Capsim Business Strategy Capsim Business Strategy SIMULATIONSIMULATION

The MarketplaceThe Marketplace

The MarketplaceThe Marketplace

Sensor Market (simple products with 2 Sensor Market (simple products with 2 dimensions—Size and Performance)dimensions—Size and Performance)

5 competitors per simulation (3A, 3B, 4A, 4B)5 competitors per simulation (3A, 3B, 4A, 4B) All start off equal, all products per segment All start off equal, all products per segment

are same, one factory with 5 assembly linesare same, one factory with 5 assembly lines $100 million sales company$100 million sales company No outside competitors or product substitutesNo outside competitors or product substitutes

The MarketplaceThe Marketplace

Simple Marketplace Simple Marketplace – modest growth, low inflation, reasonable modest growth, low inflation, reasonable

interest rates, no external surprisesinterest rates, no external surprises

Develop a strategy to maneuver around Develop a strategy to maneuver around competitorscompetitors– Create wealthCreate wealth– Satisfy constituents (shareholders and Satisfy constituents (shareholders and

customers)customers)

Market SegmentsMarket Segments

Low End (31.1%)Low End (31.1%) Traditional (32.4%)Traditional (32.4%) High End (15.3%)High End (15.3%) Performance (10.4%)Performance (10.4%) Size (10.8%)Size (10.8%)

But segments grow at different rates and But segments grow at different rates and customer expectations shift at different ratescustomer expectations shift at different rates

Customer ExpectationsCustomer Expectations

Customers go through a 2-stage buying Customers go through a 2-stage buying process:process:

(1) ROUGH CUT—Buyers focus on:(1) ROUGH CUT—Buyers focus on:– Performance of ProductPerformance of Product– Size of ProductSize of Product– Reliability Rating of ProductReliability Rating of Product– Price of ProductPrice of Product

Customer ExpectationsCustomer Expectations

(2) FINE CUT (if product passes rough cut)(2) FINE CUT (if product passes rough cut)– PositioningPositioning– AgeAge– ReliabilityReliability– PricePrice

Customer chooses products near “sweet Customer chooses products near “sweet spot”spot”

Product ManagementProduct Management How should we place our product (size and How should we place our product (size and

performance placement)?performance placement)? What is our perceived quality (MTBF)?What is our perceived quality (MTBF)? What is our price?What is our price? What is the promotion budget (awareness)?What is the promotion budget (awareness)? What is the sales budget (accessibility)?What is the sales budget (accessibility)? What is the production schedule (units)?What is the production schedule (units)? What is the capacity (including overtime)?What is the capacity (including overtime)? What is our automation level (labor content & What is our automation level (labor content &

flexibility)?flexibility)?

Your JobYour Job

Make functional decisions following a Make functional decisions following a cohesive strategy:cohesive strategy:– MarketingMarketing– Research and Development (R&D)Research and Development (R&D)– ProductionProduction– FinanceFinance– Total Quality Management (TQM)Total Quality Management (TQM)– Human Resources (Labor) Human Resources (Labor)

Common ProblemsCommon Problems

New products, but no capacity.New products, but no capacity.– Breakdown between R&D and Production.Breakdown between R&D and Production.

Emergency loans due to excess inventory.Emergency loans due to excess inventory.– Breakdown between Marketing, Production, and Breakdown between Marketing, Production, and

Finance.Finance.

Not reading your manual.Not reading your manual.– You can mess up pricingYou can mess up pricing– You can mess up product launchesYou can mess up product launches– It’s a computer program, know how to manipulate it! It’s a computer program, know how to manipulate it!

Common ProblemsCommon Problems

Performance measures inconsistent with Performance measures inconsistent with strategy. Niche strategy vs Market share. Profits strategy. Niche strategy vs Market share. Profits vs target market. vs target market. – Breakdown between Marketing and Finance. Breakdown between Marketing and Finance.

Product repositioning (change segments) without Product repositioning (change segments) without reducing material costs. reducing material costs. – Breakdown between Marketing, R&D, and Production.Breakdown between Marketing, R&D, and Production.

