StratSim FAQs – Page 1

StratSim Frequently Asked Questions The frequently asked questions are grouped into categories, in the following order. (Some of these are based in part on questions from Chris Moorman’s WEMBA Strategy class.)

Pricing and Cost Finance Manufacturing and Inventory Tools, Research, and Customers Technology Upgrades and New Product Development Development Centers Dealership and Distribution Entering Decisions B2B Marketing Licensing Miscellaneous

PRICING AND COST What is the expected price range? The expected price range reflects the beginning of the purchase process, when the customers say to themselves, “What price am I generally expecting/looking to pay for a vehicle?” Obviously, during the actual purchase process, customers prefer a lower price, but early in the process, they have a general sense of whether a vehicle is out of their price range, or else is priced so low that it won’t have the features they want. The customer uses the expected price range to determine the vehicles in her/his consideration set, along with vehicle class and size. In effect, expected price range is primarily a positioning issue before the actual buying process begins. How do you change the MSRP of a product? On the consumer marketing decision screen, click on the product, and then you'll be able to change the marketing mix decisions for that product. Is there a way to calculate the profit-optimizing price of a vehicle? The test market (tools - test market) is the best approach for optimizing price on current products. Concept tests (tools - concept test) is the best place for new products (or upgrades). Of course, competition will likely change (marketing mix or new products), so these studies provide guidance, but they can’t include competitive strategy. Beaut's MSRP is set up at $39,834, however its average retail price is $40,088. Is it technically possible for StratSim customers to pay more than the sticker price? Yes, it typically happens in one or more of the following circumstances:

1) Demand is high relative to supply, allowing dealers to mark up prices. 2) Dealer margins are tight on the vehicle and so they mark it up closer to industry standards for that product

class. 3) Since dealers are independent businesses, they may look at market conditions and realize that a higher

price is advantageous to their interests. This would typically happen on higher-end vehicles. What is the difference between base cost, unit cost and dealer price?

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Base Cost = estimated unit cost based on 100,000 units of production Unit Cost (COGS) = actual cost to manufacture based on actual volume Dealer Price = price you are charging the dealer for the vehicle Your margin = dealer price – unit cost What impacts COGS in StratSim? Economies of Scale. There are definite economies of scale present in the automobile industry and in StratSim as well. An obvious example would be use of existing capacity (a fixed cost). If two firms have the same capacity, the firm that operates at 90% capacity utilization will enjoy a cost advantage over a firm operating at 70% capacity utilization, presuming, of course, that each firm sells the vehicles that it produces and doesn’t carry them in inventory. A second example is distribution. Distribution costs are generally fixed, so again, a firm that sells more vehicles per dealer enjoys a cost advantage where the fixed costs of the dealership network are spread over more vehicles. There are also some fixed costs included in the general and administrative expenses on the income statement which are the same for all firms, so again, spreading these costs across more unit sales provides a relative advantage. Learning Curve Effects. In StratSim, there are learning curve effects present at both the product level and the class level. Therefore, all things being equal, a firm that has higher market share with a particular product, or higher market share of a particular vehicle class will enjoy a cost advantage over those products or firms with lower unit market share. Savings through Product Design. It is important to recognize that the product design process has an impact on unit variable costs. Part of this is determined by the specifications of the product, with higher values increasing the unit costs all things being equal. However, one of the major sources of lowering unit costs is provided through the upgrade process. When a vehicle is upgraded, along with creating the new product design, the engineers working on the product also attempt to find ways to lower the cost of the product without sacrificing quality. Your firm can calculate the impact of the cost savings of an upgrade by choosing to upgrade a product and making no changes to the design. Compare the base cost on the original (“previous”) product design with the upgrade. This difference is the cost savings due to re-engineering the product design. Realize that you may both change the specifications and enjoy savings due to the upgrade process itself. In addition, products that share common design elements (e.g. HP of 120 – same engine, or safety of 3) also create cost savings by share common components across vehicles. Although these savings are minimal, it should be considered during the product design process. Savings through Investment in Technology Capabilities. Finally, a firm may invest in technology capabilities which both allow your firm to create vehicles with higher specifications, but also lower costs on the existing vehicles. An estimate of the savings based on your current product portfolio and projected sales is provided on the technology capabilities input screen. It is essential that your firm considers the effectiveness of using these cost savings techniques in the context of your overall strategy. Cost savings are a net positive whether it improves your profit margin or it is passed on to the customer in hopes of gaining more sales. However, remember that it is implementation of “smart” cost savings that is ultimately rewarded. Having the largest production capacity is only an effective cost savings if that capacity is used (and sold). Having a low cost vehicle is only effective if consumers still want to purchase it. Thus, the successful manager is always looking for ways to lower cost, but keeps an eye on whether that cost savings is ultimately rewarded on the bottom line. How do you determine the Mfg price and margins after making technology investments? See the pro-forma product contribution. How can I estimate unit cost from base cost if the production is less than 100,000 units?

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Use the pro-forma product contribution report, but make sure you have entered the production decision. What are the other means to increase efficiency (i.e. reduce COGS/manuf expenses PER $ sales)? In addition to investing in technology, there are two other ways of reducing COGS - upgrading the vehicle and increasing the volume. When you do an upgrade, engineering also tries to reduce costs in the vehicle. (You can see the approximate unit cost with the upgrade compared to the original to see the savings.) Costs will also go down with volume (economies of scale / experience effects). Also, do note that inflation is pushing your COGS up. Retooling costs - we performed a major upgrade on two of our models (they will be out in Period 3). This means we write off the current inventory and produce essentially from 0. We understand this, but when putting our model production targets in the decisions, we get hit with retooling charges on both models...why is this? We think it has to do with machine tool volume - are we close in our thinking here? Also, will there ever be a period where all retooling costs will be 0? We did not anticipate having to shell out more money for the upgrades. Retooling is required for major and minor upgrades and also increases in volume beyond what has been produced before for a vehicle (typically this means you are reassigning some of your capacity from one vehicle to another). Minor upgrades have lower retooling costs, however. So there are probably two reasons for your retooling... one is the upgrade itself and the second is (perhaps) an increase in volume. Presuming no increase in volume or further upgrades, you will have no retooling costs in the following period. Our products are the Boffo, Buzzy and Boss. We are getting hit with large charges for retooling and we haven't done any upgrades. Can you explain? The retooling costs you are seeing are associated with the increased production of the Buzzy and the Boss in the previous period, not necessarily due to product upgrades. Whenever production is increased over the previous period, you will be assessed retooling costs. Another good reason to carefully manage your inventory and plan production carefully. What is included in the G&A costs? G&A (General and Administrative) is a catch all for a number of indirect expenses such as an admin cost for each vehicle sold and admin cost for each dealership (plus add'l for building dealership) as well as a fixed admin cost for every team (same). FINANCE Amortization and Depreciation - I assume that some of our expenses are treated as period expenses and others are depreciated over their useful lifetime. (I understand the cash flow implications.) I couldn't tell what the depreciation rate was for different classes of investments. Specifically, what is the depreciation rate and method for the following expenditures: Increasing our Production Capacity, Improving our Technology Capability, Opening New Dealerships, R&D spending (Minor and Major Upgrades, New Products). Are there any other expenses that are depreciated? What is the amortization rate? In general, the simulation tries to keep expenditures as current as possible, so for opening dealerships and technology capability, these are expensed in the current period. R&D is expensed over the course of the product development project (1, 2, or 3 years). Production capacity is depreciated over 10 years. The simulation speeds up depreciation/amortization rates mainly to make sure most investment decisions impact the firm during the

