Capstone Business Simulation Student Guide

Transcription

Cases in Strategy
and Business Policy
CAPSTONE
BUSINESS
SIMULATION
BACKGROUND 2
YOUR CUSTOMERS 2
BUYING CRITERIA 2
POSITIONING 3
PRICE, AGE AND RELIABILITY (MTBF) 4
SEGMENT CRITERIA 4
THE CAPSTONE COURIER 5
FRONT PAGE, STOCK & BOND SUMMARIES, FINANCIAL
ANALYSIS AND PRODUCTION ANALYSIS 5
SEGMENT ANALYSES 5
MARKET SHARE, PERCEPTUAL MAP
AND HR/TQM REPORT 6
THE PURCHASE DECISION 7
THE ROUGH CUT 7
POSITIONING IN THE ROUGH CUT 7
PRICE IN THE ROUGH CUT 7
RELIABILITY IN THE ROUGH CUT 7
THE FINE CUT 7
POSITIONING IN THE FINE CUT 8
RELIABILITY IN THE FINE CUT 8
AGE IN THE FINE CUT 8
PRICE IN THE FINE CUT 9
BUYER’S & SELLER’S MARKETS 9
MARKET SIZES AND GROWTH 10
OPERATIONS 11
R&D 11
REPOSITIONING 11
MTBF ADJUSTMENT 11
PRODUCT INVENTION 11
PROJECT MANAGEMENT 11
A PRODUCT'S AGE 12
MARKETING 12
PRICE 12
PROMOTION (PROMO BUDGET) 12
PLACE (SALES BUDGET) 13
PRODUCT 13
SALES FORECASTING 14
PRODUCTION 14
PURCHASING CAPACITY 14
SELLING CAPACITY 14
DISCONTINUING A PRODUCT 14
AUTOMATION 14
CHANGING AUTOMATION 15
FINANCE 15
CURRENT DEBT 15
BONDS 16
STOCK 16
EMERGENCY LOANS 17
CREDIT POLICY 17
ADVANCED MODULES 17
PROFORMAS & ANNUAL REPORTS 18
BALANCE SHEET 18
CASH FLOW STATEMENT 18
INCOME STATEMENT 18
EXECUTIVE SUMMARY 19
R&D 19
MARKETING 19
PRODUCTION 19
FINANCE 20
GETTING STARTED 21
DOWNLOAD CAPSTONE.XLS 21
REHEARSAL SIMULATION 21
PRACTICE ROUNDS 21
COMPETITION ROUNDS 21
INDEX 22
For detailed information, see the Online Manager Guide
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1. BACKGROUND
IN THE NEXT EIGHT YEARS, THE SENSOR MARKET WILL SEE A 165% INCREASE IN UNIT DEMAND. GROWTH RATES VARY AMONG THE SUB‐MARKETS, OTHERWISE KNOWN AS MARKET SEGMENTS.
SOME SIMULATIONS USE ADVANCED MODULES. THE WEBSITE WILL NOTIFY YOU IF ADVANCED MODULES HAVE BEEN ACTIVATED.
Your company manufactures electronic sensors. Last year, global demand for sensors surged more than 12%.
Unprecedented opportunities exist for companies that adopt a leadership role in the market, either through a superior
product offering or aggressive pricing.
Although its financial results have been respectable, your company currently markets an aging product line. To
become a market leader, you must improve your products, increase productivity and remain profitable despite
downward price pressure.
Your company needs to revamp the management structure while coordinating strategy and tactics across all
functional areas:
• Research & Development (R&D)
• Marketing
• Production
• Finance
Your company uses a Microsoft® Excel® spreadsheet called Capstone.xls to formulate and transmit corporate
decisions. To download Capstone.xls, login at www.capsim.com and click the Making Decisions link. Managers have
an opportunity to learn how to use the spreadsheet by playing the Rehearsal Simulation. The spreadsheet will teach
you step by step the decision making process.
Your company selected you and your fellow managers because of your strategic vision and tactical skills.
During the next eight years, the company expects you to make it a market leader. Careful study of the remaining
sections will help greatly in this effort. Best of luck in running your company!
YOUR CUSTOMERS
Your customers are Original Equipment Manufacturers. They put your sensors into a range of products, from bio
hazard neutralization to security systems to manufacturing controls. Because so many products depend upon your
sensors, the sensor industry is growing and evolving fast. Even the oldest designs are less than eight years old.
Customers fall into five categories or market segments:
• Traditional
• Low End
• High End
• Performance
• Size
BUYING CRITERIA
Each market segment demands sensors that fits its needs or criteria. Therefore, sensors for each segment vary in their
physical dimensions (size), and the speed with which they respond to changes in physical conditions (performance).
Combining size and performance creates a product attribute called positioning.
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Capstone Manager Guide
POSITIONING
Positioning is such an important concept that marketers developed a tool to track the position of their products and those
of their competitors. This tool is called a perceptual map.
A product with a size of 12 and a
performance of 8 is positioned here.
Note that the perceptual map in Figure 1.1 measures size on the vertical axis and performance on the horizontal axis. A
product with a size of 12 and a performance of 8 is plotted at the point where the two lines intersect. That is the
product’s position.
Market segments have different positioning preferences. Therefore, each segment clusters in a different part of the map.
Low End customers want slow performing products that are large in size. They want products that fall inside the upper left
circles in Figure 1.2. High End customers want products that are fast performing and small in size. They want products
that fall within the circles to the lower right.
Over time, customers want products that are smaller and faster. This causes the segments to move or “drift” a little every
month. As the years progress, the drift becomes significant. Figure 1.3 shows the location of the market segments at the
end of the fourth year; Figure 1.4, at the end of the eighth.
High End, Performance and Size customers demand greater product improvement than Traditional and Low End
customers. Therefore, the High End, Performance and Size market segments drift at a faster rate. As time goes on, the
overlap between the segments decreases.
Figure 1.1
Perceptual Map
YOU AND YOUR MANAGEMENT TEAM MUST ENSURE THAT YOUR PRODUCT LINE KEEPS UP WITH CHANGING CUSTOMER DEMAND. TO DO THIS, PRODUCTS MUST BE REPOSITIONED TO STAY WITHIN THE MOVING SEGMENT CIRCLES. PRODUCTS MUST BE REDESIGNED SO THAT THEY ARE SMALLER IN SIZE AND FASTER IN PERFORMANCE. MARKET Low End Performance
Traditional
Size
Low End
High End
Performance
Low End
Traditional
Size
Performance
Traditional
High End
High End
Size
Figure 1.2
Beginning Segment positions. As the
years progress, the segments will
move or “drift” at different speeds
towards the lower right.
Figure 1.3
Segment Positions at the
end of Year 4. Segment
overlap decreases.
Figure 1.4
Segment Positions at the
end of Year 8. Very little
overlap remains.
SEGMENTS WILL NOT MOVE FASTER TO CATCH UP WITH A PRODUCT THAT EXCEEDS THEIR EXPECTATIONS. FOR EXAMPLE, HIGH END CUSTOMERS WILL REFUSE TO BUY A PRODUCT TO THE LOWER RIGHT OF THE CIRCLES. CUSTOMERS ARE ONLY INTERESTED IN PRODUCTS THAT FALL WITHIN THEIR SEGMENTS ON THE PERCEPTUAL MAP.
