It's not how you start, but how you finish...

Have you ever tried to run a company, start a small business or enter a partnership for the first time? My teammates and I didn't have to jump through the hoops that many entrepreneurs go through to start a business, but I think we came away from this experience with a greater understanding of what it takes to be successful in the business world.

From the very beginning we identified two goals that we wanted to accomplish. The first was to increase our market share from our starting point of 9% to somewhere between 14% & 15%. The second goal was to maintain or increase our gross profit margins, which were around 49% in Q1 of Year 1. These goals were chosen in part because we felt it would satisfy the greatest number of our stakeholders (employees, customers, shareholders). Our employees want to be paid competitive salaries. Our customers demanded quality goods at fair prices, and our shareholders wanted to see strong returns on their investments in our company. With all these factors in mind, we decided to see what the market conditions were like.

We knew that the market would be tough to compete in given the number of rivals. However, no one company had a large market share so we saw this as an opportunity for us. Customers also were free to come and go, which made the market seem tough as well. However, the economic index suggested that the economy was doing well and the customers would be lining up with their extra bucks to buy our dinner plates. Truly, if only because we were working with no threat of substitutes within the market and they saw little difference between our wares and that of the competition. The cost of raw materials was very inexpensive as well and we could bring in however many sales people as we wanted provided we could pay the costs. With our goals and stakeholders in mind, our group developed a number of strategies that we felt would bring us to the top in this very attractive market.

To achieve our first goal of increasing our market share, we sought to improve our sales and differentiate our product. In short, we wanted to give the people what they want. So we invested heavily in R&D in hopes that we would come up with a breakthru that would separate us from the rest of the pack. In Q4 of Year 1 we "hit the lottery." For the next year we knew our product would be unique in a market that was anything but, and we raised our prices to capitalize on this opportunity. We also increased our sales reps to 8 in each region to try and take advantage of the demand for our unique dinnerware set.

We set a quality control budget of a $1 per unit manufactured to protect ourselves against costly returns (curse you Mr.Biv). These returns hurt our chances at gaining market share, and drive up our costs at the same time. We believe our focus on quality set us further apart from the majority of our competition in our customers' eyes as well. Our initial QC budget netted us a 1% return rate due to defects until the last three quarters. We experienced higher returns, we suspect, because the salary of our QC laborers went up, but we couldn't verify this since we're not explicitely told this in our quarterly reports, and didn't notice it until after Q3 because we were doing so well. So to mitigate the risk of returns in our final quarter, we raised our QC budget to $1.10 per unit in Q4 of Year 2. This brought return rates back down to 4%, but verified that the costs of QC went up. If we were to do another year of production, we would have invested something closer to $1.25 per unit in order to keep returns to a minimum and to maintain our reputation with our customers.

These two strategies helped us reach a 13.9% year end market share in year 1. We saw continued growth in year 2, where our market share rose to 14.4%. This was in line with our goal and we were satisfied with how well our strategies impacted sales. The sales growth tapered off in the final quarter because one sales rep left the company in area 1. If not for this rep we think we could have reached 15%. So to the sales rep that left us to be with their family for the holiday season...watch out. Nadav is looking for you!

To achieve our second goal of maximizing gross profit margins we wanted to have inventory on hand but not at any price. We sought to keep our per unit manufacturing costs as low as possible. To do this, we invested in engineering to uncover inefficiencies (Mr. Biv is everywhere) within our factory. By the end of the second year we had the second lowest cost factor ratio, which we believed helped us to keep our costs to a minimum while taking advantage of the R&D breakthru mentioned earlier.

To ensure that our company could meet our forecasted sales demands we increased capacity in our plant in Q1 & Q4 of Year 1. With this additional capacity we could produce over 16,000 units without going into subcontracting. Since we were focused on just selling product 1, we were comfortable with a production capacity of 16,000 units. Based on our analysis of the numbers and sales forecasts, the ROI potential was not there for any additional expansion so we stopped at that point. We believe this gave us a competitive advantage in the stock market as well as in the consumer market. Our competitors seemed to be investing very heavily into capacity expansion, which increased their depreciation on their Income Statements. Our group concluded that this meant the rest of the teams would have to sell a ton of inventory in order to see a positive net income. This may be part of the reason why our stock price was the highest in the industry at the end of the simulation.

Due to these production and planning strategies we had a manufacturing cost of $25.93 per unit by the end of year 2. With a sales price of $59.99, our gross profit margins were at a robust 56.8%. I believe that if we had continued for additional periods our investments in continuous improvement of our plant would push our gross profit margins even higher.

