Activities for Today

1. Activities for Today • Attendance • Case:The Rise and Fall of the J. Peterman Company • Review Simulation Exercise • Simulation Memo • Simulation Quiz Break (7:40 to 7.50 pm) • Disruptive Technologies: Catching the Wave (Bower/Christensen) [ML]; • Homework • Why be Honest if Honesty Doesn’t Pay (Bhide/Stevenson) [ML]; • Case: The Skeleton in the Corporate Closet [ML]; • Simulation Decision – Trial 1 MQM485/Fl08/Class3

2. Peterman Case • What advise can we offer Mr. Peterman so that he could have prevented J Peterman Company slipping away from his hands?

3. What is a Simulation? • Experiment with a model of reality • Limited replication of real life • Examples • Tradeoffs

4. Benefits of Simulation • Time compression (long series of decisions in short time) • Less Costly (in case of mistakes) • Practice for the real world • Observable Consequences • Experiment in managerial operations • All of aspects of business considered -- helps integration among function areas • Not a perfect replication of the “real world” (which is good) as we have limited time only

5. Simulation • Interactive Dynamics (vs. rivals) • Can You Understand the Other Group • Things Linked with One Another • Living Firm – Actions Constraints by Previous Choices (path dependencies) • Controllable Vs. Uncontrollable • Don’t Dwell on God’s Problems (did you use the information well?) • Simple mistakes cost too much? – YES • (typos, carelessness, lack of consistent attention)

6. Simulation • Speed of Learning • Importance of Group Dynamics • Simulation Mechanics (rules vs. logic) • Fit – Consistency – Match is critical • Sometimes (or many-times) the simulation response may not fit your mental model or expectations • What should be your response? • What type of help can you expect from me? • Procedural Matters - Yes (Integrative too) • Conceptual Matters -- Yes • Decision Choices – Big NO • For example, I cannot say if your pricing strategy is right or wrong! (I cannot support one group over the other)

7. Grading Simulation Grade:150 Points • Adjusted Performance [100 points] ** (Net Income-50%, Stock Price-50%) • Absolute & Relative (spreadsheet will be posted at my web-site) • 6 Years (6 Decision Period) – 80% of Performance Grade • Marginal Impact – by Auto-advancing 3 Periods – 20% of Performance Grade • Extent of Learning [50 points] • Memo (see syllabus - due after completion of trial rounds) • Final Presentation & Mini-Report • Caution: While the simulation is a useful exercise, it could bruise some students ‘ego’ badly (who wants to come last 5, 6, 7 times in a row????) • Look at the positive: If you made mistakes which hurt your firm badly, you probably will not do it again in life! • I will be reasonable as we all are here to learn [I expect the same from you – so do not try your luck] ** -- The simulation curve will be different across groups [the bottom performer’s could get a relative performance boost, if I feel they deserve it]. Converting $$$ to points needs some fine tuning always. You will have to trust me to treat every group fairly.

8. Simulation • For the simulation to work you need to follow deadlines. • The simulation will not wait for you. Do not plan for last minute task execution. • Coordinate Among Teammates (unlike a report, the simulation needs effort through the semester). • Help-desk response is very good (but much better if it is between 8-5 EST)

9. Be Organized Be Flexible Be Timely Organization and Planning “Organizing is what you do before you do something, so that when you do it, it is not all mixed up” - A.A. Milne “In preparing for battle I have always found that plans are useless, but planning is indispensable” - Eisenhower “When you're dying of thirst it's too late to think about digging a well” - Japanese Proverb

10. StratSimManagement Ties It All Together: • Marketing • Operations • Finance • HR Cross-Functional Long-Term Strategy

11. StratSim Environment • Based on the Automobile Industry • Multiple Markets and Vehicle Classes • Consumer market of 150 million people • Currently, low GDP and inflation growth rates • Demand sensitive to GDP, interest rates, and decisions that you make as an industry • Maximum of 10 yearly decisions