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simulation rather than after they’ve retired. This may not be in compliance with GAAP, but it improves accountability for decisions in the simulation. If we reduce capacity, does it reduce deprecation expense from the initial capacity investment? Or, will deprecation expense continue at its current rate as defined by StratSim – at the 10-year straight-line schedule? When you reduce capacity, you are actually selling off some of your equipment. There are some expenses involved in the selling of the equipment that are determined by the age of the plant. So, yes, the straight-line depreciation will continue, but the amount will change due to the selling off of the equipment. Reductions are expensed on the un-depreciated values, starting with the oldest plants. The manual states that depreciation will remain constant unless PP&E is purchased or sold. Does that mean that we assume that depreciation goes into infinity? Not to infinity, but over 10 years straight line. Since the game is played up to 10 years, you can count on depreciation remaining constant (unless you increase capacity) over the play of the game. What constitutes G&A expenses? G&A is a catch all for a number of indirect expenses such as an admin cost for each vehicle sold and admin cost for each dealership (plus additional for building dealership) as well as a fixed admin cost for every team (same). Training and support for dealerships is included, as well as factors related to receivables and payables that you can't directly control. What comprises manufacturing overhead costs in the income statement? The Manufacturing Overhead costs are the costs involved with the maintenance and general upkeep of your manufacturing facilities, including repairs to the building, repairs and preventative maintenance of manufacturing equipment, etc. Part of the costs calculation is the age of the facilities and equipment, so the retooling process that occurs with vehicle production changes and increases in your production capacity adds newer, more efficient facilities and equipment and lowers the manufacturing overhead costs. Does the stock price impact any of the purchasing behaviors in the simulation? Are we being measured by stock price in any way? No, stock price itself does not impact customer preferences. However, it is likely to be an indication of other factors that may be weak or strong that do impact it. Also, stock price would impact a firm's ability to raise addition capital, which can then be used to influence purchase behavior. Do you have any general factors or tips to raise your stock price? Any thing you can send along those lines? Stock price is an indicator of the current position of the firm. Profitability, growth, future potential, as well as market risk, are all factored into stock price. Please carefully consider your current position, your strategy, and the execution of your strategy. Since stock price is an overall measure of the current position of your firm, you will want to consider all factors that go into making your firm a profitable one, thinking long-term. Equity issuance: In the equity markets, when a company announces that it will sell additional shares of stock, this usually causes the stock price to fall. Does our simulation react in the same manner? If all other things remain unchanged, yes. Is the long-term interest rate dependent on the size of the debt issue?

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The amount of debt a firm issues will most certainly have an impact on the interest rate. In the pro-forma, you can experiment with different levels of debt to see probable impacts on the interest rate. Note, however, that the final rate is also dependent upon how things go during the year, and it will always be less than the short-term debt. The StratSim book implies that an interest rate will be paid on the excess cash. What is the rate of return that we'll EARN on our excess cash after we've paid off our short-term debt? See the economic outlook report (where GDP and other economic data are listed) for the current cash rate. We are sitting on a large pile of cash: $5.5 billion. We know that we can give this back to the shareholders by increasing the dividend payout. We also know we can use this to pay debt...but is there a way to use this cash to finance a new product launch? Could something like this be paid directly out of our cash reserves? Yes, you may choose to use it to invest in new products, upgrades, technology, etc. All of those will impact your income statement, however, and cannot be handled as a cash-only transaction. Retiring bonds is certainly an option and an improvement on the cash rate of return, but don’t forget to consider the penalty for calling the bonds early. There are two other ways to give this cash to shareholders; one is to increase dividends, but another is to buy back shares of stock on the open market. And finally, remember that you are receiving interest on that cash, so it is positively impacting income, and therefore shareholder value. If we use bonds or stock for long-term financing, does that automatically pay off short-term debt? If a firm uses long-term debt, that will reduce the need for short-term debt (as short-term debt is automatically given to firms who require cash for ongoing operations). Bond rating - is there any way in this simulation that we can restructure to improve our bond rating? Currently we are at BB and would like to improve on this. We were curious about what our options are here, if any. Generally, the bond rating reflects your current default risk as a company. The best way to improve it is to have a successful strategy and execute it well. This will improve your ability to generate a stream of income, etc. and improve your bond rating. Restructuring might help, but perhaps at the expense of your stock price. Our team recognized that selling bonds would decrease short-term debt by the amount bonds issued. Is there any pitfall if we replace all short-term debt to long-term debt to get benefit on lower interest rate? And if the rate for long-term debt would increase and be greater than that for short tem one, can we make an action to reverse the situation? If any, how can we do that? The rate for the long-term bonds will always be less than short-term. The "risks" are two-fold. One, the rate a team pays for long-term will be fixed at the time they are issued. So, if interest rates decline or the firm's risk profile decreases, one could be spending more on interest with a fixed rate than a variable rate. 2nd risk is that if the firm decides to “call” the bonds at some future date (not required, but must wait 3 years before calling the bonds), there is a one-year penalty for calling them early and all the bonds that were issued together must be called together (no partial calls). Our firm’s balance sheet currently shows $7 billion of short-term debt and 0 in long-term debt. If we issue $8 billion of long-term bonds, will the $7 billion of short-term debt be paid off (i.e. $0) and we will have $1 billion in extra cash or will our balance sheet show $7 billion of short-term credit and $8 billion of long-term debt with extra cash of $8 billion? The long-term debt will replace your short-term debt. Thus, after issuing the long-term bonds (all other things being equal), you would have $0 in short-term debt, $1 billion more in cash, and $8 billion of long-term debt.

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I'm having trouble deciding on a discount rate for my NPV analysis. The simulation only provides rates for long-term and short-term debt. I would like to calculate our WACC, however I can't calculate my firm Beta, and the risk-free rate isn't provided. Furthermore, the simulation Pro-forma analysis only provides a one-period projection based on our decisions... so there's no way to derive the value. What rate does the simulation use to calculate our share price? First, remember that in this simulation, as in the real world, you are making decisions in an uncertain environment with less than perfect information. That can be difficult and frustrating. But there are very few situations where all of the inputs of an NPV calculation are truly known. If they are “known,” it just means that someone has gone through the work of coming up with the assumptions and estimates, which is what you will have to do to some extent when you play the simulation. Second, with regard to the risk-free rate, you’ll need to make an assumption about approximately what it would be, based on the cash rate (what interest rate they can get in a money market account) and the prime rate. You can use a range of rates here to determine sensitivity or pick something that is “average.” You are correct that Beta is not provided. As you know, Betas are estimates of risk in the financial world as well; they are not known constants. To get out of the dark completely, you could use the Beta estimate of one of the auto companies, although because the simulation is a bit more volatile than the real world, I'd probably increase it a bit from that. Using the “real world” is generally not advised in the simulation, but this might be better than nothing if you need a benchmark. With regard to future cash flows of a project, you will have to make estimates beyond a year. (Note that the first year forecast is also an estimate.) Depending on the particular investment you are considering, your estimates may be fairly accurate or more difficult to nail down. The market value of the firm is the stock price x the number of shares outstanding. Keeping this equation in mind, when we declare dividends (or increase the dividends) our share price should go up. Is the market value for the firm affected by that? Increasing dividends may or may not increase the share price—it depends on whether investors are more interested in income or growth. That said, an increase in stock price would increase the market value of the firm, since the number of shares is unchanged. It is not clear if the share price is derived from market value which depends on net income or … or vice versa Investors buy shares in the company based on the current and prospective performance of the company. If the number of shares outstanding remains constant, and performance improves, the share price and, therefore, the market value, will go up. Decreased performance means fewer investors interested in the company, lower share prices, and lower market value. How do you pay off short-term debt? You may replace short-term debt with either long-term debt or cash raised by issuing stock. Alternatively, income from operations, improvements in managing inventory, etc. will also improve your cash position. Think of short-term debt as a revolving line of credit that is used if you need cash to run your business... always available and always used if needed. I have a quick question with regard to short term debt. We had lower short-term debt after playing the practice round and wondered what the reason for that was and where this amounts come from? Short-term debt is a "plug" - meaning that the amount of short-term debt is calculated based on their cash flow needs during the year. Thus, if there is less need for cash, the short term debt would be lower. This could be due

