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:
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