Capstone

2. Capstone Computer Simulation

3. Objectives • Demonstrate effectiveness of multi-discipline teams working together. • Use strategic thinking to an advantage. • Learn financial fundamentals. • 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. Advantages Risk Free View Alternative Strategies Compress Time (8 years in 8 weeks) Disadvantages Some players not serious Selectivity and abstraction Discrete time increments Why Simulate?

5. Disclaimers! • These slides are not a substitute for reading the Team Member Guide  • They do not include all necessary information to make decisions  • In the event of a conflict between these slides, the Guide, and the simulation’s output; believe the output. 

6. The Playing Field • $100M electronic sensor manufacturer. • Market dominated by handful of firms. • No outside competitors or substitutes. • Benign environment.

7. Market Segments Beginning Shares & Annual Growth Rates (nn%) Share of units Performance - 8.4% (19.8) Low End – 39.3% (11.7%) Traditional – 32.4% (9.2%) High End – 11.2% (16.2) Size – 8.7% (18.3%) These values change. Check manual.

8. Perceptual Map Large Size Small Fast Slow Performance

9. Perceptual Map Large Performance Low End Size Traditional Size High End Small Fast Slow Performance Defines five market segments.

10. Low Perf Trad High Size Perceptual Map Changes Large • Other characteristics: • Price • Reliability (MTBF) • Age (yrs since revised) Size Small Fast Slow Performance Customer expectations change to smaller and faster

11. Each Segment Has a Sweet Spot Large Rough cut Fine cut Size Sweet Spots Not to scale Small Fast Slow Performance

12. High End Sweet Spot Sweet Spot See Guidefor exact position

13. Two stage purchasing decision • Select from among products that meet criteria based on • Performance • Size • Reliability • Price • Decide on quantity based on other factors.

14. Functional Areas Production R&D HR Marketing Finance

15. Research & Development • Set Product coordinates (Position) • Set MTBF rating (Quality) • Drive Perceived age (Age) • Create new products

16. Marketing • Price • Promotion Budget • Sales Budget • Set Sales Forecast • Set Credit Policies AR/AP

17. Production • Set automation level • Buy or sell capacity • Schedule production • One year lag to add capacity or automate

18. Human Resources • Wages • Benefits • Profit Sharing • Wage Escalator

19. Finance • Acquire Capital • Issue Stock • Short Term Debt • Issue Long Term Bonds • Set Dividend • Retire Long Term Bonds • Retire Stock • Emergency Loan

20. Proformas • Balance Sheet • Profit & Loss • Cash Flow • Financial Ratios

21. Profit Market share Return on Sales Asset turnover Return on Assets Return on Equity Stock Price* Market capitalization* Scoring the Simulation You will establish your own success criteria. Capstone provides common financial performance measure that you can weight as you see appropriate to your success. Of course, the stock price is always looked at closely by the outside world. * Ending only, others areweighted averages

22. Skill Mix Needed • Teamwork—all members • At least one team member should have • Quantitative skills—spreadsheet useful • Organizing skills—get the team to meet and get decisions entered on time • Forecasting skills—anticipate future demand • Analytical skills—predict likely competitor actions

23. Functions to cover • Product managers (1 to 8, start with 5) • Segment managers (5) • Marketing • Production • Finance • Competitive Intelligence • General Manager There are more functions than people. Each person will have multiple responsibilities.

24. Team Decision Processes Review results Compare to plan R & D decisions Analyze competitors’ results. Predict strategy Marketing decisions Forecast sales Production decisions Reassess plans Cash flow decisions Capital decisions

25. Log into Capstone • http://www.capsim.com • Tour website • Download starting conditions • Operating note: If you see a quantitative conflict between the manual or these slides and the software, use the software numbers; e.g., segment growth rate or size.

26. Capstone Internal Functions

27. Internal Company Operations • Research and Development • Marketing • Production • Labor Relations • Finance Decision making should start with R & D and go down the list. Iterate until the entire team is satisfied with the decision.

28. Product R & D improves the product characteristics New products Positioning Age (perceived) Quality (mean time between failure, MTBF) Process R & D improves production Automation—covered in Production segment Research and Development

29. Reposition products’ Performance and Size. Any change cuts perceived age in half. Increase MTBF to improve quality Create new products Repositioning and quality improvements affect material cost. Automation increases time required to reposition product. Product R & D

30. + New Product Development • One year minimum • Development time driven by distance from existing product • Requires new production capacity

31. Factors affecting R&D cycle time • Automation level of production line • Number of R & D projects underway • Degree of change (distance moved on perceptual map) • Big moves (>4 units) take 2.5-3.0 years regardless of automation See Guide page 20 for details

32. Automation reduces labor cost E.g., $11.20/unit at level 1; linear to $1.20 at level 10 Automation costs $4 per level per million units production capacity. E.g., 2 levels x 600 cpy x $4 = $4,800. Automation increases time to revise a product (nonlinear). Process R & D

33. R & D notes • You can add or delete products; min=1, max =8. • Projects started must be finished before new projects can be started on that product. • All projects start on January 1. • Products not repositioned will eventually become obsolete (segment drift) • New products require new production facilities. One year minimum to complete (typical 1.1 to 2.3 years). • New production capacity takes one year.