Organizing Your TeamOrganizing Your Team

Key RolesKey Roles

Competitor Intelligence OfficerCompetitor Intelligence OfficerSegment ManagersSegment ManagersFunctional Managers—Functional Managers—

– Marketing, Finance, Operations, HR, R&DMarketing, Finance, Operations, HR, R&D

These role assignments are valuable for These role assignments are valuable for enhancing the critical thinking skills, but are enhancing the critical thinking skills, but are not required to play the simulationnot required to play the simulation

– You decide how you want to organize!!You decide how you want to organize!!

Competitor IntelligenceCompetitor Intelligence

How do the competitors measure success?How do the competitors measure success? What segments are they targeting?What segments are they targeting? What is their competitive advantage?What is their competitive advantage? What will their future products be like?What will their future products be like? Do they threaten your company?Do they threaten your company? How can they hurt you?How can they hurt you? How can you influence their decisions?How can you influence their decisions? How can they influence your decisions? How can they influence your decisions?

Segment ManagementSegment Management

What products are entering or leaving your What products are entering or leaving your segments?segments?

What is each segment’s production What is each segment’s production capacity?capacity?– Excess leads to price competition.Excess leads to price competition.– Shortages lead to margin opportunities.Shortages lead to margin opportunities.

Do you have segment accessibility?Do you have segment accessibility? What is each segment’s margin potential?What is each segment’s margin potential? What will competitors do in each segment?What will competitors do in each segment?

Functional ManagersFunctional Managers R&D managers monitor repositioning R&D managers monitor repositioning

dates (keep projects within one year).dates (keep projects within one year). Marketing managers monitor promotion Marketing managers monitor promotion

and sales budgets. Keep product within and sales budgets. Keep product within segments.segments.

Production managers monitor inventory Production managers monitor inventory levels, plant utilization and overtime. levels, plant utilization and overtime. Automation affects costs and flexibility.Automation affects costs and flexibility.

Finance managers monitor cash position Finance managers monitor cash position and capital structure.and capital structure.

R&D ManagerR&D Manager

Understand relationships between Understand relationships between – age and position changes, age and position changes, – positioning and material cost requirements, positioning and material cost requirements, – MTBF and material costs, MTBF and material costs, – automation and product implementation time, automation and product implementation time, – number of R&D project and completion times, number of R&D project and completion times, – project length and proximity to other products.project length and proximity to other products.

Impacts Marketing, Production and Finance.Impacts Marketing, Production and Finance.

Marketing ManagersMarketing Managers

Understand relationships betweenUnderstand relationships between– Price and contribution margins,Price and contribution margins,– Price and demand,Price and demand,– Promotion budget and awareness,Promotion budget and awareness,– Sales budget and accessibility, andSales budget and accessibility, and– A/R policy and demand.A/R policy and demand.

Affected by R&D launches and Production Affected by R&D launches and Production capacity and costs. Impacts Finances. capacity and costs. Impacts Finances.

Production ManagerProduction ManagerUnderstand relationships betweenUnderstand relationships between

– Inventory levels and carrying costs (interest), Inventory levels and carrying costs (interest), – Carrying costs and lost sales (market share),Carrying costs and lost sales (market share),– Capacity and overtime, Capacity and overtime, – Automation and labor costs, Automation and labor costs, – Overtime and labor costs, and Overtime and labor costs, and – Consequences of buying/selling capacity and Consequences of buying/selling capacity and

automation.automation.Impacted by R&D’s new products and material Impacted by R&D’s new products and material

costs. Impacts marketing demand, scheduling, costs. Impacts marketing demand, scheduling, and inventory. Finance affected by plant and and inventory. Finance affected by plant and equipment, inventory, and margins. equipment, inventory, and margins.

Finance ManagerFinance ManagerUnderstand relationships between Understand relationships between

– Stock issue or retirement and capital structure,Stock issue or retirement and capital structure,– Working capital and inventory,Working capital and inventory,– Emergency loans and cash,Emergency loans and cash,– Current debt and short term interest rates,Current debt and short term interest rates,– Dividend policy and stock price,Dividend policy and stock price,– Bond issue and prepayment, and Bond issue and prepayment, and – Financial performance measures.Financial performance measures.

