The Business Strategy Game 23 – 24 July 2009 Present to you by Sakchai Jarernsiripornkul MBA The College of Graduate Study in Management, Khon Kaen University

2 Objectives of the course Learn how to make strategic decision and exercise good business judgement Gain a deeper understanding of relationships between management functions inside a firm  Enhance understanding of the strategies for competing successfully in business competition

3 Customers and Distribution Channels Independent footwear retailers Company owned Megastores Online sales at the company ’ s web site Private-label sales to NA Chain Store Accounts Branded Market

4 At the openning Joining the senior management team at a $100 million company making athletic footwear Competing in four major geographic markets and the internet market Challenging to develop and execute strategy that will propel the company into a prominent and profitable position in the global athletic footwear industry

5 How your company ’ s performance will be judged Growth in revenues Growth in Earnings per share (EPS) ROI – Return on investment Market Capitalization Bond rating Strategy rating

6 Markets to compete … Branded market  North America, Europe, Asia, and Latin America Private - label market Internet market

7 Weapons of competitive rivalry 1. Wholesale Selling Price 2. Product Quality 3. Use of customer rebates 4. Product line breadth 5. Advertising 6. Celebrity endorsement and product image Branded Market

8 7. The number of retail outlets 8. Service level to retailers (Service Rating) 9. The number of company owned Megastores 10. Customer Loyalty 11. The effectiveness of the company’s online sales effort Branded Market Weapons of competitive rivalry

9 Quality Rating % of Long wear material QC expenditures / pair produced (current year) Cumulative QC expenditures / pair produced Styling/features budget per model Branded Market

10 Memo on Quality Rating Quality Rating ranges between 0 – 250 Quality Rating of unsold shoes would be reduced each year 5 pts. in the P-label Mkt. 10 pts. in the Branded Mkt. of each zone Branded Market

11 Use of customer rebate Manufacturers have the option of offering buyers a rebate on each pair purchased from retailers Rebate can range from $1-$10 per pair Branded Market

12 Product line breadth Product line breath can range between 50 to 250 models Branded Market

13 Image Rating Image Rating range between 0 – 250 Image Rating is a function of:  Cumulative advertising expenditures (up to 125 pts.)  Celebrity Endorsements (up to 125 pts.) Branded Market

14 Retail Outlets The more retail outlets selling your shoes, the more market share you could gain At the opening, each retail outlet costs $100 per year to service Branded Market

15 Service Rating Ranges between 0 – 250 The four factors that determine the service rating are:  Stockouts in the previous year  The delivery time achieved in the previous year  The resources devoted to handling customer service in the current year  The desired delivery time in the upcoming year Branded Market

16 Customer Loyalty Brand, which have more market share, would gain higher Customer Loyalty Branded Market

17 Internet Trading Volume of sales in the internet depend on:  Global factors  The number of models offered in the web  The company’s average retail sales price  Speed of delivery (next day, 3 days, 1wk., 2wk.)  Regional factors  Quality Rating  Image Rating  Advertising in the region

18 Private – label marketing Qualified specification  Quality Rating > 50  Model availability > 50  Bid price < or = $2.50 of average branded wholesale price in NA Unsold pairs  Storage costs + Quality Rating reduced by 5  Option to liquidate P-L inventory

19 Operations  There are 2 plants, situated at  North America (cap. = 1 mil. pairs)  Asia (cap. = 3 mil. pairs)  Production in North America costs higher than in Asia

20 Operations Raw material costs in year 11:  Normal-wear = $9 / pair  Long-wear = $15 / pair * Material prices are expected to fluctuate according to worldwide utilization of footwear plant capacity and the percentage use of long-wear materials

21 Worldwide shoe production  < 90% of capacity Price drop 1% for each 1% below 90% of capacity  >100% of capacity Price rise 1% for each 1% exceeds 100% of capacity  Global usage of long-wear mat. > 25% Long wear mat. price rise 0.5% for each 1% exceeds 25% Normal wear mat. price drop 0.5% for each 1% below 75% Fluctuation of Material Prices

22 Worker Productivity Depends on:  % increase in annual wage  % Incentive in the compensation package  Total compensation comparing with regional rivals  Employment Climate – Hiring or Firing  Expenditures to improve production methods

23 Compensation decisions Workers are paid by:  Annual wage Minimum annual wage in NA = $18,000  Incentive per pair produced

24 Production methods improvements Reduce material costs Reduce plant supervision costs Increase worker productivity  Company needs 5 years to wait for full effect

25 Actions to reduce the Reject Rate Reject Rate is a function of:  Annual QC expenditures per pair produced  The size of the piecework incentive per pair produced  The number of different models  “ Random factor ” * Standard reject rate is 5% at the NA plant and 5.5% at the other plants

26 Temporary Plant Shutdowns Enter a zero for pairs to be manufactured on the manufacturing screen and a zero for the total number of workers employed (you may also eliminate QC budget, Styling/Features budget) Variable Costs = 0, but still have to pay Fixed Costs Reopen, worker productivity = 90% of previous year

27 Plant Upgrade Options 6 options available Could select only 1 option per plant in each year Each plant could have only 3 options Upgrade options come on line the year after being ordered Payment must be made the year the option comes on line

28 Plant Construction and Expansion S, M, L (price list on p.56) Construction of a new plant takes 1 yr. Max. expansion = 5 mil./ yr Payments are due the year the facilities are available

29 Plant Closing Liquidation value = 75% All plants can be shut down immediately

30 Warehouse and Shipping  All shoes will be shipped directly to Memphis, Brussels and Singapore (Sao Paulo) – No shipping can be made in Y11  Shoes made for P-label are sent directly to North America after production  Goods shipped to any warehouse cannot be reshipped

31 Currency Exchange It is forecasted that in the next several years, Euro > $ > Yen > Real

32 Bond Rating Is considered from debt-to-assets ratio Y10 = 0.46 ( 0.50 have progressive negative impact; >0.65 results in BB or worse) The times-interest-earned coverage ratio Y10 = 3.25 (ratio of 2.0 is considered minimum) The strategic risk factor (> 7 negative) If Bond rating = C; no further debt would be allowed.

33 The Strategic Risk Factor Is considered from 1. Company ’ s plant capacity The bigger the capacity, the more the market share needed 2. Percentage of P-label sales in total sales 3. The number of geographic regions in which your company has plants

34 Corporate Financing Options Short – Term Loan Bond – 10 year term; max. 12 bond issues ( 3 of which have already been used); Common Stock – current share price = $7.50

35 Factors affecting Stock Price 1. Revenue Growth 2. The 3-year trend in company ’ s EPS 3. The annual ROI 4. The 3-year trend in ROI 5. EPS growth 6. Growth in the annual dividend 7. whether the company ’ s dividend payout ratio exceeds 100% 8. Bond rating 9. Strategic Risk Factor

36 Strategy Rating Score Does not assess how good a company ’ s strategy is. The rating is designed to measure what a company is known for and how much a company stands apart from rivals. Companies with few strategy rating points generally are “ stuck in the middle ” or suffer from competitive disadvantage.