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to lots of things - better income from operations, better inventory management, or issuing bonds or selling stock. Whatever drives the cash position will affect short - term debt. Does the StratSim program include a tax shield for depreciation in the financial calculations or is tax a computed directly from net income without adjustment? If you are referring to the tax shield benefits of interest or depreciation, yes, they are definitely included. However, there is no loss-carry forward effect in StratSim. What would be the impact to our stock price if we cut our dividends? All other factors being equal, cutting dividends will have a negative impact on stock price, but if the cash that is freed up is used to boost income (and therefore equity), then it could improve stock price. In short, it depends on what you do with the money saved by cutting dividends. The program seems to want to keep a minimum cash position. For example, I ran a pro forma that showed I had about 400 MM in cash. I decided to use the cash to increase my technology, thinking that my cash position would drop. Instead, my cash position stayed at around 400 MM, and I took out more short-term debt to cover the investment. Is this correct? Is there a way to tell the program to use cash and not take out more short-term debt? If there is a cash minimum, what is it? There is a minimum amount of cash that the company requires for on-going operations. This varies depending on the operating conditions of the company and cash needs. You can experiment some with the pro-forma to find out approximately what it will be, but be forewarned that the pro-forma and what may happen aren't necessarily the same. For example, the environment may change and competitors may make decisions that you do not anticipate. MANUFACTURING AND INVENTORY Can you explain how inventory and flexible production work in the simulation? In general, the car industry aims to have 30-60 days of inventory available, but may have less if a firm is planning to upgrade or discontinue a vehicle. It is important to note that when upgrading a vehicle, the current inventory will not be sold in the market, but will instead be written off at a loss to the company. By default, the Flexible Production checkbox is enabled. In this case, if demand is greater than supply, the simulation will automatically increase production up to 10% to help satisfy the unmet demand. Also, if your supply covers greater than 120 days in inventory, the simulation will automatically decrease the supply by up to 10% to meet the 120 days of inventory. If inventory is between 0-120 days, production remains unchanged. So, checking the production box means that a firm wishes to maintain 0-120 days of inventory. If the checkbox is disabled, your firm will produce exactly what you have entered in the Scheduled Production field. Do note that if production is increased beyond your overall firm capacity, you will incur over-capacity charges. In general, the key issue in managing your production is to 1) forecast well, 2) think about the value of lost sales vs. the over-capacity charges or inventory holding in most cases, 3) consider the impact of over-capacity and retooling charges, and 4) consider how a very tight supply may impact your retail prices. Does R&D contain building manufacturing capacity also? In other words, if I paid $1Bn+ for any new car, would I be getting a new manufacturing plant (or some capacity in existing plant) FREE OF COST? Manufacturing is separate from R&D. When you launch a new vehicle or upgrade an existing one, a production line is retooled to manufacture the new or modified nameplate. If you wish to increase overall productive

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capacity, you must do so in your manufacturing decision, it does not happen automatically (you wouldn't want it to if you already had excess capacity!). Keep in mind that it takes a year to build new capacity, so plan ahead. Our team is considerably over capacity and are planning to sell of 300,000 of our current capacity. What are the results for our team if we do this? Will this transaction generate immediate cash back based on the sale? When you reduce capacity, you will sell off your oldest (and most inefficient) plants. If they are not fully depreciated, you will receive 50% of the remaining value on the plant and the other 50% of that difference will be an exceptional loss. Because it takes one year to sell and dispose of the plant, reduced depreciation and plant maintenance costs will begin the following period. Our team has developed a new product and it is scheduled to be released this upcoming period. Unfortunately we did not account for the increased capacity we might need to manufacture the vehicle. If we choose not to produce any models of the new product for the upcoming period in order to buy enough capacity this period to manufacture it for the following period will we be penalized in any way? You and your team can choose among the following options: 1) Postpone production. Cost is a period delay in building brand equity, sales, etc. 2) Produce over-capacity. Any production above capacity will be assessed an over-capacity charge which is calculated automatically. The team may want to weigh that cost against lost margin on the sales and postponement of the launch. How do you calculate over-capacity charge? We were under the impression that development center would increase our capacity. But, apparently it didn't. We are coming up with 2 models this period and will be short on capacity by 200K. How much will the over-capacity charge for 200K be? The over-capacity charge is calculated for you on the Manufacturing Decisions screen, and shown as a line item under Plant Capacity. You can just enter vehicle production amounts that total more than your capacity to see the amount of the charge. What factors might impact the manufacturing overhead other than an overcapacity charge? The factors in relating to manufacturing overhead are depreciation, maintenance costs (these are broken out on the team income statements), and retooling costs. Depreciation goes up as capacity increases, and maintenance costs go up as the plant ages. Retooling also impacts depreciation and plant maintenance by adding to plant investment and updates the plant, increasing depreciation and decreasing maintenance costs somewhat. The overcapacity charge is not included under manufacturing costs, but under "other" on the financial summary, and under "extraordinary items" on the firm income statement, allowing the firm to view a line item for overcapacity charge (by clicking on the extraordinary items link). How are the consumer customer forecasted sales determined? The forecasts are based on the best economic forecasts money can buy, and are just as reliable as those in the real world. Remember that vehicle forecasts are based on what YOU enter. At the end of a cycle for a car model that is about to be upgraded, all unsold inventory is sold for a loss of up to 20% off of cost of goods. How does this work, and does this written-off inventory compete with other products? The % is based on how much inventory there is (higher amounts will result in a higher loss percentage). These sales do not impact the marketplace. It is strictly a way to clear out the old model quickly (selling off to car rental companies, CarMax, overseas, etc.). So it does always result in a loss to you (but perhaps not as high as the opportunity loss of not going with the new model) and no loss to the competition.

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Can you upgrade a vehicle without writing off previous inventory? No. It is important to note that when upgrading a vehicle, the current inventory will not be sold in the market, but instead be written off at a loss to the company. If inventory is very high, you may want to consider delaying the upgrade a year and lowering production to minimize inventory levels before initiating the upgrade. We made an upgrade to our Awesome car. In the decision summary report there is a * next to current inventory with a note that the inventory will be written off. We are curious when this write-off will take place – can we lower our price in the next decision to try to sell all the inventory and avoid the write-off? Since the upgrade is replacing your current platform now (see Input Decisions/Product Development), all sales for the coming period will use the upgrade and all existing inventory will be written off. Lowering the price will not affect the inventory write-off, but simply reduce the price on the updated vehicle. Depending on the amount of inventory, you may want to consider changing from a minor upgrade (inventory write-off in current period) to a major upgrade (inventory write-off next period) Will I always produce between 0-120 inventory if I have my flexible production box checked? Why such a range? Is this correct or does this kick in at a different level? No, the flexible production box will only modify up to 10%, so it is possible for inventory not to get within the 0-120 day range. For example, if you end up with 240 days of inventory, the 10% flex production will bring you down to around 210 days. I should not check the flexible production box if I think I can hit demand, and I want to introduce an upgrade in the next period, right? There is an outside chance that by checking the flexible production box you'll end up with more inventory than if you don't check it, but for the most part checking it makes sense (and potentially under-producing). Just be sure to take into consideration potential lost sales and possible over-capacity charges. If we begin development of a new vehicle do the development costs cover increase in capacity, or do we need to also factor that in and plan for it? If you believe the sales/production of the new vehicle will take you over capacity, you will need to consider adding some. Development costs do not cover adding capacity or retooling costs. TOOLS, RESEARCH, AND CUSTOMERS We can’t get our markets to pop! Help! Marketing expenditures are not the only requirement for developing a new segment; you must also provide the customer with a good product at the right price. Though you do not have a lot of information on new customers, you can estimate the size and expected price of the new product, as well as determine what attribute is most important to the customer. There is one other point that is (perhaps) unique to the game: only one new customer can pop each period – whichever one has a product that best meets its need and is well supported. Does the new Customers list change every period or is the set of new customers remain static throughout our test period? The new customer list stays the same until a new customer "pops" and then it is replaced with the next one.

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When a new customer pops up, it is at the expense of some of the existing segments? No, this is new business. We are trying to determine how dedicated each new customer would be to the vehicle class listed for it (i.e. could other car classes 'steal' new customers despite being a different class). A vehicle MUST be created in the class that the new customer report shows for that customer in order for the customer to pop. After the new customer pops, they will buy other vehicles, including other classes, on the market that meets their needs, just like the other consumer customers. The numbers will vary based on how well the new vehicle meets their overall needs. How do we get perceived product attributes, perceived price, etc? Focus groups will provide you with customers’ perceptions of products of interest. Thus, you may not be listed under 1T (b/c you don't offer any trucks), but your Alec product will be listed under 1E (b/c it is an economy vehicle). For perceived price, see the column in focus groups "cost". Actual average retail and MSRPs can be seen on the product detail report. 4M is a new emerging segment. However there is no option to run a focus group on 4M. Does this mean that this segment still hasn't completely entered the market? Focus groups are only available for customers that have "emerged". However, a company can run a concept test on one of the emerging customers, which provides some similar information. Can we assume that consumer preferences definitely change over time and thus that focus group will show different results every period? You can assume that both customer preferences and competition changes each period. Some periods there will be more change than others. Are there tools with which to measure satisfaction? The main measures of customer satisfaction in StratSim are: Consumer preference: Overall satisfaction measure for the firm. In effect, which company do consumers prefer to do business with? Dealer Ratings: A measure of consumer satisfaction with the dealership experience. Focus Groups: specific feedback on various aspects of the product. Is selling price on the concept test equal to MSRP or Average Sale price or dealer price? The selling price you enter on the concept test assumes that MSRP and the sales price to the consumer are the same without any dealer discounting. This is unlikely to occur in reality, so plan accordingly. When we conducted a concept test, the report showed best on all our product attributes. However it was worst on the price attribute. We ran another concept test with the lowest price range and still got worse on price attribute. Can we assume a trend and lower the prices further or is it possible that customers prefer a higher price range for the concept? The customers are comparing the concept to other vehicles in the marketplace. They are ranking the price as worst because it is the highest. This is OK as long as you are within the price range of the new customer and the overall likely to buy is high enough.

