Running head: GLOBAL TRADE AND ITS CHALLENGES
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GLOBAL TRADE AND ITS CHALLENGES
Executive Summary
This report is a letter to the Green team’s Board of Directors and Shareholders/investors. In this report, overviews of the company’s performance in each of the six rounds are presented with every decision and strategy-making process. Meanwhile, a comparative analysis between the Green team and the other four teams in Europe, Asia and the USA markets is conducted by comparing the sales revenue and different categories in costs and expenses. Based on the summary of the company’s different markets and final global share of six rounds. Lessons learned and conclusions are provided.
Overview of performance in each of the six rounds
Round 1
This would be our first attempt in this simulation world, so we changed the estimation for the market share following the market outlook, which is a growth within a range of 25-30% in Asia, 6-10% in Europe, and 15-20% in the USA.
We only have one product line for tech 1 for USA in-house manufacturing, so we put our capacity allocation into 100% as a try to see what went next. After that, we realized that the supply was actually over the demand estimated, so we would change that in the further rounds. And we didn’t do any R&D or investment in this round because we were trying to get the bigger picture of this business.
Basically, our product prices are above the average level, which doesn’t give us many advantages, so our global market share is relatively low compared to the highest one, which is 23.6%.
Round 2
Still, we changed the demand estimation according to the market outlook, and we also took our production capacity into consideration to make sure that supply meets the demand.
We noticed that the current factory capacity might no longer be enough for the increasing needs, so we purchased one new planet in the USA and four in Asia. We chose to buy more in Asia because the growth in Asia is always steady and higher than in the USA, so the production in Asia could save us a lot of financial expense.
At this round, we try to turn down both our selling prices and promotion fees to see how these elements could influence the final revenues, and we find our market share become higher than before.
As it’s mentioned in the market outlook, tech 2 is expected to be very popular around the world, especially in Asia, so we decided to buy tech 2 in this round and started its production.
Round 3
Based on the given market outlook for round 3, negative growth had been forecasted in Europe, and transportation costs increased by 15 %. We reduced the export volume to Asia and Europe and expanded contract manufacturing to cut transportation costs. However, we realized that we could have reduced more export products compared with other teams from the result.
On the other hand, since we performed well in the first and second rounds, we globally had the most market share. So, we thought we might have enough customers to support our further investment and expansion moves. Therefore, we boldly increased our prices for both tech 1 and tech 2. However, we did not invest enough in developing new features for our products. As a result, we encountered a significant failure in market share.
We have learned a lot from this round. We realized that the quality and low prices of products are the core competitive advantage.
Round 4
The main problem left to us from round three is that, compared with other groups, our prices of the products were too high which led our company to a very low percentage of market share. We learned that even if our products have more features and our capacity of production is high; the market wouldn’t prefer our products unless we have the advantage on the price tag. We greatly lowered our prices in all three markets by about 50% on all the products to improve the situation.
As a result, our global market share returned from merely 4% to 29% in round 4. We know that there are other things we could do to make our products more attractive, but in this round, we need to focus on how to bring our old market share back, and a reasonable price would be the best way to do so.
Also, due to what was mentioned in the market outlook, the financial situation in the three markets was still changing, especially with higher tax rates. In order to ensure our revenue, we need to transfer the pricing to make sure that we get what we deserve. Besides, in order to lighten our financial load due to our not-so-good result from round three, we transferred all the short-term debt into long-term debt, hoping to improve our balance sheet and our financial performance.
Round 5
After the last round’s adjustment, our market share and profit level are back to an acceptable level, so what we are trying to do in this round is to increase our capacity of production in order to embrace the exploding market demand. As it’s said in the market outlook, the cost of in-house production comes down, and contract production is showing its downside. We realized that it’s important to guarantee our capacity to a level instead of depending largely on the contract production in case the demand goes even higher in the future. Especially for technology 1, the production cost per unit can be doubled if we use contract manufacturing, and technology 1 has always been our main product for all three markets.
Besides, we decided to buy one new technology, because we think that with the demand keeps going up, people would expect more choices available in the future. We chose to buy the tech 3 with one feature because if we buy too many features and the futures market is actually not interested in these products, we may experience a huge loss.