Affected by R&D introductions, Marketing forecasts, Affected by R&D introductions, Marketing forecasts, margins, and budgets, and Production budgets, margins, and budgets, and Production budgets, margins, and inventories.margins, and inventories.

Creating a MissionCreating a Mission

What are your goals?What are your goals? What market segments will you address?What market segments will you address? What product values will you deliver?What product values will you deliver? How will you treat employees? How will you treat employees? What EPS will you deliver to stockholders?What EPS will you deliver to stockholders?

Strategy AlternativesStrategy Alternatives

Creating a StrategyCreating a Strategy

How will you achieve your goals?How will you achieve your goals? What product-market segments will you What product-market segments will you

target? How many segments and how target? How many segments and how many products?many products?

What functional capabilities are needed for What functional capabilities are needed for each? R&D, Production, and Marketing?each? R&D, Production, and Marketing?

What techniques and assets are needed? What techniques and assets are needed? What will be your competitive advantages?What will be your competitive advantages? Financial structure and market performanceFinancial structure and market performance

Capstone StrategiesCapstone Strategies

Your Your Strategic AnalysisStrategic Analysis provides an provides an understanding of the forces at work within understanding of the forces at work within each Capstone market segment. each Capstone market segment.

Decide how to use that information to gain a Decide how to use that information to gain a competitive advantage. There are many competitive advantage. There are many alternative goals & strategies - any of which alternative goals & strategies - any of which can be successful depending on how well they can be successful depending on how well they are implemented.are implemented.

CAPSTONE STRATEGIESCAPSTONE STRATEGIES Strategic alternatives Strategic alternatives

include:include:– Cost LeaderCost Leader– Cost Leader with Cost Leader with

Focus (Low Tech or Focus (Low Tech or Product Life-Cycle)Product Life-Cycle)

– DifferentiatorDifferentiator– Differentiator with Differentiator with

Focus (High-Tech or Focus (High-Tech or Product Life-Cycle)Product Life-Cycle)

STRATEGYSTRATEGYMission StatementMission Statement

Strategic IntentStrategic Intent

PERFORMANCEPERFORMANCEASSESSMENTASSESSMENT

Success MeasurementsSuccess MeasurementsRatiosRatios

StatisticsStatistics

STRATEGIC BUSINESSSTRATEGIC BUSINESSANALYSISANALYSIS

Product-Market AnalysisProduct-Market AnalysisCustomer AnalysisCustomer Analysis

Competitive Analysis Competitive Analysis S.W.O.T AnalysisS.W.O.T Analysis

FUNCTIONAL PLANNINGFUNCTIONAL PLANNINGR&DR&D

ProductionProductionMarketing Marketing

FinanceFinanceHRHR

Overall Cost LeaderOverall Cost Leader An overall cost leader will become the low-cost producer An overall cost leader will become the low-cost producer

in every segment of the market. Improve good profit in every segment of the market. Improve good profit margins on margins on allall sales while keeping prices low for price- sales while keeping prices low for price-sensitive customers. sensitive customers. – Re-position products rather than introducing new onesRe-position products rather than introducing new ones– Capacity improvements are unlikely to be undertaken Capacity improvements are unlikely to be undertaken

(maximize overtime instead)(maximize overtime instead)– Automation to cut costs and increase margins.Automation to cut costs and increase margins.– Financed with debt and/or stock issues.Financed with debt and/or stock issues.– Spend less on promotion and salesSpend less on promotion and sales– Goals may be Market Share, Profits, and Stock PriceGoals may be Market Share, Profits, and Stock Price

Cost Leader (Low-Tech Focus)Cost Leader (Low-Tech Focus) A low-tech focused cost leader dominates the price A low-tech focused cost leader dominates the price

sensitive market segments. Set prices below all sensitive market segments. Set prices below all competitors - and still be profitable. competitors - and still be profitable. – Broad product lines in the low-tech segments (Low Broad product lines in the low-tech segments (Low

& Traditional).& Traditional).– Heavy automation.Heavy automation.– Spend heavily on advertising to cost sensitive Spend heavily on advertising to cost sensitive

customers (sales people have more than one customers (sales people have more than one product to pitch to prospects).product to pitch to prospects).