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What is this error? On the conjoint screen, it shows “You may not enter the same value twice for a dimension”. With the conjoint, all combinations are considered, so there is no need to enter any value 2x. Are we limited to 4 studies per team per period? Or 4 studies in the life of the game? 4 studies per year (period) per team, as stated on the report. Each study costs 500K? That means four studies cost 2 million. Am I correct? Correct, 4 x $500K would be $2 million. Which line item is impacted when reports are purchased? An expense line item is produced for reports which can be viewed by clicking on the extraordinary items link. If we run a conceptual test, can anyone else see that we have run it and what we have run it on? Ditto for the Conjoint analysis? Not sure of how "open" the market is. Your conjoint analysis and conceptual tests are private and can only be viewed by members of your team. In buying a Conjoint report, when asked for specifications what is the best way to input numbers in order to receive the most valuable and relevant information? We kept numbers consistent (i.e. 1/1/1/1) and the result did not tell us very much. Creating a well-designed study is essential for getting useful information from conjoint analysis. For a start on choosing good values for the study, carefully read "Tools - Conjoint Analysis," in the manual. The idea behind conjoint is to find out what trade-offs your customers are willing to make, so you’ll want to design the study such that it yields that type of information. For instance, you might choose 1/1/1/1 and 2/2/2/2 and prices of $15,000 and $16,000 to see if a particular consumer is willing to pay $1000 for the improvement in vehicle specifications. On the specifications in particular, you might select 3/1/1/1 and 1/3/1/1 which can help you analyze which higher attribute is preferred. Your exhibit 1.2 says Alec has market share of 63%. But focus group has Alec with a different unit share. Is it different because focus group results are wrong and not reliable? Market Share in exhibit 1.2 is referring to share of class (Alec's share of all economy vehicles sold), whereas focus groups (and several other studies) are referring to share of a particular customer (in your example 1E - Value Seekers who prefer an economy class vehicle). According to exhibit 1.4, 363,000 units of cars are sold to 4F and 4L customers. How do I know the breakdown? You will need to look in the software and drill down to on the consumer customer report and the customer detail. On the product contribution report, Alfa’s dealer sales are $9680. But product detail shows dealer price is $20199. Aren’t they supposed to be same? The product contribution report is overall, not cost/unit. Take the total dealer sales ($) divided by units and it is approximately 20199. Note: because values are in 000s, there will be some rounding. When clicking on some of the "customer detail" screens, there is a "secondary" desired class listed. How is this achieved? More specifically, when creating a new concept for a vehicle that you know will span two

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vehicle classes, can you give it both a primary and secondary class? Or does this just happen via the simulation? The secondary just means that the customers will also consider a second class of vehicle along with the primary... they still prefer the primary, but they are also considering the secondary class. In product development, you will still need to choose one class or the other... generally, you'll want to select the primary class, but there may be situations where you might try to serve two customers with one vehicle, in which case you might consider the secondary class. How do you identify which vehicle class has the highest growth potential? You'll need to go in the software and look at historical trends and consider customers who are interested in that class and their expected growth rates. What is the meaning of Market – Consumer Customers? Consumer customers are the intersection of consumer segments (report: Industry - Consumer Segments) and vehicle classes (report: Industry - Vehicle Classes), and allow finer segmentation of the market. This question is about the statistic in “consumer customers” and “vehicle class” information. If I compare the number of unit sales between the two statistics, they don’t match. For example, focus group of 3S (single for Sport) showed the unit sales of 339 units, and vehicle class showed 112 unit sales for Sport. The 3S will buy vehicles other than sports - sports vehicles are preferred, but not necessarily their decision. (Likewise, other consumers will buy sports class vehicles, even though they may prefer say, a truck). Use the vehicle sales by customer and the customer detail to better understand this. We had a couple questions on the "Delivery" vehicle. Is this considered to be an existing platform if you are in the truck space already? I think in the vehicle description, it is described as a covered truck. The answer to this impacts development times. There is little consumer information given on what the specs for the Delivery vehicle are. Did we miss these specs? We see a wide range on price and size - not much else. Is there somewhere we can go to learn more about the Delivery vehicle? Finally, is the Delivery vehicle only a B2B vehicle? Basically, we are wondering, if we build it, where do we sell it? "...the Delivery is designed for the fleet buyer (B2B). Each of these classes represents a unique configuration that requires a significant expenditure in R&D to develop." Since the delivery class is unique, your experience with trucks will not shorten development time. There is no consumer information, because it is a B2B-only vehicle. You will need to purchase market information on the B2B contracts or target these contracts with salespeoplet to get information on delivery vehicle specs. I guess my only other question is: If you go ahead and enter this Delivery vehicle class, will the contracts start to appear? This seems pretty risky. You will likely want to get more information by purchasing research before making a decision. In the context of StratSim, if you get an invitation to bid on a contract, that contract will not go away over the course of the simulation so long as you continue to target it with your salesforce, and you can develop a vehicle to fit the specifications, should you deem it worthwhile. You will, however, have to keep up your B2B activity to be able to bid on the contract(s) in future periods. As you are aware, we exited Camini Minivan from the market last period. Though we were making about 600M annually on Caminis, that car did not fit in our world of high-image, high-feature, high-price cars. We were hoping that market would see that as a very positive sign that would significantly impact our sales of other cars and our overall firm preference. Of course, we did not see that happen. I know that within a segment, if my car is not positioned competitively with other cars from other companies, my car's share in

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that particular segment will be adversely affected. My question is how important is good or bad positioning of one car for other cars of the same company (not from strategy perspective, but from the software perspective) - or very straight-forwardly, did we make a mistake by exiting Camini just because it would have adversely affected our overall company image (in Stratsim World). When you take over a firm, you take over its customer base along with the product portfolio, competitors, development capabilities and financial position. Your vision of the company may or may not match the actual company that you are managing, and changes that you make will not change others' view of the company overnight. You could wind up alienating your customer base pretty quickly, though. Here are a few observations: Dropping a brand is always something that needs to be done with care, since you have built up equity in the brand that can only be replaced at great expense over a long period of time. Consider the fact that BMW thought it better to buy the Mini Cooper and build on it rather than develop its own brand from scratch. Reduced unit sales may be acceptable if your goal is profitability and the margins are better at the lower volume. Did the results match your expectation? Why or why not? With the Carnival, you introduced a vehicle that has great appeal to 4M customers. But 2M customers do not want to buy the Carnival; they preferred the Camini. Why? Could you have satisfied both segments? Take a close look at minvan sales to see where the lost sales went. Is there anything you could have done about this? Can you help me reconcile "projected demand" on consumer segments/consumer detail page and "chg" on consumer segments page? Is chg a leading indicator for chg, i.e. expected change in future OR is it lagging? For example- "chg" in Consumer segments / Singles is 5%. I take it that units sold to this consumer segment is growing by 5%. Now projections (through "projected demand" on consumer segments/consumer) are growing down for this segment. Does this mean projection is a prediction of decline as opposed to growth in the past? Projected demand on customer detail is a forward-looking indicator of the estimated units expected to be sold to that customer. Where you see "change" it is only the year over year growth (or decline) for that segment or customer. Thus, on customer detail you have two values, one "change from previous year" that shows actual change during the past year and one "projected demand" that is forward looking. From your example in singles, it sounds like you have it, just be sure to include all the customers in your analysis, as the singles segment is comprised of more than one customer. TECHNOLOGY Explain this technology thing to me again. There is a difference between the styling, quality, interior, etc., of a vehicle and the size and horsepower. For the former, more is always better. Who doesn’t want a better quality vehicle? But for size and performance (horsepower), the customer does not always want more. If I am looking for an economy vehicle, I do not want a 250 horsepower engine, because I won’t be able to get the gas economy I want. Likewise, a bigger car means more weight and lower fuel economy. So, on the interior, styling, safety, quality, more is always better whereas for size and performance, each customer has a more specific preference. When upgrading the technology capabilities, what do "Est. cost savings of increase" apply to? Is this per year? Or per product? Is this indefinite? The estimated savings is per year for the entire firm, based on your current product line, sales volume, and technology profile. Note that investing in your technology capabilities has two benefits: Your firm will be able to develop products with better attributes, and higher capabilities reduce the base cost of products, all else equal.

