I.

Strategy Selection
1. Generic Business Strategies
Cost Leadership
Cost leadership, the most widely used approach, is a ruthless pursuit of economy and efficiency in all
corporate processes with the goal of offering the consumer with the product or service at the lowest price
in the market (Porter 1997); or simply put, they aim to exploit all sources of cost advantages. Cost leaders
usually pursue economies of scale, mass production, proprietary technology, preferential access to raw
materials, which can cut the company’s production cost to a great extend (Porter 1998). Other than
production cost, companies can also achieve this strategy with the support from employee in the cost
cutting effort or technology application in management (e.g., integrated computer systems), optimum
planned distribution process, and minimized marketing and R&D activities (Ozdemirci, Kahvecioglu &
Yorulmaz 2019). By doing these measures, cost leaders gain a price advantage which will lower the
attractiveness of substitute products (Ozdemirci, Kahvecioglu & Yorulmaz 2019).

In Capsim, there are three strategies that follow cost leadership approach, including broad cost leader,
niche cost leader, and cost leader with product life cycle focus. These strategies all take the same
activities as the ones listed above, but they differ in terms of target segments and product life cycle
emphasis. Specifically, broad cost leader strategy has products in all segments of the market (e.g.,
Walmart in retail industry) while niche cost leader only focuses on two segments including traditional and
low-end segments (e.g., H&M in fashion industry). The last strategy focuses on the product life cycle and
demands enterprises to reduce costs, but not as aggressively as the other two because marketing and R&D
will be moderately funded. Moreover, this strategy allows products to transfer from high-end to the
traditional, and then to low-end segment as they age (e.g., Oppo in smartphone industry).

Differentiation
The differentiation strategy involves setting a product or service it apart from its competitors while
generating above-average profit (Allen & Helms 2006).Different techniques to differentiation exist,
however it is optimal if the company differentiates itself in multiple dimensions (Ozdemirci, Kahvecioglu
& Yorulmaz 2019). Specifically, company strives to be distinctive in its industry on some aspects that
buyers value greatly. It chooses one or more dimensions that many buyers in each industry consider vital
and positions itself to address those demands in a distinctive way (Porter 1998). The company is
compensated for its uniqueness with a premium price (Porter 1998). Differentiation dimensions can
include superior quality, design, performance, and special features, technology, and design (Allen &
Helms 2006). Furthermore, differentiation also comes from firm’s perceived value by customers such as
brand name, or image, or reputation (Allen & Helms 2006). In order to deliver differentiation to
customers, firms are required to invest extensively in R&D, marketing, and strive for innovation,
technology, and high-quality input, as well as emphasizing employees’ skills, expertise and knowledge
(Islami, Mustafa & Latkovikj 2020).

The strategies in Capsim that follow differentiation are broad differentiator, niche differentiator and
differentiator with product life cycle focus. These strategies have the same characteristics as the
differentiation strategy described above. However, they differ in terms of target segments and product life
cycle emphasis. Broad differentiator keeps its products present in all segments (e.g., Emirates in airline
industry), while niche differentiator aims for the high-end, performance and size segments (e.g., Ulysse
Nardin in watchmaking industry). In terms of investment style in marketing, R&D, and technology, the
differentiator with a product life cycle emphasis is comparable to differentiation strategy, but it differs in
that it will target continuous product improvement and innovation. Furthermore, this strategy allows
products to transfer from high-end to the traditional, and then to low-end segment as they age (e.g., Apple
in consumer electronics industry).

Our strategy of choice is broad differentiator.

2. Penfolds Company
Penfolds, one of Australian oldest and most prestigious winery, is one example of the broad
differentiation strategy. The brand’s distinct traits are single vineyard, single-region, multi-region and
multi-varietal blending (Penfolds n.d). Penfolds selects premium materials from the best regions in terms
of regional character and microclimate (e.g., soil, drainage), resulting in a unique terroir for each of its
product lines. Moreover, the company’s multi-region and multi-varietal blending represent its signature
“house style” (Penfolds n.d). The wine is left to fermented in premium oak barrels, giving it a creamy
texture and oak flavors (Asimov 2021). Penfolds is also known for maintaining its integrity by never
compromising balance and fresh fruit flavor of the wine in order to increase ripeness and alcohol levels
(7). The brand has received numerous awards and is recognized as the most admired wine brand in 2018
(Penfolds n.d).

