Strategy Simulation Exercise

Posted: September 9th, 2013

Strategy Simulation Exercise

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Strategy Simulation Exercise

Concerning Michael Porter’s five strategies, a firm should be able to possess the necessary qualities required for it to dominate in the market is in, be it a perfect market, a monopoly, an oligopoly or a monopolistic, competitive market. Good and consistent business strategies are advantageous to a firm since they are useful in decision-making. A firm able to employ competitive strategies in any different market is assured of competitive advantage over its rivals.

In order to assess the impacts arising from arriving at various strategic decisions under different types if industry characteristics, it was necessary to play the strategy simulation game that involved a model company focusing on computing products called Quasar Computers. The first instance was focusing on the monopoly market where a single firm decides on the prices of its products and can manipulate the prices because it is the monopoly. The second instance involved focus on an oligopoly market, where there are two firms operating in a single market, therefore the absolute price and the competitor’s price influence the market share, revenues and profits of a firm. The third instance saw the focus on a monopolistic, competitive market where there are fewer barriers to entry unlike the two aforementioned markets, many competitors in a market and various strategies such as brand improvement and product differentiation are made to increase demand of a firm’s products and have a competitive advantage over other competitors. The final example was that of the perfect competitive market, where there are level barriers of entry and exit, perfect product information and supernormal profits in the long run for a firm.

In the first example, involving Quasar firm being in a monopoly market, the decisions made was because the firm operated individually in the market, hence price could be manipulated. Since I was launching a new product into the market, I decided to fix Neutron computers’ price by increasing its price with a view of maximizing profits in the short run. Given that the product was still novel in the market, it was necessary for me to allocate finances for advertising the computer. Neutron notebook computer was relatively new, so it was strategic to allocate a large budget for its advertising in order to build its brand, to spike its attraction from civilians to even corporations. However, it was also necessary to improve on the manufacturing technology due to the costs incurred from worn out production machinery. By upgrading the production facilities, I was able to reduce the costs of production however, the price that I had set for the product did not achieve optimum profits due to the demand curve sloping downwards indicating that an increase in price would lead to a decrease in the demand for the product.

The second example involved my firm operating in an oligopoly market. Quasar computers were now competing for the market share with Orion Technologies. Orion technologies, through their product Orion, which had similar specifications with Neutron computers, had seized 50% of the market. In order to enhance Neutron computers’ competitive advantage, it was strategically valid to price the computers at an optimum price, which increased demand for computers and influenced Orion technologies to change their prices to ensure stability to the market.

The monopolistic, competitive market involved Quasar computers developing new strategies to counter the other competitors that had entered the market due to low entry barriers and ease of product differentiation. In order to have the edge over other rivals, I allocated finances for the developing of a new brand called Ceres for the publishing industry through the usage of the firm’s unused production capacity lowering the production costs for both Neutron and Ceres. As a result, this strategy enabled Quasar Computers capture a greater market share by introducing its own variant of the brand.

In the perfect competitive market, the firm had already matured, and its profit margins and market share had stabilized. The firm had also acquired a stake in one of its suppliers, Opticom, which supplied optical display screens (ODS). ODS were sold online where suppliers quoted them and buyers placed their orders. By investing in the ODS as a separate business venture, I was able to receive short run profits in the first six months. For the next six months, it was necessary to invest in the improvement of production processes in order to reduce production costs and maximize on the efficiency of machinery and quality of the products. However, cutting costs, despite creating supernormal profits for the company in the end, led to no economic benefits nor synergy since all other companies received equal economic benefits.

Through the strategy simulation exercise, I was able to deduce that for a firm to become profitable in any market, there are certain criteria it has to consider. These are key components involved in ensuring customers purchase and remain committed to a certain brand. These key components revolve around the value of a product to a customer. A product is of beneficial value to the customer if it has enabled them to accomplish the task they purchased the product (Johnson, Christensen & Kagermann 2008). It is inherent for a firm to incorporate a business model that encompasses customer value proposition, profit formula, key resources and key processes (Treacy & Wiersema, 1993). According to Anderson (2006), customer value proposition is where the firm has developed strategies to create value for their customers. The proposition is composed of three elements.

The first element, all benefits, consists of the benefits customers receive from a market offer. It highlights the various benefits customers or firms would receive from purchasing products from sellers such as suppliers. It requires extensive knowledge of the market offer by the seller. The second element, favorable points of difference, specifies the different attributes an offer has over other alternatives. It indicates why an offer is considered best over a competitor’s offer and requires knowledge of the offer, as well as that of the competitor. The third element, resonating focus, encompasses the superior value an offer might delegate to a customer over other competitors’ offers over a long period. It is necessary to know how the offer delivers great value to potential customers in comparison with the competitor’s best alternative. The profit formula describes how the firm creates value for itself while providing value to the customer. Key processes describe the managerial and operational processes that enable firms to create value for themselves and their customers, while key resources simply define the assets a firm incorporates in its business processes that create value for it, as well as its customers (Anderson, 2006).

However, value can be created in two ways: by commerce and production. Commerce creates value by positioning products in areas where they are highly valued. Production creates value by transforming products greatly valued by customers. The value created by firms is distributed among owners, employees, suppliers, property owners and the government. All these entities are referred to as the stakeholders of the firm since they are partly responsible for the gains received by the companies. Companies, thus, have responsibilities towards their stakeholders, inclusive of the environment to ensure the value created is not eroded through unethical and anti-social issues (Grant, 2008).

Through the strategy simulation exercise, I was also able to learn about different types of strategies employed in firms for profit maximization, as well as accounting for profit. According to Grant (2008), accounting for profit involves incorporating both the economic profit, which is the extra revenue received after receiving inputs and the normal return to capital that repays investors for utilization of their capital. Both types of profits are used in measuring of companies’ profit. For the purpose of strategy formulation for a firm, it is valid to consider the situation a firm occupies. This necessitates the identification of the current strategy of the firm, assessment of the financial performance is done, and diagnosis, which involves the identification of sources that produce unsatisfactory performance. Diagnosis primarily involves comparing the dismally performing sources over the sources that create value, which further enables the firm determine what to dispose and what to improve on. Another step employed in strategy formulation is the evaluation of other alternatives. Even a firm is performing successfully; it is not enough to make the conclusion that the strategy at hand is functioning properly and it is therefore, necessary to consider other alternatives due to a dynamic business environment. After choosing the best alternative, implementation is carried out for the strategy to be used in the firm, as it coincides with the firm’s goals and objectives (Grant, 2008).

Indeed, the sole purpose for an existing business is to create profits. However, numerous underlying but equally significant factors such as social responsibility and customer value, determine the success of a company internally and externally. It is necessary to incorporate all these factors to ensure a company succeeds economically and socially per its set goals and objectives.

References

Grant. (2008). Contemporary strategy analysis. Malden, Massachusetts: Blackwell Publishing.

Treacy & Wiersema. (January 1, 1993). Customer Intimacy and Other Value Disciplines. Harvard Business Review, 71, 1, 84.

Anderson. (January 1, 2006). Customer value propositions in business markets. Harvard Business Review, 84, 3, 90-9.

Johnson, Christensen, & Kagermann. (December 1, 2008). Reinventing your business model. Harvard Business Review, 86, 12, 50.