Knowledge Area Module (KAM) I



We Believe in Our ShoesChristopher KingRonald J. Robinson Darin WoldingStrategic ManagementMarch 25, 2012Arthur SmithSouthwestern College Professional StudiesWe Believe in Our ShoesThe Believe Shoe Company competed in a shoe simulation against four other companies, each with a team of co-managers. These five teams competed against each other in order to determine who could make the best decisions on the basis of corporate citizenship, sales forecast, plant capacity, branded production and distribution, internet and wholesale marketing, celebrity bids, and private label operations. These teams analyzed their business and competition through seven decision rounds to see which team could come out on top. This report is an in-depth look at the Believe Shoe Company and how its co-managers fared throughout the project. Included are the strategic vision, performance targets for EPS, ROE, credit rating, and image rating, competitive strategy of branded and private label footwear, production and workforce compensation strategy, financial strategy, as well as an identification and analysis of our closest competitors in the private and branded label segments for the last two years. Throughout this report data will also be used as analytical narratives and graphical representations.Strategic VisionStrategic vision statements are very important to a company’s future strategy. Strategic vision statements guide firms in the direction they are going and explain a clear picture about why the company is heading in that direction. According to Thompson, “it must convey what management wants the business to look like and provide managers with a reference point in making strategic decisions and preparing the company for the future”CITATION Tho \p 23 \l 1033 (Thompson, Peteraf, Gamble, & Strickland III, 2012, p. 23). These statements must be clear and specific, not vague or indistinctive. They should not be some happy statement, designed to make someone feel good. Strategic vision statements need to be strong; all areas of weakness need to be removed through careful identification and areas of improvement need to be corrected. According to David Ulrich, a University of Michigan professor, “A vision or strategic intent looks to the future and establishes a sense of direction to the organization. It goes beyond gaining “fit” through assessment of strengths, weaknesses, opportunities, and threats and emphasizes the long term intent of the firm”CITATION Placeholder2 \p 118 \l 1033 (Ulrich & Wiersema, 1989, p. 118).Believe Shoe Company went through a long and tireless process to define and polish the company’s strategic vision statement into what it is today. The company managers had many brainstorming sessions and some pretty good beginning ideas such as, “Believe Shoe Company: United to bring superior shoes to customers throughout the world”, “We create shoes that spoil your feet even when you don’t”, “your feet are our passion”, and “Believe Shoe Company exists to improve the quality of life for our customers. Using a combination of innovative technologies, high-quality materials, and good old fashioned hard work, we ensure the ultimate footwear experience is always available to our customers in every region of the world”. The managers examined these ideas and pulled out their key attributes to try to focus on what were the most important considerations for the company’s future. Those key attributes included, (1) the company personnel, (2) superior products and quality, (3) global marketplace, (4) comfort, (5) high/middle market, (6) differentiation, and (7) hard work. Once the managers agreed on the key attributes drafts were formed to work in the key attributes and ideas. Eventually a consensus was achieved and the Believe Shoe Company decided on the following, “Believe strives to spoil our customers with the ultimate footwear experience. Our employees are rewarded for combining innovative technologies and high-quality materials with expert craftsmanship. We are relentless in our quest to make the world’s most elegant and comfortable shoe available in every major department store around the world”.Performance TargetsBelieve Shoe Company measures its success based on performance metrics that are valued by our investors. We believe by focusing on these metrics, we ensure that our customers will be satisfied and the longevity of our business will be secured. The measurable criteria we base our success on include:Earnings Per Share (EPS) – Our investors expect EPS to grow at least 7% annually. This financial metric entices investors to support our brand as it reflects our profitability as a company.Returns on Average Equity Investment (ROE) – Investors expect an ROE of at least 15% annually. This financial metric serves as an indicator of how well a company uses investment dollars to turn a profit. Credit Rating – The company’s credit rating is important because it is an indicator of how willing financial institutions will be to loan money to the company. The ability to secure loans would become more important if the company decided to finance