Blog topic #8
Strategic Assessment of Simulation
The assignment will examine the strategic management concepts to operating our simulated company throughout this semester by applying Michael Porter’s competitive forces, which include the intensity of rivalry, the threat of substitutes, barriers to entry, the power of supplier, and the power of buyers.
Our main goal generally was to focus on how we are going to turn the company which is a crucial iniative. We were not exactly focus in making big numbers for our industry, but to achieve a growth constant along the time. Our simulation company has as shareholders the people that composed the group number 6.
In Porter economic model, competition among rival firms drives profits to zero. But competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences. Therefore our company, tried to implement a strategy which will help our company face the high level of rivalry. The obvious advantage that we had is the fact that we were not in first point trying to maximize profits. Also our company had a low concentration ratio and that indicates that a high concentration of market share is held by the other firms.
In Porter's model, substitute products refer to products in other industries. To the economist, a threat of substitutes exists when a product's demand is affected by the price change of a substitute product. A product's price elasticity is affected by substitute products and since more substitutes become available, the demand becomes more elastic since customers have more alternatives. A close substitute product constrains the ability of firms in an industry to raise prices. But in our case, we did not raise our prices because our objective was not in big numbers of dollars but to keep our company growing.
The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, the relationship to the producing industry is near to what an economist term called monopsony, which is a market in which there are many suppliers and one buyer. Under such market conditions, the buyer sets the price. In reality few pure monopsonies exist, but frequently there is some asymmetry between a producing industry and buyers.
A producing industry requires raw materials, labor, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits. With that said, one must consider the cost of switching companies. There are considerations such as the actual cost switching to a more expensive; also the quality of the products might change to a bad one. It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new firms may enter the industry also affects competition. In theory, any firm should be able to enter and exit a market, and if free entry and exit exists, then profits always should be nominal. In reality, however, industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market: these are barriers entry.
To sum up, I will say that the industry is a low attractive, because we financed through issuing bonds and we also bought back some stocks. We tried to boost the earning per share and reaching the debt-equity ratio to 1. We expanded new capacity very late and this cost us a lot of sub-contract money. We tried to catch up; it was a bit too late. Overall the simulation was very exiting; it was a great management experience which urged us for important decisions taking.
