Introduction

Let'sgetdowntobusiness!Yourdeliverablesare:
1. AcompletesetofRound1decisions.Wewillshowyouexactlywhattodo.
2. Aquiz.,whichyouMUSTtakebeforeyoucanfinishthetutorial.Whenthequizis
complete,amenuitemcalled"Process"becomesavailable.ClickingProcessadvances
thetutorialtothenextround(simulatedyear).
3. Asanoption,youcancontinuetoplaytheRehearsalonthroughRound4.
Ifyouunderstandhowtoperformsixbasictactics,youwillbeabletodevelopandexecutea
strategyforyourcompany.Thetacticsare:
1.
2.
3.
4.
5.
6.

Tactic1:Howdowerepositionaproduct?
Tactic2:Howdowemarketaproduct?
Tactic3:Howdowescheduleproductionandmanageinventory?
Tactic4:Howdowemodifyplantandequipment?
Tactic5:Howdoweraisemoneyandpaydebt?
Tactic6:Howdoweinventanewproduct?

Thequizwillaskyoutomatcheachbasictacticwithasetofactionsteps.Tocompletethe
Rehearsal,youmustget100%onthequiz,butyoucantakeitasmanytimesasyouneed.
Afteryoucompletethequiz,youcanputyourdecisionsintocompetitionwithtwocomputer
managedcompaniesandadvancetheclockoneyear.Youcanthenexaminetheresultstosee
howyoudid.
YoumightfinditeasiertodotheRehearsalifyouusethesethreedocuments:

ThisRehearsalscript(thisdocument)
TheCapstoneCourier(clicktheReportslinkontheRehearsalmenuintherightpanel)
TheIndustryConditionsreport(clicktheReportslinkontheRehearsalmenu)

Tip!The"expand/collapse"linkintheframeseparatorwillopenandclosethisarea,givingyou
easieraccesstotheRehearsalDecisionWorkbook.
DuringtheRehearsal,youareassignedtothe"Andrews"company.Donotworryifyouhave
beenassignedtoadifferentcompany.Whentherealsimulationbeginsyouwillmakedecisions
foryourassignedcompany.
GoodLuck!

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Tactic1:RepositioningaProduct
Instructions
1. IntheRehearsalDecisionSpreadsheet(totherightoftheExpand/Collapsebar),select
R&DfromtheDecisionsmenu.
2. Changingaproduct'sPerformanceandSizerepositionsitonthePerceptualMap.Ifa
productismovedoutsideoftheRoughCutcircles,itwillhave0sales;customerswillnot
wantthatproduct.
3. SlightlyimproveAblebyrepositioningittoaPerformanceof5.8andaSize14.2.Change
Able'sMeanTimeBeforeFailure(orMTBF)to18000.ClickRecalculate.Onthe
PerceptualMap,themagentanameiswhereyourproductwillbewhentheproject
completes.Theblacknameiswhereyourproductistoday,January1st.
4. RepositionAcretoMTBF13000.
5. RepositionAdamtoPerformance9.0,Size11.0,MTBF24000.
6. RepositionAfttoPerformance10.4,Size15.0,MTBF26000.
7. RepositionAgapetoPerformance4.7,Size9.8.
8. ClickRecalculate.Theseprojectswillhelpyourproductskeepupwithchanging
customerdemandastimegoeson,customerswantsmaller,betterperforming
products.
9. Inthemenu,selectFileandclickUpdateOfficialDecisions

Observe
1. Repositioningaproducttakestime:Thebiggerthechange,thelongerthetime;the
moreprojectsunderway,alsothelongerthetime.
2. MovingaproductonthePerceptualMapcutsitsperceivedageinhalf.SeetheAge
ProfileChart.Asawtoothlineshowsyouaproduct'sagebeforeandaftertherevision
date.
3. R&Dprojectsarebilledatarateof$1millionperyear.Athreemonthprojectcosts
$250thousand.Asixmonthprojectcosts$500thousand.
4. MaterialcostsaredrivenbythepositiononthePerceptualMapandbytheMTBF
specification;thehigherthetechnologyandthegreaterthereliability,thehigherthe
materialcosts.