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How can we estimate return on investment if we decide to change the technological capabilities. How can we estimate savings in the long run? We know that it is a way of lowering development costs but is this for all vehicles or just for the new ones in development going forward? On the input screen for technology, there is an estimate of the yearly savings based on their current product line and volume. This is for all vehicles currently in production. Please note, that the technology investment only affects the COGS, not the development costs. Also note that other factors also affect COGS (volume, specifications, inflation, etc.) Other than increasing technology capability, is there any other way to decrease any costs (Mfg, COGS, SG&A, and other costs)? During the product upgrade process, your development team will (automatically) try to re-engineer your products to reduce the base cost of production (COGS). SG&A is directly related to the quantity of vehicles you sell. Do the savings associated with improvements to tech capabilities accrue only during product development or also during manufacturing? During manufacturing only. They will impact the COGS in the results for that decision period. Note, however, that inflation will be pushing costs up each period. If also upgrading the firm’s technology, does the firm get a double benefit from the minor/major upgrade? Not on the specification of the vehicle. Increasing your technology capabilities will not directly impact the specifications of any existing product, but it will give you the capability to develop products with higher specs. Investing in technology will impact your COGS though, so in that way, investing in technology and doing an upgrade will have a double benefit. We see some numbers for est. cost savings under input decisions-> technology. If we were to invest in those technology decisions, are those numbers all we can expect in cost savings? What do these cost savings affect? – COGS? Manufacturing? Those changes impact COGS across all your vehicles on a yearly basis. UPGRADES AND NEW PRODUCT DEVELOPMENT If our competitors decide to upgrade/create new platform/enter new class, will we be able to see this before the change hits the market place? Only the new class entries will be seen by competitors a year before they hit the market. The others are internal only. However, you may want to think about other clues for discerning whether firms are active in R&D development or not. Do any firms have products in development at the start of the game? No Can you upgrade specs of a new car while it is in middle of being built? (So if there is a new car that is taking 3 yrs to build, can we upgrade specs in 3rd yr?) Yes, you can make minor changes to the specs through the 3rd year.

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Our proposal for a new truck for the x market offered a horsepower rating of x HP. We were interested in pursuing a larger engine for this market, but only have the option of adding 5 HP/year. Are there any other options to increase this parameter that we are not seeing? You have 3 options. One is to “tweak” by 5HP per period using a minor upgrade. Two is to use a major upgrade, which will allow a greater change and will take two years. Three is to introduce a new product from scratch, which will also take two years to develop. When doing a minor or major upgrade how do you know which attributes are being upgraded? You choose which attributes are being upgraded. You may choose to upgrade none, one, multiple, or all attributes, plus size and HP. There are constraints in terms of how far you may upgrade. See the manual or intro slides for details. Do we get a choice of which of attributes we want to upgrade? How many can be upgraded at once? Yes, you choose. The choice of attributes will impact both the cost of the upgrade itself as well as the COGS. When you go through the upgrade process you will see the costs as illustrated on page 58. Size, Engine, Attributes (Int/Sty/Safety/Qual) and COGS will also be impacted automatically based on product development's ability to engineer costs out of the product and the upgrade itself. Do we know what the cost of upgrade is before making the decision? The text gives a wide range. Yes, you are able to select the upgrade, view and modify it as often as you like (think of it as a discussion with your product development engineers), consider all the ramifications of the change, and ultimately cancel the project if you don't like what you see (freeing up the development center when cancelled), or keep it in the development center if you do like it. If we have a 3-year development cycle, do the expenses all occur in the first year, or are they spread over the three-year period. If spread, are they spread equally? They are spread evenly over three years. We noticed our product base costs decrease even with development costs. Is this because of production efficiencies? Each time you go through the product upgrade process, your development team also tries to reduce costs by re-engineering the product in ways that only impact the cost, not the overall "quality" of the product. We are trying to do a minor upgrade to one of our products. In the decision summary, it says 'launch now'. It also says that the current inventory of that model will be written off at a particular cost. On the other hand, the manual states that a minor upgrade will be complete in one year. If that is true, current inventory can still be sold in the next year, and for this one-year period, we can produce just enough units of this model to minimize inventory write-off. Which one is correct? The development timelines can indeed be a bit confusing. You may find it helpful to look at page 12 of the manual when making development decisions. You are currently in period 1, making decisions for period 2. Whenever the manual talks about a development project taking "one year," it means that your decision now will affect the next period results. The "launch now" is meant to remind you of this fact. With that in mind, if you decide to go ahead with the upgrade now, the existing inventory will be written off before the upgraded vehicle is sold in period 2. If you have inventory that you do not wish to write off, then do not upgrade now. Instead, adjust your production mix and turn flexible production off so the plant will produce only what you decide. Then you can upgrade the vehicle next period for period 3, which seems to be your intention.

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It seems to know the results before they have happened. I think this question is related to the first one where I don't fully understand the timing of upgrades. My understanding is that we input decisions at the beginning of a period, and a minor upgrade takes one year. So how would the ending inventory be known in advance? You must be referring to the pro-forma here. Ending inventory is projected based on your production and your forecast. The production is known (since you set it); the forecast is an estimate. Actual inventory won't be known until the simulation is advanced. If we decide to introduce a new car at the end of P1/this session and it has a development cycle of 2 yrs (existing class), when does the manufacturing capacity have to be on line? Based on the table in the case, it appears that we have to have all the capacity for this new automobile (assuming increase in output demands) on line in P3 yet the product does not reach market until P4. Is the assumption that you have to have the capacity on line the yr prior to product launch or the same yr as product launch OR the same year as in market? Stated another way, do we build all the product the year prior to "in market," hence using all the capacity, or do we make sure we have the capacity on line to support the volume in P4. We want to make sure we do not overbuild capacity prior to the need for capacity. The table in the case is the right place to look for development timelines, but one point needs to be clarified: your project will reach market in P3, the period the product is launched, not P4, so you will need to have your increased capacity online in P3. To make this happen, be sure to input your decision to increase capacity now so that it will be available next period for your initial production of the vehicle. If a team starts a new product in a new product class in year 2 it should be on the market in year 5. If this team wanted to start a new product in this same new class in year 3 would they still have to wait 3 years because it is a new class or simply 2 years because it is a new product, same class? If this team wanted to start another new product in the same new class, it would still take 3 years unless the first product is already on the market. So, once their new vehicle is on the market, if they created another one in that same class it would take 2 years. If they create the other one before the first is on the market, it will take 3. We are wondering if the simulation accounts for "synergies" between auto classes. For instance, if we are currently in the truck class, and we are considering the utility class, is there any advantage there because they can use the same frame or many of the same features. Basically, does the simulation account for the fact that it would be easier to design a utility vehicle starting with a truck than it would to go from an economy car to a utility truck. No, just because trucks and SUVs are similar, it would not be easier to design and manufacture. They are separate classes and there would be no advantage. There is only an advantage within the same class. That is, the 2nd (and subsequent) vehicles you develop within a class where you already have an existing vehicle will take less time and cost less money to develop. We put a new model (not a new class) in development last period. It is supposed to take two years. After the simulation advanced, it is still in development. That seems to make sense. However it is being "launched" this period. What does that mean? I see that for the next round of decisions it shows up in forecast, manufacture, and so on. Is it just for us to build up an inventory to begin selling next period? Or will it be on the market in this period? I guess what I'm asking for is a definition of "launched." Presuming this is a new vehicle in a class that you already have or a major upgrade: Basically, in the last year of a development project you are both completing the development (in the development center) and launching the vehicle (making the marketing decisions and producing it). It will be in your next period results (and be included in your pro-forma).