– Finance with debt and/or stock issues.Finance with debt and/or stock issues.– Goals may be ROS, ROE, and Profits.Goals may be ROS, ROE, and Profits.

Cost Leader with Product Cost Leader with Product Life Cycle FocusLife Cycle Focus

A product life-cycle focused cost leader will minimize A product life-cycle focused cost leader will minimize costs. Products will be allowed to age and change from costs. Products will be allowed to age and change from high-tech, to traditional, and eventually low end high-tech, to traditional, and eventually low end segments.segments.– Minimize presence in “specialty” segments (Size & Minimize presence in “specialty” segments (Size &

Performance).Performance).– Limited R&D spending (some re-positioning & new Limited R&D spending (some re-positioning & new

product every 2-3 years).product every 2-3 years).

– Automate Automate earlyearly in the product’s life-cycle. in the product’s life-cycle.

– High spending on promotion and sales.High spending on promotion and sales.

– Goals may be ROE, ROS, and Profits.Goals may be ROE, ROS, and Profits.

DifferentiatorDifferentiator A Differentiator will maximum awareness and A Differentiator will maximum awareness and

brand equity. Focus on high quality/highly brand equity. Focus on high quality/highly desirable products. desirable products. – High R&D spending to keep products fresh.High R&D spending to keep products fresh.– Maintain a presence in all market segments.Maintain a presence in all market segments.– Spend heavily on advertising and sales to Spend heavily on advertising and sales to

create maximum awareness and accessibility.create maximum awareness and accessibility.– Prices tend to be higher.Prices tend to be higher.– Goals may be Market Share, Profits, and Stock Goals may be Market Share, Profits, and Stock

PricePrice

Differentiator with Differentiator with High Tech FocusHigh Tech Focus

A high-tech differentiator seeks to be known as the A high-tech differentiator seeks to be known as the top producer of the best performing state-of-the-art top producer of the best performing state-of-the-art products.products.– Multiple product lines in high-tech segments Multiple product lines in high-tech segments

(High, Performance, and Size).(High, Performance, and Size).– Minimize focus in other segments.Minimize focus in other segments.– High promotion and sales investments to High promotion and sales investments to

maximize awareness and accessibility.maximize awareness and accessibility.– Continually introduce new product lines and keep Continually introduce new product lines and keep

existing products fresh.existing products fresh.– Limited automation or production capacity.Limited automation or production capacity.– Goals may be ROA, Asset Turnover, and ROE.Goals may be ROA, Asset Turnover, and ROE.

Differentiator with ProductDifferentiator with ProductLife Cycle FocusLife Cycle Focus

A product life-cycle differentiator seeks to be a top A product life-cycle differentiator seeks to be a top producer of good performing products in each of the producer of good performing products in each of the targeted segments. targeted segments. – Multiple product lines in targeted segments (High, Multiple product lines in targeted segments (High,

Traditional, and Low).Traditional, and Low).– Minimize focus in other segments.Minimize focus in other segments.– High promotion and sales investments to High promotion and sales investments to

maximize awareness and accessibility.maximize awareness and accessibility.– Continually re-position product lines and keep Continually re-position product lines and keep

products fresh.products fresh.– Limited automation or production capacity.Limited automation or production capacity.– Goals may be ROA, Stock Price, and Asset Goals may be ROA, Stock Price, and Asset

Turnover.Turnover.

SummarySummary

There is no “magic bullet” strategy in There is no “magic bullet” strategy in Capstone.Capstone.

Successful teams will:Successful teams will:– Develop a cogent long-range goalsDevelop a cogent long-range goals– Set appropriate strategiesSet appropriate strategies– Develop appropriate functional capabilities, andDevelop appropriate functional capabilities, and– Adjust as dictated by the opportunities and Adjust as dictated by the opportunities and

realities of the competitive market place.realities of the competitive market place.

