Supernova Automotive: Performance Analysis, Decisions, and Strategy

This report analyzes the performance of Supernova, an automotive manufacturer, in a business simulation targeting the European market. The report details the company's strategic decisions across four rounds, including product development (Higgs, Charm, Bosson, Quark, Photon models), pricing, production, marketing, and human resource management. Key performance indicators such as market share, gross margins, return on equity, and cash flow are examined. The analysis covers trends in production, learning, finance, marketing, operations, and human resource management, highlighting the impact of decisions on market share, profitability, and financial stability. The report provides insights into the challenges of competitive pricing, market segmentation, and the importance of strategic forecasting and efficient operations in achieving business objectives within the automotive industry. The report concludes with an assessment of the company's overall performance and strategic positioning.

Marketing and strategy

Table of Contents
Introduction..........................................................................................................................................3
Company Performance.........................................................................................................................3
Round 1............................................................................................................................................3
Decisions..........................................................................................................................................3
Round 2............................................................................................................................................4
Decisions..........................................................................................................................................4
Round 3............................................................................................................................................5
Decisions..........................................................................................................................................5
Round 4............................................................................................................................................6
Decisions..........................................................................................................................................6
Forecast and Results........................................................................................................................6
Trend Analysis.................................................................................................................................7
Production...................................................................................................................................7
Learning..............................................................................................................................................10
Finance...........................................................................................................................................10
Marketing.......................................................................................................................................12
Operations......................................................................................................................................13
Human Resource Management......................................................................................................14

Introduction
Supernova is an automotive manufacturer whose London operations targets the European market
with a range of high quality, low emission, and low running cost cars. The overall objective of
Supernova was to become the market leaders in the small and medium city car market segment. The
goals and objectives of Supernova were to increase annual productivity levels by 7% over four
years, maintain costs at 1.5% below sales, raise annual sales by an average of 42%, gain brand
awareness, train employees, achieve 40% annual return on equity, and repay 250 million pound of
loans within two years.
Company Performance
Round 1
Decisions
The company sought to introduce two car models, the smaller Higgs model in 3 and 5 door models
targeted at the under 25 years age group and the Charm SUV with a small hybrid (petrol and
electric engine) targeted at the 25 to 40 age group; the Higgs model had 10 options while Charm
had five options. The company adopted a lean production strategy in order to minimize costs given
the company is at the entry level in the competitive European market. 77695 units of the Higgs
model were produced while for the Charm model, 24,700 units were produced. Pricing was a major
factor in deciding the cars to produce; the people aged between 25 and 40 have a higher purchasing
power but are more discerning- cost is not their main objective while for those under 25, cost is a
major deciding factor and this informed the decisions to produce more of the Higgs model and few
of the Charm SUV model with a hybrid engine. Being a new company, the strategies adopted
included having a wide distributorship network, competitive pricing, and use of lean methods for
demand forecasting. Apart from providing good cars at competitive prices, the management had a
strategy of keeping production costs low, through making quality cars that would have few warranty
issues, and keep investors happy through high returns.
Forecast and Results
Strategic forecasting and lean methods ensured that the amounts forecast is what was produced; a
total of 203, 559 cars were produced against a similar forecast and using a demand driven
forecasting approach, all produced vehicles were sold. Against a forecast sales target of £ 4366
million, the actual sales were also £4366 million. Being a new entrant, a significant budget was
allocated for promotion at £447 million, against a forecast of £448 million. The strategy resulted in
healthy gross margins of 45.4%, against a similar target; operating profits was £809 million against
a target of £814 million and the net profit margin achieved was 14.2%, against a target of 14.2%.