Discussion
Whatisthistacticabout?
Positioningaproductmeanschoosingproductattributesthatcustomerswant.Youhavefive
customertypesorsegmentsTraditional,LowEnd,HighEnd,Performance,andSize.Theyare
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interestedinfourproductcharacteristicssize,performance(whichtogetherareplottedonthe
PerceptualMap),AgeandReliability.Eachcustomersegmenthasdifferentpreferences.Your
taskistogivecustomerswhattheywant,andthatrequiresrepositioningbecausethecustomer
expectationschangeovertime.
Forexample,ayearfromnowcustomerswillexpectdifferentsizeandperformance
specifications,andyourproductwillbeayearolder.Youneedtoplanarevisiontodaythatwill
givecustomerswhattheywantayearfromnow.

Wheredowegetthedatatoplanarevision?
WeneedtworeportsTheCapstoneCourierandtheIndustryConditionsReport.TheCourier
waspublishedyesterday,December31st.WearemakingdecisionsonJanuary1stforthe
upcomingyear.
IntheCourierwewillfindaSegmentAnalysispageassociatedwitheachsegment.Onthepage
wewillfinda"CustomerBuyingCriteria"box.Ittellsuswhatcustomerswantedyesterday.In
theIndustryConditionsReport,wewillfindhowquicklythoseexpectationsarechanging.For
example,supposetheCouriersaysthatTraditionalcustomerswantedaperformanceof5.0
yesterday.TheIndustryConditionsReporttellsusthatTraditionalcustomersexpect
Performancetoimproveby0.7eachyear.Thereforeattheendofthisyear,theywillwanta
performanceof5.7.
Weneedtoknowfourthings.WhenourproductcomesoutofR&D,whatwillcustomerswant
forperformance,size,ageandreliability?

Howdowemakethedecisions?
OntheR&Dspreadsheet,enternewperformance,size,andMTBFspecifications.Click
"Recalculate."Observethefollowing:
OnthePerceptualMap,ourproductappearstwice.Theblacklettersshowwhereourproductis
today.Wewillmakeandselltheproductatthosespecificationsuntiltheproductemergesfrom
R&D.ThemagentalettersshowwhereourproductwillbewhenitemergesfromR&D.
InthetableweseeaRevisionDateandanAgeatRevision.Wheneverwemoveaproducton
themap,nomatterhowfaritmoves,thedayitemergesfromR&Dthecustomersperceiveitas
being"newandimproved,"andtheycutitsageinhalf.WecanseethisgraphicallyintheAge
Profilechartatthebottomofthespreadsheet.Ifaproductisrevisedinthemiddleoftheyear,
itsageprofilewilllooklikeasawtooth.
IntheMaterialCostchartwecanseetheoldproduct'smaterialcostversustherevised
product.Twothingsdrivematerialcostthepositioningonthemap,andtheMTBF
specification.
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Aretheretipstokeepinmind?
TrytoendyourprojectsinDecember.ProjectscanonlybeginonJanuary1st.Ifanoldprojectis
stillunderwayonJanuary1st,wecannotbeginanewone.Usuallyweshouldkeepprojects
undertwelvemonths.
Themoreprojectsweadd,thelongereachprojecttakes.Thiscancauseearlierproject
completiondatestoslip.Alwayschecktherevisiondatesforallprojectsbeforesaving
decisions.
Longprojectscanmoveaproductfromonesegmenttoanotherforexample,from
PerformancetoTraditional.Thiscantaketwooreventhreeyears.Plantheprojectasaseries
ofoneyearsteps,witheachstependinginDecember.

WhatdoweneedtodobeyondtheRehearsalwhentherealcompetitionbegins?
1. UsingtheCourierandIndustryConditionsreports,findoutwhatcustomerswillwant
nextyear.
2. OntheR&Dspreadsheet,makedecisionsforAble,Acre,Adam,AftandAgape.
3. Saveyourdecisions.ClickFileandUpdateOfficialDecisions.

Tactic2:MarketingaProduct
Instructions
1. IntheRehearsalDecisionSpreadsheet(totherightoftheExpand/Collapsebar),select
MarketingfromtheDecisionsmenu.
2. SetAble'smarketingmixtoPrice$29.00,Promo$1200,Sales$1400,Forecast1850.
ClickRecalculate.(Promo,SalesandForecastnumbersareinthousandsso$1200means
$1.2Million)
3. SetAcre'smarketingmixtoPrice$20.50,Promo$1100,Sales$1300,Forecast2500.
ClickRecalculate.
4. SetAdam'smarketingmixtoPrice$39.00,Promo$1000,Sales$1100,Forecast500.
ClickRecalculate.
5. SetAft'smarketingmixtoPrice$34.00,Promo$900,Sales$1000,Forecast600.Click
Recalculate.
6. SetAgape'smarketingmixtoPrice$34.50,Promo$950,Sales$1100,Forecast550.Click
Recalculate.
7. Inthemenu,selectFileandclickUpdateOfficialDecisions.