Plan ahead (and not procrastinate)Plan ahead (and not procrastinate)

Objectives of Financial ReportingObjectives of Financial Reporting

Manage your limited resourcesManage your limited resources– Trade-offs exist with any strategic initiativeTrade-offs exist with any strategic initiative

Make wise investment and credit Make wise investment and credit decisionsdecisions– Don’t forget to follow your strategyDon’t forget to follow your strategy

Identify optimum time to take actions Identify optimum time to take actions affected by cash flowaffected by cash flow– Its an easy market for projectionsIts an easy market for projections– Project your needs early and plan accordinglyProject your needs early and plan accordingly

Financial StatementsFinancial Statements

Balance SheetBalance Sheet

What the company owns and who owns itWhat the company owns and who owns it

A snapshot of your financial healthA snapshot of your financial health

Assets = Liabilities and net worth combinedAssets = Liabilities and net worth combined

Accurate for a specific dateAccurate for a specific date

See Capstone Courier for latest round Balance See Capstone Courier for latest round Balance SheetSheet

Profit and Loss StatementProfit and Loss Statement

Compares revenues and expensesCompares revenues and expenses

““Movie” of financial healthMovie” of financial health

Shows activity over a period of timeShows activity over a period of time

Indicates the profitability of an organizationIndicates the profitability of an organization

See Capstone Courier for latest round Profit/Loss See Capstone Courier for latest round Profit/Loss StatementStatement

Cash Flow StatementCash Flow Statement

Shows movement of cash in and out of an Shows movement of cash in and out of an organizationorganization

Shows how much cash is available for use Shows how much cash is available for use during a given periodduring a given period

Reconciles net profit back to cashReconciles net profit back to cash

See Capstone Courier for latest Cash Flow See Capstone Courier for latest Cash Flow statementstatement

Financial Ratios and Financial Ratios and Success MeasuresSuccess Measures

A financial ratio shows the relationship A financial ratio shows the relationship between two financial measuresbetween two financial measures

– Developed by dividing one measure into Developed by dividing one measure into anotheranother

Provide insights into company’s Provide insights into company’s operations and strategyoperations and strategy

– Used internally to evaluate performance and Used internally to evaluate performance and set goalsset goals

– Used externally to make investment Used externally to make investment decisionsdecisions

Financial RatiosFinancial Ratios

Four categories: Four categories: – LiquidityLiquidity

– SolvencySolvency

– Market valueMarket value

– ProfitabilityProfitability

It’s a ratio! There are ethics involved, but It’s a ratio! There are ethics involved, but ratios are easily manipulated. Understand ratios are easily manipulated. Understand this factthis fact

Financial RatiosFinancial Ratios

Asset TurnoverAsset Turnover

““Reveals how effective assets are at Reveals how effective assets are at generating sales revenue.”generating sales revenue.”

Asset Turnover =Asset Turnover =salessales

assetsassets

““ROS indicates the percentage of each sales ROS indicates the percentage of each sales dollar that results in net income.”dollar that results in net income.”

Return on SalesReturn on Sales

Return on Sales =Return on Sales =net profitnet profit

net salesnet sales

Return on AssetsReturn on Assets

Return on Assets =Return on Assets =net profitnet profit

assetsassets

““ROA measures a company’s ability to use ROA measures a company’s ability to use all its assets to generate earnings.”all its assets to generate earnings.”

Return on EquityReturn on Equity

Return on Equity =Return on Equity =net profitnet profit

equityequity

““Return on Equity highlights for the Return on Equity highlights for the stockholders the return on their stockholders the return on their investment.”investment.”

LeverageLeverage

Leverage =Leverage =assetsassets

equityequity

““Leverage shows the debt level of the Leverage shows the debt level of the organization.”organization.”

Performance MeasuresPerformance Measures

Know your measures when making decisions!Know your measures when making decisions! I think of measures as falling into one of two I think of measures as falling into one of two

camps:camps:– Sales (A/TO, Share, ROA)Sales (A/TO, Share, ROA)– Profits (Cume Profits, ROS, ROE, ROA)Profits (Cume Profits, ROS, ROE, ROA)

As a general rule:As a general rule:– Never put ROS and A/TO togetherNever put ROS and A/TO together– ROS and Market Share don’t work well togetherROS and Market Share don’t work well together– These success measures typically competeThese success measures typically compete