iBizSim User Manual BM 6 Learning Phase PDF

iBizSim: International Business Simulations
International Business Simulations
User Manual
iBizSim SM 1 Learning Phase
V.18.05
© 2018 by Prof. Dr. Ashok N. Ullal, Hoelderlinstrasse 13, 72127 Kusterdingen, Germany Page 1
Table of Contents
1. The Business Simulation iBizSim.........................5
1.1. Structure of the Business Simulation iBizSim..........5

1.2. Organization of the Management Team..................5
1.3. Management Tasks.................................................7
.......................................................................................7
1.4.Company Policy........................................................8
1.5. Analysis and Evaluation of Data - Setting up Indices
.......................................................................................9
1.6. Methodology for Decision Making.........................10
1.7. The Products.........................................................11
1.8. The Markets..........................................................11
1.9. Development of Demand......................................13
1.9.1. General.................................................................... 13
1.9.2. Decisions.................................................................13
1.9.3. Demand for Petra and Quarto in the Markets...........13
1.9.4. Efects of Inability to Deliver....................................14
1.10. Terms of Payment................................................15
1.11. Image..................................................................16
1.12. Production...........................................................17
1.12.1. Personnel Capacity................................................17
1.12.2. Machine Capacity..................................................18
1.12.3. Sequence for Purchase, Production and Sale.........19
1.13. Costs...................................................................20
1.13.1. Variable Production Costs......................................20
1.13.2. Variable Marketing Costs.......................................20
1.13.3. Fixed Costs............................................................20
1.13.4. Depreciation Costs.................................................21
1.13.5. Stock Value............................................................21
1.14. Finance................................................................22
1.14.1. Procurement of Funding.........................................22
1.14.2. Liquidity and Insolvency........................................23
1.15. Exchanging Currencies........................................24
1.16. Summary of the Efect of Infuencing Factors......25

1.16.1. Efect on Demand..................................................25
1.16.2. Other Efects.........................................................26
2. Decisions...........................................................27
2.1. Company Decisions...............................................29

2.1.1. Lean Management...................................................29
2.1.2. Payment of Dividends..............................................29
2.2. Sales Decisions.....................................................30
2.2.1. Market Research......................................................30
2.2.2. Product Policy - Product Management......................30
2.2.3. Price Policy..............................................................32
2.2.4. Communication Policy - Advertising, Sales Promotion
.......................................................................................... 32
2.2.5. Distribution Policy - Marketing Logistics...................32
2.2.5.1. Quantities to be Transported........................................33
2.2.5.2. Training of Sales Personnel - Key Accounts..................33
2.3. Purchasing Decisions............................................35
2.3.1. Market Research......................................................35
2.3.2. Purchase of Raw Material.........................................35
2.3.3. Purchase of Bought-in Goods...................................35
2.4. Production Decisions.............................................35
2.4.1. Planning of Production Quantities............................35
2.4.2. Appointment and Dismissal of Personnel.................36
2.4.3. Sale and Purchase of Machines................................36
2.4.4. Lean Production.......................................................37
2.4.4.1. Total Quality Management (TQM).................................37
2.4.4.2. Production Technology.................................................37
2.4.4.3. Continued Training of Personnel...................................38
2.5. Financial Decisions................................................39
2.5.1. Raising Short-term and Long-term Loans.................39
2.5.2. Fixed-term Deposits with Banks...............................39
2.5.3. Factoring.................................................................. 39
2.5.4. Exchange Rate Fixing..............................................39
Preface
This course is based on iBizSim: International Business Simulations, a
series of business simulations developed by Prof. Dr. Ashok N. Ullal,
Professor emeritus, School of International Business (now merged into
ESB Business School), Reutlingen University, Germany.
The course is designed to give groups of students working as teams

the opportunity to build and implement an international business strat-
egy for a simulated company operating in the world markets. The sim-
ulated company is located in Germany, has a production plant initially
in Germany, manufactures initially two consumer products and sells
these in two markets, the home and the export market.
The course emphasizes strategic planning and control and ex-

pects you to use your knowledge and experience from all the
other business-related courses in a very integrated manner.
The simulated company that you will manage:
Purchases raw materials and bought-in goods - invoices are drawn

up in Euro.
Produces goods in the Germany - all costs arising are in Euro.
Transports the finished goods to the central store and to the sales
branches in the two sales markets.
Sells the products Petra and Quarto in two markets in which
the invoices are drawn up in two diferent currencies.
Currencies used
Home market Export market
Euro U.S. Dollar
(EUR) (USD)
The balance sheet, the proft and loss account, and the fnan-
cial accounts will all be drawn up in Euro.
1. The Business Simulation

iBizSim
1.1. Structure of the Business Simulation iBizSim
Several companies in a particular branch of industry are in competition
with one another. They sell the products Petra and Quarto in two mar-
kets that are independent of one another. Each company manufac-
tures the products it supplies, but there exists the possibility of buy-
ing-in these goods.
The products are generalized consumer goods. Hence the simulation is

based on the application of general business principles.
Specifc experience from particular branches of industry is

therefore not necessary for taking part in the simulation. The
products Petra and Quarto will be described in detail below.
The structure of the production plant, sales and turnover in all mar-
kets, stocks of goods and cash, outgoing and incoming payments, i.e.
all the information which is necessary for managing the company, are
in the Management Report. The first Management Report shows the
economic and operating state of the company at the close of the initial
period 0. All the companies have the same opening situation.
The simulation is run in chronological periods of a quarter each. Hence

four of these periods constitute a financial year. At the start of each
period, each company makes the decisions that are to apply in that
period. The decisions of all the companies are processed in a com-
puter program, and the results of each period are available in the form
of reports. From these reports, each management team can see the
consequences of its decisions. The report constitutes the basis of the
decisions for the subsequent period.
One of the tasks of the company’s management team is to analyze the

reports and to ascertain the interrelationships, as well as the factors
involved, in order to establish a rational basis for subsequent optimal
decisions.
All decisions have to be made in such a way that the long-term

success of the company beyond the conclusion of the simula-
tion is assured.
1.2. Organization of the Management Team

