COMM 401 - Capsim Midterm Study Guide

What are all the customer buying criteria

Price, age, MTBF ( mean time before failure), and Positioning

The Perceptual Map

Plots product size and performance characteristics. 

The Courier:

• an extensive year-end report of the sensor industry. 

• customer buying patterns, product positioning, public financial records and other information that will help you get ahead. 

Proformas

Projections for the upcoming year

Annual Reports

•  results from the previous year.

Research and Development:

• Oversees innovation and design 

In Marketing R and D addresses?

The Positioning of each product inside a market segment on the perceptual map,

The number of products in each segment,

The Age of your products,

The reliability (MTBF rating) of each product

In Production, R&D affects or is affected by:

The cost of material,

The purchase of new facilities to build new products,

Automation levels – The higher the automation level the longer it takes to complete an R&D project.

Positioning costs:

• At the beginning low end = $1 and high end = $10 

Reliability ( MTBF) costs:

• Each 1000 hrs of MTBF adds 0.30 to the material cost 

Project management:

• R&D project costs are driven by the amount of time they take to complete. A six-month project costs $500,000; a one-year project costs $1,000,000.

Age

When a sensor is improved the age cuts in half however changing MTBF alone will not change the products age

Promotion

• Awareness

• an awareness of 50% indicates half of the potential customers know it exists. From one year to the next ⅓ of customers who knew about a product forget it exists → starting awareness = last years awareness - (⅓ * last year's awareness)

• Awareness belongs to the product

• Has diminishing returns: the first 1.5M buys 36%, spending another 1.5M buys less than 14%

Sales

• Accessibility

• The number of customers who can easily interact with your product via salespeople, customer support and delivery.

  • If your sales budget drops to 0 you lose ⅓ of your accessibility each year.

• accessibility belongs to the market.

• Sales Budget: For budgets above $3,000,000, the dotted line indicates there is no additional benefit for companies that have only one product in a segment

• The first 2M buys 22%, with 2 or more products in a segment spending 4M gets you just under 35% → the second 2M buys less than 13% additional accessibility 

Total Market budget

Sales Budget + Promo Budget.

How to calculate production

• Sales Forecast developed by Marketing minus any inventory left unsold from the previous year

Capacity and cost of new capacity:

• the number of units that can be produced on an assembly line in a single year with a daily eight-hour shift.

• Each new unit of capacity costs $6.00 for the floor space plus $4.00 multiplied by the Automation rating.

• Capacity can be sold for 65% of its original value

Cost of second shift

• The second shift costs 50% more in labour 

Discontinuing a sensor

• Capstone interprets this as a liquidation instruction and will sell your remaining inventory for half the average cost of production

• If you want to sell your inventory at full price, sell all but one unit of capacity (then once inventory is sold through, sell the last unit).

Automation

• The lowest automation rating is 1.0; the highest rating is 10.0.

• Each additional point of automation decreases labor costs approximately 10%. At a rating of 10.0, labor costs fall about 90%

• It takes longer to innovate when the automation is higher

Changing automation

• For each point of change in automation, up or down, the company is charged $4.00 per unit of capacity

• Reducing Automation costs money.

• Changes in Automation require a full year to take effect – change it this year, use it next year

Five issues the finance department is concerned with:

• Acquiring the capital needed to expand assets, particularly plant and equipment. Capital can be acquired through: a. Current Debt, b. Stock Issues, c. Bond Issues (Long Term Debt), d. Profits

• Establishing a dividend policy that maximizes the return to shareholders

• Setting the Accounts Payable policy and Accounts Receivable policy

• Driving the financial structure of the firm and its relationship between debt and equity

• Selecting and monitoring performance measures that support your strategy

Current debt:

• Your bank issues Current Debt in one-year notes

• Last year’s Current Debt is always paid off on January 1

• Companies fund short term assets like Accounts Receivable and inventory with current debt offered by banks.

Bonds

• All bonds are 10-year notes. Your company pays a 5% brokerage fee for issuing bonds.

• The first three digits of the bond, the series number, reflect the interest rate. The last four digits indicate the year the bond is due

• When issuing new bonds, the interest rate will be 1.4% over the current debt interest rates

Bond rating

• Each year your company is given a credit rating that ranges from AAA (best) to D (worst).

• Your bond rating slips one category for each additional 0.5% in Current Debt interest. → For example, if the prime rate is 10% and your Current Debt interest rate is 10.5% your rating drops

Stock:

• Stock issue transactions take place at the current market price. Your company pays a 5% brokerage fee for issuing Stock.

• New Stock issues are limited to 20% of your company’s outstanding shares in that year

• Stock price is driven by book value, the last two years’ earnings per share (EPS) and the last two years’ annual dividend.

• You can buy back Stock. 

  • The amount cannot exceed the lesser of either: 5% of your outstanding shares, Your total equity listed on page 3 of last year’s Courier.

Emergency loans

• You pay one year’s worth of current debt interest on the loan and Big Al adds a 7.5% penalty fee on top to make it worth his while

Accounts receivable ( know 90, 60, 30, and 0 days):

The Accounts Receivable lag impacts the customer survey score.

• At 90 days there is no reduction to the base score

• At 60 days the score is reduced 0.7%

• At 30 days the score is reduced to 7%. 

