The Business Strategy Game Player's Guide PDF

THE BUSINESS STRATEGY GAME Created by Arthur A. Thompson, Jr. The University of Alabama...

THE BUSINESS STRATEGY GAME Created by Arthur A. Thompson, Jr. The University of Alabama Gregory J. Stappenbeck Competing in a GLO-BUS Software, Inc. Global Marketplace Mark A. Reidenbach GLO-BUS Software, Inc. Ira F. Thrasher GLO-BUS Software, Inc. 2024 Edition Christopher C. Harms GLO-BUS Software, Inc. The Business Strategy Game is published and marketed exclusively by McGraw-Hill Education, Inc., 1333 Burr Ridge Parkway, Burr Ridge, IL 60527 Copyright © 2024 by GLO-BUS Software, Inc. All rights reserved. No part of this document may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of GLO-BUS Software, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. The Business Strategy Game Player’s Guide This Player’s Guide provides you with information about The Business Strategy Game and suggestions for successfully managing your athletic footwear company. Here is a quick reference to the contents: How The Business Strategy Game Works.......................................................................................... 3 Company Operations............................................................................................................................. 4 The Worldwide Market for Athletic Footwear..................................................................................... 5 Distribution Channels for Athletic Footwear...................................................................................... 6 Raw Materials Supplies......................................................................................................................... 7 Footwear Manufacturing....................................................................................................................... 8 Exchange Rate Impacts......................................................................................................................... 9 The Competitive Factors That Drive Branded Footwear Sales and Market Share....................... 10 The Importance of Each Competitive Factor in Determining Sales and Market Share................ 14 Crafting a Strategy to Be Competitively Successful........................................................................ 15 Making Decisions................................................................................................................................. 17 Workforce Compensation & Training........................................................................................... 18 Branded Footwear Production..................................................................................................... 20 Production Facilities..................................................................................................................... 22 Branded Distribution and Warehouse Operations....................................................................... 24 Internet Marketing........................................................................................................................ 26 Wholesale Marketing................................................................................................................... 28 Private-Label Operations............................................................................................................. 31 Celebrity Endorsement Contracts................................................................................................ 32 Corporate Social Responsibility and Citizenship (CSRC)........................................................... 33 Finance and Cash Flow............................................................................................................... 33 The 3-Year Strategic Plan.................................................................................................................... 35 Special Note on Decision-Making Procedures................................................................................. 35 Reporting the Results.......................................................................................................................... 36 What Your Board of Directors Expects: Results in 5 Key Areas................................................... 36 Scoring Your Company’s Performance............................................................................................. 37 Important Advice.................................................................................................................................. 37 What You Can Expect to Learn.......................................................................................................... 39 Welcome to The Business Strategy Game. You and your co-managers are taking over the operation of an athletic footwear company that is in a neck-and-neck race for global market leadership, competing against rival athletic footwear companies run by other class members. All footwear companies presently have the same market shares in each of the four geographic market regions— North America, Europe-Africa, Asia- Pacific, and Latin America. Your company is selling over 8 million pairs annually. In the just-completed year, your company had revenues of $432.6 million and net earnings of $40 million, equal to $2.00 per share of common stock. The company is in sound financial condition, is performing well, and its brand is well- regarded. Your company’s board of directors has charged you with developing a winning competitive strategy—one that capitalizes on continuing consumer interest in athletic footwear, keeps the company in the ranks of the industry leaders, and increases the company’s earnings year-after-year. Your first priority as a BSG participant should be to absorb the contents of this Player’s Guide and get a firm grip on what the exercise involves, the character of the global athletic footwear market, and various cause- effect relationships that govern your company’s operations. Copyright © GLO-BUS Software, Inc. Back to Top Page 2 The Business Strategy Game Player’s Guide How The Business Strategy Game Works The Business Strategy Game (BSG) is an online exercise, modeled to reflect the real-world character of the globally competitive athletic footwear industry and structured so that you run a company in head-to-head competition against companies run by other class members. Company operations are patterned after those of an athletic footwear company that produces its shoes at company-operated facilities rather than outsourcing production to contract manufacturers. Cause-effect relationships and revenue-cost-profit relationships are based on sound business and economic principles and closely mirror the competitive functioning of the real-world athletic footwear market. The Business Strategy Game enables you and your co-managers to apply what you have learned in business school and to practice making reasoned, businesslike decisions aimed at improving your company’s overall performance. Everything about your company and the competitive environment in which your company operates has been made “as realistic as possible” to provide you with a close-to-real-life managerial experience where you can be businesslike and logical in deciding what to do. Each decision period in BSG represents a year. The company you will be running began operations 10 years ago, and the first set of decision entries you and your co-managers will make is for Year 11. The first time you launch the Decisions/Reports Program from your Corporate Lobby, you should scroll down the menu at the left to view the Year 10 Footwear Industry Report, the Year 10 Competitive Intelligence Reports, and your company’s Year 10 Company Operating Reports. These reports, along with this Player’s Guide, provide you with full information on where things stand going into Year 11. You and your co-managers will make decisions each period relating to branded and private-label footwear production (up to 11 entries for each production facility), the addition of facility space and production equipment and production improvement options (up to 8 entries for each facility), workforce compensation and training (6 entries for each facility), shipping and distribution center operations (5 entries per geographic region), footwear pricing and marketing (up to 9 entries per region), contract offers to celebrities to endorse your footwear brand (2 entries per available celebrity), corporate social responsibility and citizenship (up to 8 entries), and the financing of company operations (up to 8 entries). Plus, there are 10 entries for each region pertaining to assumptions about the actions of competitors that factor directly into the forecasts of your company’s unit sales, revenues, and market share in each of the four geographic regions. In addition, there are import tariffs and annual changes in exchange rates to consider, and shareholder expectations to satisfy. Video Tutorials for each decision entry page will help you get started. And there are Help documents for each page that provide valuable information about each decision entry, important cause-effect relationships, and decision-making tips. Complete results of each decision period become available about 15 minutes after each decision round deadline. Detailed information and feedback provided in the Footwear Industry Report, the Competitive Intelligence Report, and the Company Operating Reports provide essential information about each company’s performance, assorted industry outcomes, updated forecasts of total buyer demand for athletic footwear for each geographic region, your company’s competitive standing versus rivals, and other statistics that enable you to determine what actions to take to improve your company’s performance in upcoming decision rounds. The decision round schedule developed by your instructor indicates the number of decision periods for which you will be running the company. You should use the practice round(s) to become familiar with the software, digest all the information provided on the decision pages and in the reports, and get a glimpse of what to expect before actual scored rounds begin. Your company’s Corporate Lobby web page is the “gateway” to all BSG activities—the menu along the left side of the page provides access to everything that is available. Plus, the Corporate Lobby shows the latest interest rates, exchange rate impacts, and industry scoreboard. Take a couple of minutes to familiarize yourself with the features and information in your Corporate Lobby, all of which will come into play during the exercise. To access the decision entry pages and available reports from your “Corporate Lobby” page, click on the Go to Decisions/Reports button to launch the Decisions/Reports program in a new tab. When you want to save Copyright © GLO-BUS Software, Inc. Back to Top Page 3 The Business Strategy Game Player’s Guide any work you have done on the decision entry pages, click the Save button at the top-right corner of the page and the decision entries will be saved to the BSG servers. When the deadline for a decision round (year) passes, the decision entries most recently saved by any of the company’s co-managers are the ones that will be used to generate that year’s results for the company. Company Operations Your company currently produces footwear at 2 facilities—one in North America and one in the Asia-Pacific region. The North America facility has sufficient facility space to assemble 5 million pairs of athletic footwear annually without use of overtime, but prior management only installed enough footwear-making equipment going