Round 6
In the final round, we have so far gradually adjusted our company’s financial performance to a relatively steady level, so we are ready to explore more ways to increase our revenue. We learn from the market outlook that this is exactly what we predicted; the growth keeps going in this round. Also, Europe shows its interest in new technology, so we want to try to sell our new tech 3 to the market. It would fit what Europeans want and a chance to see if we tag the right price for our new product. We choose to keep our price level for tech 1 and tech 2, even if the component’s fee is higher because they make up most of our revenues. We chose to sell tech 1 and tech 2 in the Asia and USA market, tech 2 and tech 3 in the Europe market. Because the Euro appreciates against the USD again, we put the production of tech 3 in our Asian plants to avoid these conflicts.
Comparative Analysis
Asia
The Asian market is the weakness of our team. At the end of round 6, we were in fourth place in the market, which is very behind. We were in a leading position in the Asian market in rounds 2, 4 and 5, but it was challenging to alleviate our heavy losses in the third round. Because at the end of the sixth round, we only had $1,642,065 of sales revenue. On the contrary, the ochre team played smoothly in the first three rounds, developed rapidly in the last three rounds, and finally achieved a leading market share in the whole Asian market with $2,301,036 in sales revenue. At the same time, the grey team and the orange team had been growing slowly with slight fluctuations. (See Figure 1)
On the other hand, we spent the most on variable production and imported products compared with other teams. Compared with the ochre team’s investment in R & D, we completely abandoned this investment, which may be a critical reason for our disadvantage in the Asian market. (See Figure 2)
Europe
In the European market, the gap between ours and the sales revenue of other teams in the first two rounds is not large, but the wrong decisions have been made in round 3 led to us losing most of our sales share in the European market. Fortunately, through the adjustment of round 5, we quickly increased our sales share in round 6 and finally occupied the second-largest sales revenue in Europe. Nevertheless, there is still a big gap between the Ochre team and us.
On the other hand, the Grey team has achieved great success in round 3. Unfortunately, they did not maintain this advantage in the next three rounds. Orange team’s sales revenue has not changed much in these six rounds and has been maintained at about $400,000. (See Figure 3)
In Europe, we spend far more on imported products than other teams. In addition, our expenditure on transportation and tariffs is also higher than the average level, and the administration expenditure is the same as that of other teams. Therefore, although our sales revenue is in second place, our profit before taxes is not high. A moderate reduction in expenditure can help us make greater profits. (See Figure 4)
USA
We have a very strong position in the USA market. At the end of round 6, we are at the top among all the other teams. In the first two rounds, we were at a decent position, parallel with Team Orange, but only lower than Team Ochre. In the third round, the same as what just happened on the other markets, we experienced a waterloo. The sales share in the USA market dropped to 23.19 k. In comparison, Team Orange and Team Ochre had the top market shares. However, moving into round 4, Team Orange failed to maintain their success on the USA market. Meanwhile, because of the adjustment we made in round 5, we were progressively catching up with the Team Ochre while they are also increasing their sale shares. We kept a slightly better position than Team Ochre till the end of round 6. (See Figure 5)
Since Team Ochre are the major competitor for us in the USA market, by making a horizontal comparison, we realized that the reason why we are performing better is because our strategy is to maximize our contract manufacturers so that we are able to reduce the cost from both variable production costs and feature costs. Although it is a fact that we have a relatively higher cost on contract manufacturing, it canceled each other out and resulted in better profit revenue on our team. (See Figure 6)
Global Market Share Summary
We (Team Green) have a global market share of 32.52%. We are at the second position right after Team Ochre, which owns 35.94% of the global market share. The second tier of global market share are Team Orange and Team Grey which they each have 16.19% and 15.35%. And Team Blue has almost no market share (0.01) after all. In a global market perspective, we have evenly separated Tech 1, 2, and 3 within. Each of Tech 1, 2, and 3 has 30.38%, 35.24%, 35.43% in the independent global market. (See Figure 7)
At the end of round 6, the global sales revenue ranking of each team shows basically the same result as the global market share shows. The only deviation is that although we and Team Ochre almost have close global market share, the global sales revenue of the two companies shows quite a difference from $3,897,521 (Team Green) to $5,579,253 (Team Ochre).