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Observe
1. TheBenchmarkPredictionfordemandisonlyusefulforbenchmarking.Thecomputer
hasnoknowledgeofwhatyourcompetitorsaredoing.Itassumeseachcompetitorwill
offeroneunremarkableproduct.However,theBenchmarkPredictionisusefulfor
anticipatingtheimpactofchangestoyourmarketingmixupondemand.
2. UntilyousupplyanumbertoYourSalesForecast,thespreadsheetusestheBenchmark
PredictiontoforecastdemandandcalculateGrossRevenue,VariableCosts,etc.Always
overridetheBenchmarkPredictionwithaforecastofyourown.

Discussion
Whatisthistacticabout?
Marketerstalkabout"the4P'sofmarketingprice,promotion,placeandproduct."Inthis
tacticweconsiderallfouraspectsofthemarketingmixtoestimateourunitdemand.
Priceeachsegmenthasanexpectedpricerange.Priceservestwofunctions.Between
segments,pricedistinguishesonesegmentfromanotherforexample,LowEndcustomers
expectlowerpricesthanHighEndcustomers.Withinasegment,pricedrivesademandcurve
lowerpricesgeneratehigherdemandthanhigherprices.
Promotioneachproducthasapromotionbudgetthatdrivescustomerawareness.Thinkof
promotionas"whathappensbeforethesale."Ifapotentialcustomerknowsaboutyour
productbeforetheybeginshopping,theyaremorelikelytoconsideryourproduct.
Placeeachproducthasasalesbudgetthatdrivescustomeraccessibility.Thinkofplaceas
"whathappensduringandafterthesale."Ifcustomersfinditeasytoexamineyourproduct,
talktoyouremployees,andtakedelivery,theyaremorelikelytochooseyourproduct.
Productinthecontexthere,weareconcernedwithforecastingdemandsothatwecan
produceadequateinventory.Afterall,noinventory,nosales.Inabroadersense,product
designtheinventionandpositioningofaproductarealsomarketingconcerns.

Wheredowegetthedatatomarketourproduct?
TheTeamMemberGuideandtheCapstoneCourier.TheTeamMemberGuidediscussesallfour
elementsinsection4.2Marketing.
TheCourierpresentsmarketsegmentpagesthattelluswhatcustomerswantandcontrastthe
competingproducts.Themarketsharepagebreaksdowndemandbyproductandsegment.
ThePerceptualMapplotsalltheproductpositionsonamap.

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Howdowemakethedecisions?
BringuptheMarketingspreadsheet.
Themarketingspreadsheetisdesignedtogiveyousomebenchmarkingfeedbackabout
demandasyouchangevaluesforprice,promo,andsales.However,becausethecomputerhas
noinformationaboutyourcompetitor'sdecisions,theBenchmarkPredictionisonlyusefulfor
testingelasticities.
Forexample,dropAble'spriceby$1andclickrecalculate.TheBenchmarkPredictionwill
predictanincreaseinsales.However,youcannottrustthatforecast.Why?Thecomputerhas
noideawhatyourcompetitorswilldo.Theymightdropprice$2,orraiseprices.The
Benchmarkassumesyourproductwillcompetewithmediocreproducts.
Ontheotherhand,abenchmarkcanbeuseful.Asyouchangepricesandbudgets,youcanget
somesensefortheirimpactupondemandandcontributionmargin.

