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Capsim Business Strategy SIMULATION

The Marketplace

The Marketplace
Sensor Market (simple products with 2 dimensionsSize and Performance) 5 competitors per simulation (3A, 3B, 4A, 4B) All start off equal, all products per segment are same, one factory with 5 assembly lines $100 million sales company No outside competitors or product substitutes

The Marketplace
Simple Marketplace
modest growth, low inflation, reasonable interest rates, no external surprises

Develop a strategy to maneuver around competitors

Create wealth Satisfy constituents (shareholders and customers)

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

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

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

(1) ROUGH CUTBuyers focus on:

Performance of Product Size of Product Reliability Rating of Product Price of Product

Customer Expectations
(2) FINE CUT (if product passes rough cut)
Positioning Age Reliability Price

Customer chooses products near sweet spot

Product Management
How should we place our product (size and performance placement)? What is our perceived quality (MTBF)? What is our price? What is the promotion budget (awareness)? What is the sales budget (accessibility)? What is the production schedule (units)? What is the capacity (including overtime)? What is our automation level (labor content & flexibility)?

Your Job
Make functional decisions following a cohesive strategy:
Marketing Research and Development (R&D) Production Finance Total Quality Management (TQM) Human Resources (Labor)

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

Emergency loans due to excess inventory.

Breakdown between Marketing, Production, and Finance.

Not reading your manual.

You can mess up pricing You can mess up product launches Its a computer program, know how to manipulate it!

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

Product repositioning (change segments) without reducing material costs.

Breakdown between Marketing, R&D, and Production.

Organizing Your Team

Key Roles
Competitor Intelligence Officer Segment Managers Functional Managers
Marketing, Finance, Operations, HR, R&D

These role assignments are valuable for enhancing the critical thinking skills, but are not required to play the simulation
You decide how you want to organize!!

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

Segment Management
What products are entering or leaving your segments? What is each segments production capacity?
Excess leads to price competition. Shortages lead to margin opportunities.

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

Functional Managers
R&D managers monitor repositioning dates (keep projects within one year). Marketing managers monitor promotion and sales budgets. Keep product within segments. Production managers monitor inventory levels, plant utilization and overtime. Automation affects costs and flexibility. Finance managers monitor cash position and capital structure.

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

Impacts Marketing, Production and

Marketing Managers
Understand relationships between
Price and contribution margins, Price and demand, Promotion budget and awareness, Sales budget and accessibility, and A/R policy and demand.

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

Production Manager
Understand relationships between Inventory levels and carrying costs (interest), Carrying costs and lost sales (market share), Capacity and overtime, Automation and labor costs, Overtime and labor costs, and Consequences of buying/selling capacity and automation. Impacted by R&Ds new products and material costs. Impacts marketing demand, scheduling, and inventory. Finance affected by plant and equipment, inventory, and margins.

Finance Manager
Understand relationships between Stock issue or retirement and capital structure, Working capital and inventory, Emergency loans and cash, Current debt and short term interest rates, Dividend policy and stock price, Bond issue and prepayment, and Financial performance measures. Affected by R&D introductions, Marketing forecasts, margins, and budgets, and Production budgets, margins, and inventories.

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

Strategy Alternatives

Creating a Strategy
How will you achieve your goals? What product-market segments will you target? How many segments and how many products? What functional capabilities are needed for each? R&D, Production, and Marketing? What techniques and assets are needed? What will be your competitive advantages? Financial structure and market performance

Capstone Strategies
Your Strategic Analysis provides an understanding of the forces at work within each Capstone market segment. Decide how to use that information to gain a competitive advantage. There are many alternative goals & strategies - any of which can be successful depending on how well they are implemented.

STRATEGY Mission Statement Strategic Intent STRATEGIC BUSINESS ANALYSIS Product-Market Analysis Customer Analysis Competitive Analysis S.W.O.T Analysis

PERFORMANCE ASSESSMENT Success Measurements Ratios Statistics

FUNCTIONAL PLANNING R&D Production Marketing Finance HR

Strategic alternatives include: Cost Leader Cost Leader with Focus (Low Tech or Product Life-Cycle) Differentiator Differentiator with Focus (High-Tech or Product Life-Cycle)

