CapSim Simulation Introduction

1. CapSim Simulation Introduction Diane M. Sullivan, Ph.D., 2013 Some Sections Modified from Management Simulations, Inc. Some Sections Modified from Gentner (2008)

2. What is CapSim and why do we use it in MGT490? • Strategy essentially deals with making long-term decisions • Decisions involve multiple functional areas of the firm • Decisions have long-term effects on the firm’s profitability • CapSim allows us to practice making strategic decisions in a risk free environment—a simulation/game

3. More CapSim Background… • The simulation is used by companies worldwide to train managers and executives • You and your teammates are the executives of CapSim: a $100 million sensor manufacturer. • Your roles in the company are: • To formulate, articulate, and execute a strategy • To organize your team to support your strategy • To make coherent, functional decisions reinforcing your strategy • Each round is the equivalent of one year in the life of the firm • All teams start with identical positions • We start with 4 practice rounds • 8 “real” rounds follow the practice rounds

4. CapSim Context SEC ANNOUNCES BREAKUP OF MONOPLOY FOR IMMEDIATE RELEASE The SEC, took dramatic action today by breaking up the monolithic corporation Sensors, Inc. In a statement to the press, the SEC outlined the reason and the outcome of this move. “We cannot allow monopolies of this sort to impact an entire industry! The customers that utilize these sensors are being held hostage.” “Effective immediately Sensors, Inc. will be dissolved into the Andrews, Baldwin, Chester, Digby, Erie and Ferris companies.”

5. Welcome to your New Company! Teams, Segments & Products Each industry includes five product segments: You have been assigned to one of the following industries: C54525 (3:00pm), C54526 (4:30pm) There are 6 teams in the industry: 30 initial products in the industry You are in competition with the other 5 teams in your industry

6. The Basics: Sensors • What’s a sensor? • A device that receives an input and relays information or takes an action • Example: a thermometer or a thermostat • How many types of thermometers can you think of? • What applications may they be used for? • Along what characteristics do they differ?

7. The Sensor Industry • CapSim’s “sensor” market is similar to microprocessors: • High growth industry (9-20% annually in different segments) • Barriers to entry – 6 firms in a market, never any new entrants to the game • Thus, the Threat of New Entrants is extremely low/nonexistent! • Highly competitive – 6 identically endowed teams with no one being given an initial advantage • Thus, the Intensity of Rivalry is very high! • Somewhat turbulent – the market demands more every year (better performance, lower costs) • Thus, the Power of Buyers/Customers is very high! • There are multiple “sub-markets” or segments that exist within the industry

8. Positioning The Market Segments • 5 “sub-markets” or segments in the sensor industry • Traditional, low-end, high-end, size, and performance • Customers have different buying criteria relative to: • Performance: customer perceptions of how well the product performs • Size: the product's dimensions and weight • Reliability: expressed as Mean Time Before Failure (MTBF) • Price: price of product • Age: age of product • In each segment, the relative importance of these criteria are different

9. Traditional Importance: Age 47% Price 23% Positioning 21% MTBF 9% Low-end Importance: Price 53% Age 24% Positioning 16% MTBF 7% High-end Importance: Positioning 43% Age 29% MTBF 19% Price 9% Performance Importance: MTBF 43% Positioning 29% Price 19% Age 9% Size Importance: Positioning 43% Age 29% MTBF 19% Price 9% The Market Segments: Buying Criteria Importance

10. Rough Cut Fine Cut The Segments & The Perceptual Map • Positioning • Just beyond fine cut, appeal drops 1% • ½ way between fine and rough cuts appeal drops 50% • Just inside rough cut, appeal drops 99%

11. Fine Cut Criteria Changes Over Rounds Example: Traditional Segment  Round 1 Round 8  • Important Points to Remember: • Price ranges decline $0.50 in each round • Positioning ideal spots change each round and are segment specific • Age preferences always remain constant • MTBF ranges always remain constant • Growth rates always remains constant

12. The Perceptual Map: Segment Drift and Ideal Spots

13. Selling Your Products:Visualizing the Rough & Fine Cut

14. R & D: Revise product attributes Positioning (size and performance) Reliability Age Introduce new products Production: Add capacity Automation Labor costs Inventory costs Marketing: Set prices Set spending on promotions (Awareness) Set spending on sales force (Accessibility) Finance: Issue and retire stocks and bonds Set credit policies Dividend policy Manage cash flow Company Functional Areas You Will Manage

15. The two most important, critical decisions you can make • Properly organize your team, creating accountabilities and reporting assignments • Suggestion 1: Organize your team by creating product or segment managers, then • Suggestion 2: Elect a CEO who is responsible for the overall direction of the organization (e.g., strategic coherence), ensuring uploads are complete, etc. • Articulate, and define a coherent strategy • Coherence means individual decisions (e.g. finance and marketing) reinforce the overall strategy

16. Generic Strategies • There are 3-6 distinct strategies that work very well in this class • Be sure to look through your CapSim tutorials and handbooks for help with this • You should choose performance measurements that align with each of the strategies • Each strategy requires giving up something (Porter’s “tradeoffs”) • You can’t make one product that meets everyone’s needs

17. Generic Business Level Strategies Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Focused Differen- tiation Focused Low Cost Narrow Target Market Source of Competitive Advantage Breadth of Competitive Scope

18. Performance Criteria: Your Team Must Determine • Success Measures / Metrics • Average Stock price (min 20% of criteria) • Cumulative Profits (min 20% of criteria) • Average Market Share • Average Return on: • Sales • Equity • Assets • Average Asset Turnover • Suggestion – not more than 4 metrics total

19. Points to Consider for Your Strategy • Strive to give your customers the top two buying criteria. Sacrifice what customers do not care about to give them what they want. • Example: Low-end customers value Price 53%, Age 24%, Positioning 16% and MTBF 7% • It takes time and maintenance to build a solid product offering. Try to get the maximum benefit from R&D. • Invest routinely in awareness and accessibility. • It does not matter how good your product is if you stock out. A good product must be backed by production capacity to supply the demand it generates. But, excess inventory can be a killer!

20. Practice Rounds • Suggested activities in practice rounds: • Close at least one product • Launch at least one product • Reposition one product to a different segment • Goals for Practice Rounds: • Achieve 30% contribution margin • Get one emergency loan (round 3 or 4) • Maintain positive cash flow • Raise stock price by year 4 • Score #1 on at least one of your metrics • Rounds process at 7:00pm on dates indicated in the itinerary

21. Next Step… • Go to it!!