Aretheretipstokeepinmind?
Tryputtingpessimisticforecastsinto"YourSalesForecast."Youwouldliketoknowwhatyour
cashpositionlookslikeinyourworstcasescenario.Intheworstcase,salesarepoor,butyou
builtinventoryforthebestcase.Asaconsequence,allofyourcashistiedupintheinventory
sittinginthewarehouse.YouwanttohaveatleastonedollarinCashinyourworstcase
scenario.
WhatdoweneedtodobeyondtheRehearsalwhentherealcompetitionbegins?
1. Foreachproduct,usetheCourier'ssegmentpagetodeterminewhatcustomersexpect
forPriceandtocompareyourproductwithcompetingproducts'awarenessand
accessibility.
2. Decideuponamarketingmixforeachproduct.Forexample,youmightlowerAble's
priceadollar,andincreaseitspromotionandsalesbudgetsby$100thousand.Fora
demandforecast,enterlastyear'sdemandoranothernumberyoubelieveisaworst
casefordemand.
3. Savethedecisions.UnderFile,selectUpdateOfficialDecisions.

Tactic3:SchedulingProduction
Instructions
1. IntheRehearsalDecisionSpreadsheet(totherightoftheExpand/Collapsebar),select
ProductionfromtheDecisionsmenu.
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2. ForProductionSchedule:
o SetAbleto2100
o SetAcreto2800
o SetAdamto600
o SetAftto600
o SetAgapeto550(ProductionScheduleunitsareinthousands;550means
550,000)
ClickRecalculate
Inthemenu,selectFileandclickUpdateOfficialDecisions.

Observe
1. ProductionAfterAdjustmentsiswhatwewillactuallyproduce.
2. OurinventorythisyearwillbetheInventoryOnHandwithwhichwebegintheyearplus
ourProductionAfterAdjustments.
3. Ourworkforcecomplement(thenumberofworkersrequiredtomeetourproduction
schedule)varieswithnumberofunitsweproduce.Themoreunitsproduced,themore
workersweneed.
4. Therearetwoshiftsfirstandsecond.Secondshiftispaida50%premiumoverfirst
shift.
5. Iftheschedulerequiresasecondshift,buttherearenotenoughsecondshiftworkers,
firstshiftworkersproduceonovertimeata50%premiumoverfirstshift.
6. Laborcost/unitistheaveragecostoverallshiftsandovertimetomeettheproduction
schedule.
7. Materialcostisnotaffectedbytheproductionschedule.
8. Contributionmarginisdefinedas(PriceUnitCostInventoryCarryCost)/Price.Itis
thepercentageofthepriceleftoverafterpayingvariablecosts.

Discussion
Whatisthistacticabout?
Atthesimplestlevel,wemusthaveinventorytosell,andinthistacticwetellourplanthow
manyunitstoproduce.Wewillofferourproduction,plusanyinventoryleftoverfromlastyear,
forsaletoourcustomers.
Inaperfectworldwewouldproduceexactlyenoughinventorytomeetdemand.Unfortunately,
wecannotbecertainwhatyourcompetitorswilldo.Therefore,wemustmanagetworisks:
1. Stockingout.Ifwerunoutofinventory,wegiveourcustomersandourprofitsto
competitors.
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2. Carryingtoomuchinventory.Wepayforinventoryoutofcash.Iftoomuchendsupin
thewarehouse,wecouldrunoutofcashandtakeanemergencyloan.

Wheredowegetthedatatoplanaproductionschedule?
TheTeamMemberGuide,TheCapstoneCourier,andourmarketingforecast.
TheTeamMemberGuidediscussesproductioninsection4.3.TheCourieroffersstarting
inventoryandcapacityconstraintsontheProductionpage.
InTactic3Marketing,wetriedpessimisticsalesforecasts.Wesaidsomethinglike,"Inourworst
case,webelievewecansell900thousandunitsofAble."Butif900thousandunitsisourworst
case,whatisourbestcase?Wewouldliketohaveenoughinventorytosatisfyourbestcase.
Otherwisewestockout.
Supposewedecideourbestcaseis1200unitsofAble,andthatwehave100alreadysittingin
thewarehouseleftoverfromlastyear.Wewouldproduce1100.
Ifourworstcasecomestrue,weendtheyearwith300thousandunitsofinventory.Ifourbest
casecomestrue,weendtheyearwith0inventorybuteverycustomerisserved.
Intheworstcase,wewouldhavetobuy300thousandunitsofinventory.At$20perunit,that
wouldtieup$6millionofourcash.Wecanseehowmuchcashwewouldhaveleftbybringing
uptheProformaBalanceSheet.Aslongaswehave$1leftincashinourworstcase,wecansay,
"Weplannedfortheworst,butwehopeforthebest."