the construction of new production facilities to increase total capacity.Stock price gains – The board members expect stock prices to rise an average of 7% annually. In addition to these important financial metrics, the managers of Believe Shoe Company identified other measurable criteria that were found to correlate highly with increased sales and profitability through our research and analysis. Specifically, we found a high correlation between annual advertising spend and EPS. Assuming other key variables such as S/Q rating remained the same, we found that by increasing our advertising spend, we could increase market share and raise product prices. While we recognize there are many variables responsible for increased EPS, the positive correlations between advertising spend and EPS was undeniable at 75.24%. Figure SEQ Figure \* ARABIC 1: Correlation between EPS and AdvertisingWe utilized a common practice, known as curve-fitting, to project the impact increased advertising spend would have on our EPS. The table below shows the model fits a power curve most closely. This information suggests that for each percentage point advertising spend increases, the EPS will increase 1.1308% given all other variables remain constant. This knowledge makes Believe Shoe Company executives confident in projecting future EPS results of $5.93 in Year 18 and $6.45 in Year 19.Table SEQ Table \* ARABIC 1: Curve-Fitting Based On MAPEBelieve Shoe Company fell short of our investor expectations for Return on Equity (ROE). We averaged 13% against a targeted 15% ROE. Luckily, our competitors did not fare much better. Our weakness lied in our marketing campaign initially, and later in our lack of capacity. A reduced advertising budget and limited celebrity endorsements left us with a surplus of inventory at the end of several simulation rounds. We made a concerted effort to increase our advertising spend beginning in Year 14. Ultimately, we increased our advertising spend by 71% from the initial budget of $7000. Once the advertising problem was resolved, we turned our focus to managing our limited capacity. We lost $7,614,000 in revenues during Year 16 because we were not able to service the demand for our brand. Though we failed to meet the investor expectation of a 15% annual increase in ROE, we still performed significantly better than the industry average. We project ROE increases to 17.84% in Year 18 and 20.31% in Year 19. These figures represent growth of 20.85% and 13.85% respectively. While aggressive, these targets don’t appear out of line considering our percentage increases in ROE of 34.84% and 27.85% in years 16 and 17 respectively. Our strategy is to increase our price marginally, thereby reducing demand for our shoe to the point where our available capacity would be fully utilized and we would maximize our profit margin. Additionally, we would continue to repurchase stock, which would later be sold to finance construction of a new production facility.Figure SEQ Figure \* ARABIC 2: ROE ComparisonBelieve Shoe Company maintained a strong credit rating throughout the simulation. We did not have a need to leverage debt financing to build additional capacity until the later years. Therefore, we paid our debts early which improved our credit rating to an A+. We slowly repurchased stock in an effort to improve our financial metrics, e.g. EPS and ROE. This strategy also would have allowed us to sell stock at a higher price later in order to finance building additional capacity if the simulation had continued beyond Year 17. Thus, we would have limited our need to leverage debt in favor of equity financing. We project our company would continue to receive A+ credit ratings through Years 18 and 19. However, if the simulation continued past Year 19, Believe Shoe Company would be forced to build capacity in order to maintain the EPS and ROE at targeted levels without sacrificing our high S/Q ratings. If we had to finance the construction project, our credit rating may suffer marginally.The stock price soared for Believe Shoe Company as a result of our business decision to repurchase stock on the open market. We vastly exceeded the investor expectation by achieving an average annual increase in stock price of 23.56%. We ended the competition at $79.48/share.Figure SEQ Figure \* ARABIC 3: Stock Price TrendThe image ratings for Believe Shoe Company were mediocre. Our goal was to provide our customers with the highest quality shoe at the lowest possible cost. We did recognize the importance Corporate Social Responsibility, however, and thus utilized recycled packaging, sponsored a workforce diversity program, trained our employees in ethics, and made charitable contributions. We ended the simulation with an image rating of 78. This score was second from the bottom in the industry; however, only three points separated Believe from the top spot. The managers of Believe Shoe Company do not feel additional expense is warranted to improve our company’s image rating. Our projected image ratings for Year 18 and Year 19 would be 78. Competitive Strategy of Branded FootwearThe