12. StratSim Environment The Products: Cars & Trucks • Principle Characteristics • Vehicle Class • Size • Engine / Performance • Interior • Styling • Safety • Quality …and Price

13. StratSim Environment • 7 Product Classes with Existing Vehicles: (E)conomy, (F)amily, (S)ports, (L)uxury, (M)inivan, (U)tility, and (T)ruck • Plus a potential new class if developed: (A)EVs

14. Decisions for Period 1 (pre-history) Period 1 Results Decisions for Period 2 “1st Round” Decisions for Period 3 Period 2 Results “2nd Round” Etc. Decision Process

15. Round 1 Round 2 Round 3 Round 4 Round 5 Round 6 Simulation Timeline Up to 10 • Enough time to develop and implement a long-term strategy • Enough time to adjust to your competitor’s strategies

16. StratSim Environment • In the unique starting positions scenario, each team starts with a unique set of strengths and weaknesses and is positioned differently. This is standard scenario and emphasizes the importance of understanding a company’s strengths, weaknesses and positioning as an integral part of designing a strategy. This scenario has 5 firms by design, and each firm has a relatively similar opportunity to “win” based on cumulative net income and stock price. • In the even-start scenarios (3, 4, 5, 6 and 7 firms) all student team competitors start with 3 of the same vehicles in identical positions. No firm has any perceived advantage or disadvantage in this scenario, but in effect, all firms start with products that are commodities.

17. StratSim Environment • Competitors: 5 Firms (A-E) • Each firm has 3 vehicles on the market •  Alfa (F)*, Alec (E), Awesome (U) •  Boffo (F), Beaut (L), Buzzy (S) • Cafav (F), Camini (M), Climax (L) • Defy (F), Delite (E), Detonka (T) • Efizz (F), Estruck (T), Euro (U) • Amazing Cars (A) • Best Motor Works (B) • Cool Cars (C) • Driven Motor Co. (D) • Efficient Motors (E) • The firms have different strengths and weaknesses and are uniquely positioned in the market * Corresponds to Product Class

18. Industry Overview

19. Consumer Market • 5 consumer segments (1-5) with different needs and class preferences Segments Value Seekers (1) Families (2) Singles (3) High Income (4) Enterprisers (5) … New customers may emerge

20. Consumer Market Purchase Process • Customers have different needs and expectations with regard to vehicle characteristics • Customer ”consideration set” based on product class, size, and MSRP

21. Consumer Market Purchase Process • Customers prefer a particular size vehicle • Customers prefer a specific engine size due to the trade-off between performance and fuel economy • Customers prefer better (more) Interior, Styling, Safety, and Quality (“ISSQ”) • Customers weigh this bundle of goods against the price charged

22. B2B Market • New Opportunity in direct sales to Fleet Buyers: • Rental Car Fleets (6) (e.g. Hertz) • Delivery fleets (7) (e.g. FedEx) • Other (8) (e.g. Gov’t) • Note: Segments designated 1-5 are consumer customers • Segments designated 6-8 are B2B customers. • B2B Customers have a very different purchase process from Consumer Market. • Guaranteed sales are awarded to firms who meet contract requirements, preferred supplier status (2x sales) awarded to low cost supplier who meets contract requirements.

23. B2B Market • B2B Customers have requirements that must be met in order to obtain a contract: • Equal To or Below Maximum Price • Equal To or Above Minimum Specifications • Dealership Coverage in ALL regions • Specific Vehicle Class • Within Requested Size and Engine Ranges • In addition, must target the contract with your sales force to be able to bid on the contract the following period. • Salespeople are hired automatically when contracts are targeted • Salespeople cost approx $100K each including expenses

24. B2B Market • Example: Cheapy Stu’s • To qualify, you must offer an economy vehicle with size 1-20, HP between 65-115, Interior, Styling, Safety and Quality greater than or equal to 1. • Must have dealer coverage of more than 40% in all regions • Must bid a price equal to or below $10,900. • If ALL of those requirements are met, you will sell 33K units (guaranteed). • In addition, if you offer the lowest bid of any firm, you will be selected as preferred supplier and sell 66K units (2x).