3. Market Conditions
Products in the Capsim product categories include traditional, performance, low-end, high-end, and size.
Therefore, when targeting multiple segments, the broad strategy is preferable to the niche and product life
cycle approaches. Our previous investment in these product lines should be leveraged, and we should
only consider discontinuing a product if it fails to meet our high standards of quality. Consequently, the
only topics worth discussing are whether or not to pursue multiple segments, customer loyalty, better
profit margin, no substitutes product as opposed to other strategies.

According to DePamphilis (2010), with a broad differentiation strategy, a business can engage in market
competition in ways other than by offering the lowest possible prices, it is impossible to achieve cost
savings through economies of scale by balancing R&D costs with the amount of manufacturing capacity
required.

On the other hand, according to Kotrba (1966), to set the product apart from its competitors,
differentiation emphasises the product's distinctiveness. Because of the unique qualities of a product,
differentiation strategies can help a product stand out from the competition. This makes the product seem
like there is no substitute for it. As long as our company maintains the perceived quality of our products,
we could compile a list of characteristics that our products have that our competitors don't have, which
could lead to customer loyalty.

Therefore, there are more profit margins available if products are differentiated and made into higher-
quality products. Thus, it is preferable to employ a broad differentiation strategy in the Capsim market.

4. Major Decisions
Capsim's business operations are divided into several divisions, including R&D, marketing, production,
and finance. As a result, they will be in a position to make important decisions regarding the
implementation of a broad differentiation strategy.

In order to create a superior product, the R&D department must ensure that all product characteristics,
with the exception of price, satisfy the greatest desire of the customer. Our primary selling point is the
high level of quality of our products. The introduction of new product lines will make it easier for
customers to find what they're looking for.

For the purpose of delivering our superior value proposition, the marketing department will spend
aggressively on sales and promotion while staying within the ineffective rate threshold. In order to
increase our profit margins, we will raise the prices of our products. However, there will be some wiggle
room for unsatisfactory products and those in lower-end or more traditional markets where customers
place a high value on cost. In order to ensure that supply keeps up with demand, the production
department will increase production capacity. When automated second-shift operations are phased out in
the long run, the ability to constantly reposition products and keep up with customer preferences will not
be compensated.
Because the majority of Capsim's investments are long-term, the company's finance department intends to
raise capital through a combination of stock and bond offerings (more than a year). Moreover, matching
the maturity dates of debt with the lives of assets reduces the risk of default (Heyman et al. 2003). Hence,
Capsim does not take into consideration the necessity of seasonal funding.

5. Strengths & Weaknesses

Overall, when targeting multiple segments, a broad differentiation beats a niche or product life cycle
strategy. A product can be discontinued if it does not meet our high standards of quality.

A broad differentiation also emphasises the product's distinctiveness to create a product that stands out
from the competition. This makes the product seem unreplaceable. Also, maintaining the perceived
quality of our products will gain customer loyalty which help the profit margins increase when products
are differentiated and made of higher quality.

However, the best product isn't always the most in-demand. The market's demand couldn't be met in
other cases which may come high cost causing the company to lose customer (Thompson 1984).
However, the revenue from strategic segments can be used make up for any losses in other areas if we
concentrated on the production efforts.

On the other hand, no matter how well they meet customers' needs, when products aren't seen as having
more value than they cost; the result of this is losing the business to competitors with less innovative
goods (Frie 2008).

Additionally, the costs of R&D and instalment financing for a new product introduction in a broad
differentiation strategy are enormous (Guo et al. 2018). It also takes a long time for customers to realise
the value of the product because its awareness and accessibility are at the lowest at the beginning.
Finally, a high level of investment in various segments can lead to low working capital or even
insolvency (Li et al. 2014). As a result, thoughtful consideration is required prior to making any
decisions.