High efficiency production methods were adopted and this resulted in low warranty claims of 1.1%
apiece for both car models and the target of at least 40% ROE was obtained with 55.4% achieved
against a forecast of 55.3%. however, because of being in the entry level and wanting to attract the
best workers to push the company forward, average wages were 10% over the market average; the
company had expected this. Due to starting off and heavy investments in production and
manufacturing as well as labor, the cash flows were negative 481 million, slightly below a forecast
of 486 million. The strategy worked in the first period, with Higgs gaining a 1.48% market share
and Charm having 2.15% share. Using a demand pull forecasting system, 96,635 units against a
forecast of 96,635 units. The Charm model had 162,210 models produced against a forecast of 162,
210, while Bosson had 125, 260 models produced against a similar forecast.
Round 2
Decisions
The encouraging performance in year one led to offer customer variety by introducing a third 3/5
door vehicle model, the Bosson with fewer options to keep production costs low and have a lower
market entry price level, in addition to the Higgs and Charm models. The introduction of the new
model was to provide options and choice for customers in the small car segment at a lower entry
price level. The earlier strategies of a wide distribution network, increased employee productivity,
and rationalization of costs. The first year had seen encouraging performance despite being an entry
year and in the second year, the promotional budget as reduced by 40%; this was accompanied by
other efficiency measures and building on progress made in the previous year.
Forecast and Results
All Higgs and Charm models were sold, while Bosson had a stock balance of 1,000 units remaining
unsold. The gross margins achieved were as forecast (42.7% for Higgs, 45.7% for Charm, and
35.9% for Bosson). Overall, a gross margin of 42.2% was achieved, against a forecast of 42.1% .
naturally, warranty claims increased, but well below 2% while efficiency and cost cutting as well as
productivity improvement strategies resulted in an increase of return on equity to 59.4% against a
target of 59.3%. the returns on investments increased significantly to 57.0% (against a forecast of
39.4) and rising from 45.3% achieved in the previous year. The desired liquidity of 2.2 was not
achieved; instead a lower value of 1.2% was achieved as an additional £116 million was taken when
the Bosson model was introduced while the expectation had been to take zero loans. The long term
debt ratio was maintained at a low value of 4% (the target) while the total debt ratio declined
slightly to 33% from the previous years’ 34%. Days inventory outstanding rose to 1 from zero the
previous year while wages were 15% over market; this was due to the hiring of additional staff for
the introduction of the Bosson model. The cost cutting and operational efficiency strategies led to a

positive cash flow while market share rose to 2%; interest payments declined by 44% as a result,
while assets increased and inventories rose.
Round 3
Decisions
the previous two years’ performance was encouraging and so the company decided to introduce yet
another car model, the Quark, targeted at the older market of people aged above 55 (the Bosson was
targeted at persons aged between 41 and 50). Production was reduced for the existing models and a
small 3 door Quark model introduced with 80. 947 units being produced. A decision was made to
produce more of the Charm SUV, based on previous (historical performance) because it had shown
the highest gross margin returns. Having had a good performance in the other segments (market age
groups), the company decided to introduce a new model aimed at those aged above 55 with a small
car with average options to compete with the April A model from Butterflie but with fewer options
as price was to be a competitive factor.
Forecast and Results
The small car segment is very competitive and the Higgs model experienced a decline in market
share to 1.71% against a forecast of 1.85%; this was a drop from the 1.75% market share achieved
in the previous year. The Charm SUV maintained its market share of 2.69% against a forecast of
2.79% (the previous year market share was 2.69% as well) while the Bosson model gained market
share to 2.14% (the target was 2.24%) from 2.06% achieved the previous year. The Quark model
attained a lower than forecast market share (1.35% against a target of 1.45%) with higher than
expected warranty claims (1.4% against a 1.1% forecast). There was a decline on ROE to 41%
9though higher than the expected percentage of 40.1%) as the Higgs and Charm models lost market
share while Bosson remained unchanged). Quark also had unsold stock of 1708 against an expected
value of 0; the competitors gained market share while Supernova had its market share for the Higgs,
Charm, and Bosson models the market share shrank. This is largely because of pricing as Supernova
had prices slightly higher than competitors in the market. The Quark model was sold at a higher
price than the competing AprilA model (17,999 against AprilA model’s 16,000). Supernova was not
going to just compete on price, but other factors such as design and quality; Supernova had
comparatively fewer warranty claims compared to her competitors. This strategy informed the
pricing decisions; Supernova wanted to have the best returns for shareholders and the best
experience for customers such as reliability and quality. Long term debt ratio decreased overall
compared to previous year but was above the target because of the funds needed to produce the new
Quark model. The weekly wages rose significantly, 110% above the market average because the