Howdowemakethedecisions?
BringuptheProductionspreadsheet.
YourUnitSalesForecast(ideallyourworstcase)wasbroughtoverfromtheMarketing
spreadsheet,andourInventoryOnHand(leftoverfromlastyear)isshownbelowit.Wehave
ourbestcaseforecast.
Scheduleenoughproductiontomeetourbestcaseforecast.

Aretheretipstokeepinmind?
Considerthequestion,"Howmanymonthsofinventoryarewewillingtocarry?"Forexample,
threemonthsofinventorymeansthreemonthsofsalessittinginthewarehouse.Thatisa
policydecision.Ifyourpolicyis3months,thenyourworstcasesalesare9monthsofsales,and
yourbestcaseis12/9thsor4/3rdsofyourworstcase.Togetourbestcase,weneedonly
multiplyourworstcaseby4/3rdsor133%.

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WhatdoweneedtodobeyondtheRehearsalwhentherealcompetitionbegins?
1. Scheduleenoughproductiontomeetyourbestcasedemandforeachproduct.
2. Savethedecisions.UnderFile,selectUpdateOfficialDecisions.

Tactic4:ModifyingPlantandEquipment
Instructions
1. IntheRehearsalDecisionSpreadsheet(totherightoftheExpand/Collapsebar),select
ProductionfromtheDecisionsmenu.
2. ForBuy/Sellcapacity:
o a.Sell300thousandunitsofcapacityforAblebyentering300.
o b.Buy400thousandunitsofcapacityforAcrebyentering400.
ForNewAutomationRating:
1. IncreaseAble'sAutomationto5.0.
2. IncreaseAcre'sAutomationto6.0.
ClickRecalculate
Inthemenu,selectFileandclickUpdateOfficialDecisions.

Observe
1. Sellingcapacityrecovers65%ofitsoriginalvalue.CapacityissoldonJanuary1st.
2. Buyingcapacitytakesoneyeartogetdelivery.YouordercapacityonJanuary1st.It
arrivesonDecember31st.
3. Similarly,automationchangestakeayear.
4. Yourinvestmentistotaledintherightmostcolumn.Thetotalinvestmentcannot
exceedMaxInvestment.
5. OntheFinanceworksheet,issuestockandlongtermdebttofundtheplant
improvements.

Discussion
Whatisthistacticabout?
Ourplantproducesourinventory.Capacitydetermineshowmanyunitswecanproduceina
year.Automationdeterminesthelaborcontentineachunit.
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Occasionallyweneedtobuyorsellcapacity.Investinginautomationreducesourlaborcosts.If
weexpandcapacityorautomation,wemustalsoraisethemoneytopayforit.
Capacityisratedas,"Thenumberofunitsthatcanbeproducedinayearonfirstshift."A
capacityof800meansthatwecouldproduceupto800thousandunitsonfirstshift.Wecould
produceanother800onsecondshift,butourlaborcostswouldincrease50%.
CapacityandautomationareorderedonJanuary1standarriveonDecember31st,effectively
oneyearlater.
Supposethatwehavecapacityfor800.Weexpectdemandtobe1200nextyear.Wecould
produce800onfirstshiftand400onsecond.Orwecouldincreasecapacityto1200and
produceeverythingonfirstshift.Orwecouldincreaseautomationwewouldstillproduce400
onasecondshift,butatsomepointourlaborcostsfallenoughthatweareindifferent.

Howdowemakethedecisions?
BringuptheProductionspreadsheet.
Under"PhysicalPlant"wesee"Buy/SellCapacity."Tobuyanadditional100thousandunitsof
firstshiftcapacity,enter"100."Tosell100thousandunits,enter"100."
Automationisratedonascaleof1to10.Toincreaseautomationenteranewvalue.
Thecostoftheinvestmentappearsasapositivenumberwhenbuyingequipment,andasa
negativenumberwhenselling.

Aretheretipstokeepinmind?
Asaruleofthumb,alwaysfullyfundplantandequipmentpurchases.Sourcesoffunding
includestockissues,bondissues,anddepreciation.(Laterinthetutorialwewilldiscuss"why.")
Forexample,ifwearespending$20milliononnewplant,weshouldbeabletoaddtogether
stockissues,bondissuesanddepreciationequaling$20million.Likeanyruleofthumbthere
areexceptions,butyoushouldbeabletoexplainwhytheexceptionisappropriatebefore
makingtheexception.

