WELCOME TO CAPSTONE ® BUSINESS SIMULATION

1. WELCOME TO CAPSTONE ® BUSINESS SIMULATION

2. Professor Jeffrey E. McGee The University of Texas at Arlington

3. Objectives • Demonstrate effectiveness of multi-discipline teams working together. • Use strategic thinking to an advantage. • Test your business acumen. • Understand overall interaction and impact of various parts of a business on one another. • Grow an awareness of competition. • Take away practical know-how to improve the effectiveness of your business.

4. Why Simulate • Risk Free • View Alternative Strategies • Enjoyable • Compresses Time (1 Round=1Year) • Selectivity <> Integration

5. SENSOR INDUSTRY OVERVIEW

6. The Marketplace Customers (OEMs) need sensors for their products Initially one segment, now breaking into five Very different customer demands developing between the segments Diversification in the use and utility of the sensors

7. The Marketplace In our industry we track the changing customer demand on a perceptual map Low Tech Performance Traditional High Tech Size Over 8 years the customers will demand much faster and smaller sensors Market Segments will continue to diverge

8. Low Tech & Traditional Customers You’re not giving me what I want “I want these sensors to be cheap” “I want them to have been around for a while – no Beta Testing!” “They have to be moderately reliable.” “The technology doesn’t have to be cutting edge.”

9. High Tech, Size & Performance Customers And I’m not getting what I want! “These sensors have to be small, like micro, and fast” “I need them to be right out of R&D, I’m talking ZERO years on the market” “I’ll pay more to get what I want.” “I like a pretty high reliability.”

10. SENSOR INDUSTRY ANALYST PROJECT ONGOING GROWTH Sees the next 8 years as consistent growth. All market segments increase at a nice “clip,” according to market analyst. “I see the entire market growing at around 14% or 15% per year. The High Tech market alone will be growing at a whopping 16%.” I hope those companies out there are ready for that kind of expansion!”

11. COMPANY OVERVIEW

12. SEC ANNOUNCES BREAKUP OF MONOPLOY FOR IMMEDIATE RELEASE Mary L. Schapiro, Chair of the SEC, took dramatic action today by breaking up the monolithic corporation Sensors, Inc. In a statement to the press Chairman Schapiro outlined the reason and the outcome of this move. “We cannot allow monopolies of this sort to impact an entire industry!” stated Donaldson. “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.”

13. The Competition ANDREWS DIGBY 6 Companies $100 Million in Sales BALDWIN ERIE 5 Product Lines Closed Marketplace CHESTER FERRIS

14. SHAKE UP IN SENSOR INDUSTRY Company Fires Management Team After poor results, lackluster sales and angry customer reports, the Chairman of the Board of Directors has announced the immediate termination of the Management Team. “This is a black day for our company,” said Chairman Jeffrey E. McGee, “We need to hire a dynamic leadership group who will be able to take this company into the future!” “Due to this immediate need I have hired the Dream Team to start on January 1st. I expect to see great things from this Executive Team!

15. WELCOME TO YOUR NEW COMPANY!

16. Functional Areas Production R&D Finance Marketing

17. Research & Development • Establish the specification of the products to meet customer demand • Build the quality and reliability (MTBF) into the products • Ensure the perceived age of the product meets customer demands • Create new products to meet the changing marketplace “Our products are not well positioned in the marketplace.”

18. Marketing • Set the price of our products in the marketplace • Build customer awareness through promotion • Establish a sales force and distribution channels • Set the sales forecast for our products • Set Credit Policies AR/AP “Our products are not pricedoptimally. And many of our customers don’t even know our product exists.”

19. Production • Purchase machinery to automate our facilities • Buy or sell capacity of product lines • Schedule production for each line • Manage the majority of the company’s fixed assets • Establish your workforce complement “We are payingtoo much forlabor costs. Very soon we will run outof capacity to meet demand.”

20. Finance • Acquire capital to fund capital expansions • Issue Stock • Short Term Debt • Issue Long Term Bonds • Issue dividend to our shareholders • Balance our debt portfolio • Manage our proformas “We have poorcash flow and substandardfinancial ratios. We have nofinancial policystatement.”

21. Proformas A great management tool driven by forecasts and projections. Allows “What if” Scenarios by the company. • Balance Sheet • Profit & Loss • Cash Flow • Financial Ratios

22. Scoring the Game • Performance criteria is measured by: • ROE • ROS • ROA • CUM PROFIT • STOCK PRICE • MARKET CAPITALIZATION • ASSET TURNOVER • MARKET SHARE • Each reflects 12% except Market Capitalization which reflects 16% of overall performance

23. RUNNING YOUR COMPANY THINGS TO DO ON AN ANNUAL BASIS

24. To Do List • Establish business strategy for your company • Analyze Capstone Courier to see industry results • Make tactical decisions across each functional area (aligned to strategy!) • Upload official results and confirm on the website • Await results when Professor processes • Rejoice in your superior capitalistic acumen • Begin the process again by confirming alignment of your results with your company’s strategic goal.