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PRICE, AGE AND RELIABILITY (MTBF)
EACH MARKET SEGMENT EXPECTS DIFFERENT:
• POSITIONING
• AGE RANGE
• PRICE RANGE • LEVELS OF RELIABILITY, MEASURED IN HOURS AS MEAN TIME BETWEEN FAILURE, OR MTBF
In addition to position, each segment has different criteria for:
• Price: The cost of the sensor;
• Age: The length of time since the sensor was invented or revised;
• Reliability or MTBF (Mean Time Between Failure): The number of hours the sensor is expected to operate.
TRADITIONAL SEGMENT CRITERIA
Traditional customers seek proven products using current technology. Last year’s buying criteria were:
• Age, 2 years– 47% of decision;
• Price, $20.00-$30.00– 23% of decision;
• Positioning, performance 5.0 size 15.0– 21% of decision;
• Reliability (MTBF), 14,000-19,000– 9% of decision.
LOW END SEGMENT CRITERIA
PRICE RANGES IN ALL SEGMENTS DROP $0.50 PER YEAR.
FOR EXAMPLE, THIS YEAR, THE TRADITIONAL PRICE RANGE WILL BE $19.50‐$29.50, NEXT YEAR IT WILL BE $19.00‐$29.00.
Low End customers seek proven products, are indifferent to technological sophistication and are price motivated. Last
year’s buying criteria were:
• Reliability (MTBF), 12,000-17,000– 7% of decision.
HIGH END SEGMENT CRITERIA
High End customers seek cutting-edge technology in both size and performance. Last year’s buying criteria were:
• Reliability (MTBF), 20,000-25,000– 19% of decision;
• Price, $30.00-$40.00– 9% of decision.
POSITIONING CRITERIA WILL CHANGE IN FUTURE YEARS!
AGE AND RELIABILITY (MTBF) CRITERIA REMAIN THE SAME YEAR AFTER YEAR.
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PERFORMANCE SEGMENT CRITERIA
Performance customers seek high reliability and cutting edge performance technology. Last year’s buying criteria were:
• Age, 1 year– 9% of decision.
SIZE SEGMENT CRITERIA
Size customers seek cutting edge size technology. Last year’s buying criteria were:
• Age, 1.5 years– 29% of decision;
• Price, $25.00-$35.00– 9% of decision.
2. THE CAPSTONE COURIER
Customer purchase and sensor company financial results are reported in an industry newsletter called
The Capstone Courier. The Courier is available from two locations:
• Login to the website and click the Reports link;
• From Capstone.xls, click Last Year’s Reports in the menu bar.
FRONT PAGE, STOCK & BOND SUMMARIES, FINANCIAL ANALYSIS
AND PRODUCTION ANALYSIS
The Front Page of the Courier delivers a snapshot of last year’s results (Figure 2.1). Be sure to compare your company’s
sales, profits and cumulative profits with the competition’s. Page 2, Stock and Bond Summaries charts stock price and
reports bond ratings.
Page 3, The Financial Analysis, surveys each team’s cash flow, balance sheet and income statement. Use the Financial
Analysis to check the financial health of your competition.
Figure 2.1
Selected Financial Statistics from
the front page of the Courier.
Page 4, The Production Analysis, reports detailed information about each product in the market, including sales and
inventory levels, price, material cost and labor cost. The Production Analysis also reports plant capabilities
and utilization.
SEGMENT ANALYSES
The Market Segment Analyses, pages 5 - 9 of the Courier (Figure 2.2), review each market segment in detail.
The Statistics table in the upper-left corner of each analysis reports Total Industry Unit Demand, Actual Industry Unit
Sales, Segment % of Total Industry and the segment’s Growth Rate.
The Customer Buying Criteria table ranks in order of importance the customer criteria within each segment (these are the
criteria listed on page 4):
• Positioning: The preferred product location as of December 31 of the previous year, also called the ideal spot– ideal
spots drift with the segments, moving a little each month;
• Price: Every year on January 1, price ranges drop by $0.50;
• Age: Age preferences stay the same year after year;
• Reliability: MTBF requirements stay the same year after year.
The perceptual map shows the position of each product in the segment as of December 31of the previous year.
The Accessibility Chart (Figure 2.3 on page 6) rates each company’s level of accessibility. Accessibility is determined by
the Marketing Department’s sales budget– the higher the budget, the higher the accessibility. Accessibility is measured by
percentage, 0 to 100. 100% accessibility means every customer has the ability to locate your product.
Figure 2.2
Traditional Market Segment
Analysis. Segment Statistics
and Buying Criteria display in
the upper-left corner of each
segment analysis.
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The Market Share Actual vs. Potential Chart (Figure 2.3) displays two bars per company. The actual bar reports the
market percentage each company attained in the segment. The potential bar indicates what the company deserved to
sell in the segment. If the potential bar is higher than the actual, the company under produced and missed sales
opportunities. If the potential is lower than the actual, the company picked up sales because other companies either
under produced or marketed products that were unacceptable to the segment.
Top Products in Segment: This table ranks the products selling in the segment, and reports:
• Market Share
• Units Sold to Segment
• Revision Date
• Stock Out (whether the product ran out of inventory)
• Performance and Size coordinates
• Price
• MTBF
• The product’s Age on Dec.31
• Promotion and Sales Budgets
Figure 2.3
Segment Analysis
Accessibility and Market
Share Actual vs. Potential
Charts.
The Segment Analyses have two more important columns:
• Customer Awareness
• The December Customer Survey
Customer Awareness (Figure 2.4) is determined by the Marketing Department’s Promo Budget– the higher the
budget, the higher the awareness. Awareness is measured by percentage. 100% awareness means every customer
knows about your product.
USE THE CUSTOMER SURVEY AS A QUICK COMPARISON TOOL WHEN CONDUCTING A COMPETITIVE ANALYSIS. The December Customer Survey (Figure 2.4) indicates how customers perceive the products in the segment. The
survey evaluates the product against the buying criteria. 0% indicates the product meets none of their criteria. A
perfect score of 100% results in part when the product:
• Is priced at the bottom of the expected range;
• Is perfectly positioned (because the segment moves each
month, this can occur only once each year);
• Has an MTBF specification at the top of the expected range;
• Has the ideal age for that segment (because the product ages
each month, it can only have the ideal age once a year).
MARKET SHARE, PERCEPTUAL MAP
AND HR/TQM REPORT
Figure 2.4
6-
Customer Awareness reports
the percentage of customers
who know about your
product. The December
Customer Survey reports
what customers think about
your product; the higher the
score, the better they like it.
Three pages follow the segment analyses:
• Market Share Report, which details sales across all market segments;
• Perceptual Map (Figure 2.5), which displays all five segments and
every sensor in the industry;
• HR/TQM Report, which displays investments and results when
the optional TQM, Human Resources and/or Labor Negotiation
modules are activated.
Figure 2.5
Page 11, Perceptual Map,
displays the positioning of all the
sensors in every segment.
3. THE PURCHASE DECISION
Customers go through two stages as they make their purchase decisions, the Rough Cut and the Fine Cut.
THE ROUGH CUT
The outer circle indicates the
positioning rough cut.
The inner circle
indicates the
positioning
fine cut.
In the rough cut, buyers focus on four product characteristics:
• Performance: The sensor’s speed in measuring and reporting conditions;
• Size: The sensor’s dimensions and weight;
• Reliability: Expressed in terms of Mean Time Between Failure, or MTBF, the number of hours the sensor will last;
• Price: Different price ranges are associated with each market segment, and distinguish one customer type
from another.
