debt:
Although debt can be a major source of liquidity, companies must be aware that frailer to pay debt obligations at maturity or interest payments will send them to bankruptcy. In addition, heave debt burden takes away from companies’ financial flexibility and ability to grow. For example, Frontier airlines filed for bankruptcy earlier this year due to the change in policies by its principal credit card processor. The credit card processing company unexpectedly said that it would withhold “significant proceeds” received from the sale of Frontier tickets. As the result, Frontier did not have enough liquidity to continue its operations and decided to file for Chapter 11. This shows that companies, especially those that participate in the capital intensive industry like airlines, need to have enough “cash cushion” in order to sustain afloat and high leverage worsens the situation.
Too many customer complaints:
Satisfied customer is the key to succeed for every business. Companies are aiming to satisfy customers with products, services, and atmosphere to maintain long lasting relationships with them. More customers are leading to more sales and eventually higher profit. On the other hand, if the company does has many customer complaints it will lead to decreasing number of satisfied customer, deteriorating sales and eventually lower profit. Therefore, companies should perceive customers complain as a warning sign to problems. The company must quickly and efficiently respond to solve this problem. If the company failed to address the problem promptly it will lead to deterioration of company’s brand image. For instance, there was a small fruit and vegetable store on the corner where I resident in Brooklyn. It was very dirty inside, products were not fresh and there was always a long wait time when customers are ready to check out. Of course people complained about everything but management did not seem to care. Overtime, the store was forced to close because there were no more customers that were willing to spend their moneys in that store. A few months later someone reopen this store again after renovation and changing the name. I personally still do not shop in that little store because I believe the guys who reopen it is the same owners and this store will go down the same path. This is an example that shows that brand name can be harmed easily and it is very hard to rebuild customers’ trust.
Too much debt:
Although debt can be a major source of liquidity, companies must be aware that frailer to pay debt obligations at maturity or interest payments will send them to bankruptcy. In addition, heave debt burden takes away from companies’ financial flexibility and ability to grow. For example, Frontier airlines filed for bankruptcy earlier this year due to the change in policies by its principal credit card processor. The credit card processing company unexpectedly said that it would withhold “significant proceeds” received from the sale of Frontier tickets. As the result, Frontier did not have enough liquidity to continue its operations and decided to file for Chapter 11. This shows that companies, especially those that participate in the capital intensive industry like airlines, need to have enough “cash cushion” in order to sustain afloat and high leverage worsens the situation.
Friday, April 11, 2008
Business Strategy:
Competitive advantage is the position (beneficial) that a firm occupies in its competitive landscape. There are 6 common ways firms secure competitive advantage:
1. Being the first mover/first entrant into the market
2. Niche dominance
3. Cost Leadership
4. Product/Service Differentiation
5. Market Share
6. Government Protection
Unfortunately, most forms of competitive advantage cannot be sustained for any length of time because the benefits attract competitors to duplicate the competitive advantage.
In light of airlines crisis in the recent weeks (four airlines filed for bankruptcy: Frontier, Aloha, ATA and Skybus) I will examine competitive advantage of Southwest Airlines. I believe there are two main points in the CA of Southwest:
1. Low Cost leadership – Despite the recent pressure on expenses, Southwest's cost per available seat mile (CASM) is still the lowest of the large airlines. The low cost reflects the airline's high productivity of assets and labor, and no-frills, point-to-point service. The company operates a fleet of one aircraft type (Boeing 737s), which limits crew training and maintenance costs. Southwest also has a highly motivated and productive work force and benefits from relatively good labor relations, which offsets pay levels that are now among the highest in the industry. Southwest's pilots are now among the highest paid in the industry, although benefit costs are lower because there is no defined-benefit pension plan and productivity is higher because of more flexible work rules. Unlike many other airlines, the company's operations have not been strained by labor unrest thus far. In addition, Southwest's cost structure benefits from a fuel-hedging program that is the most extensive and successful in the U.S. airline industry, if not globally. Since mid-2005, with the price of oil averaging $60-$70 a barrel, Southwest has hedged more than 85% of its fuel requirements at around $26 a barrel and more than 70% of its 2006 fuel requirements at about $36 per barrel. While the company has continued its hedging program through 2012, the prices (averaging $50-$60 a barrel) are much higher than those realized in the 2005-2006 period.