We were confident heading into this simulation and we come away from the experience more knowledgeable about the importance of business strategy and the proper execution of said strategies. It's not that we're bitter at coming in second overall, but we believe we would have pulled away from the rest of the market given another year in the simulation, as the growing depreciation costs would begin to take a toll on our competitors' bottom lines.

So here is our view of the simulation in a nut shell:

Thanks all for a great semester, and please visit again soon.

Shhh you're disturbing the books...

When was the last time you visited your local library to actually read something found there? In this internet age it would seem that the traditional sources for information are becoming obsolete. Why is this? Let's explore some of the symptoms that indicate a poor business strategy (or none at all), and we'll come back to libraries in a bit.

There are a number of symptoms that could spell impending doom for a business. However, I think three important ones that all businesses should look out for are:

1. Firm’s product perceived as being relatively substandard
2. Company slow to introduce new products in a fast changing environment
3. Company does not have much product variety compared to competition

In my operation management classes we've had countless conversations about the 3C's in business. They are Customer, Change and Competition. A business that fails to account for each of these when forming their strategy will soon find themselves out of business. The reasons for this are somewhat straight forward.

If customers perceive that your product/service is substandard why would they come to you? Furthermore, what are you as a business doing (or not doing) that is giving your customers this negative perception about your company?

The world is changing rapidly. Globalization and the internet are bringing the world closer together than ever before. If your company cannot keep up or adapt, it will be hard to continue to grow your business. Customer needs change all the time. The way they shop, talk, entertain themselves. As a business you need to come out with new products or enhance your service in a way that drives home the point that your business has it going on.

Which leads me to my third point. Your competition is dealing with the same issues that you are, and in the global market your competition is everywhere. An inability to compete with products or services that offer the quality and flexibility your customers expect will push them right into your competitions arms. If you've developed a neat gadget or hit upon a niche group that likes your way of doing business congratulations. Just don't rest on your laurels. Continuous improvement is the key to long term success.

So where does this all leave our local library? Well they have a lot of work to do to change the minds of their customers. They have yet to truly embrace modern technology. No one seems interested in going to the library for research (based on personal observations in school). Instead they go to cafes, Barnes & Noble, or the park, with their wireless laptops to have a quiet place to work. Why not remind customers that you always have a quiet place to work at when you're in the library. Furthermore, if you happen to find a book you do like, you can borrow it for free!

You would think this is the kind of thing politicians would be clamouring over to bring into their districts. However, it doesn't seem to be the case. Whether that's because the municipalities are clueless or broke (or both) is another story all together. The world is moving away from desktop computers and into wireless technology. Every library should provide wireless access to its customers for free or a marginal charge. Start from there and rebuild the perception of value that libraries used to have within their community. Otherwise the only thing people will know about libraries is they used to hold encyclopedias...cited from Wikipedia of course.

Playing the "Game" - Your Way

One of my favorite cartoons as a child was Alice in Wonderland. However, after learning more about Business Strategy, I am starting to appreciate how the cartoon symbolizes the market place. Specifically, the following scene:

You see, Alice is faced with the same problems many businesses face. Confused? Don't be. Here's what each aspect of the Croquet game represents:

• Queen of Hearts: In this case she's the government and sets all the rules which Alice has to abide by. Blustery, and powerful, it's do as I say, not as I do...much like our "elected" officials.
• Card Men: They represent the market place, and as a business person you have to anticipate changes, or you could lose the game.
• Flamingo: These "croquet mallets" are perfect examples of technology. It is always changing, and is hard to control. Just when you do begin to master it, the market has changed and you have to learn a new technology.
• Mole: These cute little guys represent your customers and employees. You need to use technology to somehow reach your customers and employees so you can be successful in the market. Failure to motivate your workers and reach your customers will result in your inability to keep pace with market changes.

The true catalyst here though is the Cheshire Cat. I think he(?) represents all that can go wrong if you don't work to secure a competitive advantage. There are 6 ways to avoid having him "pop" in to ruin your company:

1. Being the first mover/entrant into the market
2. Niche dominance
3. Cost Leadership
4. Product/Service Differentiation
5. Market Share
6. Government Protection

Each of these strategies have pros and cons, but the two I find most interesting are Niche dominance & Product/Service Differentiation.

Niche dominant companies go after specific portions of a market and strive to be the best in that area. While there are a few success stories for companies serving a niche, I think the best has to be Nintendo. In 2002 Nintendo was left for dead by many gamers, game developers, and market analysts as the PS2 was the dominant player in the Video Game industry.