The amount of information and knowledge necessary for the success-
ful running of a company is continually increasing. This forces the
management to delegate important duties to senior colleagues who in
turn have to work together for the company's success. iBizSim recog-
nizes this trend and requires that all business functions are exercised
by working groups (= teams).
Hence your willingness to work in a team is an absolute pre-

requisite.
Your team will take over the management of one of the companies
that are competing with one another in an industry. In real life, man-
agement decisions directly afect the success or failure of a company.
In the same way, your team has to take decisions that will afect your
company. The decisions necessary for this will be made at the start of
each period. The owners of your company expect you to perform bet-
ter than the companies that are in competition with you.
It is your task to:
● Improve the market position of the company.
● Achieve a satisfactory level of profitability.
In principle, the internal organization and allocation of responsibilities

is left to you members of the team. However we strongly recommend
that you allocate specific functional areas e.g. sales, finance, produc-
tion to individual team members. In the areas of responsibility allo-
cated in this way, each team member can prepare the decisions in the
allocated functional area and present them to the team for subsequent
discussion.
Finally, your team must be able to reach a group decision. This

means that you must frst agree on how the fnal decisions are
to be made, whether by unanimous or majority vote.
Whatever organization you choose, remember that it is impor-

tant for every member of the team to be involved as much as
possible in reaching the decisions.
1.3. Management Tasks
Define the goals of the company
Plan the strategic and operational measures
Ensure the availability of resources
Raw materials Machines Personnel Capital
Produce the products
Petra Quarto
Supply the markets
Home market Export market
1.4.Company Policy
One of your first tasks as a team will be to define your business objec-
tives and the strategy to achieve them.
After your team has become familiar with the simulated company, the
products and the markets, we expect a clear statement of short- and
long-term company policy.
The company is not rigidly bound to the policy established at

the start of the simulation. However, any deviations from it
need to be discussed and justifed in the fnal discussion.
Here are some examples of business objectives:
In production: Optimal stock holding, high degree of utilization of

capacity, minimization of costs, an even utilization
of capacity, minimal staf turnover.
In finance: Short and long term profitability, low level of debt,
self financing, high yield on capital, distribution of
high dividends.
In marketing: Optimal satisfaction of customer demand,
favorable image, steady growth, high quality, high
market share, and constant ability to supply the
goods, high turnover.
In the social Contented workforce, continuity of employment
sphere: even when there are fuctuations in sales,
identification of employees with the company.
Your team should discuss such widely varying and often con-
flicting business objectives, even if it means that at the end of
the discussion some easily determinable objectives like com-
pany proft or proftability are selected as objectives and used
as a measure of success and hence of “ability”.
1.5. Analysis and Evaluation of Data - Setting up

Indices
The first Management Report shows the opening situation at the end
of period 0 and provides a wealth of data at the beginning of the simu-
lation. Subsequent reports at the end of each period give each man-
agement team an overview of the success and situation of its com-
pany. A careful analysis will show whether changes have occurred in
the various areas, and if so which changes. It is advisable to consider
what information can be represented by indices/statistics that are par-
ticularly meaningful and that should be regularly collated and dis-
played in charts.
In the analysis and processing of the data, the following points could
be examined:
● In which areas of the company do bottlenecks exist? How

significant are they? What short-term measures can be taken to
improve utilization, what long-term measures are there to
eliminate the bottlenecks?
● Which of the indices appear really fundamental and should thus

have particular attention paid to them?
● Which data should be collected in tabular form over several

periods, or extrapolated? Which data are suitable for graphical
representation?
● How is the progression of the curve of the diagrams to be

interpreted?
● What deviations from the planned or expected course of events

are discernible?
● What factors can cause the deviations?
● How sensitive is the situation to these factors?
● What efects do price changes have on demand in the markets?
● What efect does expenditure on communication policy have in

the markets?
● Meaningful information could be supplied by relative figures.

They provide relationships in the form of ratios between sets
and sub-sets in the same period e.g. the share of material costs
in total costs. The reference of essentially diferent figures e.g.

diference and/or change in demand in each market. Index
figures between essentially similar but chronologically dissimilar
figures e.g. personnel costs in period 1 / personnel costs period
0.
We recommend that you select and use only a limit number of indices.
Remember that the quality and usefulness of indices depends

on the quality of the data on which they based, and some ra-
tios/relationships may not be meaningful.
1.6. Methodology for Decision Making
Acquire management information
Past periods Current period Future periods
Analyze management information
Set objectives
Define strategy
Plan measures
Develop plans
Purchasing plan Production plan Sales plan Finance plan Cost plan
Assess alternatives
Take decisions
1.7. The Products

Your company currently manufactures the products Petra and Quarto.
They are durable consumer goods.
The products are ofered on two diferent markets. At the start of the
simulation, their selling prices and sales figures are identical for all
companies.
Petra and Quarto may be characterized as follows:
● They are manufactured partly from the same raw materials,

partly from diferent ones. The raw materials are Tika, Ulli and
Varu.
● Each unit of Petra requires 4 units Tika and 1 unit Ulli.

