I've seen lots of blog postings and articles about how to win the BSG. I will share with you a solid strategy along with other ideas to consider that apply to other strategies as well.
What drives sales
I did a response surface analysis to find out what are the levers that actually drive sales. In order of importance, they are: Price, Quality (SQ), Rebate. Nothing, repeat, nothing else appreciably moves the needle. Not 300 more points of celebrity endorsement. Not all the "green energy" or "diversity" stuff. NOTHING but these three things truly matter to sales. So on the revenue side, we want to focus on P, Q, and R.
What drives costs
Costs have several factors: material, labor, plant setup, training, financing, etc. You will find that cost management is the most important lever of success. The winner will be that team or person that find the lowest cost way to make shoes that sell competitively.
A Winning Strategy
There are several ways to win the game, but I believe the plan I will share with you is the best. The approach I recommend is striving to be the low-cost producer at very high volume. As competitors fade away, you can swallow their market share. Note, there is risk to this strategy, because if another team is employing the same approach, it will be cutthroat. You will either win huge or lose huge, because if you don't employ this strategy effectively, you will not be able to recover.
Here's what you are striving towards: you want to build a massive wholesale distribution machine all over the planet. You want to sell as many shoes as possible at the lowest price that still makes money without stocking out. Don't worry about having killer margins and massive profits at first. The important thing is building the "machine." The outsized profits and market share you will earn later will allow you to more than make up for mediocre performance in the first 2 or 3 rounds.
The machine is oriented around making shoes of acceptable quality at the lowest possible delivered cost. This is done primarily by optimizing the manufacturing and distribution base.
You want Latin America plant as your main plant to supply all markets but AP. You want massive production capability with trained, excellent, but cheap labor. There is no other means of lowering costs that is more effective than having a very large Latin America plant of huge capacity.
All the shoes made in NA and shipped to LA have a tariff. But shoes made in LA and shipped to NA pay no tariff. And the LA plant will cost MUCH LESS to operate, so it's a win/win. $4 per shoe times millions of pair is massive cost avoidance.
When the game starts, you have a fairly large AP plant, and a NA plant half the size. You will quickly see how expensive that NA plant is. Move capacity away from it as soon as you can. The means breaking ground on your LA plant right away, and adding as much capacity as you can. Borrow money to do so.
Ideally, you want to operate each plant at 120% of capacity with full overtime. This will slash your product costs. As you add capacity in LA, you will eventually shut down the NA plant. DO NOT SELL OFF THE NA PLANT if you can avoid doing so. The overall fixed cost of having an idle plant is surprisingly low. If you sell off that plant, you will present a major competitive advantage to your rivals as they can buy your capacity at a discount, bring it online instantly, and slash their production costs.
Only once some other competitors have sold NA capacity does it make sense for you to consider selling any of yours. It's likely that your best bet is to wait several rounds before selling the NA capacity-- just let the plant sit idle instead of selling it off.
Round by Round-- plant allocation
Round 1: Upgrade your AP plant with the 1 SQ rating improvement. Do not upgrade the NA plant (we're migrating away from it). Add 50% capacity to your AP plant. You will need this capacity to support global sales while your LA plant is being constructed. Speaking of-- add as much LA capacity as you can. Run your AP plant at 120% of capacity. NA plant at 100%.
Round 2: Again add as much LA capacity as you are allowed to. Upgrade the LA plant with 1SQ quality improvement. Add another 50% to your AP plant and upgrade the worker productivity. After this, you should have an AP plant that is huge and has two upgrades. Idle the NA plant and operate both LA and AP at 120%.
Round 3: Add as much LA capacity as you can. Do the second upgrade to worker productivity. Do not add AP capacity at this time. Do not sell NA yet, idle it again.
Round 4: Add as much LA capacity as you can. By now you will have a massive plant that is fully upgraded. It is likely you will not need as much AP capacity. Run the LA plant at 120%. AP at whatever reduced capacity need to support sales. NA is idled.
Round 5: By now, other teams will have sold off some capacity in NA. If you wish to sell yours, it's safe to do so this late in the game. You can begin selling off some AP capacity that you is not necessary because of your massive LA plant-- don't stop adding to LA until it is a 12M pair plant. This is your primary source of product for the 3/4 markets, with AP plant supplying only AP market (due to massive tariff). You should be selling most of your AP production into AP, with the goal of LA supplying the rest of the globe.
DO NOT PARTICIPATE IN PRIVATE LABEL OR INTERNET SALES, at least not at first. This runs counter to what all of the "experts" opining about BSG will tell you. You must always remember that you are selling mostly to distributors. They don't like having you compete with them. The best measure of your overall strategy is the number of dealers you have signed up to carry your shoes. If you are doing well, you will have more distributors than all your rivals. Be sure to support them (at least $500 in support, no worse than 3wk delivery).