WhatdoweneedtodobeyondtheRehearsalwhentherealcompetitionbegins?
1.
2.
3.
4.
5.

Makeanyadjustmentstocapacity
IncreaseAcre'scapacityby200thousandunits.
IncreaseAft'sautomationto6.0.
Observethenetcostofthesedecisions
OntheFinanceworksheet,issueabondtofundtheplantimprovements.(Alternatively,
useamixofissuestockandabond).

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Tactic5:RaisingMoneyandPayingDebt
Instructions
1. IntheRehearsalDecisionSpreadsheet(totherightoftheExpand/Collapsebar),select
FinancefromtheDecisionsmenu.
2. ForIssueStock,issue$9millionofnewstockbyentering9000intheIssueStockcell.
3. ForIssueLongTermDebt,issue$9millionofnewbondsbyentering9000intheIssue
LongTermDebtcell.
4. ForBorrow,raise$7millionofcurrentdebtbyentering7000intheBorrowcell.
5. LeavetheAccountsReceivableandAccountsPayablepoliciesat30days.
6. ClickRecalculate
7. Inthemenu,selectFileandclickUpdateOfficialDecisions.
8. Inthemenu,selectBalanceSheetfromtheProformasandreviewthebalancesheet.
9. Inthemenu,selectIncomeStatementfromtheProformasandreviewtheincome
statement.
10. Inthemenu,selectCashFlowStatementfromtheProformasandreviewthecashflow
statement.

Observe
1. Yourtotalsforplantimprovementarebroughtforwardtothefinancepagefrom
Production.
2. YoucannotissuemorenewstockthantheMaxStockIssuelimit.
3. YoucannotretiremoreoutstandingstockthantheMaxStockRetirelimit.
4. Youarenotrequiredtopayadividend.Ifyoupayadividend,itisexpressedindollars
pershare.
5. Yourcashpositionasofyesterday,andyourcashpositionthatisforecastfortheendof
thisyear,arepresentedatthebottomoftheleftcolumn.
6. YoucannotissuemorebondsthattheMaximumissuethisyearlimit.
7. YourAccountsReceivableandAccountsPayablelagsareexpressedindays.Increasing
yourReceivableslageffectivelygivesaloantocustomers.IncreasingyourPayableslag
effectivelyextractsaloanfromvendors.
8. Yourproformafinancialstatementsestimatewhatyourfinancialstatementswilllook
likeattheendoftheyear,assumingthatyoursalesforecastisexactlycorrect.

Discussion
Whatisthistacticabout?
Ultimatelythistacticisaboutfundingourassets.Assetsarepaidforwithdebtandequity.
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Consequencesaffectourperformanceratios,ourprofitability,ourgrowth,evenourcompany's
viability.

Howdowemakethedecisions?
BringuptheFinanceworksheet.
Wecanraisedebttwowayswithshorttermdebtfromourbanker,andwithlongtermdebt
fromourbondholders.Valuesareenteredinthousands.Forexample,4000means$4million
dollars.
Wecanraiseequitywithstockissues,andbyretainingtheprofitswemakeinsteadofpayinga
dividend.Stockissuesareenteredinthousands.
Wecanreducedebtbypayingdownourcurrentdebtorbypayingbondsearly.
Wecanreduceequitybyrepurchasingstockorbypayingadividend.Dividendsareenteredin
dollarspershare.Forexample,$1.49meanswewillpay$1.49toeveryshareoutstanding.
TherearetwocreditpolicieswhichcanalsoaffectourbalancesheetAccountsReceivableand
AccountsPayablecreditpolicies.Bothareexpressedindays.Forexample,30daysA/Rpolicy
meansthatwegivecustomers30daystopayourinvoices.

Aretheretipstokeepinmind?
Keeptheratioofassetstoequity(orleverage)between33%and66%.Whatdoesthismean?
Anyassetispaidforwithamixofdebtandequity.Let'suseapersonalassetfordiscussion
purposes.Whenapersonbuysahouse,theymakeadownpaymentsay20%.Thedown
paymentisequity.Thatmixis20%equityand80%debt,oraleverageof5.0.(Foreverydollar
ofasset,$0.20wouldbeinequity,soassets/equityis5.0.)Inbusinessaleverageis5.0isvery
risky.Itwouldbeverydifficulttomakeaprofitafterinterestpayments,andtheriskofdefault
ishigh.At33%equity,ourleverageis3.0.Riskbecomesmoretolerable.At50%,ourleverageis
2.0andcomfortlevelshigh.At66%lendersareeagertolendusmoneyatfavorablerates.