Overall Cost Leader

An overall cost leader will become the low-cost producer in every segment of the market. Improve good profit margins on all sales while keeping prices low for pricesensitive customers. Re-position products rather than introducing new ones Capacity improvements are unlikely to be undertaken (maximize overtime instead) Automation to cut costs and increase margins. Financed with debt and/or stock issues. Spend less on promotion and sales Goals may be Market Share, Profits, and Stock Price

Cost Leader (Low-Tech Focus)

A low-tech focused cost leader dominates the price sensitive market segments. Set prices below all competitors - and still be profitable. Broad product lines in the low-tech segments (Low & Traditional). Heavy automation. Spend heavily on advertising to cost sensitive customers (sales people have more than one product to pitch to prospects). Finance with debt and/or stock issues. Goals may be ROS, ROE, and Profits.

Cost Leader with Product Life Cycle Focus

A product life-cycle focused cost leader will minimize costs. Products will be allowed to age and change from high-tech, to traditional, and eventually low end segments.
Minimize presence in specialty segments (Size & Performance). Limited R&D spending (some re-positioning & new product every 2-3 years).

Automate early in the products life-cycle.

High spending on promotion and sales. Goals may be ROE, ROS, and Profits.

A Differentiator will maximum awareness and brand equity. Focus on high quality/highly desirable products. High R&D spending to keep products fresh. Maintain a presence in all market segments. Spend heavily on advertising and sales to create maximum awareness and accessibility. Prices tend to be higher. Goals may be Market Share, Profits, and Stock Price

Differentiator with High Tech Focus

A high-tech differentiator seeks to be known as the top producer of the best performing state-of-the-art products. Multiple product lines in high-tech segments (High, Performance, and Size). Minimize focus in other segments. High promotion and sales investments to maximize awareness and accessibility. Continually introduce new product lines and keep existing products fresh. Limited automation or production capacity. Goals may be ROA, Asset Turnover, and ROE.

Differentiator with Product Life Cycle Focus

A product life-cycle differentiator seeks to be a top producer of good performing products in each of the targeted segments. Multiple product lines in targeted segments (High, Traditional, and Low). Minimize focus in other segments. High promotion and sales investments to maximize awareness and accessibility. Continually re-position product lines and keep products fresh. Limited automation or production capacity. Goals may be ROA, Stock Price, and Asset Turnover.

There is no magic bullet strategy in Capstone. Successful teams will:
Develop a cogent long-range goals Set appropriate strategies Develop appropriate functional capabilities, and Adjust as dictated by the opportunities and realities of the competitive market place.

Plan ahead (and not procrastinate)

Objectives of Financial Reporting

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

Make wise investment and credit decisions

Dont forget to follow your strategy

Identify optimum time to take actions affected by cash flow

Its an easy market for projections Project your needs early and plan accordingly

Financial Statements

Balance Sheet
What the company owns and who owns it A snapshot of your financial health Assets = Liabilities and net worth combined Accurate for a specific date See Capstone Courier for latest round Balance Sheet

Profit and Loss Statement

Compares revenues and expenses
Movie of financial health Shows activity over a period of time Indicates the profitability of an organization See Capstone Courier for latest round Profit/Loss Statement

Cash Flow Statement

Shows movement of cash in and out of an organization Shows how much cash is available for use during a given period Reconciles net profit back to cash See Capstone Courier for latest Cash Flow statement

Financial Ratios and Success Measures

Financial Ratios
A financial ratio shows the relationship between two financial measures
Developed by dividing one measure into another

Provide insights into companys operations and strategy

Used internally to evaluate performance and set goals Used externally to make investment decisions

Financial Ratios
Four categories:
Liquidity Solvency Market value Profitability

Its a ratio! There are ethics involved, but ratios are easily manipulated. Understand this fact

Asset Turnover
Reveals how effective assets are at generating sales revenue.


Asset Turnover =


Return on Sales
ROS indicates the percentage of each sales dollar that results in net income.

net profit

Return on Sales =

net sales

Return on Assets
ROA measures a companys ability to use all its assets to generate earnings.

net profit

Return on Assets =


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

net profit

Return on Equity =


Leverage shows the debt level of the organization.


Leverage =


Performance Measures
Know your measures when making decisions! I think of measures as falling into one of two camps:
Sales (A/TO, Share, ROA) Profits (Cume Profits, ROS, ROE, ROA)

As a general rule:
Never put ROS and A/TO together ROS and Market Share dont work well together These success measures typically compete