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Is there any way to delay introduction of a model? If yes, what is the cost? Will that release development center for other work? For example, we like to delay Aspire's release to period 5. Can we suspend Aspire's work for one period and use that center to upgrade Alfa. In period 5, resume Aspire's work and release in period 6. What are the cost implications in this approach? You can delay introduction of a new model once it has been developed, by leaving the price at 0. However, there is currently no option to delay development of a new model. You can cancel the project, but you will need to start over again when you decide to start working on it again. The other thing to consider is opening a new development center (which I believe you have started) so that there are enough centers to develop the vehicles you want next period. To what degree does the software mimic the real business world. For some specific sample questions, in reality, corporate branding is more important to a premium brand company like BMW while product-related marketing is more important to Ford; In reality, if a BMW-type company launch a economy class car, it would confuse the customers…. Are these questions over-thought by us, or the software already incorporate these general rules from reality? Although the simulation is certainly a simplification of reality, you should run the company in a realistic way. With regard to the BMW question specifically, look at how BMW launched the mini-cooper. Yes, it is an economy car, but they clearly differentiated it from other economy vehicles through premium features (for an economy vehicle - styling, engine, etc.) that fits more with BMW's overall image. Finally, they also offered it under a different brand (mini-cooper). Though you don't have all of these options, I think you are right to take into consideration your company's overall positioning when developing new product lines in StratSim. And yes, StratSim does take into account a company’s overall positioning. It is much more difficult for a firm that is known for its economy products to successfully launch a new luxury vehicle (for example). DEVELOPMENT CENTERS Why don’t we have any development centers available this period? If you do not have any available development centers, that is because your group has used up your development capacity with on-going projects that have been continued from previous periods. All firms start with two development centers. That development capacity can be increased up to five over the course of the game (max increase of 1/period). Since it takes 3 years to build a new product but one year for plant, can I wait for 2 years before adding a development center? The product development centers are for designing new products. Thus, you may need more, depending on your new product development plans (e.g. an upgrade + a new class would use up all your centers). New plants are only necessary to increase your overall production capacity, which may or may not be necessary, depending on the expected demand for all your product lines combined. Can the decision to build a development center be reversed? It appears that I can't delete Dev Ctr 3. You may "undo" the decision to build a development center by clicking the Dev. Center button and unchecking Add Development Center. Once the simulation has advanced, however, and the new center has been built, you will not be able to make it go away. How long does it take to add a development center? In other words, if we add one in the set of decisions for the period, when can we use it?

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If you make the decision to add a development center this period, you will be able to use it next period. It takes one year to build the development center. Can we dump our third development center? How would this be done? We are assuming we would see a one-time hit here. You can’t discontinue a development center once it has been built, but there is no on-going cost for having it if you don't use it. Can one license the infrastructure (like development centers)? Not directly, but close. Infrastructure cannot be licensed as such, but licensing a vehicle offers many of the same benefits. The partners first negotiate a license agreement covering the specifications and the cost of the development project. Then the licensee enters the new specifications for the vehicle along with the price, units and licensing fee (including development cost). The licensor must then upgrade the nameplate to meet the specifications before accepting the agreement. In effect, the licensee licenses the development center for the upgrade (as well as the production of the vehicle). The key aspect that is centered on a licensed product does create some limitations. DEALERSHIP AND DISTRIBUTION How do dealerships work and what affects their ratings? Dealerships make the actual sales to customers. They are set up on a regional basis (North, South, East, and West). Dealer ratings (1-100 scale) reflect customer experience at the dealership. Product offerings, training, education, and profitability affect these ratings. Profitability provides information about how well the dealership is able to operate on the margins and volume that are generated. So, if you squeeze margins and/or lose sales volume (per dealer), ratings will eventually go down. Dealer ratings are long-term in nature, so if you squeeze in a given year, the ratings won’t suffer drastically, but in the long-run, they will. Our group is reviewing increasing the number of dealers to qualify for B2B sales. It seems there should be an increased sales benefit by increasing the number of dealers. Is this a correct assumption? Is there a way to analyze the potential benefit? From the StratSim book it isn't good to have too much coverage, but we shouldn't be close to that point yet. Increasing dealerships will provide you with improved coverage of sales areas. Dealerships are added in location based on decreasing sales potential. In other words, the first dealership is added in the best sales area and so on... So, as one increases dealerships, each one adds a little less than the previous one. The other thing that happens is that some of these dealers will be in overlapping areas. Thus, when one new dealership is added, it might hurt the sales from some of the surrounding dealerships, even though, as a group, that region's sales will increase, sales per dealer might actually decrease. This impacts the "success" of an individual dealership as that individual dealership may have less revenues to run their business. This, in turn, may impact dealer service as that dealer may have to make cuts in expenditures (staff, compensation, investments, etc.) if their revenues go down. So it is a complex cycle. The B2B aspect adds another dimension to the issue. However, that is a clearly known impact - either you have the required coverage or not. ' How do you identify why the dealer ratings are low and how to improve?

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The experience at the dealer is driven by many factors... most important is probably the success of the dealership which is the revenues they bring in (difference between retail price and the dealer invoice) x the units sold at that particular dealership. They are independent businesses and their success impacts your success. You may also find that training the employees at the dealerships will make a difference. Is there a cost associated with changes to the distribution network? Yes, check the input screen for the exact amount. Part is an on-going cost and part is for the change. Distribution still shows up in the dealerships. I thought I owned all of it? You do own it, but it does show up so you can see inventory on a per dealer basis. Don't double count this. We invested in increasing distribution. How come it didn't go up? Please note that it takes 1 year to open/close a dealership. For example, if you make the decision to add dealerships in period 1 (results for period 1), it will not impact results until the results for period 3. Pending dealership openings/closings will appear on the "Scheduled Change" line on the distribution decision screen. ENTERING DECISIONS We were playing with the studies and input the wrong price by mistake. Can they be reversed and the information that we have learned made available to all? Studies are purchased by each team for its own use and cannot be returned or refunded or made available for other teams to use. If a team is experimenting with options and they upload an option to Interpretive for a team to view, can they revert to the original data after this? If you mean marketing or production decisions, they can change their decisions as much as they want until the decision deadline. Some decisions, however, such as the purchase of a study or the acceptance of a license decision, cannot be reversed. If indeed one team member submits a decision to the server, is it possible to go "backwards". In other words, can we "take away" a decision that was previously submitted (before the simulation is advanced)? There is one set of decisions for the entire team, and each change automatically affects all team members' decisions. Except for market research studies, you "take away" a decision simply by entering new input. When I get to the pro forma step, is there a way to output all this forecasted information to a spreadsheet file? I tried the File -> Print Reports from the pro forma screen, but it gave me the original data. I would like to be able to input multiple sets of decisions and then save their pro formas to a spreadsheet for comparisons in order for the group to make decisions. Can this be done? I think having to type this in by hand will take too long. You can select Edit - Copy from the drop down menus from any report and then paste that into a spreadsheet. You'll probably want to do that on the forecast page and whichever pro-forma reports give you an insight. You may also want to copy and paste the decision summary. How do the students get charged for the studies when they do them?