WhatdoweneedtodofortheRehearsal?
Wehavealreadyissuedstocksandbondstocoverplantpurchases.
However,wehavenotconsideredcurrentdebtoradividend.
1. ExamineyourProformaBalancesheet.
2. AddtogetherInventoryandAccountsReceivable.Thesearecurrentassets,andthey
shouldbefundedbycurrentliabilitiesandworkingcapital.Currentliabilitiesarethe
sumofAccountsPayableandCurrentBorrowing.
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3. Thereisaruleofthumbthatyoucanusetocalculatehowmuchmoneytoborrowfrom
yourbankerascurrentdebt.AddtogetherInventory+AcctsReceivable.Roughlyhalf
shouldbefundedwithcurrentliabilities.Therefore,yourcurrentdebt=(Inventory+
AccountsReceivable)/2AccountsPayable.
4. BorrowtheresultontheFinanceworksheetasnewcurrentdebtinthe"Borrow($000)"
cell.
5. OntheFinanceworksheet,examinethe"EarningsPerShare"cellundercommonstock.
Assumingitispositive,howmuchofthisdoyouwishtogivetostockholdersasa
dividend?Supposeyouranswerishalf.EnterhalftheEPSintheDividendPerSharecell.

Tactic6:InventingaNewProduct
Instructions
1. IntheRehearsalDecisionSpreadsheet(totherightoftheExpand/Collapsebar),select
R&DfromtheDecisionsmenu.
2. InthefirstfreerowenteraNameAce,setperformanceto10.0,setsizeto10.0,andset
MTBFto25000.ClickRecalculate.
3. SelectProductionfromtheDecisionsmenu.
4. ForBuy/Sellcapacity,buy400,000unitsofcapacitybyentering400.ForNewAutom.
Ratingenter4.0.ClickRecalculate.
5. SelectFinancefromtheDecisionsmenu.
6. IncreaseIssueStockto$13millionbyentering13000.
7. IncreaseIssueLongTermdebtto$13millionbyentering13000.
8. Inthemenu,selectFileandclickUpdateOfficialDecisions.

Observe
1. R&Dfornewproductstakeslongertypicallybetween1.4and3.0years.
2. Sinceittakesayeartotakedeliveryonnewcapacity,ordercapacityandautomation
oneyearbeforetheproductemergesfromR&D.
3. Financethenewplantwithamixofstockissuesandbonds.

Discussion
Whatisthistacticabout?
Sometimeswewanttoinventnewproducts.Perhapswearereplacinganoldproduct,or
perhapsweareincreasingourproductbreadth.Wewanttogivecustomerswhattheywant.

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Theprocessisalmostthesameasrepositioningaproduct.However,weneedtobroadenour
perspectivetoincludeplantandequipmentforournewproduct,andraisingthemoneytobuy
theplant.
Inventingaproducttakeslongerthanrepositioningtypicallybetween1.4and3.0years,
althoughmostproductsareready1.6to2.0years.

Wheredowegetthedatatoplananewproduct?
WeneedtworeportsTheCapstoneCourier,andtheIndustryConditionsReport.TheCourier
waspublishedyesterday,December31st.WearemakingdecisionsonJanuary1st.Weneedto
thinkaheadtwotothreeyears.
Aswithrepositioning,weusetheSegmentAnalysispageoftheCourierfindoutwhat
customerswantedyesterday,thenusetheIndustryConditionsreporttoprojectintothefuture.
Weneedtoknowfourthings.WhenourproductcomesoutofR&D,whatwillcustomerswant
forperformance,size,ageandreliability?
Wealsoneedtogetasenseforourcapacityrequirements.Youwillfindthesegmentsizeand
growthratefornextyearontheSegmentAnalysispage.However,capacitymustbeevaluated
inthefaceofcompetition.WecangetasenseforcompetitorsbylookingattheSegment
Analysis,thePerceptualMap,andtheProductionAnalysispage.
Ourplanincludestheproductspecifications,ourplantandequipmentrequirements,andour
fundingrequirements.