decision makers understood the value of having the best staff that are high motivated across all
sectors.
Round 4
Decisions
Based on the previous year decisions, the decision makers sought to consolidate market share
gained so far, increase the market share for the best performing model (the Charm SUV) in terms of
gross margins. The decisions were based on past experience and forecasts and so its production was
increased over the previous period by 2%, although the total units produced were less than the
forecast units. The Higgs model saw a reduction in number of units produced, while the Bosson saw
an increase in units produced based on forecast numbers although production was less than forecast
numbers. This decision was driven by demand factors in that its demand was forecast to increase.
Quark also saw an increase in the forecast demand compared to the previous year although units
produced were less than the forecast. The management also decided to introduce a new model, the
Photon as it wanted to provide clients with a wider selection of choice; providing clients a wider
choice is a strategy to ensure greater customer satisfaction. Supernova again did no adopt an
aggressive pricing policy; the company’s strategy all along had been to compete on quality and
customer satisfaction instead of just price and price aggression but on quality and reliability as well
as customer satisfaction. Overall production increased marginally based on forecasts and actual
demand for the various models.
Forecast and Results
The actual production was less than the total forecast numbers although efficiency measures
including demand based forecasting and producing more of the Charm SUV resulted in higher net
profit margins, 21% against a forecast of 19.6% and represented a marginal growth against the
previous year. The net cash position improved by 69.5% although productivity index remained the
same. The return on shareholder funds declined from the previous year and was also lower than the
forecast amount although management decisions to improve quality led to an increase in market
share for the Higgs and Charm models. The Bosson Model performed better than expected in terms
of gaining market share while the Quark model also gained market share, but less than what was
expected. The demand based forecasting for production helped ensure ROI achieved was higher
than the expected although this declined from the previous year due to heavy investments in staff
and facilities for the production of the new Photon model. Efficient forecasting resulted in reduced
inventory while decreased borrowing and paying off loans and interest led to a reduced total debt
ratio and the achieved debt ratio was lower than the forecast amount. There was an improvement in
cash flows over the previous year and it was also higher than the forecast. This period had no

interest payments and assets increased from new plant investments while the inventory levels
decreased by more than half. There was a decreased return on shareholders and on investment
because of increased investments in the new Photon model; investments in new products/ models
and capacity take up cash but are important future contributors to revenues and sales.
Trend Analysis
Production
The production trends are shown below;

As shown in Figures 1 and 2 above; production reduced significantly in the second year based on
forecast demand and sales. The first year there was highest production 9n all the years, and this was
informed by optimism and the excitement when a new player comes into the market with a quality
product. Performance in terms of production in the first year was near excellent because all forecast
demand and subsequent production led to all units being sold with no unsold stocks despite selling
at a higher price than competitors.
Total Sales
There was a consistent increase in total sales throughout the four year period, a testament to a
strategy of demand forecasting and customer satisfaction through more features and reliability as
well as adjusting production accordingly.
Profitability (Net Profit Margins)

The figure above shows profitability rose significantly in year 2 from year 1 but in year three it was
almost flat, rising marginally in year 4. The decisions helped ensure consistent rise in profitability in
all years.
Return on Investments

ROI had mixed returns, rising I year 2 over year 1, but declining in subsequent years
Learning
Finance
The financial strategy sets out how an organization intends to finance its operations in order to meet
set objectives presently and in future; as such, it is integral to an organizations’ strategic planning.
At Supernova, the management adopted a decision of a mixed financing model ivolving the use of
shareholder funds and loans. The figure below shows the overall financing performance based on its
strategy as shown by the Long term Debt Ratios