Each segment sets its own standards for performance, size, reliability and price. Products must fall within segment
guidelines to survive a customer’s rough cut.
POSITIONING IN THE ROUGH CUT
On the perceptual map, the circles represent the market segments, the groups of customers with similar purchasing
concerns. Products that plot within 4.0 units from the center of the segment circle survive that segment’s positioning
rough cut. When products plot more than 4.0 units away, they fail the segment’s rough cut (Figure 3.1).
A product within the outer circle but outside the inner fine cut circle has reduced sales potential. Potential drops in a linear
fashion. Just beyond the fine cut circle, potential drops 1%; halfway between the fine and rough cut circles, potential
drops 50%; potential drops 99% for products that are just inside the rough cut circle.
Figure 3.1
Positioning Rough Cut / Fine Cut
circles. The outer Rough Cut
circle has a radius of 4 units. The
inner Fine Cut circle has a radius
of 2.5 units.
PRICE IN THE ROUGH CUT
Each segment sets price guidelines, which further differentiate the segments. For example, Traditional customers will not
pay High End prices. Segment price expectations correlate loosely with the segment’s position on the perceptual map. In
general, as performance increases or size decreases, price ranges go higher.
RELIABILITY IN THE ROUGH CUT
Reliability is measured with Mean Time Between Failure (MTBF). The MTBF conveys the number of hours a product is
expected to function. Each segment has a different range of expected MTBF (see page 4).
THE FINE CUT
THE SEGMENT ANALYSES OF THE CAPSTONE COURIER REPORT THE BUYING CRITERIA FOR EACH SEGMENT.
In the Fine Cut, customers evaluate products against the four buying criteria listed on page 4:
• Positioning
• Age
• Price
• Reliability (MTBF)
Each segment assigns different importance to each criteria.
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POSITIONING IN THE FINE CUT
The product’s exact position now increases in importance. Each segment’s fine cut circle has an ideal spot (arrows,
Figure 3.2). The ideal spot indicates the location where positioning demand is highest.
Customers in the high technology segments (High End, Performance and Size) want cutting-edge products. The ideal
spots for these segments are located towards the lower-right edge of the circles, where size is smaller and
performance is faster.
Low technology customers (Traditional and Low End) want proven technology. The Low End ideal spot is located
towards the upper left, where products are bigger and slower. The Traditional ideal spot is in the center of the circle.
Ideal spots drift with the circles.
RELIABILITY IN THE FINE CUT
Customers prefer high MTBF ratings to low ones. However, if a product’s MTBF is beyond the expected range,
customers ignore the additional reliability.
AGE IN THE FINE CUT
Figure 3.2
The arrows indicate each
segment’s ideal spot, the
location where positioning
demand is highest. Ideal spots
drift with the segment circles.
Figure 3.4
8-
Low End customers want
products in the 7 year
range.
In the Fine Cut, customers assess each product’s age and award a score
based upon their preferences. For example, Traditional customers prefer
products that are 2 years old. Products with that age are given a score of
10 (see Figure 3.3). Age assessments vary from segment to segment (see
Figures 3.4 through 3.7). The Buying Criteria on the Courier’s Segment
Analyses report the age preference and its overall importance to the
purchase decision.
Figure 3.5
High End customers
demand new products.
Figure 3.6
1-year-old products score
highest with Performance
customers.
Figure 3.3
Traditional customers
prefer products in the
2 year range.
Figure 3.7
Size customers prefer
products that are 1.5
years of age.
PRICE IN THE FINE CUT
Price plays a role in both the Rough Cut and Fine Cut. For products that survive the Rough Cut, demand for a product
follows a classic economic demand curve: as price goes down, demand goes up.
Customers, however, also are concerned with the product’s position, age and reliability. A better product creates higher
demand, and this can be traded for a higher price.
Suppose that the position, age and reliability for product Able is superior to Baker’s. If they were priced the same, Able
would outsell Baker. But as Able raises its price, at some point its unit demand will be equal to Baker’s demand. Able will
trade off some of its potential demand for a higher price on fewer units. In general, the high technology segments
(Performance, High End, and Size) are sensitive to design and can command a higher price. The low technology segments
(Low End and Traditional) are less sensitive to design and place more emphasis on price.
BUYER’S & SELLER’S MARKETS
In a buyer’s market there are plenty of units available to meet demand within a segment. In a seller’s market there are
too few units available to meet demand within a segment.
BUYER’S MARKET
In a buyer’s market, products priced $1 above or below the segment guideline lose about 20% of their sales potential.
Products continue to lose approximately 20% of their potential for each dollar above or below the guideline, on up to $5,
at which point they lose all sales potential.
CUSTOMERS ARE INDIFFERENT TO PRODUCTS WITH MTBFS ABOVE THE GUIDELINE.
Products with an MTBF 1,000 hours below the segment guideline lose about 20% of their sales potential. Products
continue to lose approximately 20% for every 1,000 hours below the guideline, on up to 5,000 hours, at which point they
lose all sales potential.
SELLER’S MARKET
In a seller’s market, products can be priced up to $4.99 above the price range without losing any sales potential. customers
dislike the price, but they must have something. However, at $5 above the range products lose all sales potential;
customers refuse to pay the price.
Products can have MTBFs 4,900 hours below the range without losing sales potential. However, at 5,000 hours below the
range, products lose all sales potential.
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Table 3.1
MARKET SIZES AND GROWTH
Last year’s unit sales percentage
Traditional
Low End
High End
Performance
Size
MARKET SIZE BY UNIT
32.4%
39.3%
11.2%
8.4%
8.7%
The low technology segments (Traditional and Low End)
dominated last year’s sensor market in units sold (Table 3.1).
Table 3.2
However, the Traditional and Low End growth rates trail the
growth rates for High End, Performance and Size (Table 3.2).
Segment growth rates
Traditional
Low End
High End
Performance
Size
9.2%
11.7%
16.2%
19.8%
18.3%
Table 3.3
27.5
Low End
High End
37.3%
12.9%
Performance
11.3%
Size
11.0%
THE LOW END CUSTOMERS ARE MOST CONCERNED ABOUT THE SENSOR’S PRICE, WHILE HIGH END AND SIZE CUSTOMERS ARE LEAST CONCERNED ABOUT PRICE.
Table 3.4
Last year’s dollar percentages
Traditional
32.3%
Table 3.5
High End
31.0%
15.6%
Performance
10.4%
Size
10.7%
5 year dollar forecast (assumes current prices will not change)
Traditional
27.6%
10-
Low End
Low End
High End
28.2%
17.7%
MARKET SIZE BY DOLLAR
The low technology segments (Traditional and Low End)
dominated last year’s sensor market in dollars (Table 3.4).
5 year unit sales percentages
Traditional
Five years from now, High End, Performance and Size will
command a greater percentage of the overall market (Table 3.3).
Performance
13.4%
Size
13.1%
Unlike unit demand, the five-year dollar value of each segment is
impossible to predict.
Aggressive price cutting in the Low End segment could
significantly reduce its dollar value percentage in five years.
Aggressive pricing in the High End and Size segments could
increase their dollar value.
Table 3.5 estimates the dollar percentage for each segment,
assuming there are no aggressive pricing tactics.