Howdowemakethedecisions?
SupposewedecidetocreateanewHighEndproductcalled"Ace."Lookingtwoyearsintothe
future,wewillgiveAceaPerformanceof10.0,Sizeof10.0,andMTBFof25000.Wehopeto
capture1/6thofthemarket,sowewillplanfor400unitsofcapacityatanautomationlevelof
4.0.Thiswillrequireaninvestmentof$8.8million.Wewillraise$4.4millionwithstockand
$4.4millionwithbonds.
OntheR&Dspreadsheet,weentertheproductspecifications.NameAce,Performance10.0,
Size10.0,MTBF25000.ClickCalculate.
OntheProductionspreadsheet,weenterourcapacityandautomationrequirements.Capacity
400.Automation4.0.Wereadthecostoftheinvestment.
OntheFinancespreadsheet,weraisethecapitaltofundournewplant.IssueStockof$4
million(enteredas4000becauseeverythingisinthousands).IssueLongTermDebtof$4.4
million(enteredas4400).

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UnderFile,clickUpdateOfficialDecisions.

Aretheretipstokeepinmind?
Dotherepositioningdecisionsfirst.Whenyouaddthenewproductdecisions,therevision
dateswillslip.AdjusttherepositioningprojectssotheyendbeforeJanuary1stifpossible.
Newproductsoftenemergeinmidyear.ButplantandequipmentarepurchasedonJanuary
1standarriveonDecember31st.Therefore,ourplantwillsitidleforsomeperiodoftimeuntil
theproductemergesfromR&D.Forexample,supposeourproductemergesinJulyofnext
year.Theplantwouldsitidlefor7months.Sometimesitmakessensetoeitherwaituntilnext
yeartobuytheplant,ormodifyourprojecttoendlateintheyear.Forexample,ifwemodified
ourdesigntoendinDecember,wecouldpostponepurchasingplantuntilnextyear.
WhatdoweneedtodofortheRehearsal?
Pickasegmentforournewproduct.(Example,theHighEndsegment.)
UsingtheCourierandtheIndustryConditionsReport,selectspecifications.(Example,Name
"Ace,"Performance10.0,Size10.0,MTBF25,000.)
Decidehowmuchplantandequipmenttopurchaseforournewproduct.(Example,400
thousandunitsatanautomationof4.0foran$8.8millioninvestment.)
EntertheproductspecificationsontheR&Dspreadsheet.
EntertheplantandequipmentdecisionsontheProductionspreadsheet.
Fundtheplantandequipmentusingaroughly50/50mixofnewstockandnewbonds.
(Example,stockissue$4.4million,bondissue$4.4million.)
Savethedecisions.UnderFile,selectUpdateOfficialDecisions.

TheRehearsalQuizandProcessing
Quiz
Intherighthandpane,clicktheQuizlink.
Thequizisstraightforward.Thesixbasictacticsarelistedontheleft.Intherightcolumnwelist
sixgroupsofactionstepsasgroupsAtoF.Associateeachtacticwithagroupofactionsteps.

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Youmustgetallanswerscorrecttocompletethequiz.Ifyougetthemallrightonthefirsttry,
youearnascoreof100.Ifyougetthemallrightonthesecondtry,youearna90.Onthethird
try,80,andsoon.

ProcessingtheRehearsal
Afteryoucompletethequiz,anewmenuitemwillbecomeavailableProcess.
Processingwillfinalizeyourdecisions,advancetheclockoneyear,andallowyoutoexaminea
newCapstoneCourier.
YourinstructorwillbeabletoviewtheSalesandProfitswhichresultfromyourdecisionsso
yourtacticsfortheRehearsalshouldmaximizethoseforyourcompany.
Afteryouprocess,lookattheresultsinTheCapstoneCourier.
Youcanplayuptofourroundsoftherehearsal.Simplymakenewdecisionsforthenextround
processtheround.
Alternatively,afterRound1,theProcessmenuoffersaReplayoption.Replayallowsyoutoedit
lastround'sdecisionsandtryagain.Forexample,youcouldreplayRound1asmanytimesas
youwish.WhenyouaresatisfiedwithRound1,youcanadvancetoRound2.Youcanreplay
Round2asmanytimesasyouwish.(However,youcannotrestarttheRehearsalfromthe
beginning,andyoucannotbackupbeyondthecurrentround.)
Goodluck!

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