MARGA Stories: What do you learn with the business simulation?
We have just finished the first qualification round of the MARGA Online Competition 2016/2017 with individual feedback sessions. Wow, the competition was exciting again!
- Some investments have paid out last minute.
- Other teams have taken high risks and have been lapped by the competitors at the end.
- Sometimes those teams with extraordinary high market shares were not the most profitable ones.
- And sometimes the competition was very tough and no competitor was able to achieve high margins at all.
Here we report on some of these 'MARGA stories':
Stick to your strategy!
Cost leadership, differentiation or focus strategy: No matter which competitive strategy the board teams have chosen, we recommend them to stick to this strategy through all simulation periods. To be successful with a strategy, it is usually necessary to make certain investments, which often will only pay off after some time. A cost leadership for example mostly only works out after initial investments in machines and personnel. It also requires investments in marketing, since the built capacities should be used and the products have to be pushed into the market. Generally, it is possible to win the MARGA business simulation with any strategy. But usually those teams are most successful, which consequently stick to their chosen strategy.
Business Simulation: Generic competitive strategies (Porter)
Raw material management
In one group, all four companies had completely different approaches: Company 1 installed the supply chain management tool with the respective costs already starting from period 1 onwards. Consequently the prices per unit were somewhere in mid-level and there were no stock costs or capital commitments attached. Companies 3 and 4 both bought a lot of raw material during the first period. Due to the accretion of discount they benefited from extremely low prices per unit and could therefore reduce their variable production costs. The disadvantage: A pre-financing was necessary and the high current assets caused capital costs. Finally in period 4 the raw material stock ran low for both competitors and they then decided on different courses of action: Company 3 again bought a huge amount of raw material – which is an advantage concerning the variable costs, but a disadvantage concerning the stock and capital costs. Here it was not possible to use up all stock until the end of the last period. Company 4 in contrast, continued by installing the supply chain management tool in period 4. In this case the advantage was a minimization of risk and a reduction of stock and capital costs. The disadvantage was the costs for the installation of the tool and an increase of the variable costs per unit.
Considering all four companies, in the beginning Company 2 had the highest variable costs per unit. This company did not make use of the supply chain management tool, but they only bought a small amount of raw material in the beginning of the round. The disadvantage was a high price per unit and stock as well as capital costs. Luckily the company board promptly identified this mistake and chose to make use of the supply chain management tool from period 2 onwards.
Which method is the best? Of course, this depends on the strategy chosen and as concerning all MARGA decisions, it is inevitable to carefully balance all advantages and disadvantages. As a matter of fact, a cost leadership is only possible with low costs for raw materials. This means that in the best case an investment is only necessary once at the beginning and then the stock can be reduced bit by bit up to the end of the round.
Business Simulation: Impact of raw material management on variable production costs