Each unit of Quarto requires 1 units Ulli and 2 units Varu.
● They are manufactured on the same groups of machines, but

require diferent production times per unit.
● Both products may be bought in as finished goods which,

thanks to strict quality control measures, are equal in quality to
your own production.
● There is no competition between Petra and Quarto as

substitutes.
● Petra is a product that has been available in the markets for

several years and has developed into a main generator of
turnover. The well-tried and tested basic concept, which, when
it was originally introduced, was considered a major innovation,
has been largely retained. From time to time attempts have
been made by introducing minor improvements and adaptations
to respond to ever more sophisticated requirements,
particularly in the export markets. But this has not prevented
the customers from turning to newer products.
● Quarto is a mature product that corresponds to state-of-the-art

technology. Quarto meets the high demands of the discerning
consumer with high spending power. It has earned high praise
from consumer test associations and in technical journals.
Quarto has been available in the markets for several periods
and to date has fulfilled all expectations. So far the markets
have been only partially opened up, and that to difering
degrees.
1.8. The Markets

The products Petra and Quarto are ofered on two separate markets.
All companies compete in these markets, but there are no further sup-
pliers. Cooperation between companies is not allowed.
The markets are diferent in size and structure.
It is up to each company to decide in which markets it wishes to sup-

ply its goods. Sales branches have been set up in the markets. They
are the prerequisites for opening up and supplying the markets. They
fulfill all necessary functions such as processing estimates/ofers and
orders, after-sales service, customer care, service backup, storage and
dispatch.
The transport of products to the two markets causes diferent costs.

These costs are specified in the List of Parameters.
The size of the sales branches in the two markets is determined by the
expected demand for Petra and Quarto This is a fixed cost.
Please note that in the profit and loss account the costs of maintaining
additional stores in the sales branches are not included under the
heading “Sales branches” but are lumped together with the costs of
additional stores in the central store under the heading “Storage costs
for finished goods”.
The companies attempt to build up long-term business rela-

tionships in the markets, a permanent presence on the mar-
kets is hence required. The closing down of individual sales
branches is not permissible, even when the situation on the
market does not allow for costs to be covered on a short-term
basis.
1.9. Development of Demand
1.9.1. General
In the first period, the trend of the general economic environment in
the two markets remains the same. To date, there have been various
forecasts for the development in subsequent periods.
Customer demand for the products of a company is determined by the

following factors:
● The decisions of the company.
● The decisions of competing companies.
● The general economic environment.
● Factors specific to particular markets.
● The reputation (= image) of the company.
The development of Petra and Quarto in the markets may vary

and can be influenced to a considerable degree by the deci-
sions of the companies. Hence, the sales position of the indi-
vidual companies can and will deviate from the general situa-
tion in the overall markets.
1.9.2. Decisions
As at the start of the simulation the products of all the companies are
the same, special significance attaches to the companies’ sales policy
decisions. Their aim is to firmly establish the name of the products and
of the company in the consciousness of potential customers, to create
a competitive advantage for their own products, and last but not least
to increase demand and sales at “reasonable” prices.
In this, the demand and purchasing decisions of the customers

will be determined partly by their experience with the degree
to which the diferent suppliers are able and willing to deliver
the right goods at the right time at the right price.
1.9.3. Demand for Petra and Quarto in the Markets

Petra and Quarto develop diferently in the markets. These develop-
ments can be infuenced considerably by the companies’ decisions.
Hence, the sales situation of the individual companies can, and will,
deviate from the general situation on the total markets.
Petra was introduced a long time ago in the home market. Petra
achieved high turnover figures and great success. However, for some
time now the turnover in the home market has been stagnating. Mar-
ket resistance is expected to grow. For the coming periods pessimistic
forecasts predict a considerable decline in demand. This trend will
gradually accelerate. To begin with, replacement sales will continue
but will decline in the long run.
In line with declining interest on the part of customers, the

level of personal preferences for Petra in these markets must
be expected to decline or disappear. This, however, also ap-
plies to the comparable products of the competition.
Petra was introduced in the export market at a considerably later date.

The product can be considered as being in the mature stage. It has
been possible to achieve such a level of consumer awareness of Petra
since its introduction.
Quarto, a technically, high-quality product, was received well in the

home market, where customers are particularly receptive to new
ideas. The correct application of sales policy instruments has enabled
the establishment of a loyal group of regular customers. Competing
companies, ofering comparable products, have been able to do the
same. Lower turnover growth rates are expected in the home market.
On the other hand, Quarto was introduced in the export market only at
a later date. Higher turnover growth rates can be expected in these
markets, as the product is increasingly accepted by customers, lead-
ing to higher demand.
The forecasts are only valid while the economic situation re-
mains constant, i.e. upswings and downswings will increase or
decrease the expected quantities. A continuous observation of
the markets and their developments will improve the level of
information of the companies.
1.9.4. Efects of Inability to Deliver

If a company cannot satisfy demand, i.e. if the demand in a specific
period and in a specific market exceeds the supply, the customers are
patient and are willing to wait for late delivery in the following period.
Non-fulfilled orders are stored and added to the new orders of the fol-
lowing period, hence leading to an increase in demand in the following
period.
Non-fulflled orders prejudice the image of the company. The

damage to the image increases in proportion to the inability
to satisfy the demand in that period.
It is difcult to win back in subsequent periods those cus-

tomers who have drifted away as a result of this loss of image.
1.10. Terms of Payment

The customers in all market pay after 90 days i.e. in the following pe-
riod.
Turnover figures are indicated in the balances of the pertinent periods

as accounts receivable. Accounts receivable from the export market
are in USD and are converted into the base currency of your company,
Euro, at the exchange rate valid in that period.
There are two possibilities depending on your decision to use ex-

change rate fixing (see “financial decisions“):
● If the exchange rates are not forward fixed, the accounts

receivable are entered on the assets side at the spot rate. Any
exchange rate profits or losses are then indicated in the profit
and loss account of the subsequent period.
● If exchange rates are forward fixed, the accounts receivable are

entered on the assets side at the forward rate. Hence there will
be no exchange rate profits or losses registered in the following
period.
Please note that the exchange rate fxing is entered as a deci-

sion individually for each market and should not be entered
for your home market with its currency Euro. Each decision
covers the entire turnover of the selected market and cannot
be made for a part of the turnover of that market.
It is assumed that the payments from the export market in the initial
period 0 are made to the company in accordance with the contract,
i.e. in the following period.
Factoring is possible (see “financial decisions“).
1.11. Image
The market position of the companies, and thus also buyer behavior,
are infuenced by, among other things, image. By “image” we mean
the sum total of all factors that contribute to the public reputation of a
company. Cultivating this reputation can lead to an indirect infuencing
of customers, and to considerable favorable side efects on the promo-
tions side. The companies establish standards that - from the point of
view of the customers - provide the best performance.
By adopting the following measures, companies can encourage the de-

sired favorable attitude of the customers:
● Punctual delivery of ordered goods:

Punctual delivery is a strong sales argument. It is, rightly, taken for
granted by customers. It therefore does not improve the regard in
which a company is held. On the other hand, failure to provide
punctual delivery damages the company’s reputation and worsens its
image in proportion to the degree to which demand in the market
cannot be met. Damage to image is efective in the following period.
● Motivation and qualification of personnel involved in marketing:

The products are of a high technical standard and hence require
explanation and guidance from the sales personnel. This puts the
motivation and the qualifications of the sales personnel at a premium.
They can be achieved by the training of sales personnel.
● Continuity of prices:
Customers show annoyance with, and lose faith in, companies whose
prices fuctuate greatly between periods.
● Payment of dividend:
Dividend payouts up to a certain level benefits image.
At the start of the simulation, all companies enjoy the same

image. This factor has the value of 100. It is calculated sepa-
rately for each market in each period. The image of the com-
panies afects the level of demand for their products: a good
image can increase demand; a poor image can result in a re-
duction in the demand for the products of a company.
1.12. Production
You are required to set up the production program to manufacture the
products Petra and Quarto utilizing the available capacities of raw ma-
terials, machines and personnel. The products are manufactured
partly from the same raw materials, partly from diferent ones. The
raw materials are Tika, Ulli and Varu.
When the financial position permits, it is possible to a balance be-

tween demand on the markets and the necessary production capacity
by:
● Adapting the working hours by introducing overtime (for a

maximum 2 consecutive periods).
● Changing the machine capacity by purchasing or selling

machines.
● Changing the personnel capacity by appointing or dismissing

personnel.
● Buying in finished units of Petra.
● Buying in finished units of Quarto.
● Utilizing excess capacity and producing for stock.
If demand exceeds available supplies of the products, your company

cannot meet the demand, with unfavorable consequences for the com-
pany. If demand is lower than the supply of products available, stock-
piling is inevitable. While this increase in stock levels improves your
ability to supply the demand in the following period, it also ties up
cash.
Company policy permits a reduction of capacity to a certain

minimum number machines. This minimum number is speci-
fed in the iist of Parameters. This means that you are not al-
lowed to shut down your production.
1.12.1. Personnel Capacity

Every company requires a set of personnel other than those employed
in the actual production (technical and commercial administrators,
skilled tradesmen, and similar) to run the company’s operations.
Wages and salaries of these employees, whose number is basically de-
termined by size of the company, are included in the fixed costs.
In addition, the company has available a workforce employed in the

actual production. This pool of productive labor can be enlarged or re-
duced by management decisions and reduced by fuctuation.
● The pool of labor decreases automatically by a certain natural

attrition per period.
● Additional personnel can be hired.
● Companies may reduce the workforce by dismissing personnel.
If the pool of labor is insufcient to operate the existing ma-

chines and to produce the planned quantity of goods, some
machines will be standing idle. This afects the quantity of
products that your company can manufacture.
In single shift operation, no employee may work more than 8 hours per
day.
You may decide to use overtime to a maximum of 2 hours per day.

Agreements with the trade unions permit overtime working only for
two consecutive periods. After that, at least one period must be
worked without overtime. If you utilize overtime, the maximum work-
ing hours increase to 10 hours per day.
Companies can increase the qualifications of their production person-

nel by expenditure on continued training of personnel.
1.12.2. Machine Capacity

The number of machines available in any period is shown in the Man-
agement Report.
The machines are all the same.
The capacity of each machine is:
● 8 machine hours per working day with single-shift operations.
● 10 machine hours per working day with overtime.
Each period covers one quarter with 60 working days.
The products Petra and Quarto make diferent demands on production

capacity. The base production times are defined in the List of Parame-
ters.
These base production times may be infuenced by lean production

and by the continued training of production personnel. The efective
production times are available in the Management Report.
The variable production costs (without depreciation) are given in the

List of Parameters.
The useful working life of the machines is also defned in the

iist of Parameters. The linear depreciation fgures are calcu-
lated in each period as costs. The companies reinvest in each
period the same amount that is calculated as depreciation.
This means that the machines are maintained at a constant
level and the production capacity does not fall due to aging
machines.
1.12.3. Sequence for Purchase, Production and Sale
Order raw
materials
Delivery of
raw
materials
Raw material
store
Home
market
Produce
Transport
Deliver
to the
Central store to the
market
customers
stores
Delivery of
bought-in
goods
Export
market
Order
bought-in
goods
The entire quantity of raw materials delivered in any period

can be processed in that period.
The entire quantity of fnished goods produced in any period

is available for transport to the market stores.
The entire quantity of bought-in goods delivered in any period

is available for transport to the market stores.
1.13. Costs
For the purposes of costing, the costs can be categorized as follows:
1.13.1. Variable Production Costs

The variable production costs depend on the quantity of goods pro-
duced.
It is assumed that these costs rise proportionally to the utilization of

capacity, i.e. as a rule they remain constant per hour of production
and hence per unit of production. The costs per unit will only change
as a result of price changes for raw materials, a reduction of the pro-
duction time per unit, the introduction of overtime.
Into this category fall the costs of:
● Raw materials used by the production.
● Production wages.
● Other variable costs. These are largely machine-dependent and

are therefore calculated as cost rates per machine hour.
The wages for surplus production personnel, i.e. personnel not

required in a period, are added to the fxed costs.
1.13.2. Variable Marketing Costs