• Offering no credit terms (0 days) reduces the score by 40%

Accounts payable ( know 30 days, 60, 90, 120 and 140):

Extends payment to suppliers

• At 30 days, they withhold 1%.

• At 60 days, they withhold 8%.

• At 90 days, they withhold 26%. 

• At 120 days, they withhold 63%.

• At 140 days, they withhold all material

Scoring

Measures performance across four categories:

• Financial: profitability, leverage and stock price

• Internal business processes: ranks CM, plant utilization and working capital 

• Customer: how well the product satisfies customers

• Learning and growth: evaluates employee productivity 

Customer survey score:

• Customer survey scores are calculated 12 times a year.

• A perfect customer survey score of 100 requires that the product: is perfectly positioned, be priced at the bottom of expected range, has ideal age, an MTBF at the top of range.

Segment circle

• Any product that falls outside of this is dropped from consideration. The segment circle has a radius of 4.0 units. ( customers wont buy it) 

• Scores drop 99% for products that are almost to the edge of the circle, what we call the rough cut

Pricing of segments ( cutoff)

• Price ranges in all segments drop $0.50 per year.

• Sensors priced $1.00 above or below the segment guidelines lose about 20% of their customer survey score ( they continue to lose around 20% with every dollar over) —> $5 and over = no purchases

MTBF (cutoff)

• Products with an MTBF 1,000 hours below the segment guideline lose 20% of their customer survey score. Products continue to lose approximately 20% of their customer survey score for every 1,000 hours below

• At 5,000 hours below the range, demand for the product falls to zero

Estimating customer survey score:

• is your score divided by the sum of the scores of competitors and you

Base scores

The segment weighs the criteria at: Age 47%, Price 23%, Positioning 21% and MTBF 9%. You can convert these percentages into points then use these numbers to estimate a base score for your product. —> base score can fall because of poor Awareness (Promotion), Accessibility (Sales) or the credit terms you extend to your customers.

Sellers market

Usually, a product with a low customer survey score has low sales. However, if a segment’s demand exceeds the supply of products available for sale, a seller’s market emerges. In a seller’s market, customers will accept low-scoring products as long as they fall within the segment’s rough cut limits.

Forecasting:

last years production * ( 1 + annual growth rate)

Sales revenue calculation

based on its price multiplied by the lesser of either: Your Forecast The total number of units available for sale

HR

• Ability to invest in the people that run your company

• you have the opportunity to invest in three areas of your company: Research & Development, Marketing, and Production

HR investments

• Manufacturing – Training & Assembly Teams

  • Determine the investment in training your manufacturing employees to work in assembly teams. 

• Scientists – Recruitment & Retention

  • Determine how much you will spend to recruit and retain scientists to work on new R&D projects for your company. This will impact how quickly you release new products and product updates,

• Sales – Compensation

  • Determine how much you will compensate your sales force. This decision will impact how accessible your products are to customers and your employee turnover.

TQM ( total quality management)

• With TQM active, you can reduce material, labor, and administrative costs, shorten the length of time required for R&D projects to complete, and increase demand for the product line. 

• If you are keeping automation levels low so R&D projects complete more quickly, you might want to invest in areas that lower labor costs (for example, Quality Initiative Training)

TQM Process management initiatives

• CPI (Continuous Process Improvement) Systems - Reduces material cost and to a lesser degree labor costs. 

• Vendor/JIT (Just in Time [Inventory]) - Reduces material costs and administrative overhead. 

• QIT (Quality Initiative Training) - Reduces labor costs.

• Channel Support Systems Increases the effectiveness of the Sales Budget, and therefore demand. 

• Concurrent Engineering - Reduces R&D cycle time

• UNEP Green Program - The United Nations Environment Program increases the effectiveness of the Sales Budge

TQM initiatives

• Benchmarking - Reduces administrative overhead.

• Quality Function Deployment Effort - Reduces R&D cycle time and enhances the effectiveness of the Promotion and Sales Budgets

• CCE (Concurrent Engineering)/6 Sigma Training - Reduces material costs and labor costs.

• GEMI TQEM Sustainability - The Global Environmental Management Initiative Total Quality Environmental Management initiative reduces labor costs as it minimizes environmental risks

Income statement

• Your company can use the income statement to diagnose problems on a product-byproduct basis.

• Subtracting variable costs from sales determines the contribution margin (The contribution margin measures how much money remains from sales revenue after paying for all variable production costs.)

The six basic strategies

Broad cost leader: presence in all segments, gain advantage by low product cost —> compete on price which is lower than average

Niche cost leader (low tech): concentrates primarily on the Traditional and Low End. keeping costs to a minimum, enabling the company to compete on the basis of Price, which will be below average.

Niche Differentiator (High Technology):focuses on the high technology (High End, Performance and Size).gain a competitive advantage by distinguishing its products with an excellent design, high Awareness, easy Accessibility and new products. 

Cost Leader with Product Lifecycle Focus: keep costs low —> Products will begin their lives in the High End, mature into Traditional and finish as Low End products.

Differentiator with Product Lifecycle Focus:concentrates on the High End, Traditional and Low End segments. gain a competitive advantage with excellent design, high Awareness, easy Accessibility and new products. Products will keep pace with the market, offering improved size and performance. The company will price above average and will expand capacity as it generates higher demand