competitive strategy for branded footwear used by the Believe Shoe Company was the best-cost provider strategy. According to Thompson the best-cost provider strategy is about, “giving customers more value for the money by offering upscale product attributes at a lower cost than rivals. Being the best-cost producer of an upscale product allows a company to underprice rivals whose products have similar upscale attributes”CITATION Tho \p 136 \l 1033 (Thompson, Peteraf, Gamble, & Strickland III, 2012, p. 136). Management’s focus was about giving our customer a high quality shoe that was priced at a lower cost than our rivals. At certain times during the simulation we also tested out some hybrid options for our strategy by incorporating some elements of differentiation and low cost strategies. Through careful use of market snapshots, analysis of competitor trends, and two years’ worth of results, management eventually came to the conclusion that following a stricter best-cost provider strategy was best for the Believe Shoe Company.Throughout this simulation the main focus of the Believe Shoe Company has been to make small adjustments and evaluate the results. This plan stayed true in aggregate and for all of our regions. The managers agreed from the start that minor adjustments were all that was needed to put Believe Shoe Company ahead of market. Management was not about taking high risk; heading in an extreme direction without a clear understanding of the end result of a company’s actions is very undesirable and could prove to put your company in a position that it will not recover from. The main focus of the Believe Shoe Company was taking care of our corporate citizenship, workers, pricing our product correctly, and matching our production and capacities with supply and demand. Once these main focuses were addressed, the management team looked to fine tune the remainder of its strategy though the use of celebrity appeal. Getting the message out quickly, that Believe Shoes was a responsible corporate citizen was very important. Jacquie L Etang, an author for the Journal of Business Ethics believes corporate citizenship and social responsibility are important, “because it affects a company's image and reputation and public relations practitioners will want to capitalize on the opportunity because it tells publics exactly what sort of company they are dealing with” (L Etang, 1994, para. 30). Believe Shoes started initiatives that included recycling, energy efficiency, charitable donations, diversity training, and ethics enforcement.Employee compensation was also very important from the start. The Believe Shoe Company is a firm believes that a happy, satisfied worker is a productive worker. Donna McNeese-Smith, an author for the Journal of Healthcare Management stated, “In an era of increasing competition and scarce resources, maximizing employees' productivity, job satisfaction, and commitment to the organization is a critical issue” (McNeese-Smith, 1996, para. 2). A comprehensive look into wages, incentive pay, and best practices training was accomplished. All areas were found to be deficient and increases to all areas were implemented in order to raise employee satisfaction and increase productivity. Matching Believe Shoe Company’s production and capacity with the markets supply and demand was also a key part of the Believe Shoe strategy. Management’s goal from the start was to ensure they were getting the most productivity possible out of their factories, but not in excess of the demand for their product. Believe Shoes was careful to minimize their shortfalls and surpluses as they adjusted employee-working hours, to include the use of overtime, along with buying and selling capacity, with careful analyses of expansion efforts. The backbone of the Believe Shoe Company is pricing. Management needed to be careful that they were offering a high quality product at a price that was better than their competitors. This meant constant price adjustment based on the industry changes. Management was very careful to keep prices low enough to ensure their retailers were able to make a profit, while ensuring on-line sales were competitive. Management was constantly aware of the possible issues that could be created if the gap between their wholesale prices to their retailers and their Internet sales was to narrow. A guideline of 40% was used as the limit to the differences in prices. This guide ensured the retailers were motivated to push Believe Shoes products.Private Label StrategyThe Believe Shoe Company did not enjoy much success in the private label competitive market. Initially the management team was excited to bring their successful best-cost provider strategy to the private label market. The team was intent on providing a similar product strategy as with branded footwear, with different adjustments made depending on how the market carried itself. The team realized that a different strategy was needed for this market and was unable to take advantage of the growing market for the most part.Through years 11 and 12 the management team chose to focus the company’s