However, Nintendo recognized that the casual gamer was largely being ignored by Sony, Microsoft & themselves in their quest for dominant market share of the hard core gamer. So the powers that be over at Nintendo decided to change their business strategy, and focused on developing a console that the casual gamer would enjoy...and enjoy we did.

My friends...Allow me to introduce The Nintendo Wii:

By changing how video games are played, Nintendo has found the "Power-Up" they needed to take back the crown as No. 1 video game company in the world.

Product/Service Differentiation strategies require a bit more finesse. If this is your strategy, you'll have to convince the market that what you're offering is unique and therefore worth the higher sale price. When searching for companies that employ this strategy, I think most people will look at companies like Starbucks, Whole Foods, or Neiman Marcus because of their push to separate themselves from the pack by offering higher quality products and service.

It is this market perception that allows them to charge higher prices and to do so succesfully. Each of these companies saw a market that was overcrowded (or untapped in the case of Starbucks), and jumped in with a business strategy that allowed them to create a brand that symbolizes a premium good or service.

A good strategy doesn't aways lead to huge sucess in the market. That's why you play the game. Ultimately though, no matter which of the six strategies you choose to employ, be sure that it is of your own choosing, and after careful thought to the pros and cons...a bad strategy will set you in the wrong direction every time.

60 Minutes of Darkness for a Lifetime of Light

Whether you believe in Global Warming or not, I think we can all agree that Americans are consuming more energy than ever before. What's sad is that so little of our energy comes from renewable energy sources.

This is the country that was built on innovation and creativity. Hell we built the internet! When did we become followers? But we have a choice. Today, the people at http://www11.earthhourus.org/ are asking us to Turn Off our lights. Not forever, not for a year, not even a day. For 1 hour.

Someone once said:

"Let both sides seek to invoke the wonders of science instead of its terrors. Together let us explore the stars, conquer the deserts, eradicate disease, tap the ocean depths, and encourage the arts and commerce.

Let both sides unite to heed in all corners of the earth the command of Isaiah—to "undo the heavy burdens ... and to let the oppressed go free.

And if a beachhead of cooperation may push back the jungle of suspicion, let both sides join in creating a new endeavor, not a new balance of power, but a new world of law, where the strong are just and the weak secure and the peace preserved.

All this will not be finished in the first 100 days. Nor will it be finished in the first 1,000 days, nor in the life of this Administration, nor even perhaps in our lifetime on this planet. But let us begin."

At 8pm today, wherever you are, I ask that you turn off your lights, for just an hour. Why? Because I care, and it starts with you and me.

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As promised earlier, today I'll analyze the attractiveness of the Online Video Game Industry, or what is commonly referred to now as MMOs. As a long time MMORPGer I've played many of these games and currently "pwn mad n00bs" on the Scryers Server in World of Warcraft Online.

I started playing Everquest 7 years ago, and have participated in Beta trials for City of Heroes, Shadowbane, Dungeon & Dragons Online, Yugioh, and Chaotic. So I've been around the block a few times and think I can analyze this industry impartially. To do this I'll be using Porter's Five Forces model to try and pinpoint just what is so sexy about these massive multiplayer online games for companies that are considering entering this market.

I. Rivalry - Ugly (Low)
According to the awesome research conducted by http://www.mmogchart.com/ the current market is dominated by Fantasy based MMORPGs (94% - click here for chart), which is rolling up the big game titles like World of Warcraft, EverQuest & Final Fantasy XI that service this genre.

However, if you look at total market share based on game title, World of Warcraft dominates the market with over 62% of the market! That's some L337 pwnage if I might say so myself. I would also say that this market is highly concentrated and therefore less competitive as a whole.

To get any kind of traction in this market you need to have a strong brand. The companies like WoW and Final Fantasy were easier to establish in the market because they had a reputation amongst gamers and the resources to fund the advertising campaign required to reach customers. For new entrants, you have to consider purchasing the licensing rights to produce a MMO in order to have a shot now. You can go with your own brand, but it's very difficult (I'll explain further in the Buyer section). Either way, you'll be competing over a small piece of the pie, unless you can differentiate from the rest of the group. This increased rivalry makes it very unattractive to new entrants.