In the entire four years, Supernova sought to reduce its long term debt ration by using loans to
finance operations and especially investments and gradually reducing its reliance on debt and
instead, use more shareholder equity contributions. As such, the overall trend is that of declining
long term debt ratios which shows the company becoming progressively less leveraged. A well
leveraged firm is more stable and can sustain performance even with reduced revenues and income.
The company had cleared all its loans by the end of the second year, showing a strategy of
becoming less leveraged to ensure financial health and stability. The lesson learned from using such
a strategy is that debt has its benefits; a company that creatively uses debt can earn
disproportionately more from its assets than if it did not use debt at all. However, the use of debt
should be balanced with the use of assets and the need to use debt because debt attracts interest
expenses and if too many loans are used, the interest expenses may become too much and result in
reduced income. When management is making decisions on financing, it should consider its
objectives and the interests of investors and shareholders. Shareholders invest in a business to get
some returns; when a organization uses a lot of debt, the interest expenses and loan repayments can
take away a significant chunk of the organizations’ earnings. However, if a company does no use
debt, it risks losing out on future income because it cannot inst effectively in capital equipment and
the assets needed to generate and guarantee future income. As such, a major lesson learned is that
debt and equity financing should be judiciously balanced based on the company objectives, and also
considering the risk associated with debt financing versus the opportunities that can be lost from not
taking any debts. Financing and financial management in organizations requires a holistic view; it
incorporates making considerations for solvency and liquidity. As such, decisions were made to
retain current ratios above 1 to ensure the company could pay off short term debts whenever they
fell due. Taking a loan of 250 million pounds was useful in getting operations up and running as the
500 million available at bank was not sufficient to set up and still maintain a healthy cash position
to fund operations such as paying wages. The management also wanted a healthy financial position
in terms of solvency and risk exposure and sought to clear debts including the 250 million loan
borrowed in the first year. The reason for reducing debt as a priority was also to reduce interest
expense costs as the longer a debt takes before repaying, the higher the interest expenses increase. A
decision was also made to retain an increasing cash reserve balance in order to have the necessary
cash to invest in operations and incidents, including increasing capacity and hiring new workers
wen increasing production or developing a new car model.

Marketing
This refers to the process of creating and maintaining / managing relationships with customers in
order to maintain a positive exchange between the customers and the company. Marketing is
essential because it is through it that customers get to know about products and also, the process by
which customers are convinced to purchase products. It refers to decisions that an organization
undertakes to promote a products/ service from its concept to the customer. Marketing entails
coordinating four main elements, the 4 P’s of marketing that include product, price, place, and
promotional strategy. Product as an element of marketing entails identifying what to produce,
selecting among a variety of options, and developing a product to meet or satisfy a specified
customer need. The developed product must then have a price set based on the forces of demand
and supply and the product must be delivered to a convenient location for ease of access by the
customer. To get customers to purchase the product,a suitable promotional strategy must be used. In
determining the product to produce, the management evaluated population dynamics and the needs
of each population group/ target market. Initially, it was identified that the target market aged below
25 years very large, highly competitive, and highly price sensitivity as well. It was also determined
that the age group between 25 and 40 was also good, but their rice sensitivity is not as high, while
they prefer quality and luxury. As such, these considerations informed the managements’ decision to
start off with a small car with three and five door versions that would be priced lower and targeted
at the under 25 market. This age group are also technologically savvy and prefer a lot of fancy
features in a car so this segment required a car with many features, the Higgs model was therefore
developed for this market segment. For the 25 to 40 age group, it was decided that a Sports Utility
vehicle was the best and so the Char model was developed for this group with considerable features
but not as many as those in the Higgs model. The team decided against using price alone to gain
market share; there were considerations for an aggressive pricing strategy but this was shelved and
instead opted to provide quality, reliability, and suitable features to convince customers to but even
though the company’s products were on average priced higher than competitors. The team
recognized the importance of price, but it was not going to be used as the major selling point,
especially in a market segment with stiff competition (for the Higgs model). The team relied on
factors such as quality, reliability and meeting customer needs and this is evidenced by lower
warranty claims for Supernova products compared to competitors. This would ensure brand loyalty
in future such that customers seeking to upgrade to an SUV will buy from Supernova based on their
experience of quality and reliability in the previous model (Higgs). It was also decided to start with
just two models targeting the different market segments as a market entry strategy and to focus on
customer delivery and satisfaction while evaluating the market for future demand trends. A higher
rice level would also result in better returns for the company and shareholders as one of the