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Before students view any conjoint or focus group studies, they will get a prompt confirming that they want to purchase the study. The study will then be added to their list, and the cost will show up under Extraordinary Items on the Income Statement. The detail will show the cost as "Reports." When are you charged for doing a cost analysis, can you be charged for multiple analyses? (If 2 different team members do the same/similar conjoint analysis, does it count as two?) Each time you order a study, it is added to the list of available studies, and all team members can access it. If two team members are doing exactly the same study at the same time, there is a chance that you will be charged twice for the same thing. There is also nothing to prevent you from ordering the same thing twice. I would recommend that you divide up the work and pay attention to what the team has already purchased so that you do not waste resources on duplicated effort. B2B MARKETING B2B Markets: How do we find out more about potential contracts in the B2B market? There is some general information under the Market menu, but nothing about specifics. If you decide that you want to explore the B2B market opportunities, you may either purchase detailed information in the contract requirements through the MARKET – B2B CONTRACTS or by targeting particular contracts in your B2B decisions. This will hire a sales force who will go out and get a request for proposal which will also include all the requirements. B2B Markets: How are contracts awarded and how do we know what a “preferred” provider is? There is a guaranteed quantity that will be awarded to each qualifying team that bids on a contract. However, only one qualifying firm will be selected as a “preferred” supplier and be awarded twice the guaranteed units (if there is sufficient production). The preferred supplier is the one who meets all the requirements at the lowest price. Company fleet buyers have a significantly different purchase process than individuals. First, B2B buyers have specific requirements that must be met in order for a manufacturer to qualify for a contract. These include meeting or being less than a maximum price, meeting or exceeding dealer coverage in all regions to provide an adequate service network, being within a particular range for size and performance, and meeting or exceeding particular attributes (interior, styling, safety, and quality). Second, their purchase is direct from a manufacturer rather than through a dealership. B2B Markets: If no one qualifies for a contract, will it be awarded to the supplier with the closest product/service offering or will the contract be abandoned? You must qualify for a contract in order to sell any units, and you must submit a bid. On the B2B marketing decision screen you will see all the contracts for which your sales force received a request for bid, and if you bid on the contract, it will show a “yes” under the qualify column if you have qualified for the contract. If the contract is not awarded for this period, it will remain in the market going forward with approximately the same demand throughout the course of the game. Thus, you can plan on these B2B contracts being part of your strategy going forward (or not). However, you MUST meet ALL requirements or the contract will not be awarded to you.

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With regard to the specialty fleets: one student has the situation in which a contract requires a MSRP of 20K for a minivan. However their current retail price is 28K. They are wondering whether they have to input 20K to qualify or does the bidding process allow to keep 28K for the dealerships and 20K for the specialty fleets? Or does the system only allow one price? These are two different markets with different purchase processes. The B2B is direct and requires a maximum of the price listed in the B2B contract requirements. This does not have to be related to the consumer market (and typically is not). Generally, the fleet buyers want a lower price for the volume that they purchase (also note there is no dealer discount deducted from the contract price). How much does it cost us every period to support B2B? For example, we are bidding for Corp Car Rental with an alliance. How much support do these guys need from dealers, and what is the cost to us? The only direct cost is the sales force. However, overhead, retooling, product development, expanding dealers, etc., may all also come into play also, depending on how B2B impacts demand for your vehicles. I have a question about B2B business. We're trying to assess the possible costs/benefit trade-off of pursuing B2B business. If we choose to pursue B2B sales, is there any impact on consumer perception of our brand? Are we at risk of putting our brand image / equity at risk in the consumer space (our primary target) by selling cars to B2B customers? No. You should not expect any negative impact. Two separate markets. What happens with the contract that we won last period? Are we going to continue winning in this period or do we have to re-bid? In other words, is the sale fixed for lifetime of this game? The default decision is to re-bid on the contract at the same price. You may, however, change your bid price. To withdraw from the bidding enter 0 for the price. Do all firms see the same B2B contracts available for bidding? Yes. I want to double-check my understanding of winning a contract. At what point do you have to start production of the promised vehicle? For example, if you don't have enough production when you make the bid but will have enough at the next decision point, is that all right? You do not start production of that vehicle unless you know you have won it, correct? If the B2B screen says, "yes" to qualify for the contract, you will sell units when the simulation is advanced, so you will need to produce additional vehicles now. But you have to have that "yes" in the qualify column on the B2B decisions. Also, units for B2B contracts are first priority - that is production is set aside for B2B contracts first, then consumer markets. So, if you do not produce enough to sell in both B2B and consumer markets, it is the consumer market that will be short-changed, as the B2B market is a contractual obligation. How do decisions in period2 affect B2B bidding? For example, if we decided to upgrade a car in period2, can we use upgraded specs to bid for the contract in period2? Yes. When you actually go into the B2B marketing decisions for a particular contract and place a bid, you will see if you qualify on the main page. If you get a "yes," you can count on those sales for the coming period (and possibly double if you are the preferred supplier). If "no," you will not get them. (Please note that if you get a "yes" and then change the upgrade so you don't meet the requirements anymore, you won't qualify). We are increasing our dealer coverage this period. This is necessary to meet a particular contract. Can we bid for this contract in this period, since we are making a decision to increase dealer coverage now?

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It takes a year to open dealerships, so they will not be ready to fulfill the requirements of the contract this period. If you increase your coverage now, you will be able to bid and qualify next period. Is the B2B contract volume listed per year? In other words, Corp Car Rental is looking for 25K cars; if the contract is assigned, do they buy 25K per year for all periods? Yes, if you qualify, that 25K is a guaranteed quantity for the coming year, and, at this point, all fleet buyers expect that demand to remain approximately the same for the foreseeable future. Does it mean that if we win this contract, Corp Car Rental will buy from us for all rest of the periods? As long as you qualify each period and place a bid, yes. For instance, if you closed some of your dealerships (didn't qualify on coverage), or lowered your specs, etc. and no longer qualified, you would not sell any cars. The key thing is to make sure that each period you go into the B2B screen and check to see that you still qualify.

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LICENSING I'd like to begin negotiations on potential licensing agreements. How do I contact potential partners? Email, phone, in person. Can I license across industries? No Is this license renewed annually or can we set it up for a multiyear term? In terms of the software, both teams must agree to the license terms annually. However, you may negotiate a long-term agreement that is then implemented annually in the simulation. Can either party withdraw from the agreement? Are there any penalties for withdrawing from a licensing agreement? If we are licensing a particular product, will we automatically get any upgrades? No, you license a particular set of specifications, not the upgrades. Again, with regard to the simulation, you will update license terms each year, but you could have an agreement that specifies different terms over time including access to upgrades and penalties for withdrawing from the agreement. We would like to license a vehicle without ANY commitment of volumes. Is this possible? You must enter the units, which transfer into the production decision. Someone has to commit to making the vehicles, just as you do when you input your production volumes. The firm will then sell that many vehicles to you to resell. With regard to licensing, is there a mechanism included which gives a penalty if the licensor doesn't deliver the cars that were in the contract? In licensing, the licensor must deliver the vehicles by contract. Once a license agreement is in place (both parties agree), the productive capacity is set aside to make sure the vehicles are available. Each year this is updated (though the parties may agree to a longer term deal, in StratSim, the license must be agreed to each period). Could you give us some guidance on how to determine penalties when one doesn't stick to a (multi-year) licensing agreement? If the teams agree on a multi-year contract, we would recommend having them build a penalty into their negotiations should one of the teams opt out of the contract early. They should probably provide that licensing agreement to you (including the agreed-upon penalty), in writing. For example, they might agree that if one of the teams breaks the contract, they will incur a $2 million penalty (and if this happens, your professor can let us know and we will add negative $2 million in exceptional income to that team). Both teams will be able to sell a licensed vehicle, although we will sell under different brand name, right? Correct. Your licensed vehicle will start with no brand awareness. Price is fixed for 2 periods. Is there any way to enforce this? Price to market would have to be checked using the competitive products page and you might negotiate terms in a contract between your two firms. Lots of additional terms can be created in a contract, but the inputs remain simple. You'll also need to re-enter each period (even if a multi-year agreement).

