ENGINUITY TUTORIAL

Forming A Business Strategy

Copyright Virtual Management Simulations

Why Have A Strategy ?

Business Strategy

A smartly designed, well-executed business strategy is indispensable not only to an organizations long-term
success, but to its very survival. Simply having one does not give you a competitive advantage. Its the depth,
quality and flexibility of a business strategy that makes the difference.
The new management team need to develop a clear strategy, or business plan to : Grow the business and improve its value
Enhance the companys reputation with clients
Keep shareholders happy
The value of the company is measured by a number of assets, such as the company cash account, capital base
(infrastructure) and investments.
OBJECTIVES
Developing an effective strategy will involve acquiring a good understanding of : The economic environment in which the company is operating
The strengths and weaknesses of the business as it currently stands
The strategy will consist of number of objectives relating to :

Identifying new work in different sectors and locations (UK/Overseas)

Expanding the infrastructure of the business to achieve growth
Winning new work in a competitive bidding environment
Improving profitability through effective job and overhead management

Current State Of The Company

Business Strategy

We will now look at an example of setting and reviewing company strategy.

We have been given the task of running a fledgling UK-based multinational construction company, with
its headquarters in London, that has been trading for just one year (4 periods).
To be able to develop an effective strategy we need to first look at the status of the company when we
take control at the end of the History, at the beginning of period 5.
To do this we refer to information shown in the Performance Summary.

The company is valued at 4.75m

The company share price is trading at 1.12
To date the company have identified 12% of the new work in
the market (market share)
54% of the companys infrastructure has been utilised in
procuring and progressing jobs
The average turnover per period to date has been 7.7m
A gross profit of 4.5% (of cost) was made on the work
progressed
After taking overhead costs and tax into account the net
operating profit was 1.5% (of cost)
The company order book looks healthy, with a forward
workload of around 18.3m

Global Economic Outlook

Business Strategy

As well as the status of the company, to develop a strategy for the business we need to look closely at the
predicted global economic environment in which the company is operating.
Navigate to "Main menu/Industry information/The environment in which the company is operating"

GLOBAL OUTLOOK
Looking at the outlook for the UK and Overseas it appears that after tighter
fiscal policies by Governments worldwide caused stagnation over recent
years, there is finally signs of growth, and there is optimism of a global upturn
for the Construction Industry.

The Global Market

Business Strategy

Navigate to "Main menu/Assessing performance/Overhead analysis/Market trend"

NEW WORK
In line with an expected upturn in the construction industry worldwide, the
overall value of new work in the global market is predicted to steadily
increase from currently 390m to around 465m by the end of period 9.
There appears to be work in all sectors, particularly in the building &
commercial sector.

Setting Objectives

Business Strategy

After a thorough review, the following key objectives are set for the foreseeable future, all aimed at increasing
the value of the business, improving the companys reputation, and keeping shareholders happy.
MARKETING
Increase market share, and the number of new jobs indentified by :
Increasing the size of the Marketing Department.
Targeting the larger Building & Commercial sector to guarantee a flow of new work.
Targeting the Water & Sewage sector, which is expected to have a steady flow of new work for the
foreseeable future in both the UK and Overseas, and which may not be as competitive as larger sectors.
GROWTH
Increase the average turnover each period through a combination of : Identifying a larger share of the new work in the market, as outlined above.
Expanding the companys infrastructure, known as the capital base, to support more work.
Competitive bidding to secure more jobs.
PROFITABILITY
To increase the operating profit of the business by:
Progressing jobs won as profitably as possible by completing them on or before schedule, allocating
appropriate personnel, effective risk and cost management.
Efficient management of the particular the Head Office, QHSE and Measurement departments, to ensure that
the staff can cope the companys turnover.

There are many other areas that could be considered, and creating a long-term strategy is a complex task.
Indeed, the strategy will have to be periodically reviewed, particularly as the economic environment is
constantly changing, and our original objectives may not have been met.
ONE YEAR LATER, how did we perform against the objectives that were set ?

Reviewing Performance: Marketing

Business Strategy

OBJECTIVE
To increase market share
ASSESSING PERFORMANCE

Navigate to "Main menu/Assessing performance/Performance summary"

Referring to information shown in the Performance Summary, by

the end of period 8 the market share had increased from 12 to 28%.
This was achieved by : Increasing the size of the Marketing Department each period.
Targeting the Building & Commercial and Water & Sewage
sectors in particular, which accounted for 47 and 36% respectively
of the new work identified.

Reviewing Performance: Growth

Business Strategy

OBJECTIVE
To increase the average turnover each period.
ASSESSING PERFORMANCE

By the end of period 8 the average turnover each period had

increased significantly from 7.7m to 12.3m.
This was achieved by : Identifying more new work in the market.
Increasing the companys infrastructure, or capital base, to enable
more work to be undertaken.
Successfully winning new work.
Progressing the work won

During periods 5 to 8, 5 new

contracts were secured.

Reviewing Performance: Profitability

Business Strategy

OBJECTIVE
To increase the operating profit of the business.
ASSESSING PERFORMANCE

By the end of period 8 the net operating profit had

increased significantly from 1.5% to 3%
This was achieved by : Progressing jobs profitably (gross profit of 6.1%)
Efficient management of key overhead departments

During periods 5 to 8 the Head Office, QHSE and Measurement Departments were very well managed.
Bearing in mind that the benchmark level was 100% of the required level to prevent any understaffing, all 3
departments were more than adequately staffed, and by being overstaffed they contributed an extra 0.25m to the
companys operating profits through : Lower costs (Head Office and QHSE)
Higher value (Measurement)

Strategy Successful ?

Business Strategy

Having met the objectives, have we also achieved the strategic goal of increasing the value of the business,
improving the companys reputation, and increasing the company share price ?
COMPANY VALUE

By the end of period 8 company value had increased by 14% by : Increasing market share to identify more new work
Growing the business by winning more work, and increasing turnover
Increasing operating profits through effective job and overhead management

COMPANY REPUTATION

KEEPING SHAREHOLDERS HAPPY

During periods 5 to 8 the companys reputation with clients improved

significantly (client satisfaction) as jobs were successfully undertaken.

During periods 5 to 8 the companys share price

rose from 1.12 to 1.42 as a result of : Keeping shareholders happy with ample dividend
An increasing company value
A stable level of anticipated future profits
Keeping debt burden to a minimum