34. Marketing’s four Ps • Price—quick response, easily copied • Promotion—Cumulative effect with diminishing returns • Place—Have the product where the customer needs it. • Product—The result of R & D efforts (prior slides). • All are described ceteris paribus but that is never the case!

35. Two Stage Purchasing Decision • Stage One: Which products meet the customer’s requirement? • Performance and size are within 4 units of center • Reliability and age within expectations • Price does not exceed maximum • Stage Two: How many units to buy from among those that pass stage one? • How close to ideal is each product on each characteristic?

36. Able Price Segments Two Stage Purchase Decision Stage 1 - Match Product to Market Size 1. Product must plot within the segment. Able 2. Product must fall within price guidelines. Performance Able Quality (MTBF) 3. Product must fall within quality and age guidelines Segments

37. Two stage purchase decision Stage 2 - Rank Best Product Quality 1. Positioning 2. Age 3. Quality 4. Price Position 3 Sweet Spot 0 Yrs 1 Age Price 20000 25000 HIGH END $30 $40

38. Age Effects • Product age does not affect rough cut • Demand is normally distributed around ideal age (with truncation) • Sensitivity to age varies by segment Gary Whitney

39. Demand Curve Example Gary Whitney

40. Sellers’ Markets • When there is insufficient inventory to meet aggregate demand, there is a “sellers’” market. Buyers relax their criteria to meet needs. Sellers’ market slope—precipitous! Buyers’ market slope 20%/1K hours Demand 22K 27k MTBF Guidelines

41. Segment Criteria Traditional Low End High End Perform Size Age Price Position Quality Price Age Position Quality Position Age Quality Price Quality Position Price Age Position Age Quality Price See Guide for exact criteria

42. Price • Low price alone is not a strategy Prices have been dropping about $.50/year in each segment. Therefore, holding price will reduce demand. Price Estimate this curve for your segment to find optimal prices. 2001 2000 Quantity demanded

43. Price drives margins • Hint! • In Capstone, a good variable margin target is about 38%! • Variable margin = Price – (Direct labor + Direct Mat’ls + Inventory carrying cost) Price • See page 2 of your annual report

44. Price • Credit policy is a form of price competition; it affects the capital structure of the buyer and seller • One million dollars in A/R costs you $100,000 at interest rates of 10%

45. Promotion % aware Example only Promotion expense Note: half of those not made aware will do their own research to find the product.

46. Promotion (2) • Only products that pass the rough cut are affected by promotion. You cannot sell an unsuitable product with high promotion. • About half of the customers who have NOT seen your promotions will find it through their own research. • Promotion can explain no more than about half of the demand for your product compared to competitors; less if all promote about equally. • E.g. if all 6 companies achieve 80% awareness, then other factors become the driving forces.

47. Place • Sales force budget gets the product placed where the customer can buy it. • The relationship of expense to sales is the same as promotion but: • It applies to all of your products in that segment. This is an opportunity for economies of scale. • Products moving between segments get the benefit of the sales budget from the segment when they are in it.

48. Customer Survey (in Courier) • Index from 0 – 100 of how well each product met criteria in December • Lowest Price # • Perfect Position * • Top MTBF # • Ideal age * • 100% Awareness • 100% Accessibility • * Changes monthly so customer • survey score of 100 is • nearly impossible. However, • this can be useful information • for sales forecasting. • # Competitors may change your • ranking for the following year • on these.

49. Production Andrew’s Factories • Scheduling (short term) up to 200% of capacity at time and half • Automation (see Process R & D) • Capacity (long term) • Vendor relations (A/P) • Slow payments cause raw material to be withheld creating shortages and idle workers Able Acre Adam Aft Agape Space for additional factory Space for additional factory Space for additional factory 30 days--1%, 60 days—8%, 90 days—26%, 120 days—63%, 150 days—100%

50. Inventory is money • Hint! • In Capstone, a conservative target for end-of-year inventory is 10% of annual sales (36 days of inventory). • The perfect end-of-year inventory is 1 unit.