2. Leading Market Share – Southwest Airlines is the original and largest low-cost airline in the U.S. Currently Southwest has no international routes. Southwest serves 64 cities in 32 states. It has a market share of approximately 60% on its largest 100 routes; with dominant shares in the intra-California and intra-Texas markets, and at Chicago's Midway International Airport, and a strong presence in the Northeast to Florida corridor and at Baltimore, Phoenix, and Las Vegas. The company has entered several new markets over the last three years, including Philadelphia, Pittsburgh, Denver, and San Francisco, taking advantage of competitors' weaknesses. Southwest expects to have international booking capability by 2009, which could allow Southwest to fly to international destinations.
Although, Southwest experiences increasing pressures on its revenues and expenses due to rising fuel prices, strong competition, and economic downturn, it is still clearly a leader in the airline business.
1. Being the first mover/first entrant into the market
2. Niche dominance
3. Cost Leadership
4. Product/Service Differentiation
5. Market Share
6. Government Protection
Unfortunately, most forms of competitive advantage cannot be sustained for any length of time because the benefits attract competitors to duplicate the competitive advantage.
In light of airlines crisis in the recent weeks (four airlines filed for bankruptcy: Frontier, Aloha, ATA and Skybus) I will examine competitive advantage of Southwest Airlines. I believe there are two main points in the CA of Southwest:
1. Low Cost leadership – Despite the recent pressure on expenses, Southwest's cost per available seat mile (CASM) is still the lowest of the large airlines. The low cost reflects the airline's high productivity of assets and labor, and no-frills, point-to-point service. The company operates a fleet of one aircraft type (Boeing 737s), which limits crew training and maintenance costs. Southwest also has a highly motivated and productive work force and benefits from relatively good labor relations, which offsets pay levels that are now among the highest in the industry. Southwest's pilots are now among the highest paid in the industry, although benefit costs are lower because there is no defined-benefit pension plan and productivity is higher because of more flexible work rules. Unlike many other airlines, the company's operations have not been strained by labor unrest thus far. In addition, Southwest's cost structure benefits from a fuel-hedging program that is the most extensive and successful in the U.S. airline industry, if not globally. Since mid-2005, with the price of oil averaging $60-$70 a barrel, Southwest has hedged more than 85% of its fuel requirements at around $26 a barrel and more than 70% of its 2006 fuel requirements at about $36 per barrel. While the company has continued its hedging program through 2012, the prices (averaging $50-$60 a barrel) are much higher than those realized in the 2005-2006 period.
2. Leading Market Share – Southwest Airlines is the original and largest low-cost airline in the U.S. Currently Southwest has no international routes. Southwest serves 64 cities in 32 states. It has a market share of approximately 60% on its largest 100 routes; with dominant shares in the intra-California and intra-Texas markets, and at Chicago's Midway International Airport, and a strong presence in the Northeast to Florida corridor and at Baltimore, Phoenix, and Las Vegas. The company has entered several new markets over the last three years, including Philadelphia, Pittsburgh, Denver, and San Francisco, taking advantage of competitors' weaknesses. Southwest expects to have international booking capability by 2009, which could allow Southwest to fly to international destinations.
Although, Southwest experiences increasing pressures on its revenues and expenses due to rising fuel prices, strong competition, and economic downturn, it is still clearly a leader in the airline business.
Tuesday, March 25, 2008
Porter’s “5 Forces Model”
The U.S. Pharmaceutical Industry
3) Bargaining power of suppliers - LOW
Based on Porter’s model LOW to MEDIUM forces are present among the strong players in the pharmaceutical industry. Thus, the industry is attractive to investors largely due to the high-barriers to entry, purchasing and pricing power, and strong credit profiles of existing firms.
1) Threats of entry posed by new or potential competitors – LOW
- High barriers to entry; the company needs to put a lot of capital into research and development, lengthy approval process, marketing before it is able to receive any returns.
- The “big pharma” companies that were able to build global operations are benefiting from economies of scale in terms of manufacturing. They are able to access low-cost supplies, as a result.
- Challenging regulatory conditions (hurdles to get FDA drug approvals for new products); industry is highly regulated which to some extend protects from new competition. The FDA approvals appear to have slowed during 2007. This could be one measure indicating that the FDA is taking a more cautious position on new drug approvals. In addition, legislative changes in the upcoming years may have a negative impact for the industry.
- Pharmaceutical companies benefit from continuation of U.S. employer-based health coverage. Customers buy medication that was prescribed by the doctors.