efforts on the branded label market. At year 13 the management team considered diving into the private label realm by bidding in all four-market segments. During that year, Believe Shoes successfully managed to win all four market segments and enjoyed a market share of 26.1% for North America, 33.6% market share for Europe-Africa, 30% market share for Asia Pacific, and 31.4% market share for Latin America. Although our company received decent market shares for Europe-Africa and Latin America the cost of competing in those two markets was too great, which caused our profit margin to be very low. Overall the management team was pretty happy with the results from our year 13 endeavors and decided to continue with the private label market. For year 14 the management team decided to only bid on private label contracts for North America and Asia-Pacific. The team was looking to eliminate the potential loses suffered in the Latin America and Europe Asia markets from the previous year. The bids were adjusted from the previous year and the company was underbid, therefor unable to win the private label bids. Year 15 proved to be very similar to year 14. The management team adjusted bids, but this time decided to compete in three markets. North America, Europe-Africa, and Asia Pacific all received bids from the Believe Shoe Company. Unfortunately, our competitive rivals were able to outbid our company once again and our company received zero private market bids for year 15.For year 16 and year 17 the management team decided to change focus from mixing our branded and private label strategies to a branded production only strategy. There were zero bids placed for private label manufacturing during those years.Production and Workforce Compensation Strategy The production and workforce compensation strategy for Believe Shoe Company reflects our desire to reward employees for expert craftsmanship. A significant portion (up to 46%) of our total compensation plan is incentive-based. Additionally, we invest in our employees by spending $1300 per employee on additional “Best Practices” training. Employee retention is vital to our strategic plan. We have a finite capacity and depend on each employee to be productive and deliver a high-quality product. Our employees are guaranteed a 3% raise per year, to ensure their loyalty to the Believe Shoe Company. We had the second highest operating profit margin in the industry, averaging 15.45% over the 7 year simulation cycle. We also produced the second highest total number of pairs sold at 13,871. Only Company C (Crossfire) bested us in terms of overall production, but this accomplishment is dampened by the fact that Company C had an additional plant in the Asia-Pacific region.Financial StrategyThe management team used a conservative fiscal policy especially in the form of equity, debt, and dividend management. The company maintained a share balance of 10 million outstanding shares until Year 15. This enabled the company to avoid reducing its earnings per share (EPS) or diluting shareholder value. At Year 14, the management team utilized idle cash to buy back 1.15 million shares leaving the company with 8.85 million outstanding shares. This move was an attempt to increase the EPS and shareholder value. This strategy paid off during Year 16. During Year 15 the management team boosted cash reserves by borrowing $11.5 million for ten years. Due to a better than expected Year 15, the management team was able to pay the loan off with cash reserves in Year 16. The company bought 885 thousand shares back in Year 17 with idle cash reserves to boost the share price and EPS. This left an ending balance of eight million outstanding shares and acting as a catalyst to the share price and EPS. The management team will consider the repurchase of stock in when the share price is under $31 a share. An issuance of stock is not planned for the next two years. However, the management team believes that under certain conditions equity financing is better than debt financing. The management team did not declare dividends for the five year management period. Dividends reduce cash flow and increase the likelihood that either equity or debt would be necessary to maintain operations. Additionally, the A- to A+ credit rating could be maintained by keeping cash reserves with the company instead of paying it out to the shareholders. Furthermore, the management team’s goal was to make the company into a value investment instead of growth or income. This strategy attracts long term investors who are most likely to leave their capital with the company. This in turn stabilizes the stock price and enables the shareholders to realize better gains. The management team does not predict that dividends will be declared over the next two petitive AnalysisThroughout the simulation, the strategic push for Believe was to remain true to our strategic vision and provide shoes made with the highest quality materials at the lowest possible price. Though we competed as the best-cost provider, our strategic focus shifted throughout the simulation. We identified strategic