4. OPERATIONS
YOUR R&D DECISIONS ARE FUNDAMENTAL TO YOUR MARKETING AND PRODUCTION PLANS. IN MARKETING, R&D ADDRESSES:
• THE POSITIONING OF EACH PRODUCT INSIDE A MARKET SEGMENT ON THE PERCEPTUAL MAP; • THE NUMBER OF PRODUCTS IN EACH SEGMENT; • THE AGE OF YOUR PRODUCTS; • THE RELIABILITY OF EACH PRODUCT (ITS MTBF RATING). IN PRODUCTION, R&D AFFECTS OR IS
AFFECTED BY:
• THE COST OF MATERIAL; • THE PURCHASE OF NEW FACILITIES TO BUILD NEW PRODUCTS; • LEVELS OF AUTOMATION FOR A PRODUCT (AND ITS LABOR COST). Each company starts the simulation with five products. Your company has one product for each segment. You have one
assembly line per product. Products can be terminated or added. Your company must have at least one product and cannot
have more than eight.
You and your fellow managers make business decisions on January 1 of each year. They are then executed by your
employees. Industry results are published in The Capstone Courier, which can be viewed from the website’s Reports link
and from the Last Year’s Reports menu in Capstone.xls.
R&D
The Research & Development Department invents new products and changes specifications for existing products.
Changing size and/or performance repositions a product on the perceptual map (see Figure 1.1 on page 3). Improving
performance and shrinking size moves the product toward the lower-right on the map.
All R&D projects begin on January 1. If a product does not have a project already underway, you can launch a new project
for that product. However, if a project begun in a previous year has not finished on January 1, you will not be able to
launch a new project for that product (the decision entry cells on the R&D spreadsheet in Capstone.xls will be locked).
REPOSITIONING
A repositioning project moves an existing product from one location on the perceptual map to a new location, generally
(but not always) down and to the right.
Repositioning requires a new size attribute and/or a new performance attribute. To keep up with segment drift, products
must be made smaller (that is, decrease its size) and better performing (that is, increase its performance).
IMPROVING POSITIONING AND RELIABILITY WILL MAKE A PRODUCT MORE APPEALING TO CUSTOMERS, BUT DOING SO INCREASES MATERIAL COST.
MTBF ADJUSTMENT
The reliability rating, or MTBF, for existing products can be adjusted up or down. Lowering an MTBF decreases
material cost.
PRODUCT INVENTION
IF YOU DON’T BUY THE PRODUCTION LINE THE YEAR PRIOR TO ITS INTRODUCTION, YOU CANNOT MANUFACTURE YOUR NEW PRODUCT!
WHEN PRODUCTS ARE CREATED OR MOVED CLOSE TO EXISTING PRODUCTS, R&D COMPLETION TIMES DIMINISH. THIS IS BECAUSE YOUR R&D DEPARTMENT CAN TAKE ADVANTAGE OF EXISTING TECHNOLOGY.
New products are assigned a name (the first letter of all new products should match the first letter of the company name),
size, performance and MTBF. Of course, these specifications should conform to the intended market segment.
All new products require a production line. The Production Department must order equipment one year in advance.
Invention projects take 1.3 to 2.3 years to complete.
PROJECT MANAGEMENT
Segment circles on the perceptual map move at speeds ranging from 0.7 to 1.3 units each year. You must plan to move
your products (or retire them) as the simulation progresses.
Generally, the longer the move on the perceptual map, the longer it takes the R&D Department to complete the project.
Project lengths can be as short as three months, or as long as three years. R&D project lengths will increase when
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companies put two or more products into R&D at the same time– when this happens each R&D project takes longer.
It is important to verify completion dates after all decisions have been entered.
IF THE PROJECT LENGTH TAKES MORE THAN A YEAR, THE CHANGES WILL NOT APPEAR IN THE NEXT CAPSTONE COURIER. THIS IS BECAUSE THE PRODUCT IS STILL IN R&D, AND THE OLD PRODUCT ATTRIBUTES WILL BE REPORTED. THESE NUMBERS CHANGE WHEN THE ADVANCED MARKETING MODULE IS ACTIVATED. SEE ADVANCED MARKETING IN THE ONLINE MANAGER GUIDE FOR COMPLETE INFORMATION.
THE SEGMENT ANALYSES REPORT AWARENESS. SEE FIGURE 2.4 ON PAGE 6. Usually you want repositioning projects to finish in less than a year. For example, consider breaking an 18 month
project into two separate projects, with the first stage ending just before the end of the current year, and the second
ending halfway through the following year.
A PRODUCT’S AGE
It is possible for a product to go from an age of 4 years to 2 years. How can this be? When repositioning projects
conclude, customers do not perceive the modified product to be new, but they do not perceive the product to be the
same age as it was prior to modification. As a compromise, customers mentally cut the age in half.
Age criteria vary from segment to segment. For example Traditional customers prefer an age of 2 years. This
accounts for 47% of the Traditional customers’ purchase decision. If a Traditional product’s age approaches 3 years,
customers will begin to turn away (see Figure 3.3 on page 8). Repositioning the product will drop the age from 3 to
1.5 years, and customers become interested again.
MARKETING
Marketing is concerned with the 4 Ps:
• Price
• Promotion
• Place
• Product
PRICE
Price was discussed in “PRICE IN THE ROUGH CUT” on page 7 and “PRICE IN THE FINE CUT” on page 9. To
review, demand falls to zero when prices go $5.00 above or below the expected price range.
Price drives the product’s contribution to profit margin. Dropping the price increases demand but reduces profit per
unit. Segment price ranges fall at a rate of $0.50 per year. For example, last year Traditional customers expected a
price between $20.00 and $30.00. This year, the Traditional price range will be $19.50-$29.50, next year it will be
$19.00-$29.00, etc. This puts pressure on companies to improve their cost structures.
PROMOTION (PROMO BUDGET)
Figure 4.1
12-
Increases in Promotion
Budget have diminishing
returns. The first $1,500,000
buys 36% awareness;
Spending another $1,500,000
(for a total of $3,000,000)
buys approximately 50%. The
second $1,500,000 buys only
14% more awareness.
A percentage of your customers know about your product. This is called awareness. 50% awareness indicates half of
the customers know your product exists. From one year to the next, a third of those who know about your product
forget about it. If a product ended last year with an awareness of 50%, this year it will start with an awareness of
approximately 33%. This year’s promotion budget builds from 33%.
A $1,500,000 promotion budget would add 36% to the starting awareness, for a total awareness of 69%
(33% + 36% = 69%). A $3,000,000 budget would add 50% to the starting awareness, only 14% more than the
$1,500,000 expenditure (33% + 50% = 83%). This is because further expenditures tend to reach customers who
already know about the product (see Figure 4.1).
Once your product achieves 100% awareness, you can scale back the product’s promotion budget to around $1,400,000.
This will maintain 100% awareness year after year.
THE $250,000 FEE AND THE 50% AWARENESS WILL NOT BE REFLECTED IN THE MARKETING SPREADSHEET IN CAPSTONE.XLS. THEY WILL APPEAR IN THE NEXT CAPSTONE COURIER AND ANNUAL REPORT.
When new products are invented, they are considered newsworthy events. Awareness is created quickly with a public
relations campaign. At launch you automatically are charged a $250,000 fee for marketing rollout and public relations.
This fee earns a new product a starting awareness of 50%.
Suppose no team promotes their products and all have 0% awareness. Customers would rely upon their own research.
Sales would be distributed based upon the merits of those products that pass the fine cut.