25. B2B Market • Initial Period • Determine whether to pursue the B2B market (Strategic Decision) • Use the B2B market research to evaluate the B2B opportunities • Select contracts to target to bid next period • Consider investments necessary to meet requirements • Subsequent Periods • For contracts where you qualify, select vehicle and enter bid • Must meet all specs and price at or below minimum • Check main decision page to make sure you qualify after entering bid • For contracts where you don’t qualify, decide if it is worth the investment necessary to bid on the contract in the future • Adjust your target contracts as necessary

26. B2B Market • Adds potentially lucrative target markets to the environment, but requires additional management time and resources • Make sure you meet ALL minimum requirements • Consider impact on margins and production especially if you are chosen as preferred supplier. B2B contracts are the first units allocated from production. • Think about synergies (or not) between B2B customers and consumer customers.

27. Licensing (optional) • One firm makes “offer” to another firm that specifies vehicle class, size, HP, and minimum specifications – The “licensee” • The firm that receives the offer must have a vehicle that meets the requirements and they must accept the offer – The “licensor” • Additional terms to be negotiated: • Price licensee pays per vehicle • Units purchased • Any additional fees • License is re-entered each period (even if you negotiate a long-term agreement) • Once licensor accepts the offer, it is a legally binding contract. Cancelled

28. StratSim Logistics • All decisions are saved on the server, so you must be online • Everyone on the same team shares ONE decision file, so when one person makes a change, the whole team makes that change. In addition, when one team member purchases a tool, the whole team purchases the tool. In other words, organize your decision process! • It is recommended that you print out decision summary and pro-forma income statement when your team is done entering your its decisions • Decisions must be completed on time • Results will be available at beginning of next meeting time

29. Planning: Pro-forma • Use the Pro-forma analysis toward the end of your decision-making process to: • Estimate ending inventory (check production) • View projected income statement and balance sheet • Estimate projected cash flow • Calculate projected product contribution • BEWARE! Based on YOUR unit sales estimates • Actual results (after advance) will vary • Default sales estimate = last period’s sales • Costs / Expenditures based on your decisions

30. Decisions (Overview) • Technology • Concept Creation • Product Development • Consumer Marketing • Manufacturing • Distribution • Finance Cross Functional Long-Term

31. Final Considerations • Your strategy drives your decisions – make sure you have one! • Focus on how to best serve your target markets through a total offering – product, marketing, service, and price • Importance of team organization - HR • Manage your margins – understand financial implications of decisions • Understand fixed and variable costs • Long term vs. short term • Make wise investments • Use the Pro-Forma for insights BEFORE finalizing decisions • Try new approaches – apply concepts – experiment – have fun!

32. Manage the Performance Dynamic Profit = Unit Sales x Unit Margin - FC (Demand x Share) x (Sell. Price – COGS) - FC - Economy - Industry Dynamics (products, adv$,etc.) - “Quality” - Relative $Ad - Price • - Distribution • - Preference - R&D - Capacity -Tech - Distrib. - Adv (MSRP - %) - Value - Price Sensitivity -“Quality” - Tech Cap. • Volume • Upgrade Align with strategic positioning model (e.g. focused differentiation, etc.)

33. Technology • Each firm has an overall technology capability with regard to Interior, Styling, Safety, and Quality that can be improved through investment in technology • For Example: Firm A’s technology profile is 4, 5, 4, 5, meaning that it can develop and/or upgrade vehicles to these maximum specifications • A firm with greater technology capability can produce vehicles with better features in these areas AND produce vehicles with the same features at lower per unit cost • Weigh benefit against cost of investment Important: Investing in technology does not automatically improve the specifications of your products, only your ability to do so through upgrades.

34. Cost of investment and estimated benefit Click here to change your technology capabilities Technology

35. Product Development • Product Development takes place in “Development Centers” • New products move from concept to development in one of the centers • Upgrades also take place in the centers • Each firm starts with 2 development centers allowing concurrent development on two products (new products or upgrades) • New development centers can be added over time up to a maximum of five (one per period).