into Year 11 to assemble 4 million pairs (without overtime). The somewhat newer Asia-Pacific facility, while having sufficient facility space to assemble 6 million pairs, currently has only enough footwear-making equipment to assemble 4 million pairs without use of overtime. You may install additional production equipment in the two facilities should you wish to bring assembly capability up to 11 million pairs, and you can construct additional facility space to accommodate more than 11 million pairs. Both facilities can be operated at overtime increasing annual assembly capability by 20%, thus giving the company a current annual production capability of 9,600,000 pairs without installing additional equipment in the unused space in the North America and Asia-Pacific facilities and annual capability of 13,200,000 pairs if the company buys enough production equipment to fill the available facility space in the two existing facilities. Your company’s worldwide sales volume in Year 10 equaled 8.15 million pairs, so you have ample time to consider whether to construct additional space at the two existing facilities or to construct new facilities in the Europe-Africa and/or Latin America regions. At management’s direction, the company’s design staff can come up with more footwear models, new features, and stylish new designs to keep the product line fresh and in keeping with the latest fashion. The company markets its brand of athletic footwear to footwear retailers worldwide and to individuals buying online at the company’s website. In years past, whenever the company had more assembly capacity than was needed to meet the worldwide buyer demand for its branded footwear, it entered into competitive bidding for contracts to produce footwear sold under the private-label brands of large chain retailers. In Year 10 the company sold 7.35 million pairs of branded shoes to retailers and individuals, and it bid successfully for contracts to supply 800,000 pairs of private label shoes (200,000 pairs in each of the four regions) to large multi-outlet retailers of athletic footwear. Materials to make the company’s footwear are purchased from a variety of suppliers, all of whom have the capability to make daily deliveries to the company’s production facilities; the company’s just-in-time supply chain eliminates the need for maintaining materials inventories at its facilities. Newly produced footwear is immediately shipped to one of the company’s four regional distribution centers. The North American distribution center is in Memphis, Tennessee, the one for Europe-Africa is in Milan, Italy, the one for the Asia- Pacific is in Bangkok, Thailand, and the one for Latin America is in Rio de Janeiro, Brazil. Many countries place import duties on footwear produced outside of their geographic region. Tariffs, which are payable when your company ships footwear produced in a region to distribution centers outside of that region, currently average $4.00 per pair in North America, $6.00 per pair in Europe-Africa, $8.00 per pair in Asia- Pacific, and $10.00 in Latin America. Your course instructor has the option to alter tariffs as the simulation progresses, so the current tariffs may prove temporary. Shipping and Distribution Center Operations. Personnel at the company’s distribution centers open the bulk shipments from facilities, pack each incoming pair in individual boxes, store the shoe boxes in bins numbered by model and size, and retrieve the pairs/boxes from bins as needed to fill incoming orders from footwear retailers and online buyers. Arrangements are made with independent freight carriers to pick up outgoing orders at the loading docks of the distribution centers and deliver them to customers within the region (distribution centers cannot ship to any buyers outside their region). Each distribution center maintains sufficient inventory of each model and size to enable orders to be delivered within 1 to 4 weeks from the time the order is placed. You will decide whether to operate each distribution center in a manner that enables 1-week, 2-week, 3-week, or 4-week delivery to retailers. Competitive Efforts in the Marketplace. The company can enhance its footwear with new styling and performance features on an annual basis and can also increase/decrease the number of models/styles in its product lineup. In addition, the company strives to enhance its sales volume and competitive standing against rivals via attractive pricing, advertising, mail-in rebates, contracting with celebrities to endorse its brand, building a stronger brand image and reputation with buyers, providing merchandising and promotional Copyright © GLO-BUS Software, Inc. Back to Top Page 4 The Business Strategy Game Player’s Guide support to retailers stocking its brand, good delivery times on shipments to retailers, and using search engine ads to draw online shoppers to its website. Stock Listings and Financial Reporting. Since going public in Year 6, the company's stock price has more than tripled, closing at $30 at the end of Year 10. There are 20 million shares of the company's stock outstanding. The company’s financial statements are prepared in accord with generally accepted accounting principles and are reported in U.S. dollars. The company’s financial accounting is in accordance with the rules and regulations of all securities exchanges where its stock is traded. The Worldwide Market for Athletic Footwear The number of companies competing in your industry is determined by your course instructor and will range from as few as 4 to as many as 12. All companies begin Year 11 in the exact same competitive market position—equal in sales volume, global and regional market share, revenues, costs, profits, footwear styling and quality, prices, and so on. In upcoming years, managers may pursue actions to alter their company’s sales and market shares in all regions, opting to increase sales and share in some and decrease sales and share in others (including exiting one or more regions or market segments entirely). Market Growth. The prospects for long-term growth in the sales of athletic footwear are excellent. Athletic shoes have become the everyday footwear of choice for children and teenagers. Adults buy athletic shoes for recreational activities as well as for leisure and casual use, attracted by greater comfort, easy-care features, and lower prices in comparison to dress shoes. Athletic footwear has proved very attractive to people who spend a lot of time on their feet and to older people with foot problems. The combined effect of these factors is reliably expected to produce 7-9% annual growth in global demand for athletic footwear for Years 11-15, slowing to about 5-7% annual growth during Years 16-20. But the projected growth rates are not the same for all four regions (as shown in the following table). Projected Growth in Buyer Demand North America Europe Africa Asia-Pacific Latin America Worldwide Years 11-15 Branded 5% to 7% 5% to 7% 9% to 11% 9% to 11% 7% - 9% Private-Label 10% to 12% 10% to 12% 12% to 14% 12% to 14% 11% to 13% Years 16-20 Branded 3%-5% 3%-5% 7% - 9% 7% - 9% 5% to 7% Private-Label 8%-10% 8%-10% 10%-12% 10%-12% 9%-11% Note: Branded footwear sales to individuals at the company’s website (which were 15% of total branded sales in each geographic region in Year 10) are projected to rise by 1 percentage point annually to 25% of total branded sales in each region by Year 20. Where actual growth will fall within the indicated 2 percentage-point intervals varies both by year and by region—thus branded sales might grow 5.3% in Year 11 in North America and 6.6% in Year 11 in Europe- Africa, then grow 6.2% in Year 12 in North America and 5.8% in Year 12 in Europe-Africa. Moreover, the forecasts are all based on the assumption that companies in the industry compete aggressively enough to capture the growth opportunities and do not radically alter current price levels, product quality, models, etc. Future growth rates may turn out to be higher than forecast in the event more buyers are attracted to purchase branded athletic footwear because of significant declines in industry-wide average prices, sharp increases in the marketing and competitive efforts of rival companies, and/or significant improvements in footwear quality/performance over time. Conversely, factors that can drive away potential buyers and cause the growth in buyer demand to fall below the forecast amounts include sharply higher prices and/or eroding footwear quality/performance and/or greatly diminished marketing and competitive efforts industry-wide. In other words, the forecast growth rates in the table above are reliable only to the extent that rival companies, on the whole, do not pursue actions that result in future prices, product quality, and marketing and competitive efforts that differ significantly from the levels prevailing in Year 10. The projected average sales volumes per company for Years 11-13 for the four geographic regions (based on growth rates at the midpoint of the forecast ranges) are shown below: Copyright © GLO-BUS Software, Inc. Back to Top Page 5 The Business Strategy Game Player’s Guide Projected Unit Sales Volumes per Company North America Europe Africa Asia-Pacific Latin America Worldwide Year 11 Branded 2,491,000 2,120,000 1,650,000 1,650,000 7,911,000 Private-Label 222,000 222,000 226,000 226,000 896,000 Totals 2,713,000 2,342,000 1,876,000 1,876,000 8,807,000 Year 12 Branded 2,640,000 2,247,000 1,815,000 1,815,000 8,517,000 Private-Label 246,000 246,000 255,000 255,000 1,002,000 Totals 2,886,000 2,493,000 2,070,000 2,070,000 9,519,000 Year 13 Branded 2,798,000 2,382,000 1,997,000 1,997,000 9,174,000 Private-Label 273,000 273,000 288,000 288,000 1,122,000 Totals 3,071,000 2,655,000 2,285,000 2,285,000 10,296,000 Long-range demand forecasts indicate that by Year 20 (1) branded footwear demand per company will average 3,825,000 pairs in North America, 3,256,000 pairs in Europe-Africa, 3,552,000 pairs in the Asia- Pacific, and 3,552,000 pairs in Latin America and (2) private-label demand per company will average 517,000 pairs in North America and Europe-Africa, and 618,000 pairs in the Asia-Pacific and Latin America. This equates to total athletic footwear demand per company by Year 20 of 4,342,000 pairs in North America, 3,773,000 pairs in Europe-Africa, 4,170,000 pairs in the Asia-Pacific, 4,170,000 pairs in Latin America, and a global per company average demand in Year 20 of 16,455,000 pairs (versus average per company demand of 8,150,000 pairs in Year 10). Ratings of Athletic Footwear Styling and Quality. The International Footwear Federation, a well- respected consumer group, rates the styling and quality of the footwear of all competitors and assigns a styling-quality or S/Q rating of 0.0 to 10.0 stars to each company’s branded footwear offerings. The IFF’s S/Q rating is a function of five factors: (1) current-year spending per footwear model for new features and styling, (2) the percentage of superior materials used, (3) current-year expenditures for Total Quality Management (TQM) and/or Six Sigma quality control programs, (4) cumulative expenditures for TQM/Six Sigma quality control efforts (to reflect learning and experience curve effects), and (5) current-year and cumulative expenditures to train workers in using the best practices to assemble athletic footwear. The IFF obtains the needed data annually from all footwear companies, compares the styling and quality of models and brands on the market, and rates the styling/quality of shoes produced at each facility of each company. Based on where each facility’s output is shipped, S/Q ratings are calculated for each company in each