Suppose all products enjoyed 100% awareness. Again, sales would be distributed based upon the merits of those products
that pass the fine cut. Now suppose your product has not been promoted for many years while competitors have
aggressively promoted their products. Your awareness is 0%, their awareness is 100%. Your product would achieve about
half the demand it would have received if it also had 100% awareness.
YOUR COMPANY ALLOCATES A SALES BUDGET FOR EACH PRODUCT. THE SALES FORCE DRUMS UP DEMAND FOR THE PRODUCT IT REPRESENTS. FOR EXAMPLE, SUPPOSE A CUSTOMER IS CONSIDERING TWO IDENTICAL PRODUCTS. YOUR COMPANY HAS A SALESPERSON PRESENT, YOUR COMPETITOR DOES NOT. YOU WILL MAKE THE SALE TWO OUT OF THREE TIMES. IF YOUR COMPETITOR’S SALESPERSON IS PRESENT AND YOURS IS NOT, YOUR COMPETITOR WILL MAKE THE SALE TWO OUT OF THREE TIMES.
PLACE (SALES BUDGET)
Place operates in a similar fashion to Promotion. The sales budget creates relationships with customers and establishes
distribution channels. In the short term, your sales force promotes your products, which increases demand. In the long
term, your sales budget builds distribution channels. Each market segment has a distinct sales channel (a Traditional
channel, a High End channel, etc.). The strength of your sales channel is measured by accessibility, on a scale of 0 to
100%. If your product exits the segment, it leaves the old segment’s accessibility behind. When it enters the new segment,
it inherits the accessibility present in that segment.
If you drop your sales budget to zero, you lose one third of your accessibility each year. Like awareness, 0% accessibility
does not imply zero sales. Instead, sales potential might be half what it could be because it is more difficult for customers
to find your product or interact with you.
Unlike awareness, accessibility applies to the segment, not the product. This has three important implications:
THE SEGMENT ANALYSES REPORT ACCESSIBILITY. SEE FIGURE 2.3 ON PAGE 6. THESE NUMBERS CHANGE WHEN THE ADVANCED MARKETING MODULE IS ACTIVATED. SEE ADVANCED MARKETING IN THE ONLINE MANAGER GUIDE FOR COMPLETE INFORMATION.
1. Customer access to the product depends on the accessibility strength in the segment.
2. The more products you have in a segment, the stronger your distribution channels, support systems, etc. This is
because each product’s sales budget contributes to the strength of the segment’s accessibility.
3. Achieving 100% accessibility is difficult. Teams must have two products inside the segment. Each product
experiences diminishing returns at a sales budget of $3,000,000. However, the segment’s overall diminishing
return is not reached until the two budgets total $4,500,000 (for example, two products with sales budgets of
$2,250,000 each). Once you reach 100% accessibility, you can scale back the segment’s total sales budget to
around $4,000,000 to maintain 100%.
Think of awareness and accessibility as “before” and “after” the sale. The Promo Budget drives awareness, which
persuades the customer to look at your product. The Sales Budget drives accessibility, which governs everything during
and after the sale. The Promo Budget is spent on advertising and public relations. The Sales Budget is spent on
distribution, order entry, sales budgets, customer service, etc.
PRODUCT
Product is the primary concern of your R&D Department. It controls the three factors that affect design:
• Positioning
• Age
• Reliability (MTBF)
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SALES FORECASTING
Accurate sales forecasting is a key element to team success. Manufacturing too many units results in extra time/
material costs and inventory carrying costs. Manufacturing too few units means stock outs and lost sales, which can
be even more costly. See Sales Forecasting in the Online Manager Guide for complete information.
PRODUCTION
The Production Department schedules manufacturing runs for each sensor product. Your production plant has five
lines with room for three more.
Each assembly line is unique to the product it manufactures. You cannot move a product from one assembly line to
another because automation levels vary and each product requires special tooling.
CAPACITY
First shift capacity is defined as the number of products that can be produced on an assembly line (that is, without a
second shift) in a single year. Assembly lines can produce up to twice their first shift capacity with a second shift. For
example, an assembly line with a capacity of 2,000,000 units per year could produce 4,000,000 units with a second
shift. However, second shift wages are 50% higher than the first shift.
PURCHASING CAPACITY
Each new unit of capacity costs $6 for the floor space plus $4 times the automation rating. The production
spreadsheet in Capstone.xls calculates the exact cost.
SELLING CAPACITY
Capacity can be sold at the beginning of the year for $0.65 on the dollar value of the original investment. You can
replace the capacity in later years, but you have to pay full price.
If you sell capacity for less than its depreciated value, you lose money, which is reflected as a write-off on your
income statement. If you sell capacity for more than its depreciated value, you make a gain on the sale. This will be
reflected as a negative write-off on the income statement (see “INCOME STATEMENT” on page 18).
DISCONTINUING A PRODUCT
If you sell all the capacity on a production line, Capstone interprets this as a liquidation instruction and will sell your
remaining inventory for half the average cost of production. Capstone writes off the loss on your income statement. If
you sell all but one unit of capacity, your inventory will not be liquidated and it can be sold for full price.
LABOR COSTS INCREASE EACH YEAR BECAUSE OF THE ANNUAL RAISE IN LABORʹS CONTRACT. OPTIONAL LABOR NEGOTIATIONS AND THE HUMAN RESOURCE MODULE ALSO AFFECT LABOR COSTS.
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AUTOMATION
Automation levels are given a scale of 1.0 to 10.0. 1.0 is the lowest automation, 10.0 the highest. At the beginning of
the simulation all assembly lines have an automation level between 3.0 and 5.0.
As automation levels increase, the number of labor hours required to produce each unit falls. At an automation rating
of 1.0, labor costs are highest. At a rating of 10.0, labor costs fall about 90%. Each additional point of automation
decreases labor costs approximately 10%.
IF YOU REDUCE AUTOMATION, YOU WILL INCUR A RETOOLING COST. THE NET RESULT IS YOU WILL BE PAYING MONEY TO MAKE YOUR PLANT LESS EFFICIENT. WHILE REDUCED AUTOMATION WILL SPEED R&D REDESIGNS, BY AND LARGE IT IS NOT WISE TO REDUCE AN AUTOMATION LEVEL.
Despite its attractiveness, two factors should be considered before raising automation:
• Automation is expensive: At $4 per point of automation, raising automation from 1.0 to 10.0 costs $40 per unit
of capacity;
• As you raise automation, it becomes increasingly difficult for R&D to reposition products short distances. At an
automation level of 1.0 it is possible to move a product 1.7 units on the perceptual map in a single year. At 10.0 it
takes 1.1 years to move a product 0.1 units. This relationship does not apply to long moves on the map. You can
move a product a long distance at any automation level, but the project will take between 2.5 and 3.0 years.
CHANGING AUTOMATION
For each point of change, up or down, the company is charged $4 per unit of capacity. For example, if a line has a capacity
of 1,000,000 units, the cost of changing the automation level from 5.0 to 6.0 would be $4,000,000 Reducing automation
does not have the same effect as selling capacity. You will not receive cash for lowering your automation, but will be
billed instead.