The variable marketing costs depend on the quantity of goods trans-
ported or sold.
This category includes costs for transporting the goods from the cen-
tral to the market stores.
1.13.3. Fixed Costs

The fixed costs result from the degree of operational readiness of the
company. These costs are dependent on time and are basically inde-
pendent of the quantity of goods produced, transported or sold.
These costs are not regarded as a single, monolithic block of fixed

costs, but rather are subdivided as follows:
● Product fixed costs, e.g. in the framework of product policy or

communication policy.
● Sectional fixed costs. These include fixed costs of production.
They amount to a fixed basic sum and, in addition, may depend

on the available capacity of personnel and machines.
● Company fixed costs for technical and commercial

administration, sales etc.
1.13.4. Depreciation Costs

Depreciation costs occupies a special position. When single-shift work-
ing prevails, aging is the dominant cause of loss of value.
1.13.5. Stock Value

Goods produced within the company are entered with their variable
production costs; bought-in products are entered with their purchase
price.
In the central store in which at time, old stocks, bought-in products,

and newly produced products may be stored, a weighted average
value is ascertained.
The method of weighted averages is also used to calculate the value

of the stocks in the sales branches.
1.14. Finance
At the start of period 0, all companies possess the same amount of
cash. This is reported in the liquidity account and in the balance sheet.
The List of Parameters defines the minimum amounts of cash that

your company must maintain at the end of a period, and the maxi-
mum amount of indebtedness.
All decisions taken by you afect the finances of your company and
lead directly or indirectly to cash infows and cash outfows.
● Directly in the same period: lean production, communication

policy, etc.
● Indirectly e.g. by decisions in the framework of price policy.
In addition, income and expenditure arise e.g. by reinvestment of ma-

chine depreciation, withdrawal from banks of fixed-term deposits, etc.
1.14.1. Procurement of Funding

The companies have several methods of procuring financial resources
to cover planned expenditure:
● By selling of manufactured or bought-in products. The turnover

of a period is shown in the balance as accounts receivable and
the customers pay in the following period.
● By selling factoring the accounts receivable. This is a means of

receiving the cash in the current instead of the following period.
The factoring costs are defined in the List of Parameters.
● By selling used production machines. The book value of these

machines is defined in the List of Parameters.
● By reducing of stocks of raw materials and bought-in goods

thereby releasing locked capital.
● By utilizing short-term credit (= overdrafts). The overdraft is

granted automatically when your company does not have the
minimum amount of cash at the end of the period. The
overdraft is also repaid automatically in the following period.
The interest rate for the overdraft is defined in the List of
Parameters.
● By raising long-term loans. The interest rate for the long-term
loans is defined in the List of Parameters.
1.14.2. Liquidity and Insolvency

In each period, companies must be in a position to meet their payment
obligations, i.e. expenditure in any period must not exceed the avail-
able financial means. Ideally, both amounts should be equal. While
over-liquidity does no more than reduce profitability, under-liquidity
threatens the very existence of the company. Under-liquidity exists
when in any period the financial means are insufcient to cover the
planned expenditure.
The maximum debt-equity ratio (credit limit) is defined in the List of

Parameters. Your decisions will constantly and directly afect the debt-
equity ratio.
A company is insolvent when the debt-equity ratio equals or is greater

than the limit defined in the List of Parameters.
The following considerations must be taken into account in liquidity

planning:
● Taxes due at the end of every period must be paid.
● Any dividends also occur as cash outfows at the end of every

period.
In every period the basis for the calculation of the debt-equity

ratio (credit limit) is capital resources (ordinary share capital
plus reserves, as adjusted for dividend payouts). At the end of
the year in period 4, the basis for the calculation of the debt-
equity ratio is capital resources (ordinary share capital plus
reserves, as adjusted for dividend payouts and further ad-
justed for any accumulated losses).
1.15. Exchanging Currencies

In the Management Report the exchange rates are reported in a style
that will, at first, appear unfamiliar to you, as they are based on the
Euro. This is unusual, but essential, as your company’s balance sheet,
profit and loss account and financial results will be expressed in Euro.
You will hence have to use such exchange rates as:
1 USD has a value of EUR 0.80433.
The efective exchange rates for a period are displayed in the Manage-
ment Report of the period.
1.16. Summary of the Efect of Infuencing

Factors
1.16.1. Efect on Demand
Has afect on
Factor
Demand Image
State of the economy •
Product life cycle •
Price policy •
Communication policy •
Product policy •
Product quality •
Image •
Payment of dividends •
Training of sales personnel •
Continuity of sales prices •
Punctual delivery •
1.16.2. Other Efects
Has afect on
Fixed Product Production Staf Rejection
Factor costs quality times per turn- rate
per unit over
period
Lean
•
management
Total quality
• •
management
Production
•
technology
Continued
training of • • •
personnel
2. Decisions
When you have become familiar with the simulated company, you
should prepare and enter the decisions for the next period.
The course instructors will define and tell you of the specific dates and
times for the entering of these decisions for every period.
It is essential that you enter your decisions by this deadline.