geographic region where its shoes are available for sale. Companies thus have as many as 8 S/Q quality ratings—one each for branded and private-label pairs offered for sale in North America, Europe- Africa, Asia-Pacific, and Latin America. A company's S/Q rating in each market segment is a weighted average of the S/Q ratings at the production facilities from which the pairs were shipped, adjusted up or down for the S/Q ratings of unsold pairs from the prior year. The IFF's S/Q rating formula calls for a 0.3- star reduction in the S/Q rating on all unsold branded pairs carried over in inventory to the following year since they represent last year's styles. Ratings are updated annually. The Federation's ratings of each company's shoe styling and quality in each market segment are often the subject of newspaper and magazine articles. Market research confirms that many consumers are well informed about the S/Q ratings and consider them in deciding which brand to buy. Distribution Channels for Athletic Footwear Athletic footwear makers have three distribution channels for accessing consumers of athletic footwear: Wholesale sales to independent footwear retailers who carry athletic footwear—department stores, retail shoe and apparel stores, discount chains, sporting goods stores, and pro shops at golf and tennis clubs. Worldwide, there are some 60,000 retail outlets for athletic footwear scattered across the world. North America and Europe-Africa each have 20,000 retail outlets selling athletic footwear, while Latin America and the Asia-Pacific each have 10,000 retail outlets for athletic footwear. Online sales to consumers at the company’s website. Private-label sales to large multi-outlet retailers of athletic footwear. Copyright © GLO-BUS Software, Inc. Back to Top Page 6 The Business Strategy Game Player’s Guide All manufacturers have traditionally used independent footwear retailers as the primary distribution channel for selling branded footwear. Manufacturers have built a network of retailers to handle their brands in all geographic areas where they market. Retailers are recruited by small teams of company-employed sales representatives working out of regional offices; the role of the sales reps is to call on retailers, convince them to carry the company's brand, solicit orders, and provide assistance with merchandising and in-store displays. Typically, retailers carry 2-4 brands of athletic footwear (depending on store size and location) and usually stock only certain models/styles of the brands they do carry (since manufacturers have anywhere from 50 to 500 models/styles in their product lines). Retail markups over the wholesale prices of footwear manufacturers can run anywhere from 40% at discount chains to as high as 100% at premium retailers. Thus, a pair of shoes wholesaling for $50 usually retails for between $70 and $100. However, all footwear manufacturers operate websites to display and actively merchandise their models and styles, partly because selling online gives the company access to consumers not living close to retailers carrying the company’s brand and partly because growing numbers of consumers like the convenience of shopping online. Online sales of branded footwear have been growing steadily and now account for 15% of total branded sales in each geographic region; this percentage is expected to grow by 1% annually, reaching 25% of total branded sales by Year 20. However, the management teams at all companies have the discretion to place greater/lesser emphasis on promoting online sales and thus may end up with online sales that are above/below the industry average. The third channel—private-label sales to large chain store accounts—is attractive for two reasons: The private-label segment is projected to grow a healthy 12% annually during Years 11-15 and a brisk 10% during Years 16-20. The growth in private label sales is being driven largely by the practice of multi- outlet chains to use lower-priced private-label goods to attract price-conscious consumers. Chain retailers that sell athletic footwear under their own label outsource the pairs they need from manufacturers on a competitive-bid basis. Making private-label pairs for chain retailers allows a manufacturer to use production capability more efficiently. For example, a manufacturer selling only 9 million branded pairs but having production capability of 11 million pairs (13.2 million pairs with maximum use of overtime) can reduce overall costs per pair by utilizing some or all of its unused capability to produce private-label pairs. The added production volume from being a successful low-bidder to supply private-label pairs to chain retailers helps spread fixed costs over more pairs and can improve overall financial performance (provided the price received for producing the private-label pairs is above the direct costs per pair). The Demand Side of the Market for Athletic Footwear. Consumer demand for athletic footwear is diverse in terms of price, styling, and purpose for which athletic footwear is worn. Many buyers are satisfied with no-frills, budget-priced shoes while some are quite willing to pay premium prices for top-of-the-line quality, special high-tech features, or trendy styling. The biggest market segment consists of customers who buy athletic shoes for general wear, but there are sizable buyer segments for specialty shoes designed expressly for walking, jogging, training, aerobics, basketball, tennis, golf, soccer, bowling, and so on. The diversity of buyer demand gives manufacturers room to pursue a variety of strategies—from competing across-the-board with many models and below-average prices to making a limited number of styles for buyers willing to pay premium prices for top-of-the-line quality. Competition. The efforts of footwear companies to attract buyers and compete effectively with rival brands revolve around 11 factors: pricing, styling and product quality (as mirrored in competitors’ S/Q ratings), the breadth of product selection (the number of models/styles buyers have to choose from), celebrity endorsements, advertising, brand image and reputation, the comparative sizes of the footwear retailer networks, the amount of merchandising and promotional support provided to footwear retailers, mail-in rebates, the speed at which rivals deliver orders to retailers, and sales efforts at company websites. Raw Material Supplies All of the materials used in producing athletic footwear are readily available on the open market. There are some 250 different suppliers worldwide who have the capability to furnish interior lining fabrics, waterproof materials for external use, rubber and plastic materials for soles, shoelaces, and high-strength thread. It is substantially cheaper for footwear manufacturers to purchase these materials from outside suppliers than it is to manufacture them internally in the relatively small volumes needed. Delivery times on all materials are Copyright © GLO-BUS Software, Inc. Back to Top Page 7 The Business Strategy Game Player’s Guide usually less than 48 hours. Suppliers have ample capacity to furnish whatever volume of materials that manufacturers need; no shortages have occurred in the past. Just recently, suppliers confirmed they would have no difficulty in accommodating increased materials demand in the event footwear-makers build additional production capacity to meet growing worldwide demand. Suppliers offer two grades of materials: standard and superior. The qualities of superior and standard materials are the same from supplier to supplier. All suppliers charge the going market price because of the commodity nature of materials. The use of superior materials improves quality and performance, but shoes can be manufactured with any percentage combination of standard and superior materials. The “base” materials prices (which are subject to change by your instructor) are currently $6 per pair for footwear made of 100% standard materials and $12 for footwear made of 100% superior materials. However, the prevailing base prices are adjusted up or down according to the percentage mix of standard- superior materials usage and the strength of demand for footwear materials: The going market prices of standard and superior materials in any upcoming year will deviate from their respective base prices whenever the percentage mix is anything other than 60% for standard and 40% for superior materials. The going market price of standard materials will increase by 2% above the base for each 1% that worldwide use of standard materials exceeds 60%. Simultaneously, the global market price of superior materials will decrease by 0.5% for each 1% that the global usage of superior materials falls below 40% (and vice versa). Thus, worldwide materials usage of 50% superior materials and 50% standard materials will result in a global market price for superior materials that is 20% above the prevailing $12 base, and a global market price for standard materials that is 5% below the prevailing $6 base. Similarly, worldwide usage of 70% standard materials and 30% superior materials will result in a global market price for standard materials that is 20% above the $6 base and a global market price for superior materials that is 5% below the $12 base. In other words, greater than 40% usage of superior materials widens the price gap between superior and standard materials, and greater than 60% usage of standard materials narrows the gap. Materials prices fall whenever global production is below 95% of global production capability and materials prices rise when global production is above 110% of global production capability (maximum global production capability is 120%, since the use of overtime is limited to 20% of installed capability). Should global production fall below 95% of the global production capability (not counting overtime), the market prices for both standard and superior materials will drop 1% for each 1% that global shoe production is below the 95% utilization level. Such price reductions reflect increased competition among materials suppliers for the available orders. On the other hand, when global production levels exceed 110% of global production capability (reflecting overtime usage averaging 10% across all companies and regions), the prices of both standard and superior materials will go up 1% for each 1% that global production levels exceed 110% of global production capability. Thus, once overtime production exceeds a global average of 10% of installed production capability worldwide, material suppliers can exert pricing power and command higher prices. Footwear Manufacturing Footwear manufacturing has evolved into a rather uncomplicated process, and the technology is well understood. No company has proprietary know-how that translates into manufacturing advantage. The production process consists of cutting fabrics and materials to size and design, stitching the various pieces of the shoe together, molding and gluing the shoe soles, binding the shoe top to the sole, and so on. Tasks are divided among production workers in such a manner that it is easy to measure individual worker output and thus create incentive compensation tied to piecework. Labor productivity is determined more by worker dexterity and effort than by machine speed. On the other hand, there is ample room for worker error and unless workers pay careful attention to detail, the quality of workmanship suffers. Training production workers in the use of best practice procedures at each step of the manufacturing process has recently become important to minimizing the reject rates on pairs produced. Footwear industry observers expect company managers to look