FINANCE
Your Finance Department is primarily concerned with five issues:
1. Acquiring the capital needed for company activities. Capital can be acquired through:
• Current Debt
• Stock Issues
• Bond Issues (Long Term Debt)
• Profits
2. Establishing a stock dividend policy that maximizes the return to shareholders.
3. Setting credit policies for customers and suppliers (which are set on the marketing spreadsheet).
4. Driving the financial structure of the firm, its relationship between debt and equity.
5. Selecting and monitoring performance measures that support your strategy.
CURRENT DEBT
AS A GENERAL RULE COMPANIES FUND SHORT TERM OBLIGATIONS LIKE ACCOUNTS PAYABLE, INVENTORY EXPANSIONS OR INCREASES IN ACCOUNTS RECEIVABLE POLICY WITH CURRENT DEBT. Your bank issues current debt in one year notes. The finance spreadsheet in Capstone.xls displays the amount of current
debt due from the previous year. The company can “roll” that debt by simply borrowing the same amount again. There are
no brokerage fees for current debt.
Interest rates are a function of your debt level. The more debt you have relative to your assets, the more risk you present to
debt holders and the higher the current debt rates.
Current debt amounts are limited to 75% of the value of Accounts Receivables (A/R) plus 50% of the value of your
inventory. Banks will look at the combined value from your proforma balance sheet, which is the forecast for the current
year, and the annual report balance sheet from last year. Banks will allow the larger of the two amounts when calculating
the limit (see “PROFORMAS & ANNUAL REPORTS” on page 18).
-15
AS A GENERAL RULE, BOND ISSUES ARE USED TO FUND LONG TERM INVESTMENTS IN CAPACITY AND AUTOMATION. A BOND WITH A FACE AMOUNT $10,000,000 COULD COST $11,000,000 TO REPURCHASE EARLY BECAUSE OF FLUCTUATIONS IN INTEREST RATES AND YOUR CREDIT WORTHINESS. IF THE FACE AMOUNT OF BOND 12.6S2009 WERE $1,000,000, THE $1,000,000 REPAYMENT IS ACKNOWLEDGED IN YOUR REPORTS AND SPREADSHEETS IN THE FOLLOWING MANNER: YOUR ANNUAL REPORTS FROM DECEMBER 31, 2009 WOULD REFLECT AN INCREASE IN CURRENT DEBT OF $1,000,000 OFFSET BY A DECREASE IN LONG TERM DEBT OF $1,000,000. THE 2009 SPREADSHEET WILL LIST THE BOND BECAUSE YOU ARE MAKING DECISIONS ON JANUARY 1, 2009, WHEN THE BOND STILL EXISTS. YOUR 2010 SPREADSHEET WOULD SHOW A $1,000,000 INCREASE IN CURRENT DEBT AND THE BOND NO LONGER APPEARS. BONDS
All bonds are ten year notes. Your company pays a 5% brokerage fee for issuing bonds. The first three digits of the
bond, the series number, reflect the interest rate. The last four digits indicate the year in which the bond is due. The
numbers are separated by the letter S which stands for “series.” For example, a bond with the number 12.6S2009 has
an interest rate of 12.6% and is due December 31, 2009.
Bondholders will lend total amounts up to 80% of the value of your plant and equipment (the Production
Department’s capacity and automation). Each bond issue pays a coupon, the annual interest payment, to investors.
If the face amount or principal of bond 12.6S2009 were $1,000,000, then the holder of the bond would receive a
payment of $126,000 every year for ten years. The holder would also receive the $1,000,000 principal at the end of
the tenth year. Each year your company is given a credit rating that ranges from AAA (best) to D (worst). In
Capstone, ratings are evaluated by comparing your short term interest rates with the prime rate.
If your company has no debt at all, your company is awarded a AAA bond rating. As your debt-to-assets ratio
increases, your short term interest rates increase. Your bond rating slips one category for each additional 0.5% in
interest. For example, if the prime rate is 10%, and your short term interest rate is 10.5%, then you would be given a
AA bond rating instead of a AAA. When issuing new bonds, the interest rate will be 1.4% over the current debt
interest rates. If your current debt interest rate is 12.1% then the bond rate will be 13.5%.
You can buy back outstanding bonds before their due date. A 1.5% brokerage applies. Buying back bonds reduces
interest payments. These bonds are repurchased at their market value or street price on January 1 of the current year.
The street price is determined by the amount of interest the bond pays and your credit worthiness. It is therefore
different from the face amount of the bond.
Bonds are retired in the order they were issued: The oldest bonds retire first. There are no brokerage fees for bonds
that are allowed to mature to their due date.
If a bond remains on December 31 of the year it becomes due, your banker borrows current debt to pay off the
principal. This, in effect, converts the bond to current debt. This amount is combined with any other current debt due
at the beginning of the next year.
STOCK
Stock issue transactions take place at the current market price. Your company pays a 5% brokerage fee for
issuing stock.
AS A GENERAL RULE, STOCK ISSUES ARE USED TO FUND LONG TERM INVESTMENTS IN CAPACITY AND AUTOMATION. DIVIDENDS ARE PAID TO STOCKHOLDERS IN QUARTERLY INSTALLMENTS AT A RATE PER SHARE THAT YOU ESTABLISH AT THE BEGINNING OF THE YEAR. FOR EXAMPLE, IF YOU SET A DIVIDEND POLICY OF $2.00 PER SHARE, THE DIVIDEND WOULD BE PAID DURING THE YEAR IN FOUR $0.50 INSTALLMENTS.
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Stock price is a function of:
• Book Value
• Earnings Per Share (EPS)
• Dividend Policy
Book value is equity divided by shares outstanding. Equity is common stock plus retained earnings. Shares
outstanding is the number of shares that have been issued. For example, if equity is $50,000,000 and there are
2,000,000 shares outstanding, book value is $25 per share.
EPS is calculated by dividing net profit by shares outstanding.
Dividend is the amount of money paid per share to stockholders. Stockholders do not respond to dividends beyond
the EPS. They consider them unsustainable. For example, if your EPS is $1.50 per share, and your dividend $2.00 per
share, stockholder’s would ignore anything above $1.50 per share as a driver of stock price.
All of these factors are profit dependent. You need to make sufficient profit to increase the book value of your
company and pay a dividend. Improving profit also improves EPS.
You are charged a 1.5% brokerage fee to retire stock.
EMERGENCY LOANS CAUSE STOCK PRICE TO FALL, EVEN WHEN YOU ARE PROFITABLE. STOCKHOLDERS TAKE A DIM VIEW OF YOUR PERFORMANCE WHEN THEY WITNESS A LIQUIDITY CRISIS.
THE TOTAL AMOUNT APPEARS IN THE DUE THIS YEAR CELL ON THE FINANCE SPREADSHEET IN CAPSTONE.XLS. EMERGENCY LOANS
Financial transactions are carried on throughout the year directly from your cash account. If you manage your cash
position poorly, Capstone will give you an Emergency Loan to cover the shortfall.
The loan comes from a gentleman named Big Al, who arrives at your door with a checkbook and a smile. Big Al gives
you a loan exactly equal to the shortfall. You pay one year’s worth of current debt interest on the loan, and Big Al adds a
7.5% penalty fee on top to make it worth his while. For example, suppose the current debt interest rate is 10%, and you are
short $10,000,000 on December 31. You pay one year’s worth of interest on the $10,000,000 ($1,000,000) plus an
additional 7.5% or $750,000 penalty.
The emergency loan is combined with any other current debt due at the beginning of the next year. You do not need to do
anything special to repay it. However, you need to decide what to do with the current debt (pay it off, re-borrow it, etc.).
The interest penalty only applies to the year in which the emergency loan is taken, not to future years.
CREDIT POLICY
Your company determines the number of days between transactions and payments. For example, your company could
give customers 30 days to pay their bills (accounts receivable) while holding up payment to suppliers for 60 days
(accounts payable).