Why avoid private label (P/L)? It is simply too risky. Either you must price yourself such that you have no margin in private label, or you must run the huge risk of making shoes that didn't sell because you were undercut by someone else who priced themselves for no margin. Private label is a race to the bottom. There is always going to be a round or two where some team makes a killing in P/L with fat margins. That lures in other people who end up dying in P/L. Only the first profit makes it-- all those who come later will be stuck on a suicide mission trying to scratch out a few pennies of margin in P/L. Do not fall into the trap. FOCUS ON WHOLESALE.
What about online sales? Online sales seem appealing, but when you look at the considerable extra setup costs, and the need to offer more models (compared to wholesale), the pressure on margins can be substantial. It also tends to undermine your wholesale distribution network. Don't get sucked into online sales, it's too small of a market to worry about at first. Later, if you have a massive capacity manufacturing base, you have the margin cushion that you can undercut your competitors and move effectively into online sales.
No amount of advertising or celebrity endorsement will help you as much as having a quality shoe at a low price. NOTHING else matters as much. So instead of spending $2 per pair on endorsements, cut the price by $2 if you wish. The effect on margins is the same, but you will sell more. And you need the volume.
When you start to win big in wholesale, your rivals will be lured into Private Label and Online sales. This will be the end of them. They will end up with mountains of unsold shoes. Then they will have to lower production. That raises costs massively, and then they will have to raise pricing to offset, making them even less competitive. It's a vicious trap you want to avoid.
A word about the number of styles and models to offer: adding a lot more models should only be done to larger plants. At some plants, the setup costs are too high to be offset by additional sales. You should never offer fewer than 100 or more than 350 models. Start with fewer (100 or so) and gradually add more as your market share supports.
The risk of this strategy lies in being highly leveraged at first. Keep in mind that your credit rating and image points only matter for the last few rounds, so use the early rounds as "loss leaders" here as you build the machine out.
You will need to borrow heavily to expand and upgrade your plants, especially for the LA plant. Because you will need to borrow, it is ESSENTIAL that you do not run out of cash and incur the penalty of an "emergency" loan. That will take away your ability to refinance (which is critical.)
The leverage can be managed if you are making smart risk assessments, cutting costs elsewhere, and monitoring your coverage metrics. A critical tool on the financial side: refinance every round. That means you pay off as much debt as you can by borrowing a new 10-year loan. Borrowing for 10 years will lower the principal payment, which improves the coverage ratio that contributes directly to credit rating.
You must repurchase as many shares as possible each round. This will soften the blow to your RoE as you lever up in the first few rounds, and it will pay off handsomely in later rounds. There are limits to how many shares can be repurchased in a round, and if you put it off thinking you can take a massive pile of cash and do a big repurchase later in the game, you'll be stuck. Also, since you are likely to have poor EPS and shareprice in the first two rounds, your costs of repurchasing will be less up front. If beneficial later, you can re-issue stock at a (hopefully) higher share price.
Remember, equity and debt are your capital structure. More debt means less equity and high RoE (a key scoring measure). Borrowing money for share repurchase is a good idea because your cost of equity is almost surely higher than your cost of debt.
Achieving a given SQ rating at the lowest cost is the name of the game. Look at your company's performance reports. If the cost of low quality is $2 per pair, but you are spending $5 on TQM efforts, you need to ask yourself why you are doing that. Spending $5 to solve a $2 problem makes no sense. However, you want to continuously be investing in SOME improvement effort, because the cost of quality may rise rapidly if you aren't spending at least a little on TQM/Six Sigma. Let the effect on SQ rating drive your overall TQM spend, don't worry about "investing for the future" as it is likely you will never recover $5 per pair (or whatever the maximum investment is).
Do note the cost of waste and workmanship on your Plant Operating Report, page 1. It will tell you at the bottom the cost (per pair) of your rejected pairs. In one year, one of your plants had a cost per pair of maybe $0.40. The cost per pair on "cumulative best practices" however, was $1.79. THIS IS WASTEFUL! Never spend $1.79 to solve a $0.40 problem.
The best way to lower the cost per pair of poor quality is to limit the number of models offered. Defect rates can go from being 2.3% at 100 models to over 8.5% at 500 models. The higher the SQ of the shoes you are making, the more expensive a defect is, because you are throwing away far more expensive materials. As you go higher in SQ, you may want to shy away from offering a huge number of models (350 or 500). Consider this excerpt from the guide:
Production run set-up costs per plant for branded footwear are $1 million for 50 models, $2.5 million for 100 models, $4
million for 150 models, $6.0 million for 200 models, $8 million for 250 models, $10.5 million for 350
models, and $14 million for 500 models. The size of the plant does not matter in determining
production run set-up costs, only the number of models produced at the plant.
Especially at very small plants, the setup costs for lots of models can be killer. Do not fall into this trap! Pushing out lots of models drives lots of cost and higher reject rates. If you have larger plants, you can offer more models, but only on large plants. Let's say you have a large-ish, 4 million capacity plant-- setting it up for 250 models will put $2 PER SHOE of cost into the product. But setting it up for 500 models will put $3.50 of cost per shoe into the product. But if your mega-plant is 12M capacity? Now the cost of even 350 models is less than $1/pr. Having more models is a competitive advantage, but NOT as effective as having a lower price for the same or higher quality. Until your plant capacity is large, the cost per pair of more models is not as effective as just cutting the price by the same amount.