Otherwise the decisions of period 0 will be used as your deci-
sions for the next period.
The decisions fall into the following categories:
● Company decisions
● Lean management
● Payment of dividends
● Sales decisions
● Product policy
● Price policy - sales price
● Communication policy - advertising, sales promotion
● Distribution policy - marketing logistics
● Training of sales personnel - key accounts
● Transportation
● Market research
● Purchasing decisions
● Market research
● Purchase of raw materials
● Purchase of bought-in goods
● Production decisions
● Planning of production quantities
● Appointment and dismissal of personnel
● Purchase or sale of machines
● Lean production
● TQM (Total Quality Management)
● Production technology
● Continued training of personnel
● Financial decisions
● Raising and repayment of long-term loans
● Deposits with banks
● Export factoring
● Exchange rate risk management
2.1. Company Decisions
2.1.1. Lean Management

The idea of introducing lean production has long been discussed by
the directors of your company. Outmoded practices that have become
fossilized in other sections of the company have led to the idea being
pursued and to the introduction of lean management techniques to
the whole company.
iean management is a management concept that is aimed at

the greatest level of efciency in all sections of the company.
Among the major objectives are:
● Recognition and fulfillment of customer wishes as the primary

goal.
● Elimination of superfuous hierarchy levels.
● Encouragement of responsibility of personnel. Decentralization,

adoption of personnel into the decision making processes
(downward shift of responsibility).
● Greater fexibility through communication and co-operation

across sections and division.
● Faster reaction times to changes in the markets.
It is not easy to break up existing structures and to change behavior

patterns. Yet lean management is not a state, or condition, it is a con-
tinuous process of efort to increase the efciency of the company,
even if only in small steps. You too can try to put the ideas of lean
management into practice in your company.
Expenditure invested in this will achieve a reduction of the company

fixed costs.
Experts are of the opinion that a 25% reduction of these com-

pany fxed costs is possible.
2.1.2. Payment of Dividends

The shareholders expect from the companies a dividend as a commen-
surate return on their invested capital and their share of the com-
pany’s success.
Dividend payments at the end of each period improve the

company’s image, but at the same time reduce the company’s
own retained earnings and credit line.
Dividend payments that reduce the company’s available capital can

lead to critical discussion in public. This in turn can afect the com-
pany’s reputation.
2.2. Sales Decisions
2.2.1. Market Research

A market research institute can supply information on the competitor
companies and the markets.
Prices for the various reports are defined in the List of Parameters.
Expenses occur in the period in which the decision is taken,

the market research reports are available at the end of the
same period.
In the section “Sales” the following reports can be purchased:
● Type 1:
Spend on product policy of all companies.

Image of all companies in all markets.
Sales price of all companies in all markets.
● Type 2:
Total sales of the products of all companies in all markets.

Market shares of own company.
● Type 3:
Quality index of all companies

Spend on training of sales personnel of all companies
Spend on communication policy of all companies in all markets.
● Type 4:
Development of the general economic climate as well as

specific developments in the markets.
2.2.2. Product Policy - Product Management

Characteristics required of a product go beyond the basic use desired
by the customer.
They also include, for example:
● Increased functions, simplification, i.e. fewer parts subject to

wear and tear, repair-friendliness.
● Improved design.
● Expansion of customer service and extension of guarantee.
● Product variations or innovations in order to diferentiate

products from those ofered by the competition.
An integral part of product policy is, in addition to decisions regarding

the range/assortment of products (to begin with, Petra and Quarto),
the planning of new products.
Expenditure on product policy increases demand in proportion

to the degree to which it exceeds that of the competition. Ex-
perts are of the opinion that in this way demand can be in-
creased by a maximum of 15%.
Improved
customer service
Extended Environmentally
guarantee friendly packaging
Basic function
= Basic use
Improved Attractive
durability design
Fewer parts subject

to wear and tear
= Repair-friendliness
2.2.3. Price Policy

Price policy attempts to establish a relationship between the selling
prices set by a company and the possible quantity of demand. Price is
only one - albeit a very important - component in a bundle of possible
instruments/measures that can be applied to infuence demand. The
purchasing decisions of the customers can be infuenced considerably
by their experience with the overall efciency of a company (e.g.
punctual delivery).
If prices are too low, there is a danger of reducing willingness of the

customers to buy, as they could lose faith in the quality of the prod-
ucts.
If prices are set too high, particularly if they are not justified by adver-
tising or quality, customers may feel tempted to switch to other,
cheaper, competing products.
In this sense, the decisions of each individual company, as

well as those of the competition, exert an efect on the de-
mand accruing to each company.
2.2.4. Communication Policy - Advertising, Sales Promotion

Communication policy embraces all the measures a company adopts
to inform and to convince potential clients in the market of the charac-
teristics of the products - such as technical fields of application, econ-
omy, design, etc. They draw attention to the products of a company
and serve to distinguish the products from others on the market, and
to create preferences. Advertising and sales promotion directly afect
the number of orders received by a company - the sum total of all ex-
penditure of all companies infuences the overall total demand. The
level of expenditure on it determines the quality of communication
policy. Expenditure is established separately for each product and for
each market.
The efect of communication policy is immediate and there is a fading

in the following periods. It is therefore spread over the current and
subsequent periods (carry-over efect), although the efect steadily de-
clines. The greatest efect arises in the period in which expenditure oc-
curs.
The List of Parameters defines the rate of fading.
Experience so far indicates that an increase of expenditure

over and above 8% of the previous period’s turnover will not
lead to any notable further increase in the efect of communi-
cation policy.
2.2.5. Distribution Policy - Marketing Logistics