advantages and attempted to exploit them throughout the simulation. Our competition was just as responsible for determining our strategic focus as our vision statement. We learned that it is difficult to remain true to a strategic vision when market forces threaten a company’s survival. As the best-cost provider, we struggled to our quality levels high and our price low. Our high quality ratings are the result of a large percentage (80%) of superior materials used in our shoes. Believe Shoe Company was determined to have the highest S/Q rating in the industry. In addition to the high percentage of superior materials used in our shoes, we also increased spending on our Total Quality Management programs and Best Practices training for our employees. Even with our participation in these programs, our S/Q rating did not increase until we expanded our model offerings to two-hundred. Initially, we had reduced our product offerings to improve our production capacity by minimizing changeovers. As evidenced by the increase in our S/Q rating, in Years 15 and 16, with a corresponding increase in net profits, we found a formula for raising our S/Q rating to the second highest in the industry, while still increasing the profitability of our company. Figure SEQ Figure \* ARABIC 4: Believe: S/Q Rating vs. Net ProfitIn comparison, it did not appear that any other company was as effective as Believe at increasing their S/Q rating while also generating an increase in net profits. Company D (We Got Sole) had the highest S/Q rating in the industry, but could only generate 75% of the profits we enjoyed during the final two years of the simulation.Two rival companies were the focus of many strategic decisions made by Believe executives. These companies were: Company A (Aswego) and Company C (Crossfire). It is our contention that both of these companies were competing to be the best-cost provider. The heat map below illustrates the annual pricing comparisons between companies. Clearly, Company E (If The Shoe Fits) was attempting to be the low-cost provider after they adjusted to the industry average. Conversely, Company D (We Got Sole) was competing on the basis of product differentiation by claiming the highest S/Q rating in the industry (9). The company also claimed the highest prices in the industry for more years than any other company. Figure SEQ Figure \* ARABIC 5: Heat Map - Product Price CompetitivenessAnalysis of the competitive pricing data is only provides a portion of the information necessary to compete successfully against our primary rivals. The S/Q rating also provides clues about the strategic objectives of the other companies. Crossfire had the lowest S/Q rating in the industry, presumably because the company executives wanted to reduce costs in order to maintain profitability at low product prices. Believe Shoe Company executives felt that we could demonstrate our superiority over Crossfire by beating the company’s wholesale product prices while maintaining our high S/Q rating. We were perplexed to find Crossfire performing well in spite of our efforts to eclipse the company in all of the key investor measurables. We struggled to understand how a company with a significantly lower S/Q rating could sell products at roughly the same price as Believe and remain competitive. Figure SEQ Figure \* ARABIC 6: S/Q RatingsOur research revealed that Crossfire made a large stock offering early in the simulation in order to finance capital investment in a new production facility. The increased production capacity allowed Crossfire to achieve higher unit sales than the rest of the industry. Figure SEQ Figure \* ARABIC 7: Wholesale Market Global Unit SalesThe additional capacity came at a price for Crossfire as the company was not able to generate as high an operating profit as Believe or Aswego in the first several years of the simulation. Crossfire corrected this problem by the end of the simulation and reduced operating costs, which ultimately led to a vastly improved ROE. Crossfire did this by focusing on production efficiencies, though in order to remain profitable the company has refrained from improving on the quality of its product.Table SEQ Table \* ARABIC 2: Operating Profit %Company A (Aswego) was the leader from the beginning of the simulation to the end. This company relied heavily on a strong advertising campaign. Company A spent $10M more than any other company in the industry on advertising. Unfortunately, for Company A, the additional advertising expense forced the company to charge a higher price for their product. In comparison, our high S/Q rating and lower product pricing has allowed Believe Shoe Company to increase market share in both the internet and wholesale markets. The pricing war in the wholesale market is very competitive, but the fact that Company A has been able to increase its total sales volume at a higher product price gives us confidence that we have some room to increase our price and offer a higher quality shoe than either Company A or Company C. Our competitive advantage over Company C is our superior S/Q rating offered at a