The upshot is that if you setup a plant for lots of models, you end up driving cost doubly: higher defect rates AND higher setup costs. Can your marketing and sales recover from $4 or $5 per pair disadvantage? Probably not. Only a truly huge capacity plant can produce 350 or 500 models cost-effectively, and even then only if the SQ isn't very high. It is exceedingly difficult to be cost competitive if you are producing lots of models at high SQ.
Beware of material cost variation. If the industry-wide demand for superior materials falls below 17% or so, then superior materials will actually cost LESS than the cheap materials. (it's true, read the BSG guide). Be sure that you always use at least 20% superior materials so that you are driving demand above this "inversion" point. Be aware of what your market rivals are doing. If they are all pursuing a dirt-cheap, Wal-Mart grade shoe at the lowest possible price, then you can make it backfire by going a couple SQ point higher-- your material cost will be less (or very close), but your SQ will be superior.
As your plant capacity grows, and your market share, you will be able eventually to produce a shoe of higher quality at a lower price. That is the ultimate competitive advantage.
Distribution is often overlooked, but is a potential area where your team can gain an edge. The optimization of which plants supply which regions is pretty straightforward, and drives the decision to build LA and AP plants to optimize tariff avoidance and labor costs. The almost universal advice to avoid building a plant in Europe is not coincidence.
However, the core distribution effort is managing inventory levels. You absolutely want to avoid a stock-out situation (this occurred with my team several times, and was indication of poor pricing, as our prices were too low). Stock out is forfeited revenue, so if you are playing the game well, you should have a small amount of inventory left over without a stock out (Price is Right rules apply-- get as close as you can get without going too far). Stocking out is not a good thing, it shows you are being too aggressive. Your shoe shortage will drive sellers to your rivals because you couldn't deliver.
What if you have a round where you end up with a substantial amount of unsold shoes? What to do?
- Sometimes you can clearance a fraction of the shoes at positive margin. If you can clear some out at a net gain, you should consider this. The cost of the inventory isn't just the loss of SQ, it is the pressure to produce lower volume at your plants (and drive up production costs). Compare your clearance gain/loss to the effect on production costs. It's likely that even small positive on clearance is a net gain.
- It is almost always a bad idea to eat a significant loss and do 100% clearance. Better to slowly reduce inventory levels over a couple rounds be selling more than that round's production.
- While the previous year's inventory is dropping an SQ point every year, the overall SQ assigned for all shoes in a given warehouse is the weighted average. At some level, the quantity of new production is a large enough proportion to make all that warehouse be considered that SQ. So carrying some inventory left over-- even two years or more-- is manageable if you have enough new production coming in and you take pricing action to increase sales.
- Take the longer view on inventories-- do not try to solve an inventory problem in a single round. DO NOT do a 100% clearance and eat several dollars loss per pair. Clearance often turns possible future gains into certain present losses.
Your business results after the first few rounds should assure that you will have EPS, ROE, and Share Price scores that will rank very well. Your credit score in the first few rounds will not be good-- remember, you are leveraging to build a massive weapon of war. It costs money, so you are borrowing heavily. Think of them as War Bonds. However, it is critical that you bring up your credit rating within the first four rounds, do not go more than 3 rounds with a dismal credit score.
The game scoring is cumulative across all rounds. That means you cannot dig yourself a hole so deep you cannot climb out of it. You must initiate recovery by round four(of a 10 round game) or three (of a shorter game). It's OK if you don't win every round at first. In fact, if you "win" the first few rounds, you are almost certain to lose the whole game.
If you far exceed some particular measures, you can achieve a 110/100, which offsets those early rounds where you didn't have good image or credit scores.
As the BSG likes to say, there's no one way to win the BSG. I have outlined above a strategy that worked and often can work well. But ultimately, a winning strategy is highly context-dependent. The best teams will recognize when what they are doing isn't working and recover in time. Others will fail to take timely action and be doomed as they end up in an unrecoverable situation.
For example, let's say that you are pursuing the high-volume strategy employed above, but so are several competitors doing it as well. In this "race to the bottom" someone is going to be the team that goes too far into debt, builds too much capacity, or (most likely) makes a critical pricing error that leaves them with a mountain of unsold inventory, and then they move too aggressively to clear that inventory. The Rule of the Herd is critical to remember: you don't have to be the fastest zebra to outrun the lionesses; you just can't be the slowest.
What that means is that you may need to wait for a rival to make a critical mistake-- like that zebra that stumbles just once. That might be selling the NA plant too soon (and offering a capacity advantage at discount to a ready rival). It might be not building in LA. It might be wasting millions on celebrity endorsers. Or on pointless marketing efforts like environmentally friendly packaging or such. Most likely, it will be a miscalculation on price and SQ-- you simply cannot spend enough on advertising to make up for high price and poor quality.
Be as aggressive as you can while recognizing the limits and managing risk, and you are likely to experience BSG success.