Marketing logistics is understood as the sum of activities adopted in
order to be able to supply or deliver the right goods in the right quanti-
ties to the right place.
2.2.5.1. Quantities to be Transported
At the start of each period, the companies decide which quantities of

products are to be transported from the central store to the market
stores.
The following types of finished goods are available for transport to the
market stores:
● The stocks available at the start of each period. These are the
residual quantities left over at the end of the previous period.
● The deliverable part of the products produced in the same

period. This is dependent on the through-put time.
● The bought-in goods delivered in the period. These are the

finished goods that were ordered in the previous period.
You may transport the maximum quantity represented by the total of

the three types of finished goods.
These transport quantities together with the quantities available in the

market stores are available to meet the demand.
If the transport decisions of the companies exceed the avail-

able quantities, the planned level of transport quantities to
the markets are reduced proportionately.
An exchange of stocks between the markets is not possible

due to the distances involved. Return of stocks to the central
store is not permitted.
The costs arising from transportation of goods from the central store
to the market stores are debited in the profit and loss account of the
same period.
The transport costs per product and market shown in the List of Pa-
rameters are applicable to small quantities.
In all markets bulk transport is possible, which - depending on the

quantities of all products transported to this market - result in dis-
counts. The discounts are included in the accounts of the same period.
2.2.5.2. Training of Sales Personnel - Key Accounts
Technical expertise and motivation of the sales personnel of one’s

company can be improved by training in the qualities and possible
fields of application of the products, as well as the required sales tech-
niques. Detailed technical advice and counseling improve the regard in
which the company is held (= image). You might also think of the
training of particularly competent personnel responsible exclusively for
looking after key accounts (key customers) and for the solution of their
problems. These members of the personnel would be specialists in, for
example, negotiating, financing, foreign exchange transactions, risk
management, customs law and preference law, export calculation and
export marketing. Additionally, they would be totally familiar with the
mentality and customs of foreign customers.
The efect of sales personnel training on a company’s image

depends on how far the training is superior/inferior to that of
the competition. Changes in image of up to 5% seem possible.
2.3. Purchasing Decisions
2.3.1. Market Research

Prices and available quantities of raw materials and bought-in goods
can change independently of the general economic situation and other
factors. The higher the share of material costs in manufacturing costs
of the products is, the more advisable it is to keep a close eye on the
purchasing markets.
By purchasing market research reports, the companies can gain infor-

mation on any trends in good enough time to include such changes in
their decisions.
Without market research, the companies will only be informed

of changes once they have already taken place.
2.3.2. Purchase of Raw Material

The level of production per period depends on, among other things,
sufcient stocks in hand and/or prompts ordering of materials. If stock
in hand plus materials ordered are not sufcient for planned produc-
tion, then machines will be idle.
The purchase of raw materials results in delivery in the same period.
The material is paid for on delivery.
Prices for raw materials are given in the List of Parameters.
2.3.3. Purchase of Bought-in Goods

To relieve pressure on their own production plant, companies can buy
in finished Petra and Quarto. They are delivered directly to the central
store.
The goods ordered are delivered immediately and the payment is on

delivery.
Quantities available on the market are, as a rule, sufcient to supply

the companies. Delivery prices are shown in the List of Parameters.
2.4. Production Decisions
2.4.1. Planning of Production Quantities

In each period the companies establish the planned production quanti-
ties of the products, these quantities are limited by the capacity avail-
able in that period.
To adapt production capacity to demand, the introduction of overtime

is permissible.
Management expressly orders overtime, and the planned

amount expressed in total machine hours for the whole period
is entered in the decisions sheet. Please do not enter 1 or 2
overtime hours that are allowed per day but some calculated
number like 1,800 overtimes hours.
The decision is valid for one period, and is efective directly. No more
than 2 machine hours of overtime are allowed per working day.
Overtime working leads to an increase in production wages. The in-

crease is the overtime surcharge defined in the List of Parameters. It
also increases the variable production costs, among other things
through necessary overtime working in auxiliary sections, but does not
afect the depreciation per period as the latter is regarded as deter-
mined by aging.
Overtime must not be used for more than two consecutive pe-
riods. After that, at least one period must be without over-
time.
2.4.2. Appointment and Dismissal of Personnel

Appointments are possible at the commencement of each period.
Newly appointed personnel can be used immediately in production.
The appointment of a new employee requires a fixed sum for such ex-
penses as job advertisement, interview, and similar.
It is also possible for employees to hand in their notice, or be given

their notice, in each period. Dismissals take efect one period after no-
tice has been given.
The dismissal is efective immediately at the beginning of the period.

For social reasons, they receive severance pay on leaving the com-
pany.
Companies that frequently dismiss personnel must take into

account that, as a result of the resultant poor reputation of
the company, job advertisements in future periods will not at-
tract sufcient applicants.
2.4.3. Sale and Purchase of Machines

Purchase of machines may take place in any period, in order to expand
production capacity. Only whole machines can be purchased.
Machines ordered are available at the beginning of the period.. Pay-

ment is made on delivery.
Companies can reduce their production capacity and hence the fixed
assets by selling production plant. Proceeds from the sale of machines
are usually lower than the book value.
The decision to sell machines has an immediate efect.
● The capacity of machines sold is no longer available in that

period.
● The proceeds are calculated as cash infow in the same period.
● The profit and loss account is debited with any loss in the same
period.
2.4.4. Lean Production

2.4.4.1. Total Quality Management (TQM)
It is no longer sufcient to regard quality as the fulfillment of minimum

standards, as today’s commercial world is characterized by ever in-
creasing competitive expectations. Today, “quality” is seen as an all-
embracing concept. It includes products and personnel, but also all the
company’s procedures from planning and draft projects, production,
through to marketing and distribution.
In traditional quality control, errors arising at the planning stage are

not discovered until it is too late: but later the discovery, the more ex-
pensive it is to rectify the error.
A modern all-embracing system of quality control has the aim of:
● Recognizing errors at the earliest possible stage, or – even

better -
● Not letting them occur at all.
Expenditure on TQM (e.g. the formation of quality circles, quality sys-

tem certification, and so on) enables you to:
● Reduce the rejection rate of faulty products. These rejects

cannot be re-used.
● Improve the quality of products produced in your company.
Rising expectations of the customers and the eforts of the competi-

tors require each company to pay increasing attention to quality and
to eforts to improve it.
Experts expect that an increase in product quality up to 15%

can be achieved by these measures.
2.4.4.2. Production Technology
Through investment in superior technology, but particularly through a

rigorous structuring of logistic process, an improved fow of informa-
tion, and the utilization of value analysis, kanban, etc. a continuous
process of improvement can be achieved.
On the basis of exhaustive analyses, experts are of the opin-

ion that a considerable cost-reduction potential can be real-
ized in production. Specifcally, such measures can bring
about a reduction of the production time per unit, up to a
maximum of 20%.
2.4.4.3. Continued Training of Personnel
TQM and lean production presuppose qualified and motivated person-

nel. The latter must be willing to work in semi-autonomous groups, to
accept changing work demands, and to take on responsibility. They
then enable the dismantling of superfuous levels of hierarchy.
Programs for the continued training of the work force represent expen-
diture that results in:
● A reduction of staf turnover and non-reusable rejects.
● A shorter production time per unit.
It is doubtful whether expenditure in this direction of more than Euro