comparable price. We attribute the steady decline in the number of pairs sold by Company C to this fact. Conversely, we have an advantage over Company A in terms of our product pricing. Our strategy moving forward is to continue offering products with an S/Q rating of at least 8 and to slightly increase our product prices to maximize our profitability. We have room to increase our wholesale pricing by $2.75 per pair and still remain competitive due to our high S/Q ratings. We would exercise great caution in any price increase, preferring to make small adjustments. A key tactical maneuver we rely on is to price our product as high as necessary to reduce demand for our product so that we minimize the threat of stock out, but maximize the profitability from each shoe produced. It is our contention that no other adjustments would be necessary for the next two years of simulations in the wholesale market. The internet market is highly reflective of the wholesale market with regards to the strategies employed by each company. Believe Shoe Company is ranked third overall in terms of market share, ending with 20.34%. Our primary competitors are Company A and Company D. Company A offers the lowest priced shoes at $70, compared to $75 for Believe and $77 for Company D. Believe Shoe Company has steadily increased market share in this segment and plans to utilize the same strategy moving forward. With a slight decrease in price, we believe we can capture a 25% market share.Lessons LearnedThere were many lessons learned during the management period. The first and foremost lesson that the management team learned was the large amount of complex data that had to be digested for the decision rounds. Although this massive amount of data was complex, the prevailing thought is that in real life it is even more complex. The next lesson was that although strategies have to be flexible, management teams must stick with their original strategy. The temptation to change strategies is especially strong when the strategy appears to be less successful. However, management teams must be able to adjust strategies to meet the specific demands of the various markets. This is to say, what works in North America may not work in Europe or elsewhere. The third lesson is that management teams can work even when all co-managers have the same amount of power to influence decisions. Sometimes personal histories make accepting this fact difficult but managing in a team can provide better decisions by creating discussion. The most important lesson is that people cause a strategy to fail or succeed. The people involved in the strategy must be willing and capable of executing it. Finally, the management team would like to note that the lessons learned during the management period may not be identifiable immediately. There is certainty that some of the lessons to be learned will be presented in future endeavors. ConclusionThe preceding is an in-depth study of the experience of the Believe Shoe Company management, which competed in a shoe simulation against four other companies, each with a team of co-managers. As discussed, these five teams competed against each other in order to determine who could make the best decisions on the basis of corporate citizenship, sales forecast, plant capacity, branded production and distribution, internet and wholesale marketing, celebrity bids, and private label operations. These teams analyzed their business and competition through seven decision rounds to see which team could come out on top. This report was an in-depth look at the Believe Shoe Company and how its co-managers fared throughout the project. Included were the strategic vision, performance targets for EPS, ROE, credit rating, and image rating, competitive strategy of branded and private label footwear, production and workforce compensation strategy, financial strategy, as well as an identification and analysis of our closest competitors in the private and branded label segments for the last two years. Throughout this report, data was also used as analytical narratives and graphical representations.ReferencesL Etang, J. (1994). Public relations and corporate social responsibility: Some issues arising. Journal of Business Ethics , 13 (2), 111-124. Retrived from ProQuest (01674544).McNeese-Smith, D. (1996). Increasing employee productivity, job satisfaction, and organizational commitment . Journal of Healthcare Management , 41 (2), 160-176. Retrived from ProQuest (10969012).Thompson, A. A., Peteraf, M. A., Gamble, J. E., & Strickland III, A. (2012). Crafting and Executing Strategy: Concepts and Readings (18th ed.). New York, NY: McGraw-Hill/Irwin.Thompson, A. A., Stappenbeck, G. J., Reidenbach, M. A., Thrasher, I. F., & Harms, C. C. (2012). The Business Strategy Game: Competing in a global market place. Retrieved from . com/Ulrich, D., & Wiersema, M. F. (1989, May). Gaining Strategic and Organizational Capability in a Turbulent Business Environment. The Academy of Management Prospective, 115-122. Retrieved from ProQuest (15589080). ................
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