closely at the economics of where best to locate any additional footwear production facilities. While trainable labor supplies are available in all four geographic regions, base wages for Asian-Pacific and Latin America workers currently run about 35% of base wages in Europe-Africa and North America; all workers worldwide are paid 1.5 times their regular base wage for working overtime (more than 40 hours per week). However, worker productivity levels, labor costs Copyright © GLO-BUS Software, Inc. Back to Top Page 8 The Business Strategy Game Player’s Guide per pair produced, and overall production costs at facilities in different geographic regions are not only a function of base wages and overtime pay scales but also by the fact that different facilities in different regions may have different fringe benefit and incentive compensation plans, spend different amounts for best practices training, use new or refurbished footwear-making equipment, and may have invested in different production improvement options at different facilities. It is perilous to leap to the conclusion that production should be concentrated in the Latin American and/or Asia-Pacific regions simply because of lower base wages and overtime costs. Moreover, the costs of producing footwear in one region and exporting some of the pairs produced to supply buyer demand in another region are substantially impacted by import tariffs, fluctuating currency exchange rates, and the higher cost of shipping pairs to foreign distribution centers ($2 per pair) versus the cost of shipping to the distribution center in the region where a production facility is located ($1 per pair). Even more importantly, tariffs have to be paid on footwear exported from Asia-Pacific facilities to markets in Latin America ($10 per pair), Europe-Africa ($6 per pair) and North America ($4 per pair); likewise, tariffs have to be paid on footwear exports from Latin American facilities to markets in North American ($4 per pair), Europe- Africa ($6 per pair) and the Asia-Pacific ($8 per pair)—it’s uncertain whether tariffs in future years will rise or fall and by how much. Also, all companies are subject to year-to-year exchange rate fluctuations in shipping footwear from one region to another (as discussed below). One strategy to escape paying import tariffs and guard against adverse changes in exchange rates is to maintain a production base in each of the four geographic regions and rely upon those facilities to satisfy demand for the company’s branded footwear in their respective region. Exchange Rate Impacts All footwear companies are subject to exchange rate adjustments at two different points in their business. The first occurs when footwear is shipped from a facility in one region to distribution warehouses in a different region (where local currencies are different from that in which the footwear was produced). The production costs of footwear made at Asia-Pacific facilities are tied to the Singapore dollar (Sing$); the production costs of footwear made at Europe-Africa facilities are tied to the euro (€); the production costs of footwear made at Latin American facilities are tied to the Brazilian real; and the costs of footwear made in North American facilities are tied to the U.S. dollar (US$). Thus, the production cost of footwear made at an Asia Pacific facility and shipped to Latin America is adjusted up or down for any exchange rate change between the Sing$ and the Brazilian real that occurs between the time the goods leave the facility and the time they are sold from the distribution center in Latin America (a period of 3-6 weeks). Similarly, the manufacturing cost of footwear shipped between North America and Latin America is adjusted up or down for recent exchange rate changes between the US$ and the Brazilian real; the manufacturing cost of pairs shipped between North America and Europe-Africa is adjusted up or down based on recent exchange rate fluctuations between the US$ and the €; the manufacturing cost of pairs shipped between Asia-Pacific and Europe-Africa is adjusted for recent fluctuations between the Sing$ and the €; and so on. The second exchange rate adjustment occurs when the local currency the company receives in payment from local retailers and online buyers over the course of a year in Europe-Africa (where all sales transactions are tied to the €), Latin America (where all sales are tied to the Brazilian real), and Asia-Pacific (where all sales are tied to the Sing$) must be converted to US$ for financial reporting purposes—the company’s financial statements are always reported in US$. The essence of this second exchange rate adjustment calls for the net revenues the company actually receives on footwear sold to retailers and online buyers in various parts of the world to reflect year-to-year exchange rate differences as follows: The revenues (in €) the company receives from sales to buyers in Europe-Africa are adjusted up or down for average annual exchange rate changes between the € and the US$. The revenues (in Sing$) received from sales to Asia-Pacific buyers are adjusted up or down for average annual exchange rate changes between the Sing$ and the US$. The revenues (in Brazilian real) received from sales to Latin American buyers are adjusted up or down for average annual exchange rate changes between the Brazilian real and the US$. No adjustments are needed for the revenues received from sales to North American buyers because the company reports its financial results in US$. Copyright © GLO-BUS Software, Inc. Back to Top Page 9 The Business Strategy Game Player’s Guide BSG automatically accesses all the relevant real-world exchanges rates between decision periods, handles the calculation of both types of exchange rate adjustments, and reports the size of each year’s percentage adjustments in your Corporate Lobby as well as on pertinent entry pages and in company reports. While you do not have to master the details of how the two types of exchange rate adjustments are calculated, you definitely will need to keep a watchful eye on the sizes of the exchange rate adjustments each year and understand what you can do to mitigate the adverse impacts and take advantage of the positive impacts of shifting exchange rates. The sizes of the exchange rate adjustment each year are always equal to 5 times the actual period-to-period percentage change in the real-world exchange rates for US$, €, Brazilian real, and Sing$ (multiplying the actual % change by 5 is done so as to translate exchange rate changes over the few days between decision periods into changes that are more representative of a potential full-year change). However, because actual exchange rate fluctuations are occasionally quite volatile over a several-day period, the maximum exchange rate adjustment during any one period is capped at 20% (even though bigger changes over a 12-month period are fairly common in the real world). There will be no exchange rate adjustments in Year 11. The real-world exchange rate values prevailing at the time your instructor re-starts the industry after any practice rounds and the real-world rates prevailing at the time of the decision deadline for Year 11 will serve as the base for calculating the Year 12 exchange rate adjustments. The real-world changes in the exchange rates between the Year 11 and Year 12 decision deadlines serve as the basis for exchange rate adjustments in Year 13. And so on through the exercise. This means you have the advantage of knowing in advance what the exchange rate effects will be in the upcoming year and can thus take actions to mitigate adverse exchange rate effects (this is done to help you manage the risks of exchange rate fluctuations as opposed to giving you the option to engage in currency hedging, which is pretty intricate and has risks of its own). The Competitive Factors That Drive Branded Footwear Sales and Market Share Competition among rival athletic footwear companies centers around 13 factors that affect each company’s branded footwear sales volumes and market shares in each of the four geographic market regions. Five of the 13 factors affect both wholesale sales to footwear retailers and online sales at company websites, five of the factors affect only wholesale sales, and three of the factors affect only internet (or online) sales. The Five Factors that Impact Both Internet Sales and Wholesale Sales of Branded Footwear 1. The S/Q Rating. Footwear shoppers consider the widely-available and much-publicized annual S/Q ratings of the various brands of athletic footwear compiled by the International Footwear Federation to be a trusted measure of how a company’s footwear offerings compare on styling and quality against competing brands of athletic footwear. Market research indicates that S/Q ratings are generally the second or third most important factor (along with breadth of product selection) in shaping consumers’ choices of which footwear brand to purchase. A company whose S/Q rating in a region is above the all- company average S/Q rating, thus enjoys an important competitive advantage on the styling-quality aspect of its footwear brand, whereas a below-average S/Q rating constitutes an important competitive disadvantage. The more a company's S/Q rating in a region is above the all-company average, the more that footwear shoppers in the region are attracted to purchase the company’s brand—unless the company’s higher S/Q rating is undermined by (1) charging a price premium for the added styling-quality that buyers consider “too high” or “not worth the extra cost” or (2) unfavorable comparisons against rivals on other buyer-relevant features such as comparatively few models/styles for buyers to choose among, brand advertising, mail-in rebates, the appeal of celebrity endorsers, etc. 2. Number of Models/Styles. The competitive value of a broader product line is that companies can then include models in their product lineups that are specifically designed for particular purposes (running, walking, cross-training, basketball, golf, tennis, and so on as well as for casual and leisure wear) and they can also have a wider selection of colors and styles for men, women, and children. In effect, the more models/styles a company has in its product line, the more reasons consumers have to consider buying multiple pairs of the company’s footwear. Companies offering comparatively fewer models/styles than rivals risk losing sales and market share to competitors offering greater selection, unless they offset their narrower selection with other appealing competitive attributes (such as a lower price, higher S/Q rating, higher appeal of celebrity endorsers, and so on). Copyright © GLO-BUS Software, Inc. Back to Top Page 10 The Business Strategy Game Player’s Guide 3. Brand Advertising. Media advertising is used to inform the public of newly introduced models/styling and to tout the company’s brand. Even though retail dealers act as an important information source for customers and actively push the brands they carry, advertising on the part of footwear producers informs people about their latest styles and models, strengthens brand awareness, helps pull buyers into retail stores carrying the company’s brand, and helps drive footwear shoppers to a company’s website. The competitive impact of brand advertising depends on the size of each company’s current-year advertising budget in each region. A company's aggressiveness in promoting its footwear in each geographic region is judged competitively stronger when its annual brand advertising expenditures exceed the all-company regional average and is judged weaker the further its expenditures for brand advertising are below the all-company regional average. When cross-rival differences on all the other competitive factors are, on balance, close to equal among company rivals in a region, companies with above-average current-year brand advertising expenditures will outsell companies with below-average current advertising expenditures. 