25. Types of Business-Level Strategies • Business-level strategies are intended to create differences between the firm’s position relative to those of its rivals • To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals

26. Five Generic Strategies Competitive Advantage Cost Uniqueness Cost Leadership Differentiation Broad target Integrated Cost Leadership/ Differentiation Competitive Scope Narrow target Focused Cost Leadership Focused Differentiation

27. No Clearly Defined Strategy… MY FIRM HAS A COMPETITIVE ADVANTAGE MY FIRM HAS A COMPETITIVE ADVANTAGE STUCK IN THE MIDDLE

28. CAPSTONE STRATEGIES • Strategies are declared in corporate mission statements • Capstone firms may develop and execute any strategy (or none at all - though that isn’t advisable). Basic strategies include: • Overall Cost Leader • Cost Leader with Focus (Low Tech or Product Life-Cycle) • Differentiator • Differentiator with Focus (High-Tech or Product Life-Cycle) STRATEGY Mission Statement INDUSTRY AND MARKET ANALYSIS S.W.O.T Analysis Competitor Analysis Competitive Analysis PERFORMANCE ASSESSMENT Success Measurements Analyst Report Round Analysis - Star Summary FUNCTIONAL PLANNING R&D Marketing Production HR Finance TQM

29. OVERALL COST LEADER An overall cost leader will attempt to be the low-cost producer in every segment of the market. They will have good profit margins on all sales while keeping prices low for price-sensitive customers. • Firm Profile: • More likely to re-position products than introduce new ones to the market • Capacity improvements are unlikely to be undertaken (may run overtime instead) • Automation may be pursued to increase margins • Investments will be financed with debt and/or stock issues • Tend to spend less on promotion and sales • Focus on Market Share, Profits, and Stock Price

30. COST LEADER WITH LOW-TECH FOCUS A low-tech focused cost leader seeks to dominate the price sensitive market segments. Their aim is to set prices below all competitors - and still be profitable. • Firm Profile: • Multiple product lines in the low-tech segments (Low & Traditional) • Invest heavily in automation • Spend heavily on advertising to cost sensitive customers (sales people have more than one product to pitch to prospects) • Investments financed with debt and/or stock issues • Focus on ROS, ROE, and Profits

31. COST LEADER WITH PRODUCT LIFE-CYCLE FOCUS A product life-cycle focused cost leader will seek to minimize costs through efficiency and expertise. Products will be allowed to age and change in appeal from high-tech, to traditional, and eventually low end buyers. • Firm Profile: • Minimum presence in “specialty” segments (Size & Performance) • Low R&D spending (very little re-positioning & new product every 2-3 years) • Invest in automation early in the product’s life-cycle • High spending on promotion and sales • Focus on ROE, ROS, and Profits

32. DIFFERENTIATOR A Differentiator will seek to create maximum awareness and brand equity. They want to be well known as makers of high quality/highly desirable products. • Firm Profile: • 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 • Focus on Market Share, Profits, and Stock Price

33. DIFFERENTIATOR WITH HIGH-TECH FOCUS A high-tech differentiator seeks to be known far and wide as the top producer of the best performing state-of-the-art products. • Firm Profile: • Multiple product lines in high-tech segments (High, Performance, and Size) • Minimum focus in other segments • High promotion and sales investments to create maximum awareness and accessibility • High R&D expenditures to continually introduce new product lines and keep existing products fresh • Unlikely to invest in increased automation or production capacity • Focus on ROA, Asset Turnover, and ROE

34. DIFFERENTIATOR WITH PRODUCT LIFE-CYCLE FOCUS A product life-cycle differentiator seeks to be well-known as a top producer of good performing products in each of the targeted segments. • Firm Profile: • Multiple product lines in targeted segments (High, Traditional, and Low) • Minimum focus in other segments • High promotion and sales investments to create maximum awareness and accessibility • High R&D expenditures to continually re-position product lines and keep products fresh • Unlikely to invest in increased automation or production capacity • Focus on ROA, Stock Price, and Asset Turnover

35. SUMMARY There is no "magic bullet," guaranteed winning strategy. Each simulation has a unique competitive dynamic. • Successful firms will focus on planning, strategic alignment, teamwork, competitor analysis, and tactical adjustments.

36. Comp-XM ® • After competing in the Capstone® Business Simulation game, each student will be required to complete Comp-XM® individually. • This exercise entails participating in an additional four similar, yet different rounds (years) of another simulation. After each simulated year, you will complete a short quiz, called a “Board Query,” that contains questions tailored to your specific situation. • Although every student in the course will use the same software, the environment, rules and competitive environment change. Consequently, each examination is unique, because each student is tested on the decisions and results in his/her own company — decisions and results that will be different from those of any other company.

37. Comp-XM ® • The Comp-XM® industry has four market segments. Each individual participant is the sole decision maker for the Andrews company. Andrews competes against three computer companies, Baldwin, Chester and Digby. • The Comp-XM® simulation runs four rounds. • Simulation performance is judged using a Balanced Scorecard. Each round, a score is generated based on performance measures in these categories: • 􀂃 Financial • 􀂃 Internal Business Process • 􀂃 Customer • 􀂃 Learning and Growth • At the end of Round 4, a fifth score is generated using a different set of measures that evaluate the cumulative performance for Rounds1-4.

38. Good Luck and Enjoy!