4,000 per person/period is sensible.
2.5. Financial Decisions
2.5.1. Raising Short-term and Long-term Loans

Within certain limits, companies can obtain short-term and long-term
loans. The sum total of indebtedness must not exceed a certain pro-
portion of the company’s own capital.
Short-term loans (overdrafts) do not have to be specifically applied for.

Any needed overdraft is credited automatically at the end of the pe-
riod.
Short-term loans are automatically paid back in the following period.
Long-term loans, on the other hand, do have to be applied for. The

amount applied for is available in the same period. The rate of inter-
est for long-term loans is, as a rule, more favorable than for over-
drafts. Long-term loans are not subject to a time limit.
Long-term loans may be paid back in part or in total. To do either, it is

necessary to enter your decision the notice to repay the debt(s). Re-
demption takes place in the beginning of the period.
2.5.2. Fixed-term Deposits with Banks

If a company does not wish to use all available funds in a period, it can
make its financial surplus available to the money market and invest it
on an interest-bearing basis.
These deposits are invested in the same period in which the decision
to do so is taken. This investment is always on a short-term basis for
two periods.
2.5.3. Factoring
It is possible to arrange for the collection of all accounts receivable
from customers in all markets through the services of a factoring com-
pany. Thus, return on turnover in the period of sale immediately be-
comes cash infow.
The decision to use factoring is entered separately for each market. It

covers the entire accounts receivable of the market cannot be used for
a part of the accounts receivable.
The fees (including interest and del credere) are given in the List of Pa-
rameters. The account in the markets is paid at the forward rate of the
pertinent period.
2.5.4. Exchange Rate Fixing

Sales activities in the export market are conducted in a foreign cur-
rency. The forward and spot rates for the pertinent period are docu-
mented in the Management Report. The forward rate is the rate at
which 90-day forward buying can be conducted. This means that the
companies have the following alternatives:
● At the conclusion of the sales contracts (e.g. in period n) the

foreign exchange due to be received by the companies 90 days
later (period n+1) can be sold at the forward rate. The proceeds
from such a transaction are received by the companies at the
fixed rate of period n.
Currency transactions of this nature give the companies a

certain protection against exchange rate risk, but the
commission, brokerage etc involved cost some proportion of the
amount receivable.
● If no forward buying transaction is conducted, receipts of

foreign currency paid by customers in the period n+1 will be
converted at the then valid spot rate.
The spot rate of the period n+1 can, and as a rule will, deviate
from both the spot rate of period n and from the forward rate of
period n+1. Depending on whether the spot rate of period n+1
is higher or lower, exchange rate losses or profits will accrue.

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iBizSim: International Business Simulations

International Business Simulations

1. The Business Simulation iBizSim.........................5

1.1. Structure of the Business Simulation iBizSim..........5

1.16. Summary of the Efect of Infuencing Factors......25

2.1. Company Decisions...............................................29

The course is designed to give groups of students working as teams

The course emphasizes strategic planning and control and ex-

The simulated company that you will manage:

Purchases raw materials and bought-in goods - invoices are drawn

1. The Business Simulation

The products are generalized consumer goods. Hence the simulation is

Specifc experience from particular branches of industry is

The simulation is run in chronological periods of a quarter each. Hence

One of the tasks of the company’s management team is to analyze the

All decisions have to be made in such a way that the long-term

1.2. Organization of the Management Team

Hence your willingness to work in a team is an absolute pre-

It is your task to:

● Improve the market position of the company.

● Achieve a satisfactory level of profitability.

In principle, the internal organization and allocation of responsibilities

Finally, your team must be able to reach a group decision. This

Whatever organization you choose, remember that it is impor-

1.3. Management Tasks

Define the goals of the company

Plan the strategic and operational measures

Ensure the availability of resources

Raw materials Machines Personnel Capital

Produce the products

Supply the markets

Home market Export market

The company is not rigidly bound to the policy established at

Here are some examples of business objectives:

In production: Optimal stock holding, high degree of utilization of

1.5. Analysis and Evaluation of Data - Setting up

● In which areas of the company do bottlenecks exist? How

● Which of the indices appear really fundamental and should thus

● Which data should be collected in tabular form over several

● How is the progression of the curve of the diagrams to be

● What deviations from the planned or expected course of events

● What factors can cause the deviations?

● How sensitive is the situation to these factors?

● What efects do price changes have on demand in the markets?

● What efect does expenditure on communication policy have in

● Meaningful information could be supplied by relative figures.

in total costs. The reference of essentially diferent figures e.g.

Remember that the quality and usefulness of indices depends

1.6. Methodology for Decision Making

Acquire management information

Past periods Current period Future periods

Analyze management information

1.7. The Products

Petra and Quarto may be characterized as follows:

● They are manufactured partly from the same raw materials,

● Each unit of Petra requires 4 units Tika and 1 unit Ulli.

● They are manufactured on the same groups of machines, but

● Both products may be bought in as finished goods which,

● There is no competition between Petra and Quarto as

● Petra is a product that has been available in the markets for

● Quarto is a mature product that corresponds to state-of-the-art

1.8. The Markets

The markets are diferent in size and structure.