4. Appeal of Celebrities Endorsing the Company’s Brand. Footwear companies can contract with celebrity figures, especially those in sports, to endorse their footwear brand, appear in company ads, and be a brand ambassador. Endorsements from appealing celebrities enhance the brand image a company enjoys in the minds of athletic footwear consumers and positively affects consumer purchases. The influence of the company’s celebrity endorsers is, of course, magnified by higher brand advertising and search engine advertising—it would make little sense to sign celebrities and then not run ads featuring their endorsement of the company’s brand. Companies with more influential celebrity lineups in a region enjoy an advantage in attracting buyers to purchase their brand in either retail stores or online as compared to regional rivals with less influential celebrity endorsements (or no celebrity endorsements). 5. Image and Brand Reputation. The “image rating” for each company in the industry is based on (1) its global average branded S/Q rating, (2) its global average market share of total footwear sales (which includes sales of both branded and private-label footwear across all four geographic regions), and (3) its actions to display corporate citizenship and conduct operations in a socially responsible manner over the past 4-5 years—a total of 3 factors. All companies had an overall worldwide image rating of 70 at the end of Year 10. Image ratings/brand reputations are updated at the end of each year, using that year’s global average S/Q ratings, year-end global market shares of total footwear sales, and information relating to the social responsibility efforts of rival companies. Newly-released company image ratings are widely-publicized and are easily accessible to the buyers of athletic footwear. Market research confirms that the prior-year company image ratings (brand reputations) of rival companies have a moderately strong influence on the brand choices of footwear buyers in the upcoming twelve months. Thus, companies with prior-year image ratings above the industry average have a meaningful edge over rivals with below-average image ratings in attracting buyers to purchase their brand and in recruiting additional retailers to stock and merchandise their footwear brand for a period of 1 year (at which time new end-of-year company image ratings are released). The importance of a strong brand reputation in attracting buyers is big enough that companies with comparatively weak reputations must exert enough extra effort on the other 12 competitively relevant factors to boost overall buyer appeal for their brand and overcome their image/reputation disadvantage. When weak image companies significantly improve the overall buyer appeal and competitiveness of their athletic footwear from one year to the next, they can win market share from strong image rivals despite having an image rating disadvantage. Should companies with once-weak brand reputations continue to improve their overall image ratings over a period of several years, they can turn the liability of a weak brand reputation into a strong brand reputation and competitive asset. The Five Factors that Impact Only Wholesale Sales of Branded Footwear to Retailers 1. Average Wholesale Price for Branded Footwear Sold to Retailers. How a company’s average wholesale price for branded footwear in each region compares with the wholesale prices of competing companies is an important competitive factor. Charging a higher price than rival companies puts a company at a price-based competitive disadvantage against lower-priced rivals whereas charging a lower price results in a price-based advantage over higher-priced rivals—big cross-company price differences matter more than small differences and much more than “tiny” differences. But the more important price-related consideration affecting a company’s unit sales/market share is the amount by which its wholesale selling price to footwear retailers in each region is above/below the all-company average in each geographic region. The more a company's wholesale price to retailers in a geographic region is above the all-company regional average, the bigger and more Copyright © GLO-BUS Software, Inc. Back to Top Page 11 The Business Strategy Game Player’s Guide important is its price-based competitive disadvantage and the more that athletic footwear buyers in that region will be inclined to shift their purchases to lower-priced brands (since higher wholesale prices to footwear retailers translate into higher retail prices for footwear consumers). Conversely, the more a company’s wholesale price to retailers is below the all-company regional average and the wholesale prices of higher-priced rivals, the greater is its price-based competitive advantage and the greater is the company’s potential for attracting the region’s footwear shoppers to purchase its lower-priced brand, unless the buyer appeal of the company’s lower price is undercut by the company having an unattractively low S/Q footwear rating and/or comparatively few models/styles for buyers to choose among and/or a comparatively weak reputation/brand image, fewer retailers stocking and merchandising its brand of athletic footwear, and/or other less appealing factors that matter to footwear buyers. Low price alone won’t attract droves of buyers when a company’s footwear brand does not compare favorably with rival brands on other important factors that affect the preferences of footwear buyers for one brand versus another. It is important to understand that the size of any company’s pricing disadvantage or advantage versus rivals (and the resulting loss or gain in unit sales and market share) can be decreased or increased by its competitive standing versus rivals on the other competitive factors. Any company whose price exceeds the average prices of its regional rivals can narrow the sales and market share impact of its price-based competitive disadvantage when it has competitive edges on some/many other relevant buyer considerations—such as an above-average S/Q rating, more models/styles for buyers to select from, and/or bigger mail-in rebates. But the further a company's average price to retailers is above the average prices of rival companies, the harder it is for a company to use non-price enticements to overcome rising buyer resistance to the company’s higher priced footwear. Similarly, any company whose price to retailers is below the average prices of its regional rivals can widen its price-based advantage over rivals when it also has a competitive edge over these rivals on some or many of the other 10 competitive factors that determine a company’s unit sales and market share in a region. In addition, the further a company’s price is below the average being charged by regional rivals, the easier it becomes to offset any competitive disadvantages relating to a less attractive S/Q rating, fewer footwear models/styles to choose from, and other factors that govern overall buyer preferences for one brand of footwear versus another. 2. The Numbers of Retail Outlets Carrying the Company’s Brand. A company’s sales and market share in a geographic market are heavily influenced by the number of footwear retailers it can convince to stock its models/styles and promote its brand with shoppers. Having more retailers selling the company’s brand enhances a company’s competitiveness and overall brand appeal because of the added retail exposure and the added convenience to footwear buyers of being able to buy a given brand at more locations. The number of retailers in a region desirous of carrying a company’s brand in an upcoming year is based on four factors: (1) the company’s market share of branded footwear sales in that region, (2) its regional S/Q rating for branded footwear, (3) the number of weeks it takes for retailers in the region to receive the pairs they have ordered, and (4) the degree of merchandising support that the company provides to regional retailers stocking its brand of footwear. 3. The Number of Weeks It Takes to Deliver Orders to Retailers. Company co-managers can decide whether to install the capability to deliver the newly-received orders from retailers in 4 weeks, 3 weeks, 2 weeks, or 1 week. While retailers can easily live with a 4-week delivery time on footwear orders, manufacturers can boost the appeal of their brands and more easily convince retailers to carry their brands by cutting the delivery times on the orders of footwear retailers to 3 weeks, 2 weeks, or 1 week. Companies whose delivery times are in a region are shorter than the all-company average have an advantage in attracting footwear retailers to stock their brand and boosting sales because retailers are less likely to run out of particular sizes and styles. However, shorter delivery times require footwear companies to incur higher shipping costs and maintain higher inventories to ensure having all sizes of its various models and styles on hand in the region’s distribution center. 4. Support Offered to Retailers in Merchandising and Promoting the Company’s Brand. Footwear retailers are also attracted to stock the brands of those footwear manufacturers that provide them with the best merchandising and promotional support. Such support can include providing in-store displays and signage, providing helpful information about styles, models, and performance features, supplying brochures detailing shoe construction and other noteworthy features, making it easy for retailers to place orders online, and keeping retailers posted on styles or models that have been newly introduced/discontinued or are about to be introduced/discontinued. In short, footwear retailers and their store personnel want to deal with a footwear supplier that works closely with them to boost sales and that is easy to do business with. Companies that provide amounts of retailer support above the all- Copyright © GLO-BUS Software, Inc. Back to Top Page 12 The Business Strategy Game Player’s Guide company average in a region have an advantage in attracting footwear retailers to stock their brand and thereby boosting their branded footwear sales in the region. 