36. Product Development • 4 General Approaches: • Minor Upgrade: Based on existing product, uses 1 center for 1 decision period, prepare launch now (immediate impact after advance). Inventory disposed now. • “tweak” – Max. change of 2 size, 5 HP, 1 other specs. • Major Upgrade: Based on existing product, uses 1 center for 2 decision periods, prepare launch next decision (1 year). Inventory disposed next year. • Max change of 10 size, 20 HP, 2 other specs + “tweak” next year • New Product, Same Class: Based on concept, uses 1 center for 2 decision periods, prepare launch next decision (1 year) • New Product, New Class: Based on concept, uses 1 center for 3 decision periods, prepare launch in two years • Use concept test for new products to measure “quality” of your offering. Balance opportunities, speed to market, cost, and need for change

37. Product Development • To introduce a new product (new brand name, not an upgrade), a firm must first develop a product concept • A concept consists of all the vehicle specifications (class, size, engine, attributes) • Your firm will receive feedback on the unit cost, development cost, and time to develop • Your firm may also run a concept test to see how a customer views your concept.

38. Product Development Product Development Timelines (Exhibit from the StratSim Case)

39. Product Development • Example: • In the 1st decision period, a firm initiates a minor upgrade and a new product in a new class… • If, in the following period, the firm thinks it will want to initiate two more upgrades, what are its options? • Build a new development center in the 1st decision period so they would have 3 operational centers in the 2nd decision period • Only choose one upgrade in the 2nd period (because the new product would occupy one development center) • Choose to discontinue development of the new product to free a development center. Hints: Be sure to plan development time lines and development capacity

40. Product Development Sample development screen showing an upgrade (Alfa), new product (Aphid), and a new development center:

41. Marketing • Corporate Level Marketing: • Budget set by region (North, South, East, West) to create general firm preference and support dealerships • Public relations to create interest in firm • developments • Direct Mail to different consumer segments

42. Marketing • Product Level: Advertising and Promotion • Advertising budget to build and maintain awareness • Advertising theme (performance, interior, style, safety, quality) to appeal to target segment’s “hot button” • Promotion budget to help spur sales during slow periods used for rebates, special financing, attractive leases, etc.

43. Marketing • Product Level: Pricing • MSRP = Manufacturer’s Suggested Retail Price used to position vehicle, set expected price in mind of consumer and dealership • Dealer Discount = % discount off MSRP to dealer • MSRP - discount = Actual revenues to your firm • Actual selling price to consumer (retail price) determined by dealer

44. Marketing Consumer Marketing Decisions Screen

45. Manufacturing • Capacity • Total vehicle production must be less than capacity or incur over-capacity charges • Capacity may be increased, but takes one year before available and costs $$$ • Plant investment is depreciated over 10 years • Maximum increase (or decrease) in a year is 50% of current capacity

46. Manufacturing • Product Production • Set production based on YOUR sales forecasts and inventory levels • Retooling costs for initial or increased production • Remember there is a cost to dispose of inventory of old vehicles if upgraded • Set flexible production (+/- 10%)

47. … and Alfa inventory write-off (upgrade) Manufacturing Note over-capacity (1845>1800) and resulting charge

48. Distribution • Dealerships make the actual sale to consumer • Set up on a regional basis (North, South, East, West) • Can open or close dealerships (max of 10% change each year and takes 1 year to open/close) • Dealer ratings (1-100 scale) indicate customer experience at dealership, impacted by: • Profitability and product offerings • Training, education and support • Dealer discounts and servicing

49. Note Coverage (= established / full) … and 20 new dealerships started Distribution

50. Finance • Uses of cash (long-term investment decisions): • Technology, product development, capacity, retooling, advertising, distribution, repurchase of bonds and stock, repayment of loans. • Sources of cash: • Operations, selling bonds and stock, short-term borrowing • Use Pro-Forma to see likely impact on cash position based on YOUR forecasts and decisions