II. Threat of Substitutes - Hottie (High)

They don't call these games World of Warcrack, or Evercrack (in the late 90s) for nothing. The social aspect of the MMO as well as the entertainment factor makes it a unique product onto itself. Some would say that there are some alternatives, such as video games from Microsoft Live, that allow you to interact online and compete in games virtually. While this is somewhat true, platform (XBox 360, PS3, Wii) games aren't true substitutes for the real thing. So in this area, of focus, the market is pretty attractive.

III. Buyer Power - Cutie (Medium)

The customers for MMO's are a unique bunch. On the one hand, it has been my experience from interacting with people who subscribe to different games, that these customers are fiercely loyal to their game. I'm sure it has to do in part with the expensive switching costs involved. For starters, a customer wishing to leave their current MMO would have to purchase the new game at their local video game shop (or download it from the company at full price). Their progress within the game, their investment of time, subscription fees, as well as any friends and communities they met along the way would be lost as well. These are strong barriers to switching.

Community sites like Penny-Arcade or GuComics (my personal favs) can play a pivotal role in the sucess or failure of a game. They give new games a fair shake, but have high standards as well, which can sometimes kill a game before it ever reaches the public. It isn't even entirely of their own doing either. Much like Tiananmen Square or the Washington Monument served as meeting places for discussion and disagreement with the establishment, these virtual meeting places provide many within the gaming community the opportunity to voice their frustrations over the current system (of play within their game). If others see this and agree it can catch on really quickly. So while I want to say that Buyers (ie customers) are weak in general...if provoked long enough, they can mobilize and make things very difficult for even established companies within the industry. I would therefore conclude that the Buyer Power factor is somewhat attractive for a new entrant.

IV. Supplier Power - Ugly (Low)

Running an MMO has high fixed costs, in part because of the cost of infrastructure (i.e. fiber networks, servers, backup servers, routers, switches, etc.) and experienced IT staff to supervise the operations of your servers. Since MMO run 24/7, 365 days a week, you need to have staff available to troubleshoot the hardware and software issues that could arise at any time, while constantly looking at keeping up with the tech cycle so your game isn't outdated. These setup costs are very high and make the Supplier Power aspect very unattractive for new entrants.

V. Entry Barriers - Ugly (Low)

Speaking of software, each company holds their own code as proprietary. If they give up on a title and decide to release the license back to the owner, they are the sole owners of whatever programs or designs they created. This means that any new entrants looking to pick up where an old company left off would have to pay to get the rights to that company's content, or start from scratch all over again. This also means, if you want to enter the MMO market, you have to be willing to pay big bucks to recruit expert game designers, graphic designers, and programmers, because they are hot commodities right now.

Secondly, while there doesn't seem to be any obvious collusion going on in regards to the subscription fees, the market seems to be working with a 14-16 per month subscription fee. I think this is just a case of the market hitting a mature stage of its life cycle (given current technology, services, etc.) and newer entrants who will be tempted to charge higher subscription fees to recoup some of their development costs sooner will not fair well. The current gamer would have little interest in paying the costs (as noted in Buyer Power) to switch, and new customers who look at their options will have little reason to rush to pay more than what the market average is for similar products. These entry barriers make it really hard for a new entrant to the industry if they don't have the ability to overcome these barriers. I would therefore call this a low attractiveness factor.

Conclusion - A star will only carry you so far before the crappy teammates drag you down to the predictable end. I believe the lack of credible substitutes make it very enticing, however, given that the rivalry, supplier power, and entry barriers factors are all low attractiveness I believe it doesn't make sense to jump into this market at this time. Sadly, my work here won't stop Disney...Argh!

Who's in Porter's Fave Five?

One of the cleverest commercials to air during the Super Bowl this year was T-Mobile's Fave Five commercial. In case you missed it:

Now Porter's Five Forces are a bit different, but pretty cool (in an academic, non-basketball sort of way) none the less. Porter's model focuses on the following five areas:

1. Rivalry


2. Threat of Substitutes


3. Buyer Power


4. Supplier Power


5. Barriers to Entry

While I like the idea behind Porter's model, and believe it is a great tool to use when analyzing an industry, I have a problem with the conclusions you are supposed to make based on your analysis. After investing what feels like a herculean effort into researching and analyzing an area, it seems to take the easy way out by subjectively ranking the attractiveness of the area from Low, Medium, or High. Why not just say Ugly, Cute, or Drop Dead Hottie? It means the same and is always in the eye of the beholder. So ultimately the model is only as effective (and credible) as the person who is trying to sell it.

Up next: How sexy is the Online Video Game industry?

