StratSim Group Audit Report

Smit Chotai, Darius Demello, Jason Hylton, Yudav Rambali, & Aya Younus

MGMT40000D: Strategic Management

Feb 22, 2022

Executive Summary

This report is a group audit of the first 3 years regarding the StratSim simulation. This audit will be presented in 5 distinct sections: Performance to Date, Decisions, SWOT Analysis, Strategy Moving Forward and Projected Performance.

For the last three years the company has been finding its footing in the industry and has seen varying performance in different metrics. As a group, there are different decisions that we made based on the performance of the company. In the first year, we refreshed our economy model vehicle to help increase revenues in this segment. In the second year, the group decided that the company should develop a new luxury car, and this is because we identified a market opportunity that we believe will be beneficial to the company in the long term. The group also decided that it would be ideal to increase the number of dealerships to increase our retail footprint nationwide. As well, we invested heavily in our dealership staff in order to create an unmatched customer experience. The decisions for the third year include entering the electric vehicle industry, this is because the AEV industry seems to be very promising and investing in a new plant to increase our production capacity to help the company meet the increasing demand for our vehicles.

Performance to Date

The company’s performance has varied over the last 3 years throughout different segments such as sales, market share, net income, and inventory. In regards to sales revenue, the company started with a modest $22.5 billion at the end of year 1, by the end of year 3, the company grossed $32.7 billion, a whopping 42% increase. When it comes to market share, we are competitively placed in second at 21.9%. This competitive market share is due to the sales performance of our vehicles. Specifically, our family vehicle, Cafav, became the highest contributor to the overall sales and generated about 44% of the total sales revenue at the end of year 3, which was followed by Crash at 34% of the total sales revenue, and Cameo was the lowest contributor. The company sold 192,500 units in year 3 compared to 130,000 in year 1. This shift was due to the improvement in the production capacity and opening more dealerships. Our dedication to getting vehicles to our dealerships did come at a cost as there was a negative shift in net income as we spent more towards improving the car quality i.e., safety, design, etc., and plant capacity. In addition to the current expenses, the company decided to add a research and development center. Also, there was a sharp increase in our research and administrative expense, which was due to some components such as developing in-house AEV technology.Comment by Yudavraj Rambali: what units are we dealing with here? Also, instead of speaking about how its dropped, lets talk about the percentage increase in year 2. Comment by Yudavraj Rambali: is this the beginning of year 3 or by the end?

Decisions: What and Why

Year One

During the first year, our group was willing and able to take risks. As a group we decided to issue 3 million shares at a rate of $32.99 which totalled approximately $89 million in additional cashflows in addition to the $1.2 billion made in the fiscal period. The reason we made these decisions was to increase our liquidity in case we needed to make any large capital expenditures in future periods. The second decision the group made was to build 30 new dealerships. This increases our geographical footprint in all directions in order to sell more cars. The third decision the group implemented was to focus the safety aspect of our economy car, the Cameo. All the members in the group found safety to be important and wanted to take advantage of that attribute. The group also decided to do a full refresh of the Cameo. The reason we decided to implement this decision was because we identified an opportunity in the economy space, and as such we decided to focus on creating the best car in the segment.

Year Two

In the second year, the group reviewed the previous sales and noted that they were selling more than we can produce. This information was useful to us because it showed us that we could increase our prices and still be able to sell our cars. The second decision was to continue to add dealerships since the addition of the dealerships had a positive effect on our sales in the last fiscal year. The third decision in the second year was to build a new luxury car. This decision will help the company to enter the luxury market industry. The reason we made this decision was because there was an opportunity in this market and no other company had entered the luxury market. Since we were constructing a new car in the fiscal period, this required us to construct a new Research and Development center for the new luxury venture that we were pursuing.

Year Three

In the third year, our company decided to enter the electric vehicle industry. The reason this decision was made was because the group was thinking about future gas prices. Per the past years' analysis, gas prices were increasing on a consistent basis. One other competitor had introduced the electronic vehicle and our company saw this as a good opportunity to enter into the electronic vehicle (EV) market. The second decision in year three was to increase our overall manufacturing capacity by 500,000 units as we were experiencing a shortfall in our ability to manufacture enough cars to meet demand.

SWOT Analysis

Strategy Moving Forward

Moving forward there are a number of changes our company will be making in an effort to change the company’s trajectory. Firstly, from a financial perspective we will better our leverage ratios. In year 3, our company took on more debt in effort to expand our production capacity and develop an electric vehicle. As such, our debt to asset ratio was 1:1, which means we were able to meet our debt obligations, however, we endeavour to increase this multiple to 3:1 it would mean we can better leverage our use of debt to expand the company whilst making the company more attractive to potential investors as our assets outweigh our long-term debt. We plan to achieve this over the next 3 years. To do this, we will keep our vehicle production in line with our capacity limits so that we are not using debt to meet our production goals. Additionally, as of year 4 we will be initiating a stock buyback program as our current stock price is undervalued. This initiative is designed to help boost the short-term stock price of the company and we will prepare to sell a large number of shares in either year 5 or 6 to boost our assets. Moreover, we will immediately begin instituting moderate price increases throughout our product lines, as we strive to concentrate our business on higher margin vehicles and moving away from our previous strategy of relying on solely on sales volume.

Looking at our opportunities in sales and marketing, we are excited about the unveiling of two new vehicles to our lineup. In year 4, we will be launching the Caviar, our luxury flagship car. Our market scan shows that we will be alone in this space, and we are looking forward to serving the currently neglected market of high earners. In year 5, we will be launching the Cesla – our electric vehicle. The Cesla will cater to our customers that our becoming more environmentally conscious and sensitive to the ongoing increase in fuel costs. To support both of these launches, we will continue to increase our marketing spend by 10% year over year. As well, we will continue to increase the budget for the training and support of our dealership network by 10% ever year. We are committed to creating the best dealerships led by the best staff in the industry.

Projected Performance

We project that the performance of our organization will increase if it takes advantage of the different opportunities identified and turns the threats to the company to opportunities as well. The company expects to sell less units then it has historically, however that is by design as the projected margins per unit will be higher leading to an increase in net profit margins. The company will have increased cashflows because of the new product mix including a luxury car and an electric car. Additionally, we will be more efficient at the manufacturing process as we will keep production tied to capacity limits. Moreover, the EPS of the company and the dividend per share will increase as a result of the net profit margin increase. The company will also have the stock price increase by 100% over the next three years as result of the both the stock buy back initiative and tighter fiscal restraint.