UNIVERSITY OF GLASGOW Business Simulation Report of Cesim Name: Zhao Yiming GUID: 2074359 Group: Universe 2 Orange Date: 20th April 2014 1. Introduction Cesim is a system to simulate all kinds of business process. We used the system to complete a series of procedure to operate a smartphone company—Orange Juice, in terms of product design, market, customer care, and R&D. This report aims to illustrate the decision-making process, analysis of our group’s and others’ performance, and find our pros and cons. 2. Round 1- 3 2.1 Marketing outlook According to the marketing outlook, the demand of European customers to smartphones is already at a positive level at the beginning of Round 1. On contrast, the demand level of Asia market is much lower than the one of Europe market in Round 1, but it is more potential. Both markets increased hundreds of % in Round 2, especially the number of low-end customers of which price elasticity of demand is high correspondingly. Asia market grows dramatically, but the high-end market still dominates Asia market. With the significant rise of low-end market, smartphone markets in Asia have undergone remarkable structural changes. 2.2 Decision-making process The design of phone After analyzing the marketing outlook, as the high-end market is huge, our group decided to mainly focus on high-end one in each market firstly. Considering Asia market was small, so only one was launched in Asia in Round 1, and added one in the next round. Table 1 Name Market Position Daisy Europe Company and household Lily Europe High-end company and household Peony Asia High-end company Jasmine Asia High-end household Table 1 illustrates the target market of each phone. In detail, the strategy of two smartphones, which one is designed for low-end and the other is for high-end, were launched in Europe. The designs of smartphone in Europe are Sport, because most European prefer to this style according to Markets Research Report. As the investment of R&D, technology indices increased. During the design of phones, the compactness and battery life of existing products were added to some degree. It can be seen in Picture 1. Picture 1: Round 1-3 Round 1 Round 2 Round 3 Markets Pricing The pricing strategy is always end of 9. The strategy of Daisy was still cost-leadership, as well as the one of other 3 products was pricing skimming in order to keep high profits of which high-end customers still tend to pay highly for high-quality smartphones, though the low-end market enlarged significantly. Sales forecast Because of the first period, it was hard to do sales forecast. So the method we chose was 20% of the target segment, 15% of the same-end segment (low-end or high-end), and 10% of other two segments respectively. Advertisement and channel Considering that advertisement has long-term effects, and too high investments of advertisement and channel have negative effect in fixed costs, so the appropriate percentage of the part is 15% out of the profit margins to invest in advertisement and 10% out of the margin after advertising to invest in channel in both Europe and Asia market. Warranty period As the market average warranty period is one year, we decided to choose one year. Additionally, we lowered down the margin on repairs to 25% in order to attract the market share of repair market as well R&D We found that only when R&D is higher than others, can company provides high-quality products in terms of battery life and compactness with relatively low costs, which would be our group’s competitive advantage. So we decided increased R&D investment from 4000k€ to 10000k€. 2.3 Result analysis The result of the period is that share price of our group was 18.2, which was third prize of Universe 2. The investment of advertisement and channel were too high, which caused that fixed costs rose and influenced profits and share price, which resulted our products’ customer awareness was high but its sales were not as excellent at the awareness. Additionally, Europe market failed, because Daisy’s price was too high. Specifically, Daisy that only had two features with 50 compactness and 40 battery life, compared with our competitor—Green Apple, whose MEE had 3 features with 65 compactness and 60 battery life, only sold 219. The price of 229 was too high. 3. Adjustment period: Round 4-5 3.1 Marketing outlook Due to the vast population in Eastern Asia, Asia market exceeded Europe market. Meanwhile, household market became the largest one among the 4 segments, so market became more sensitive with price. As estimated, the growth of demand for smartphones has decelerated in both market areas, which turned into negative figures in high-end segments. However, the demand of low-end segments in both Europe and Asia might still grow at the rate of 100 %. 3.2 Decision-making process The design of phone Because of the growth of Asia market, we decided launched Daisy and Lily in Asia. Considering we were lack of middle-end smartphone, so Lily was adjusted for middle-end product, while Peony was put into Europe to attract high-end customers. All products’ prices were reduced because market became more sensitive (see Picture 2). At that time, product portfolio initially formed. Picture 2: Round 4-5 Markets Advertisement and channel For long-term development, we still maintained about 15% from margin for investment in advertisement and 10% from after advertising margin for investment in channel. In addition, considering that the products had been updated and a couple of new products also launched in this period, it is crucial to remain the same marketing power in order not to lose the previous market share but gain more as much as possible. Customer care and R&D This round, the warranty period was adjust to 18 months in order to raise the customer loyalty. Meanwhile, R&D was increased to 30000k€in total. 3.3 Result analysis The share price of our group was 42.84 in this period, which was fifth prize of Universe 2. In Europe, both Daisy and Lily’s sales were poor. In terms of Daisy, its design was Asian household favourite one but unpopular one of European household. So it failed in Europe but was successful in Asia. Meanwhile, other group had similar product as Lily but with lower price. On the other hand, our group did well in Asia, especially Daisy that became the best seller with 955.2 total. Although Peony and Jasmine’s sales were not as good as Daisy, the profits were high due to its high price. But we found a serious problem that our company do not have middle-low end products, and there were still 2 products we can design. Considering that high-end market became decrease, our product structure would be changed in the next turn. 4. Round 6-8 4.1 Marketing outlook The growth of demand has decelerated in both market and kept stable. During Round 7 and 8, marketing share became more important, and customers put more attention to features. 