Shortening the A/R (accounts receivable) lag from 30 to 15 days in effect extracts a loan from customers. Similarly,
extending the A/P (accounts payable) lag from 30 to 45 days extracts a loan from your suppliers.
The accounts receivable lag impacts sales. If your company offers no credit terms, sales potential falls to about 65% of
maximum. At 30 days, sales potential is 92%. At 60 days, sales potential is 98.5%. At 120 days there is no reduction. The
longer the lag, the more cash is tied up in receivables.
CUSTOMER AND SUPPLIER CREDIT POLICIES ARE SET ON THE MARKETING SPREADSHEET IN CAPSTONE.XLS.
The accounts payable lag has implications for production. Suppliers become concerned as the lag grows and they start to
withhold material for production. At 30 days, they withhold 1%. At 60 days, they withhold 8%. At 90 days, they withhold
26%. At 120 days, they withhold 63%. At 150 days, they withhold all material. Withholding material creates shortages on
the production line, workers stand idle and per-unit labor costs rise.
5. ADVANCED MODULES
Instructors can activate four advanced modules:
• Advanced Marketing
• Human Resources
• Labor Negotiations
• Total Quality Management
The website will notify you if the modules are active. If they are, you will find complete documentation in the Advanced
Module section of the Online Manager Guide.
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6. PROFORMAS & ANNUAL REPORTS
TO ACCESS PROFORMAS, CLICK THE PROFORMAS MENU ITEM IN CAPSTONE.XLS; TO ACCESS THE ANNUAL REPORTS, CLICK THE LAST YEAR’S REPORTS MENU ITEM IN CAPSTONE.XLS OR THE WEBSITE’S REPORTS LINK.
Proformas and Annual Reports include:
• Balance Sheet
• Cash Flow Statement
• Income Statement
What’s the difference between proformas and annual reports? Proformas are projections of results for the upcoming
year, Annual Reports are the results from the previous year. The Proformas allow you to assess the projected
financial outcomes of the company decisions entered in Capstone.xls.
BALANCE SHEET
The balance sheet identifies what is owned by the company, and by whom. Assets always equal liabilities & owners
equity. Liabilities & owner’s equity represent who owns those assets. Creditors have claim to the accounts payable
(suppliers), current debt (bankers), and long term debt (bondholders). Stockholders have claim to the common stock.
Management controls retained earnings, the portion of profits that is not returned to shareholders as dividends.
CASH FLOW STATEMENT
The cash flow statement indicates the movement of cash through the organization, including operating, investing and
financing activities. The annual report cash flow statement shows how much cash was on hand at the end of last year.
The proforma cash flow statement indicates how much cash is expected at the end of this year.
Figure 6.1
Proforma Balance
Sheet. This is a
projection of the results
of the upcoming round
based upon the
company’s decisions.
REMEMBER, THE PROFORMA REPORTS ARE ONLY AS ACCURATE AS THE MARKETING SALES FORECASTS.
YOU MIGHT WANT TO PRINT YOUR PROFORMA INCOME STATEMENT AFTER FINALIZING YOUR DECISIONS, THEN COMPARE IT TO THE ACTUAL RESULTS IN THE ANNUAL REPORTS.
SG&A, OR SALES & GENERAL ADMINISTRATION COSTS INCLUDES R&D, PROMOTION, SALES AND ADMIN COSTS.
18-
INCOME STATEMENT
The income statement is an indispensable tool. Your company can quickly diagnose problems with excess inventory,
insufficient profits or excess interest payments. The income statement provides a record
of profits and losses by comparing revenues and expenses on a product by product basis.
Sales are reported in dollars (not the number of products). Subtracting variable
costs from sales determines the contribution margin, which generally should be 30%
or more. Inventory carry costs are driven by the number of products in the warehouse.
If your company has $0 inventory carry costs, you stocked out of the product and most
likely missed sales opportunities. If your company has excessive inventory, your carry
costs will be high. Sound sales forecasts matched to reasonable production schedules
will result in a modest inventory carry costs.
Period costs are the sum of deprecation and SG&A costs. Period costs are subtracted
from the contribution margin to determine the net margin.
Depreciation is an accounting principle that allows companies to reduce the value of
their capacity and automation. Each year, some of the value is “used up.” It decreases
the firm’s tax liability by reducing net profits, and provides a more accurate picture of
a company’s value. Depreciation is reflected as a gain on the cash flow statement,
but is expensed on the income statement. Net Profit impacts many of the financial
measures associated with business success, including earnings per share, which
drives stock price and market capitalization.
Figure 6.2
Annual Report
Income Statement. This
shows the results from
the previous year.
7. EXECUTIVE SUMMARY
Your company manufactures electronic sensors. Activities are divided into four primary functional areas:
• Research and Development or R&D
• Marketing
• Production
• Finance
R&D
The Research & Development Department controls the company’s product line. The line currently has five sensor models,
and can grow to as many as eight.
Figure 7.1
R&D spreadsheet
Your customers are concerned with four product characteristics:
• Size: The weight and girth;
• Performance: The sensor’s speed in measuring and reporting conditions;
• Reliability: How long the sensor lasts before it fails;
• Age: The amount of time since the product was invented or revised.
As time goes by, customers want smaller, more powerful sensors. Keeping customer requirements in mind, the
department updates existing sensor designs. R&D also invents new products by assigning a name (the first letter must be
the same as the first letter in the company, name), performance, size and MTBF (the Production Department must
purchase capacity and automation for all new products one year prior to release). The length of time required to revise or
invent a sensor varies. Slight revisions can complete in three or four months; more comprehensive projects, the better part
of a year. Inventing a sensor always takes more than a year. The longer the project, the greater the cost: a six month
project costs $500,000; a 12 month project costs $1,000,000.
MARKETING
Figure 7.2
Marketing
spreadsheet
The Marketing Department controls each sensor’s:
• Price: customers want sensors priced within expected price ranges;
• Promotion Budget: The department sets a promotion budget for each sensor. Promo budgets create awareness by
letting customers know your sensors are available. 100% awareness means every customer knows about the sensor;
• Sales Budget: The department sets a sales budget for each sensor. Sales budgets build accessibility via salespeople
and distribution systems. 100% accessibility means every customer can locate your product.
Promotion and sales budgets for each sensor affect sales. In general, higher budgets, which “differentiate” the product,
increase demand. However, the department can choose to hold the line on these budgets, and increase demand with lower
prices. The Marketing Department also develops sales forecasts.
PRODUCTION
Figure 7.3
Production
spreadsheet
The Production Department schedules manufacturing runs for each sensor. The department is also responsible for
purchasing or selling production capacity, and for determining automation levels.
The Production Department has five assembly lines with room for three more– each sensor requires its own assembly line.
The department determines production schedules based on sales forecasts from the Marketing Department.
-19
Each assembly line has a first shift capacity. The capacity reflects the number of sensors that can be produced each
year with an eight hour shift. The company can schedule a second eight hour shift, which allows the company to
manufacture up to twice capacity, however second shift labor costs are 50% higher than first shift.
The department also buys and sells production capacity for each assembly line. Higher capacities increase the number
of sensors that can be manufactured each year. In addition to capacity, assembly lines have automation ratings.
Higher automation decreases labor costs because machines replace workers.