5. Mail-in Rebates. As an added sales inducement, footwear companies have the option of offering buyers a rebate on each pair purchased from retailers. Mail-in rebates, if offered, can range from as low as $3 per pair to as much as $15 per pair. Companies who give rebates provide retailers with rebate coupons to give buyers at the time of purchase. To obtain the rebate a customer must fill out the coupon and mail it to the company's regional distribution center, along with the receipt of purchase. The customer service staff at the distribution center handles verification, check processing, and mailing the rebate check. When cross-rival differences on all the other factors that influence buyer brand preferences are, on balance, quite small, companies offering bigger-than-average mail-in rebates in the wholesale segment will outsell companies offering smaller-than-average mail-in rebates (or no rebates). The Three Competitive Factors that Impact Only Internet Sales of Branded Footwear 1. Average Retail Price Charged at Each Company’s Regional Websites. Charging a higher online price than rival companies puts a company at a price-based competitive disadvantage against lower- priced rivals whereas charging a lower price results in a price-based advantage over higher-priced rivals—big cross-company price differences matter more than small differences and much more than “tiny” differences. But the more important price-related consideration affecting a company’s online sales/market share in each region is the amount by which its average online selling price in each region is above/below the regional all-company average. The more a company's regional online price is above the all-company average in a geographic region, the bigger and more important is its price-based competitive disadvantage and the more that online footwear shoppers in that region will be inclined to shift their purchases to lower-priced brands. Conversely, the more a company’s online price is below the all-company regional average and the online prices of other regional rivals, the greater is its price-based competitive advantage and the greater is the company’s potential for attracting greater numbers of online shoppers in the region to purchase its lower-priced brand, unless the buyer appeal of the company’s lower price is undercut by the company having an unattractively low S/Q footwear rating and/or comparatively few models/styles for buyers to choose among and/or a comparatively weak reputation/brand image, and/or other unappealing factors that matter to online shoppers. Low price alone won’t attract droves of buyers when a company’s footwear brand does not compare favorably with rival brands on other important factors that affect the preferences of footwear buyers for one brand versus another. Consequently, it is important to understand that the size of any company’s pricing disadvantage or advantage versus rivals (and the resulting loss/gain in unit sales and market share) can be decreased/increased by its competitive standing versus rivals on all the factors affecting the brand preferences of online shoppers. Any company whose price exceeds the average prices of its regional rivals can narrow the sales and market share impact of its price-based competitive disadvantage when it has competitive edges over rivals on some/many other relevant buyer considerations—such as an above-average S/Q rating, more models/styles for buyers to select from, and/or a better company image/brand reputation. But the further a company's average price to retailers is above the average prices of rival companies, the harder it is for a company to use non-price enticements to overcome rising buyer resistance to the company’s higher priced footwear. Similarly, any company whose price to retailers is below the average prices of its regional rivals can widen its price-based advantage over rivals when it also has a competitive edge over these rivals on some or many of the other competitive factors that determine a company’s online unit sales and online market share in a region. In addition, the further a company’s price is below the average being charged by regional rivals, the easier it becomes to offset any competitive disadvantages relating to a less attractive S/Q rating, fewer footwear models/styles to choose from, and other factors that govern the preferences of online shoppers for one brand of athletic footwear versus another. 2. Search Engine Advertising. Athletic footwear companies use search engine ads to help attract more footwear buyer traffic to their websites and thereby help boost online sales and market share in a region. A company’s competitiveness versus rival brands in the internet segment is stronger in a region when its expenditures for search engine advertising are above the all-company region average and weaker when its expenditures for search engine ads are below the region average. 3. Free Shipping on Online Purchases. To make it more attractive for athletic footwear buyers to make purchases at their websites, footwear companies have the option to offer free shipping. Companies that Copyright © GLO-BUS Software, Inc. Back to Top Page 13 The Business Strategy Game Player’s Guide offer free shipping to buyers in a geographic region enjoy an advantage in securing online sales versus regional rivals that choose not to offer free shipping; however, this advantage is weakened when companies offering free shipping charge considerably higher online prices (more than enough to cover the costs of free shipping) and/or their footwear carries a lower S/Q rating and/or their online selection of models/styles is more limited and/or their expenditures for search engine ads are lower than rivals and/or their standing on other factors affecting buyer brand preferences is less favorable. Likewise, rivals that choose not to offer free shipping in a region can offset some or all their shipping disadvantage in securing online sales with lower online prices and/or higher S/Q ratings and/or bigger selections of models/styles and/or greater expenditures for search engine ads and/or other factors that stimulate buyers to prefer their brand over the brands of rivals. The Importance of Each Competitive Factor in Determining Sales and Market Share As should be expected, the 13 competitive factors for athletic footwear have differing impacts—some carry more weight than others in determining how much cross-company differences affect the brand preferences of buyers, the number of branded pairs sold, and market shares. As a general rule, the three most important competitive factors affecting buyer brand preferences, pairs sold, and market shares are price (the average wholesale price in the case of branded pairs sold by footwear retailers and the average online price in the case of pairs purchased online), S/Q ratings, and the number of models/styles offered. The next most influential factors include the appeal of celebrities endorsing the various rival brands, brand advertising, search engine advertising, company image/brand reputation, the number of retail outlets stocking the company’s brand of footwear, and free shipping. The competitive advantages/disadvantages associated with differences in the number of weeks it takes to deliver retailer orders, the sizes of mail-in rebates, and the comparative amounts of support provided to retailers in merchandising and promoting their respective brands weigh the least heavily in determining buyer brand preferences and each company’s regional unit sales and market share. The behind-the-scenes weights placed on the 13 competitive factors closely mirror what is believed to actually prevail in the real-world marketplace for athletic footwear. While knowing precisely what these weights are might seem helpful or even essential, such knowledge is not as useful as you might believe—just why is explained below. How Much Each Competitive Factor Matters Is Not a Fixed Amount. Both logic and common business sense instruct that price is certainly a very important factor affecting both a company’s competitiveness against rivals and overall buyer appeal for one brand versus another. Big price differences in a region matter a lot in accounting for differences in branded pairs sold and market share. But as the spread between the highest-priced company and the lowest-priced company becomes smaller and smaller, the weaker is the unit sales/market share impact of price differences and the greater the role of differences on other competitive factors in causing the sales and market shares of some companies in the region to differ from those of other companies. Indeed, in the rare instance that all companies should happen to charge the same wholesale price to retailers in a region and the same online price at their websites, then price becomes a total competitive nonfactor and has zero impact on buyer appeal for one brand versus another—in such cases, 100% of the regional sales and market share differences among company rivals stem directly from differences on the other 12 competitive factors. Therefore, how much price matters in determining a company’s unit sales/market share in a region is not a fixed amount but rather is an amount that varies from “big” (when price differences are also “big) to “small” (when prices differences are “small”) to “zero” (when the prices of rivals are identical). Precisely the same reasoning holds for all the other 12 competitive factors. While it is true that some competitive factors affect the brand choices of buyers more than others, what matters most in determining sales and market shares is the sizes of the differentials on each competitive factor. Big differences on a less influential competitive factor (like the number of weeks in which orders are delivered to retailers) can end up having a bigger sales/market share impact than very small/insignificant differences on more influential competitive factors (like price, S/Q rating, and advertising). Essential Understanding: The more that a company’s brand appeal to buyers on any one competitive factor (whether it be price, S/Q rating, number of models/styles to choose from, advertising, delivery time, and so on) is above/below the all-company average in a region, the bigger is the “weighting” or impact of that factor in accounting for why that company’s regional unit sales/market share is above/below the region’s all-company average. Conversely, the closer to the all-company regional average is a company’s price or Copyright © GLO-BUS Software, Inc. Back to Top Page 14 The Business Strategy Game Player’s Guide S/Q rating or brand reputation or number of models (and so on) the smaller is the weighting/impact of that factor in accounting for why that company’s regional unit sales/market share is above/below the region’s all- company unit sales/market share averages. When a company’s competitive effort on each of the relevant competitive factors in the wholesale or internet market segments for branded footwear approximates the all- company averages in a region, then its resulting unit sales volume/market share in those two segments will also approximate the region’s all-company sales/market share averages. Therefore, which competitive factors turn out to be most important all depends on how that company’s competitive effort stacks up against the all-company average competitive effort, competitive factor by competitive factor. All unit sales and market share outcomes in all regions are thus 100% competition-based and are a function of the size of each company’s competitive advantage/disadvantage against the all-company averages for all the relevant competitive factors. Special Note: After each year’s decision round, you can review a Competitive Intelligence Report (Comparative Competitive Efforts for each geographic region) showing each company’s competitive standing against all other companies on each of the competitive factors for branded footwear. It is imperative that you review this information to determine how well your company’s competitive effort stacked up against the all-company averages—on which factors did your company have a competitive edge and on which factors was your company at a competitive disadvantage? This information puts you in position to correct any important competitive disadvantages and to consider ways to further exploit any competitive advantages in the upcoming decision round. Ignoring the information in the Competitive Intelligence Reports puts your company in the risky position of heading into the upcoming year’s market contest with little or no clue as to competitors’ prior- year prices, S/Q ratings, product breadth, brand reputations, and so forth and the extent to which your company was or was not out-competed by rivals. Crafting a Strategy to Be Competitively Successful With so many competitive factors determining each rival company’s unit sales and market