- Patent expirations may lead to an entry of new competitors (generic competitions), resulting in decreased revenues. High rates of patent expirations are approaching in 2010 through 2012.
- The ability of a pharmaceutical company to offset loss of revenue from patent expirations depends on growth in existing products as well as successful execution from the new product pipeline.
- Mature, consolidating, highly competitive industry (many large pharmaceutical acquisitions closed in 2007 including AstraZeneca’s $15.6Bn purchase of Medlmmune Inc. and Schering-Plough’s $15Bn acquisition of Organon BioSciences).
- Strong credit profiles: companies operate off of high margins (high 70%), healthy balance sheets, and good liquidity
- Industry benefits from strong demand from consumers.
- Weak, small companies usually go out of business (bankruptcy) if they have no potential “blockbuster” in future pipeline. Others that have some significant research or valuable assets will be bought by big and strong pharmaceutical companies.
- Suppliers generally have little room for negotiation. Large pharmaceutical companies generally enjoy significant buying power. They can dictate the price they want to buy or take their business elsewhere.
- Generally consumers have very little bargaining power. Most of the medication is prescribed by the doctors. Consumers will have to buy the drug at any given price if they need it. More educated consumers may buy a generic alternative (which have the same impact but less expensive) if available on the market.
- Pricing pressure – The U.S. remains one of the few developed markets where drug manufacturers have significant pricing flexibility, and this is in jeopardy due to increasing pressures from consumers and legislators to control health care costs. Governments in other markets are generally the primary customers, and therefore, enjoy substantial pricing leverage.
- Shareholders continue to pressure the companies for increases in the share repurchase programs. The companies looking for ways to increase shareholders returns partly because the industry is approaching maturity and is not growing as rapidly, and because many companies have a lot of cash on their balance sheet.
- Threat from generic competition.
- Customers can find substitute medicine if the original product has an expired patent. However, if it is a new product the consumer generally will have no choice for an alternative.
- Over the few years generic drug manufacturers face excellent opportunities for utilization and volume trends. Generic companies are increasing focused on establishing global operations in order to achieve a lower-cost of supplies, thus posing even more threat to non-generic drug manufacturers.
Based on Porter’s model LOW to MEDIUM forces are present among the strong players in the pharmaceutical industry. Thus, the industry is attractive to investors largely due to the high-barriers to entry, purchasing and pricing power, and strong credit profiles of existing firms.
Saturday, March 8, 2008
A Sound Mission Statement:
The mission statement should be a clear and succinct representation of the organization’s purpose for existence. It should incorporate socially meaningful and measurable criteria addressing concepts such as the moral/ethical position of the organization, public image, the target market, products/services, the geographic domain and expectations of growth and profitability.
For example, Merck, a company that produces pharmaceuticals products and provides insurance for pharmacy benefits, publicly states the following values.
- Corporate social responsibility
- Unequivocal excellence in all aspects of the company
- Science-based innovation
- Honesty & integrity
- Profit, but profit from work that benefits humanity
"To Preserve and Improve Human Life."
The mission of Merck is to provide society with superior products and services by developing innovations and solutions that improve the quality of life and satisfy customer needs, and to provide employees with meaningful work and advancement opportunities, and investors with a superior rate of return.
About Merck & Co., Inc:
Merck is a global research-driven pharmaceutical company dedicated to putting patients first. Established in 1891, Merck discovers, develops, manufactures and markets vaccines and medicines to address unmet medical needs. The company also devotes extensive efforts to increase access to medicines through far-reaching programs that not only donate Merck medicines but help deliver them to the people who need them. Merck also publishes unbiased health information as a not-for-profit service.
Saturday, February 2, 2008
Welcome to Wonderland!
Dear Friends,
Welcome to my Blog. I am very excited to share some of my thoughts with you. My name is Anna. I am a senior at Baruch College and I will be graduating in May with degree in Finance & Investments and minor in Clinical Psychology. I know some of you might think "what an interesting mix?" To tell the story short, I have been interested in Finance since high school and I love to examine people's minds. So finance + psychology is a perfect mix for me.
Welcome to my Blog. I am very excited to share some of my thoughts with you. My name is Anna. I am a senior at Baruch College and I will be graduating in May with degree in Finance & Investments and minor in Clinical Psychology. I know some of you might think "what an interesting mix?" To tell the story short, I have been interested in Finance since high school and I love to examine people's minds. So finance + psychology is a perfect mix for me.
Subscribe to:
Posts (Atom)