4.2 Decision-making process The design of phone Picture 3:The design in Round 6 From Round 6, our group did change much in design. Specifically, in each market, we launched 4 smartphones: low-end, middle-low end, middle-high end, and high-end, as a product portfolio to competed with other group. Considering that both high-end markets liked avant-garde style and low-end customers were care about design, so the middle-high end and high-end one were designed as avant-garde. Others were according to marketing research report to choose their design. Since features became important, every phone was added one feature in order to cater to customers. Furthermore, after analyzing our competitors, we found two kinds of gap: price gap and function gap. Likewise, in these three rounds, our group firstly analyzed our competitors, then, designed our smartphones with competitive matching pricing strategy, which means our price was adjusted according to our competitors. Market The percentages of advertisement and channel investment kept 15% and 10% respectively. Customer care This round, the warranty period was adjust to 3 years, because the market research report refers that the effect of 3-year warranty period is 3 times as 18-month. Another reason is that few groups choose 3 years as their warranty period, so we tended to increase our repair sales through improve the warranty period. R&D R&D kept 30000k€ in Round 6 and 7, while the figure reduced to 10000k€ in Round 8. 4.3 Result analysis Although our group did excellently in both markets, especially Daisy and Rose gained huge successes in Europe, our share price was still fourth prize in Round 6 (58.5) and 7 (70.01), improve to third prize in Round 8 (85.35). Through financial statements, some problems can be analyzed. Firstly, with the growth of sales, variable costs increased as well. But that is not the main reason of low share price but the prices of our smartphones were too low. Secondly, due to increase of new products, the production line costs rose rapidly as the top 1 among our universe, which around 21000k€. Thirdly, the warranty investment could be decreased to about 23000k€, and it was 35000k€at that time. 5. The contrast between our group performance and other groups’ performance Picture 4: the result of all groups’ performance According to the summary, Orange Juice stands at third prize of share price (85.35) at the end of Cesim, following Green Apple (111.1) and Ochre (91.02). Actually, the share price between Green Apple and our group appeared in Round 4, then, enlarged in the following rounds. Since the strategies of Green Apple and Ochre are similar, only the performance of Green Apple will be analyzed in the report, in terms of products’ design and portfolio, and fixed costs in Round 4. As well as in Round 6, our group had a huge change of product design, so the figure of this round will be analyzed as well. 5.1 Round 4 Picture 5:Financial statement in Round 4 According to financial statement, it shows that fixed costs of the two groups were almost similar. Only a problem is that our production line costs were too high, because Green Apple rarely changes all products in one round that can keep production line costs at a low level. The main reason for the gap between Green Apple and us is sales. Their sales were almost 1.5 times of ours. What resulted these were the problems of product design. Product design Green Apple is the first group to apply product portfolio in Europe to focus on all market from low-end to high-end in Round 3. With the expand of Asia market, Green Apple launched their product portfolio in Asia as well, which brought them huge success. Picture 6:Green Apple product design in Round 4 Picture 7:Orange Juice product design in Round 4 According to product design, it can be seen that they also existed the maldistribution of product portfolio in terms of compactness and battery life without from 70 to 100, they emphasized more on low-end that there were two smartphones for low-end customers in each market. Comparing with them, we focused more on high-end market due to its high profit, but we cannot adjust product portfolio promptly according to the change of market. For example, the distinguish between Peony and Jasmine was the difference of function, so they can be combined and launched new one for middle-low end market. Then, our group cannot understand the usage of high R&D fully. Specifically, there are two effects of R&D: increasing product attributes and decreasing costs. We only realized first one, and ignore the later. So the inappropriate usage of R&D reflects our prices were too high. Last but not least, we should developed six products from this round, because both markets increase most rapidly in Round 4, actually which was a chance to enlarge our market. 5.2 Round 6 Product design Picture 8:Green Apple product design in Round 6 Picture 9:Orange Juice product design in Round 6 It is obviously that Green Apple was lack of these kinds of products: compactness between 70-111, 111-160; battery life between 70-109, 109-160; and price between 189-249, 249-330, and 330-389, which were exact our products. That is also what is mentioned in previous contest: function gap and price gap. Picture 10:Financial statement in Round 6 But this huge change resulted the rise of production line costs, which can be seen in financial statement, 3500 versus 21000. On the other hand, since they had obtained huge market share during the previous rounds, it is necessary to invest a little in advertisement. In addition, the long-term effect of advertisement showed up during the last rounds, so we need not invest so much. 6. Conclusion Overall, in my opinion, our pros are that R&D investment, the later product portfolio, and sales forecast. Especially, high R&D provides us competitive advantage to design high-end smartphones in the previous 5 rounds and low costs in the later rounds. On the other hand, we were poor in controlling fixed costs, which is main reason for low share price. It is hard to say whether we did good or bad, but we really learnt a lot from this course. Just like how to implement strategies and position our products, how to design smartphone to cater to customers, how to calculate all costs, and so on. Also, during the decision-making process, we really made mistakes. But the most important I consider is what we learnt from these mistakes and how to avoid make again. However, Cesim is only a simulation, dislike real business, what we should consider is limited. Therefore, we still should analyze physical situation before making decision.