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The vehicle will need to be upgraded to our specs. These are minor and hence they can upgrade and sell through us simultaneously. Can we put upgraded specs? In your "offer," you will let the firm know what specs you need in order for the license to be valid. If they have to upgrade to do so, then they will upgrade, or they can refuse the contract. Our deal with the other firm is that THEY will be incurring all inventory costs if sales don't reach to the forecasted mark. So if we enter units, then we would be committing to buy those # of units which will mean if sales don't hit that mark, we will be incurring inventory costs, contrary to the deal. Is there anyway to get around it? In the StratSim licensing deal, they will produce the vehicles and deliver them to you, who will market them through their dealer network or use them to fulfill a B2B contract. If you wish to recover the cost of the inventory, you can certainly do that by using the annual fee input for the licensing agreement. Normally, a per-period fee paid by one firm to the other is entered there, but by entering a negative number, funds can be transferred the other direction. This complicates the deal, and I’m not sure if both teams will agree to a fixed fee (negative annual fee) at this juncture, since both of us are risk averse in the deal. Thus, it sounds like team A will need to take a risk that was not scoped in our deal. The "fixed fee" can be changed every year, so there is no more risk than in the way you wanted to structure it. The only cost is that you wait a year before being reimbursed for the possible inventory cost. Are there any additional costs with licensing a vehicle? Any time you add or upgrade a new vehicle to the manufacturing mix, you will incur retooling costs. In StratSim, when you produce a vehicle under license, you do not simply use the old production line and slap a different nameplate on the vehicles as they come off the line. Rather, while you do benefit from the experience with the vehicle it is based on, you are still creating a new production line, allowing you to do upgrades of the licensed vehicles (as per your agreement), independent of your own products. In other words, producing a product under license is not cost-free. If we continue to license this vehicle to our competitor in subsequent periods, will we keep incurring retooling costs? Additionally, I am unable to find in the manual how to calculate/project retooling costs. Can you provide the formula to us? Once a production line has been established, retooling costs are incurred only when there is an increase in production or the vehicle is upgraded. The easiest way to calculate the cost of retooling for the licensed vehicle is to enter increased production for the vehicle it is based on by the amount of the license agreement, and see what the retooling cost will be. Be sure to reduce the production input for the base vehicle once you have the information you need. We are planning to upgrade our vehicle next period. Our understanding is that if we do a minor upgrade next period, the same upgrade will also apply to the licensed vehicle that we will be supplying to the other firm. Is that correct? No. The development process in this version of StratSim is tied to vehicle nameplates. When you do an upgrade, you upgrade a nameplate. When you license a vehicle, you create a new nameplate that can only be sold to your licensing partner. Therefore, upgrading your vehicle next period will not automatically upgrade the licensed vehicle. (Often this is a benefit.) If you want to upgrade the licensed vehicle as well, simply have your partner input the new specs in the license agreement next period along with funds for developing the upgrade in the licensing fee.

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We licensed a vehicle from another firm last period. At this time we have an inventory of 4K. Hypothetically, if we don't renew license, can we still sell the 4K units that we already have in our dealerships? Yes, you can still sell the 4K vehicles unless your agreement specifies otherwise. We will license a product as long as we win the b2b contract. We like to do this without any commitment of volumes, since we don't know if we will win. There is no question about whether you will get the B2B contract: if you qualify for any contract you bid on, you will get the sales. Just make sure you meet the dealer coverage requirements for the contract, then enter specs that meet the vehicle requirements for the contract when you create your license agreement. If your partner cannot meet the specs, they will not be able to accept the license agreement and you will not qualify for the contract. If they can meet the specs and accept your offer, your bid will qualify for the contract, and you will sell the vehicles. They only thing you cannot know is whether you will be the top supplier and receive additional sales. (See the note under Market/B2B Segments.) If you do not want to risk holding the inventory, only order enough units from your partner to satisfy the guaranteed B2B contract. Suppose we license one of our cars out to another company, and they ask for 60,000 units. Do we need to adjust our sales forecast and scheduled production upwards by 60,000? Or, should we just consider our numbers (from sales to our dealers) when deciding on sales and production for next period assuming that the licensed volume of 60,000 will be automatically produced. Also in the latter case, by undertaking 60,000 units of additional production for licensing, do we need to increase our production capacity if necessary (or, would that also be automatically increased)? When you accept the license agreement (by clicking the Accept button), the licensed vehicle and units will automatically be added to your production schedule, and you will not be able to change the number, since you are bound by contract to deliver the vehicles. Increasing the production capacity, on the other hand, is a decision you make separately. Keep in mind that if you increase capacity this period, it will not be available until next decision period, so you may be running over capacity for a year. If we request a licensing for a vehicle with 3/3/3/3 (say luxury from firm B) and the vehicle it's based on has attributes 5/5/5/5, what are the attributes of the vehicle we receive? In a licensing agreement, the class, size and engine attributes you specify must match exactly, but the interior, styling, safety and quality are minimums. The attributes of the licensed vehicle will be the same as the vehicle on which it is based. In this case, even though the request is for a luxury vehicle with 3/3/3/3, the licensed vehicle will be the same as the base: 5/5/5/5. Let me ask you similar (but different) question.. can we license a vehicle that has 5555 interior/styling... attributes and size 51 at a certain price from Firm B and then modify that vehicle to size=46 and attributes- higher or lower as we wish? What all can we do? Yes, you can license a vehicle and then have your partner change the attributes. Development can occur in your partner's firm or you can start modification in your own center. When having your partner upgrade the vehicle, you enter the new attributes in your license decision, and your partner must match the changes. The constraints are the same as for any other minor upgrade: +/-2 on the size, +/-5 on the engine, and +/-1 for the other attributes. So, if you licensed the vehicle at size 51, your partner could only reduce the size to 49 in the next year, to 47 the year after, etc. When you begin your own development of a licensed vehicle (by clicking the Develop button in the license screen), you control the changes the same way you would any other development project, and your specs will replace the license specs as soon as the project is ready.

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Because of all the different options open to you, this is definitely one of the more complex areas of the simulation. If you have further questions, do not hesitate to ask. Regarding the price and quantity of the units to the licensee, can the price change year to year or are you stuck with the purchase price for the length of the contract? These values are input / agreed to each year. You may specify it as part of a long-term contract between the two parties, or just make it a 1-year renewable contract that is renegotiated each year. Can we do a co-brand deal where our distribution channel is selling someone else's vehicle? I am guessing this will be a different type of licensing agreement. Is this acceptable within the StratSim software? Yes, this is doable, but it is sold as your vehicle, under your brand name (e.g. even if it is made by Izuzu, it is a Honda brand). You'll need to make an offer to the firm that is selling the brand that you'd like to sell through your firm, and they will need to accept. We are trying to arrange a deal where we license one of our vehicles to a competitor, who then bids for a B2B contract with that vehicle we licensed out to it. Is it possible to do such a transaction? If so, is it possible to immediately terminate the license if the competitor doesn't win the contract? We don't want the competitor to have those vehicles in stock if they are not selling to a fleet manager. As part of the agreement, you can specify that they only sell the vehicles into the B2B market. They just have to be sure to unclick on the "sell into consumer market" button. Then it will only sell to B2B market. However, they shouldn't make you an offer for vehicle specs that don't qualify. Does this mean that if the competitor doesn't win the contract, they'll have surplus inventory? Or will the license end, and cars be returned back to us? The inventory will be theirs and either disposed of or sold to the B2B market (or consumer markets if allowed in your agreement). MISCELLANEOUS It appears as though the other 50% of our grade is based upon net income. The syllabus states that this will be our cumulative net income. Is net income in year 1 equivalent to net income in year 10, or is it discounted? If there is a discount rate, what is that rate? We use straight cumulative net income – no discount rate. Are we in the beginning of period 1, making decisions for period 1, or the end of period 1, making decisions for period 2? How does this affect the timing of upgrades, etc? You are making decisions at the end of period 1, for period 2, and you will have period 2 results when the simulation is run forward. Look at pg. 12 in the manual—this shows a timeline that may be more helpful than words! What are the drivers of firm preference? Firm preference is determined by dealer ratings, range of products offered, firm technology capabilities, age of products, actual sales, and firm publicity -- in short, all the things that make a customer want to do business with a firm.

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Our team is trying to figure out how the simulation thinks about the end of the game, and whether we should do a lot of cost cutting then, to try to maximize our position. What is the best way to approach this? Remember that your firm performance is a function of your performance within industry and across industry on net income and market value. The stock market is determining the value of your firm into the future by assessing the discounted value of your future cash flows. These assessments are made each period, including the final period. In other words, even though we are ending the game at period 10, the market's assessments of your firm continues to be forward looking as it has been throughout the game. So perhaps the question your team should consider is what is impacting the market's assessment of your firm's future value. How does the simulation deal with increasing or decreasing demand for different cars? Are current US data used in some way? Moving average of some time frame, for instance, or some published forecasts? Same question about short-term and long-term interest rates on borrowed money. What's the connection to current US rates? Demand data is only very loosely based on North America, so faculty and students should only use historical perspectives in the US as a way of relating to the market, rather than for analytical purposes. Same for interest rates. Generally, what we are trying to provide is an even opportunity experience for all students thats reflects, in a simplified way, a realistic market and market dynamics.