"Moving Forward" on many levels

What do you think of when you hear the word Toyota? In the early 70's it was seen by many competitors as an inexpensive (cheap), and small (cheap) car for low income (poor) consumers. At that time the Big Three: Ford, General Motors & Chevrolet, were gaining greater revenues from their larger more expensive models and ignored the growing trend for more fuel efficient vehicles. Fast forward 30 years, and well you can see for yourself:







How was Toyota able to go from making it's first auto in 1936 to being the largest global automobile manufacturer with over 2.5 Million cars sold in 2006 in the U.S. alone? It wasn't easy but I believe it has something to do with its mission:

"To attract and attain customers with high-valued products and services and the most satisfying ownership experience in America." - source

In today's market companys are faced with many challenges. The ones of primary importance are Customers, Competition and Change. A company is succesful if it can meet each of those challenges head on, and a mission statement helps them do this.

The mission statement is an organization's goal. It's their reason for being, and requires a lot of thought before announcing it to the public. This is because an organization's mission statment should encompase four characteristics:

1. Must be customer driven (pun unintended) - The world is moving so quickly, and today customers have so many products to choose from and so many places to find out more about products. Focusing on shareholder equity and ignoring your customer's needs is done at your own risk.
   
2. Must be forward thinking - A company's mission statement should challenge the organization to constantly improve to better prepare itself for the future. While it is ok to be somewhat vague about specific strategies, an organization needs to have a solid grasp on what it wants to do and where it wants to be in the future.
   
3. Accountability should be built in - The average person should know if/when a company is working towards achieving its mission statement, and more importantly, when it has lost focus.
   
4. Corporate Social Responsibility needed - CSR should be built into every mission statement the same way spell check is built into every word processing program. An organization has a responsibility to serve the public not the other way around.

As I mentioned earlier, Toyota is a solid example of a mission statement that works. Firstly, the mission statement tells you within the first five words who they are targeting. The customer is the most important stakeholder in Toyota's view, and they want to focus their resources on attracting and attaining more customers.

Secondly, Toyota is giving you the blue print on how they hope to achieve this goal. With a focus on high-value (quality) products and services, Toyota believes they can succeed now and in the future. Most importantly, it's providing the public with a measure with which to evaluate Toyota.

Lastly, this mission statement shows a clear commitment to discovering and working out solutions to issues that affect the consumer and the greater society as a whole. By focusing on owner satisfaction, Toyota is helping to solve many larger issues that were thought inreconcilable with big business interests. For example, the price of oil is trading at over $108 a barrel. Why is it that the Big Three are just now getting their hybrid vehicles out within the last 5 years or so while the Toyota Prius has been around since 1997 ?

If Toyota were not following its mission statement, would they be as successful as they are today, or in such a great position for continued growth tomorrow?

Toyota is certainly moving in the right direction, and their mission statement has everything to do with it.

The "AIG"-ita that keeps on giving

In case you missed it, AIG recently announced that due to an internal accounting error, they understated their losses. Their Mistake cost them over $4 billion dollars in previously undisclosed losses, and sent the market reeling as another US bank 'fesses up for their mistake.

What was their mistake? I'm glad you asked. Like any financial bank, they have a number of investments, and just like almost every other bank in this country, they invested heavily in the Sub-Prime lending that took our economy by storm the last couple of years.

To mitigate risk (short hand for: reduce the chance that this exploitative lending practice would bankrupt them) they decided to chop up these crummy investments, then mix them in with Grade-A bonafide home mortgages and sell them off to investors like a butcher selling funky sausage.

But they aren't the first financial institution to fall prey to their own stupidity. They are just the latest and everyone is paying for it.

Damn you Mr. Biv.

The Challenge

Have you ever sat down in a class room and had a brief moment of clarity? A moment where all the pieces seemed to fall into place. These moments are fleeting, and the more you try to focus on that sensation the harder it is to regain. However, if you give it over to your subconscious to puzzle over, you start to unlock pieces of the puzzle step by step. This is how it was when I first learned of Mr. Biv.

I had a feeling like this when I first learned of Mr. Biv in Prof. Young Son's management class in Baruch College. Mr. Biv is an acronym first used by the Ritz Carlton hotel to explain what problems they watch out for in their hotels. The five ways that poor operations can ruin a business are:

• M - Mistakes
• R - Reworks
• B - Breakdowns
• I - Inefficienies
• V - Variences

I've made it a point to expose and fight Mr. Biv ever since. I can't do it alone however, so I hope you'll join me for the ride. This blog is part of course requirements in my Business Policy class with Professor Kurpis, but I hope it will evolve into something more.