II. Forward Planning & Evaluation

1. Planning for Round 1&2
R&D As high-end, performance, and size segments
always demand smaller and better performing
product through times. Hence, moderate
repositioning will be made so that the products in
 these segments may approach near to ideal spot in
the Courier without delaying the revision date
until next year. To keep positioning costs low,
there will be little or no size and performance
adjustments for the low-end and traditional
segments. Regarding reliability rate, MTBF for
high-end, size, and performance segments will be
set close to the maximum amount suggested by
Customer Buying Criteria. MTBF for other
segments should be in the middle of the suggested
range to avoid unnecessary increase in material
cost.
Marketing Prices will be adjusted following the suggested
range in the Courier and contribution margin
number. Usually, every product price increases in
the interval of $0.5 until the contribution margin
reach the optimal number. Sales and promo are
initially set at around $2 million to avoid
diminishing returns and low accessibility.
Adjustments in sales and promo budget are made
with the considerations of Less Promo/Sales
amount. Sales forecasts are calculated based on
Production The production schedule is estimated by
multiplying the sales forecast with 1.15 or 1.20 (if
our company is optimistic), and then less the
inventory on hand amount. Automation rating will
be increased by 1.0 or 1.5 for low-end and
traditional products to achieve economies of
scales. For the remaining products, this rating will
be increased by 0.5 or stay at the initial rate to
facilitate R&D. About Buy/Sell Capacity, our
team are unlikely any capacity unless the current
capacity exceeds forecast to a significant extend.
 Finance We prefer to have $15 to 17 million of cash
position at year end to prevent emergency loan.
Therefore, we’ll achieve this by using short-term
and long-term debt, stocks, and bonds issue. Cash
position must be always positive to prevent
emergency loan. To raise money, we use a mix of
short-term and long-term debt, stocks, and bonds
issue. If the required funding to have positive cash
amount, we’ll cut down on some of the spending
in other departments. Ideally, our target amount of
cash is from $10-15 million at year end. We’ll
balance between issuing stocks and taking on
debts to keep the leverage ratio at 2.5-2.8.
Human Resources We will spend around 20,000 dollars on hiring
more expert staff for producing more high-end
products for the R & D phase. We want to give
staff more training time to increase their job
efficiency. Therefore, we will set our employee
training time to 120 hours.

2. Key Performance Metrics

The chosen key performance indicators are market share, Return on Asset (ROA), Return on Equity
(ROE), and contribution margin.

In terms of market share, it is a company's portion of a market, implying a measure of consumers'

preference for a product over other similar items (CFI n.d). Since differentiation strategy is all about
creating unique products, market share provides an answer to whether the company’s uniqueness is
acceptable to customers or not, and thereby, allows our team to devise a suitable strategy. When a product
market share decreases, this means that the uniqueness of that product no longer fit the customer’s taste.
Hence, to retrieve the market share, our company can choose to invest in R&D and marketing of that
specific product.

ROA is a profitability ratio which gauges how effectively a firm manages its asset investment and uses it
to produce profit (Aprillianto & Sayekti 2017). the ROA best use is to compare with the company’s past
performance or competitors in the same industry. For example, An ROA higher than the industry average
shows that a firm is not upgrading its machinery and equipment for the future, hence jeopardizing its
long-term prospect (Gallo 2016). It may be concluded that ROA assists businesses in better understanding
their market position in terms of asset utilization efficiency and how to make better use of their assets
(Gallo 2016). Additionally, because of their inverse U shape relationship, ROA can assist detect when the
R&D budget is too high (Aprillianto & Sayekti 2017). Specifically, a big increase in R&D spending can
lead the future to decline.

ROE is a metric that measures a company's net earnings based on each dollar of equity invested by
shareholders (ref HBR). It can be beneficial to our team since it can be used to evaluate our management
team's capital allocation decisions and ability to generate shareholder value. For instance, a stable and
growing ROE over time (assuming no significant increase in leverage) indicates that we have effectively
employed the company's equity, but a dropping ROE indicates that we have been reinvesting capital in
unproductive assets (CFI n.d). Another approach to look at ROE is to compare it to the cost of capital
(WACC) to assess management team’s ability of adding value (Courtis 2003). Only when ROE surpasses
WACC can management be said to be adding value.

The contribution margin indicates how much of a product's revenue is available to pay fixed costs and
contribute to the profit of the company (Renfro 2021). It’s used to establish prices, determine the break-
even point, and, most significantly, decide whether to subtract or add a product. Particularly, our team
will use contribution margin as a reference to set a product price in a way that it can exceed fixed cost.
Moreover, we can target the target volume based on the break-even analysis. Finally, if a product has a
poor contribution margin, we will alter the sales price, variable costs, or delete the product entirely.

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