The cost to purchase more assembly line capacity varies depending on the automation rating. For example,
purchasing an additional 100,000 units of capacity for a line with an automation rating of 3.0 costs $1,800,000;
100,000 units of capacity with an automation of 5.0 costs $2,600,000– the line with the automation of 5.0 is more
expensive because it requires more machines. The production spreadsheet in Capstone.xls calculates the exact cost.
Your company can sell underutilized capacity for 65 percent of the purchase price.
Selling all of an assembly line’s capacity discontinues the associated sensor– it is no longer available for sale.
FINANCE
R&D, marketing and production decisions require money. The Finance Department must ensure all company
activities are funded. While it is possible to fund activities entirely from cash flow, it is unlikely to happen in the early
years. The company will need to turn to the capital markets.
Figure 7.4
Finance spreadsheet
The company has three sources of money:
• Stock: New stock issues are limited to 20% of the company’s outstanding shares. For example, if the company
has 2,000,000 shares outstanding, it can issue an additional 400,000. The share price is based on the closing
value as of December 31 of the previous year. If the price per share were $30, the company could raise up to
$12,000,000.
• Current Debt: These are one year bank notes. The company can borrow year after year, but interest rates
fluctuate. Banks are willing to lend amounts up to 75 percent of the company’s account receivable, plus 50
percent of its inventory. If the company has accounts receivable valued at $10,000,000, and inventory valued at
$5,000,000, it could borrow up to $10,000,000.
• Bonds (Long Term Debt): These are 10 year notes. While bonds carry an interest rate 1.4 percent higher than
the current debt rate in the year they were issued, the rate is locked in– it will not fluctuate. Bondholders are
willing to lend amounts up to 80 percent of the value of the company’s plant and equipment, that is, the
assembly lines. If the company has no bonds, and assembly lines valued at $100,000,000, the company could
issue up to $80,000,000 in bonds.
Other Finance Department activities include:
• Stock Dividend: The company can choose to issue dividends. Paid quarterly, dividends tend to (but do not
always) increase the price per share.
• Retire Stock: The company can buy back stock to reduce shares outstanding, which can increase share price.
• Retire Bonds: The company can choose to retire bonds early, which saves interest expense.
If the company runs out of money any time during the year, emergency loans are issued by a lender of last resort,
affectionately known as Big Al. Big Al will automatically keep the company afloat with a loan for whatever amount
needed. Big Al charges a 7.5% penalty in addition to the company’s current debt rate. Emergency loans convert to
current debt at the beginning of the following year. Emergency loans have an adverse effect on stock price.
Accounts receivable and accounts payable finance decisions are made via the Marketing Department.
20-
8. GETTING STARTED
DOWNLOAD CAPSTONE.XLS
Capstone.xls is a Microsoft Excel spreadsheet. You will use Capstone.xls to enter simulation decisions and send them to
the website. To download Capstone.xls, login at www.capsim.com and click the Making Decisions link.
REHEARSAL SIMULATION
Typically, Capstone simulations begin with participants reviewing the simulation environment via an individual
Rehearsal Simulation. The Rehearsal Simulation teaches the basics; it quickly gets participants up the decision entry
learning curve.
• Open Capstone.xls with Microsoft Excel. If asked, be sure to enable macros. If the Enable Macros button is grayed
out, click the Always Trust checkbox. This will activate the Enable Macros button (Figure 8.1);
• A dialogue box will appear. Select The Rehearsal Simulation;
• Enter your User ID and password. The spreadsheet will download your information.
Figure 8.1
If the Enable Macros button is gray,
click the Always Trust checkbox,
then click Enable Macros.
The spreadsheet will coach you through four rehearsal rounds, which you can play on your own prior to joining a
company. As you complete each rehearsal round, be sure to click File|Save Decisions. At that time, the spreadsheet will
ask if you wish to advance to the next round.
PRACTICE ROUNDS
THE WEBSITE WILL NOT RECORD
YOUR REHEARSAL SIMULATION
RESULTS BEFORE YOU ADVANCE TO
REHEARSAL ROUND 2.
Practice rounds are different from the rehearsal simulation. Working as a group, you and your fellow managers will
implement practice strategies and tactics.
• To begin Practice rounds, open Capstone.xls and select Work On My Company’s
Official Decisions.
The spreadsheet will ask for your User ID and password, then download the latest company information, including any
decisions made by other members of the company. Use the practice rounds to organize work procedures and assignments
(see Role Assignment in the Online Manager Guide for further information).
COMPETITION ROUNDS
At the conclusion of the practice rounds, the simulation is reset and the real competition (and learning) begins. You take
the reigns of a $100 million company and become the driving force behind its strategy and tactics. In a matter of weeks,
you will go through up to eight years in the life of the company. You make decisions January 1 of each simulated year,
and live with those decisions until January 1 of the following year.
• To begin Competition rounds, open Capstone.xls and select Work On My Company’s
Official Decisions.
The spreadsheet will ask for your User ID and password, then download the latest company information.
Best of luck with the simulation!
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INDEX
A
A/P 17
A/R 15, 17
Accessibility 5, 6, 13, 19
Accounts Payable 15, 17, 18, 20
Accounts Receivable 15, 17, 20
Actual Sales 6
Age 4, 5, 6, 8, 11, 12
Annual Reports 18
Automation 11, 14, 15, 19, 20
Awareness 6, 12, 13, 19
F
Finance 15, 20
Fine Cut 7, 8, 9, 13
B
Balance Sheet 5, 15, 18
Bonds 15, 16, 18, 20
Book Value 16
Buyer’s Market 9
Buying Criteria 2, 4, 5, 6, 7, 8
L
Labor 11, 14, 17, 20
Long Term Debt 15, 16, 18, 20
Low End 3, 4, 10
C
Capacity 14, 20
Capstone Courier 5, 7, 11, 12, 13
Capstone.xls 2, 21
Cash Flow Statement 18
Competition Rounds 21
Create a Product 11, 13, 19
Current Debt 15, 16, 17, 18, 20
Customers 2, 3, 4, 6, 7
D
Discontinue a Product 14, 20
Dividend 15, 16, 18, 20
Drift 3
E
Earnings Per Share (EPS) 16, 18
Emergency Loan 17, 20
22-
H
High End 3, 4, 10
I
Ideal Spot 5, 8
Income Statement 5, 14, 18
Invent a Product 11, 13, 19
M
Market Segment Analyses 5
Market Segments 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12
Market Share 6, 10
Marketing 12, 19
Material 11, 17
Mean Time Between Failure (MTBF) 4, 5, 6, 7,
8, 9, 11
P
Perceptual Map 3, 5, 6, 7, 11, 15
Performance, product attribute 2, 3, 4, 5, 7, 8
Performance, segment 4, 10
Positioning 2, 3, 4, 5, 7, 8
Potential Sales 6
Practice Rounds 21
Price 2, 4, 5, 7, 9, 10, 12, 19
Production 5, 14, 19
Proformas 18
Promotion Budget 6, 12, 13, 19
R
Rehearsal Simulation 2, 21
Reliability 4, 5, 6, 7, 8, 9, 11
Research & Development (R&D) 2, 11, 13, 15,
19
Revisions, R&D 6, 15, 19
Rough Cut 7
S
Sales Budget 6
Segment Analyses 5
Segment Drift 3
Segments 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12
Seller’s Market 9
Size, product attribute 2, 3, 4, 5, 7, 8
Size, segment 4, 10
Stock 15, 16, 20
T
Terminate a Product 14, 20
Traditional 3, 4, 10

Capstone Business Simulation Student Guide

Transcription

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