shares of branded footwear in each of the world’s four geographic regions and with the sales/market share impacts of these factors varying from region-to-region and year-to-year because of shifts in each company’s competitive advantage/disadvantage against rivals on all these factors, you have wide-ranging options for crafting a strategy capable of producing good overall company performance and competing successfully in the global market for athletic footwear. For example, you can Employ a low-cost leadership strategy and pursue a competitive advantage keyed to operating more cost-efficiently than rivals and striving to earn attractive profits selling at prices below those of rivals. Employ a strategy to differentiate the attributes of your company’s footwear from rival brands based on features/styling/quality, breadth of product line, endorsement contracts with more influential celebrities, and/or other competitive factors—and thereby outcompete rivals with a product offering that has greater brand appeal to buyers. Employ a “more value for the money” strategy (providing 7-star footwear at lower prices than other 7- star brands) where your competitive advantage is an ability to incorporate appealing attributes (styling/quality and wide selection) at a lower cost than rivals and thus be in position to underprice rival brands having comparable attributes and S/Q ratings. Focus your strategic efforts on being the clear market leader in one or more market segments— wholesale sales to footwear retailers, Internet sales, or private-label footwear sales to chain retailers. Focus your company’s strategic efforts on being the clear market leader in one or two geographic regions as compared to the other regions (perhaps because you have highly efficient facilities in one or two or maybe three regions that give you a cost advantage over rivals in those regions). Pursue essentially the same strategy across all four regions or else craft regional strategies tailored to improve the company’s competitiveness region-by-region and counteract/overcome the strategic actions and competitive maneuvers of specific rivals in specific regions. Each company’s management team is at liberty to try to outcompete rivals (or at least compete well enough to be attractively profitable) with some version of any of the competitive approaches outlined above or some other customized strategy that company managers find appealing—and can do so with full assurance Copyright © GLO-BUS Software, Inc. Back to Top Page 15 The Business Strategy Game Player’s Guide that The Business Strategy Game absolutely does not have any built-in bias that favors any one strategy or competitive approach over all the others. But just because you and your co-managers have control over the company’s strategy does not mean your company can be a “top performer” pursuing whatever strategy that you “like best.” Why? Because whatever strategy and level of competitive effort your company adopts is always subject to being overpowered or thwarted by the actions and competitive efforts of rival companies. As discussed above, unit sales and market share outcomes in all regions are 100% competition-based and are a function of the size of each company’s competitive advantage or disadvantage against the all-company regional averages for all the relevant competitive factors. Thus, no company can escape having the “competitiveness” of its strategy and the overall buyer appeal of its branded footwear “tested” against the competitiveness of the strategies employed by rivals and the overall buyer appeal of rival brands, competitive factor by competitive factor and region-by-region. In other words, the freedom of each company’s management team to pursue whatever combination of competitive efforts it wishes (as concerns prices, S/Q ratings, number of models/styles, advertising, and so on) is “limited” or “regulated” by the business necessity of competing successfully enough against rivals for the company to be attractively profitable and, ideally, profitable enough to be a top performer in the industry. So, the hard reality is that in every decision round you and your co-managers—like the management teams of rival companies—are challenged to devise a strategy and exert sufficient effort on the relevant competitive factors affecting online sales and wholesale sales to footwear retailers that enables your company to compete successfully enough against rivals to result in sufficiently profitable sales volumes, market shares, and revenues across the four market regions. The point not to be forgotten here is that The Business Strategy Game is a competition-based exercise where your company’s management team competes head-to-head against other companies in your class. Each decision round, your management team must match its strategic wits against the strategic wits of rival company managers in a globally competitive market battle. The contest is one where the power of your company’s competitive approach and the overall buyer appeal of your company’s footwear is pitted against the power of the competitive efforts of rival companies and the overall buyer appeal of their footwear brands. The outcome of this contest produces winners and losers. Typically, companies with competitively successful strategies in a given decision round outperform those companies with competitively weak and thus less successful competitive strategies. Each company’s management team then makes whatever adjustments in their strategy and competitive effort in each region that aim at improving company performance, and the market contest resumes for the next decision round. As long as your company’s competitive efforts/actions and decision entries produce an overall buyer appeal for your footwear offering and so long as your company exerts sufficiently aggressive competitive efforts, then you can expect a satisfactory percentage of buyers to prefer purchasing your brand over rival company brands. If your company’s sales volume and revenues are disappointingly low in certain regions in a given decision round, then it is management’s responsibility to adjust the company’s strategy and levels of competitive effort to produce better competitive outcomes. If your company’s sales volume and revenues are attractively high in certain regions in a given decision round, then management may well decide to adjust the company’s strategy and levels of competitive effort in ways calculated to further expand the company’s competitive advantages to produce even more attractive and profitable outcomes—as a rule, it is unwise for a competitively successful company to rest on its laurels because weak performing rivals can be expected to boost their competitive efforts and try to close the performance gap. While achieving attractive sales volumes and revenues in the world’s athletic footwear marketplace is necessary, it is not sufficient to produce the best profit outcomes. For a company to rank among the industry’s top-performers, its net revenues must cover costs by an amount that results in profitability. Good profitability requires not only sufficient competitive success to produce attractively large revenues but also consistent managerial success in operating the company cost-efficiently—operating inefficiencies and wasteful spending impair a company’s profitability and overall performance. Don’t Waste Time Searching for Some “Magic Bullet” or “Undefeatable” Strategy. Because the sales and market share outcomes for a company are 100%-based on the competitiveness and overall buyer appeal of its brand, it is conceptually impossible for there to be some preselected surefire strategy or some undefeatable combination of competitive efforts/actions that is “guaranteed” to produce sufficient unit sales, market shares and revenues to propel a company into the ranks of the top- performing companies, irrespective of the strategies and competitive actions undertaken by rival Copyright © GLO-BUS Software, Inc. Back to Top Page 16 The Business Strategy Game Player’s Guide companies. How well any one particular strategy or combination of decisions and actions will fare cannot be predetermined but rather must await the instructor’s scheduled deadline for each decision round—only when each company’s “final” decisions have been saved to the BSG server for a given decision round is it feasible to perform the calculations needed to determine each company’s competitiveness versus rivals and translate this into unit sales, market shares, revenues, costs, profitability, and overall performance for all the various companies. It is deeply flawed thinking to believe that some predetermined level of competitive effort could be built into The Business Strategy Game that will always turn out to be competitively powerful enough to deliver great overall company performance irrespective of the strategies, actions, and decisions of rivals. Be Very Wary about Following the Advice of Outside Sources. You are well-advised to be highly skeptical about following any advice and tips regarding “what to do” or “what works best” that come from prior participants in The Business Strategy Game exercise at your school or from sources you discover from Internet searches. While you might be tempted to view such anecdotal information as “helpful” or “important to know” or “worth considering,” just bear in mind that your company will be competing against companies run by students in your class—any information you run across about the experiences of companies run by other teams of students in other industries at your school or elsewhere in the near or distant past are of dubious relevance. Why? Because the specific actions and decisions that other companies in your class have previously taken and/or are likely to take in upcoming decision rounds are certain to differ—by perhaps a little and more likely by a lot—from those that occurred previously in other industries. To put it a bit differently, the chance that the head-to-head competition and outcomes in whatever past industries produced the tips and advice you have gotten will closely match the levels of competitive effort in each region that the companies in your industry have already undertaken and will undertake in the future is very small—certainly under 5% and more likely close to zero. Ask yourself two things: 1. “Do I really believe that the advice/tips I have gotten that come from experiences in past industries and are based on the competitive efforts of as few as 4 or as many as 12 rival companies in each of the four regions are actually going to closely approximate the competitive efforts on each of the relevant competitive factors undertaken in each region by the companies in my industry?” 2. “How risky (foolish?) is it for my company to base its strategy and levels of competitive effort on somebody else’s assessment of what worked for them in competing with an unknown number of rival companies (more? or less? than in my industry) pursuing strategies that I know nothing about and levels of competitive effort across the four regions that I know nothing about?” In the view of the BSG author team, following such advice carries significant risk of being “off the mark” or even “dead wrong” in helping you identify what specific strategy and levels of competitive effort are needed to compete effectively against the rival companies in your class. The most accurate and dependable source of information for guiding your efforts to compete successfully is always found in the Competitive Intelligence Report you receive after every decision round. Making Decisions As indicated earlier, there are 57 different types of decision entries and 10 entries involving assumptions about the competitive actions that rivals are likely to take. In some cases, entries for the same decision type (like selling price or advertising or delivery times) are required for each of the four geographic regions of the world market. Each of the decision pages displays the projected outcomes of your decision entries. These projections appear as soon as an entry is made, allowing you to isolate the incremental impacts of each decision entry. On each decision page are also calculations showing projections of earnings per share (EPS), return on average equity (ROE), credit rating, image rating, revenues, net profit, and year-end cash balance. These projections are instantly updated each time a new entry is made, allowing you to see the probable impacts of each new decision entry on company performance. You will find these built-in decision support calculations invaluable in evaluating alternative decisions and deciding what to do. You can easily try out any number of “what if we do this” decision alternatives, review the projected outcomes, and thereby search for a combination of decision entries that appears to offer the best overall performance and meets with the consensus approval of your company’s management team. The first time you visit a decision entry page, you should take time to explore and digest all the information. If you feel the need for assistance or additional information while you are working on a page, click the Help button at the top-right. The Help documents provide detailed entry-by-entry guidance, including Copyright © GLO-BUS Software, Inc. Back to Top Page 17 The Business Strategy Game Player’s Guide important cause-effect relationships, explanations of all on-page calculations, and decision-making tips. From time-to-time you will likely need to come back to certain Help documents to refresh your memory on what causes what to happen and how certain numbers are calculated. Totally ignoring the Help information is unwise. Most likely, you will find the information valuable in making wiser decision entries and avoiding the desperation of entering “some number” in hopes that the outcome will be “good” or “okay.” Upon visiting a decision entry page, take time to explore the page and digest all the information. The numbers you see in the entry boxes represent either the decisions made in the prior year or the latest decisions you and/or your co-managers saved while having previously worked on the current-year entries. No decision entry for the current year is considered final until the deadline (set by your instructor) for the decision round arrives. BSG considers the last set of decision entries saved prior to the decision round deadline as “final”. It is critical that you and your co-managers save your entries before the deadline passes. WORKFORCE COMPENSATION AND TRAINING There are 6 different types of entries on the first decision entry page you will encounter: (1) how much to raise/lower the base pay of workers at each production facility, (2) whether and how much to raise/lower each worker’s incentive payment per pair produced, (3) the dollar size of the fringe benefits package that the company will provide to production workers at each production facility, (4) how much to spend on training workers in the use of best production practices at each facility, (5) approximately what ratio of production workers to supervisors you want to have at each facility, and (6) what percentage increase in salaries and benefits to grant to production supervisors. The dollar size of the compensation package paid to production workers (base pay, incentive pay, and fringe benefits) relative to the regional average directly affects worker productivity (the number of workers needed to produce the desired number of branded pairs) and the percentage of pairs rejected due to defects in workmanship. Expenditures for best practices training have four highly positive benefits in all facilities: (1) helping curb reject rates associated with defective workmanship, (2) helping improve S/Q ratings for both branded and private-label footwear, (3) curtailing materials waste and potentially lowering material costs at the facility by as much as 20% annually, and (4) increasing worker productivity. In Year 10, the company spent $77.5 million on standard and superior materials, so making use of best practices training to achieve (over time) materials cost savings of even 5-10% annually (and maybe 15% to 20% annually over a period of years with all-out long-term best practices expenditures over time) is one way to achieve a sustainable cost advantage over rival companies. Annual increases of 1% or more in worker productivity at the North American facility where productivity is presently 5,000 pairs per worker per year and at the Asia-Pacific facility where productivity is just under 3,500 pairs per worker per year also holds potential for meaningful savings in labor costs over time. All the benefits of current-year spending for best practices training are reflected in the supporting calculations of productivity, materials costs, reject rates, and S/Q ratings each time you change a decision entry, allowing you to evaluate the immediate cost effectiveness of such expenditures. Expenditures to achieve a comparatively low ratio of production workers per supervisor and pay supervisory personnel higher than average salaries also helps boost production worker productivity. The Factors That Affect Worker Productivity. Annual worker productivity (that is, how many pairs each production worker, on average, produces in a given year) is influenced by nine factors: Annual base pay increases—Annual increases in base pay of 2% or more lead to higher levels of productivity, chiefly because higher pay scales help the company attract and retain workers with better skills and work habits. The maximum base pay increase in any one year is 15%. Cuts in base pay are allowed, up to a maximum of 10% in any one year, but they will tend to decrease worker productivity (unless the base pay cut is offset with increased incentive payments). A small pay cut will not cause a big drop in productivity, but cuts approaching 10% will have a sizable negative impact. (Calculations on the page show the effects of changes in base pay on worker productivity and labor costs per pair.) How much emphasis is placed on incentive compensation (as measured by the percentage of the company's total compensation package accounted for by incentive pay)—Prior management instituted the practice of paying each worker an incentive “bonus” for each pair produced that passed inspection for good workmanship, the thesis being that such incentives spurred workers to curb defective workmanship. Currently, the incentive payment for shoes passing inspection is $1.00 per pair at the North American facility and $0.50 per pair at the Asia-Pacific facility. You will have to decide whether to Copyright © GLO-BUS Software, Inc. Back to Top Page 18 The Business Strategy Game Player’s Guide continue the use of incentive pay per non-defective pair, whether to raise/lower the incentive payment, and, if so, what percentage of regular compensation (not including overtime pay) that incentive pay should represent. The larger the percentage of total compensation that comes from piecework incentives, the larger the gain in worker productivity. However, the incremental gains in productivity become progressively smaller and top out altogether once incentive pay reaches 25% of total compensation. Past 25% of regular compensation, higher incentive payments per non- defective pair cause workers to spend progressively more assembly time to eliminate defects, thus resulting in progressively larger drop-offs in worker productivity but in fewer defective pair that will not pass inspection. The total annual compensation of workers relative to industry-average compensation levels in the geographic region—How well your company’s facility workers are being compensated relative to the compensation at rival companies with production facilities in the same region is a major factor in the company’s ability to attract and retain better-caliber, more productive employees. The best, most productive workers are inclined to leave jobs at lower-paying facilities for higher-paying jobs. Likewise, job seekers with desirable work habits and attitudes are drawn to work for those footwear-makers having a better overall compensation package. Consequently, worker productivity tends to be higher at the better-paying production facilities in a geographic region. Special Note: The worker productivity figures shown on the page are projections (based on prior-year compensation levels), not certainties, because there is no way to know in advance how the company’s compensation package in the current year will compare to the pay packages of rivals. The amount the company spends annually per worker on best practices training—Apart from compensation, the productivity of workers is significantly affected by the amount the company spends annually to train workers in using the best-known footwear-making methods. You have the authority to raise/lower spending for best practices training and production methods improvement. There are potentially significant gains in worker productivity that can come from increased spending on best practices training; in Year 10, your company spent an average of $600 per worker on training in the North American facility and $400 per worker on training in the Asia-Pacific facility. However, the productivity benefits from spending progressively more dollars on training are subject to diminishing marginal returns—in other words, the benefits of spending a second $500 per worker per year on best practices training are smaller than spending the first $500 and the benefits of spending a third $500 per worker per year on best practices training are smaller than spending the second $500. If and when the resulting productivity gains become too small to justify spending additional sums in upcoming years, you can cut back spending on training without losing any of the previous build-up in productivity. The number of models workers must assemble at a given facility. Work force productivity decreases as the number of models being assembled goes up; this is because somewhat different production/assembly methods are used for different models. The greater the number of models being produced, the more different production methods there are for workers to master and the less efficient workers are in performing the different tasks associated with each model. Higher supervisor salaries relative to the regional average. Paying supervisors amounts above the regional average enables the company to attract higher caliber supervisors, which in turn enhances the productivity of the production workers they supervise. A smaller ratio of production workers to supervisors. The fewer workers that supervisory staff are assigned to supervise, the better able they are to quickly correct sloppy assembly practices and lax worker attention to detail and the more time they have to police the use of best assembly practices by production workers. The use of new equipment (as opposed to refurbished equipment even if the refurbished equipment has been recently purchased). New equipment has features that enhance the footwear assembly process allowing workers to produce pairs at a faster rate than with refurbished equipment. Whether Production Improvement Option D has been installed at the facility. This option increases worker productivity by 50%. As of Year 10, worker productivity averaged 5,000 pairs annually at the facility in North America and 3,500 pairs annually at the