2025 Foundation Team Member Guide PDF

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 Unforgettable Business Learning USA & Canada 877.477.8787 Outside USA & Canada +1.312.477.7200 WWW.CAPSIM.COM   Management Tools 1 Introduction 1.1 The Industry Conditions Report Each simulation industry is unique. As your simulation starts, the Congratulations, you are now in charge of a multimillion dollar Industry Conditions Report, which is explained in Chapter 2, will company. You manufacture sensors, which you market to other outline the beginning business environment, including customer manufacturers. They put your products into the devices they sell. buying criteria. Your company was created when the government split a monopoly into identical competitors. As a monopoly, operating inefficiencies The Industry Conditions Report is available from your and poor product offerings were not addressed because: simulation Dashboard. Increasing costs could be passed onto customers; and Mediocre products would sell because customers had no 1.2 Management Tools other choices. Here are the tools you need to run your company. While last year’s financial results were decent, your products are getting old, your marketing efforts are falling short, your 1.2.1 The Rehearsal Tutorial production lines need revamping and your financial management is Think of the Rehearsal Tutorial as a driving school for the almost nonexistent. simulation. The tutorial will show you ways to steer the company, including how to: Competition in the post-monopoly era means you can no longer ignore these issues. If you do, competitors with better products and/ Invent and revise products; or lower prices will take your market share. Make marketing decisions; Schedule production and buy/sell equipment; and Sensors Are Everywhere... Ensure your company has the financial resources it needs for the upcoming year. The sample resources used for the Rehearsal, including its Foundation FastTrack (see below) and Industry Conditions Report, mirror those used in the actual simulation. The Rehearsal is available from your simulation Dashboard. 1.2.2 The Foundation FastTrack Every round, you and your competitors will have access to an industry newsletter called the Foundation FastTrack. The FastTrack (described in Chapter 5) is an extensive year-end report of the sensor industry. It includes customer buying patterns, product positioning, public financial records and other information that will help you get ahead. In business, knowledge is power. If you want to evaluate your company’s performance or analyze your competitors, the FastTrack is the place to start. Every product’s Customer Survey Score (Chapter 3) can be found Sensors are devices that observe physical conditions. For in the FastTrack’s Segment Analysis pages. These scores example, the average cell phone contains dozens of sensors determine sales distribution. In general, the higher the score, the that allow it to interpret touch, spatial orientation and better the sales. signal strength. New sensor businesses are created every day in areas as The FastTrack Reports “Last Year’s Results” diverse as security, aeronautics and biomedical engineering. The FastTrack available at the start of Round 1 displays You are in a business-to-business market, not a direct-to- results for Round 0, when all companies were equal just after consumer market; the sensors your company manufactures the monopoly’s breakup. The FastTrack available at the start are incorporated into the products your customers sell. of Round 2 will display the results for Round 1. As the simulation progresses and strategies are implemented, results among the competing companies will begin to vary. Team Member Guide 1 Company Departments The FastTrack is available from two locations: 1.3 Company Departments From the Foundation Spreadsheet, click Reports in the The Rehearsal Tutorial and Chapter 4 discuss company activities. You menu bar; and have four main departments or functional areas: On the website, log into your simulation and click the Reports link. Research & Development, or R&D 1.2.3 The Situation Analysis Marketing Completing the Situation Analysis (described in Chapter 9) will Production enable you to understand current market conditions and how the Finance industry will evolve in the next few years. It will assist you with your Many simulations utilize the Human Resources and TQM (Total operational planning. Quality Management)/Sustainability modules. These modules require additional management decisions. Your simulation The Situation Analysis comes in two versions: Dashboard will tell you if the modules are included. Online interactive Companies use the Foundation Spreadsheet to enter Downloadable PDF (pen and paper) departmental decisions. The Situation Analysis is available from your 1.3.1 Research & Development (R&D) simulation Dashboard. Your R&D Department designs your product line. The department needs to invent and revise products that appeal to your customers’ 1.2.4 Proformas & Annual Reports changing needs. Proformas and annual reports are specific to your company. Proformas are projections for the upcoming year. Annual reports are 1.3.2 Marketing the results from the previous year. Your Marketing Department prices and promotes your products. It The proformas will help you envision the impacts of your pending interacts with your customers via its sales force and distribution decisions and sales forecasts. The annual reports will help you system. Marketing is also responsible for sales forecasts. analyze last year’s results. 1.3.3 Production Proformas are only available from the Foundation Your Production Department determines how many units will be Spreadsheet’s Proformas menu. manufactured during the year. It is also responsible for buying and selling production lines. To access the annual reports: 1.3.4 Finance From the Foundation Spreadsheet, click Reports in the Your Finance Department makes sure your company has the financial menu bar; or resources it needs to run through the year. The department can raise On the website, log into your simulation then click the money via one-year bank notes, 10-year bonds or stock issues. Reports link. The department can also issue stock dividends, buy back stock or 1.2.5 The Foundation Spreadsheet retire bonds before their due dates. The Foundation Spreadsheet is the nerve center of your company where you formulate and finalize management decisions for every 1.3.5 Plug-ins department. Plug-ins are different than modules. Plug-ins and their decisions have a greater overall impact on your organization. After you log into your simulation, the spreadsheet is For example, the simulation might include the Ethics plug-in, which available from the Decisions link. presents you with an unexpected dilemma. Group discussion and consensus is imperative because your decisions will affect your 1.2.6 Just in Time Information financial results. In the spreadsheet decision areas, look for the flag symbol shown to the right. Clicking it will give you detailed information about the area Your simulation Dashboard will notify you if a plug-in has you are viewing. been scheduled. 2  Buying Criteria 1.4 Inter-Department Coordination After the conclusion of the Practice Rounds the simulation is reset and the real competition begins. Now it’s time to drive your company 1.4.1 R&D and Marketing to success! Companies compete for up to eight rounds, with each round simulating one year in the life of your company. R&D works with Marketing to make sure products meet customer expectations. 1.5.1 Decision Audits 1.4.2 R&D and Production The Decision Audit is a complete trail of all team decisions. It will R&D works with Production to ensure assembly lines are purchased help you identify your decision-making strengths and weaknesses. for new products. If Production discontinues a product, it should notify R&D. The audit is available from two locations: 1.4.3 Marketing and Production From the Foundation Spreadsheet, click Help in the menu bar; or Marketing works with Production to make sure manufacturing quantities are in line with forecasts. Marketing’s market growth On the website, log into your simulation then click the Decision Audit link. projections also help Production determine appropriate levels of capacity. If Marketing wants to discontinue a product, it tells 1.6 Company Success Production to sell the product’s production line. The board of directors, shareholders and other stakeholders expect 1.4.4 Marketing and Finance you to make the company a market leader. Successful managers will: Marketing works with Finance to project revenues for each product and to set the Accounts Receivable policy, which is the amount of time Analyze the market and its competing products; customers can take to pay for their purchases. Create and execute a strategy; and Coordinate company activities. 1.4.5 Finance and Production Best of luck in running a profitable and sustainable company! Production tells Finance if it needs money for additional equipment. If Finance cannot raise enough money, it can tell Production to scale back its requests or perhaps sell idle capacity. 1.4.6 Finance and All Departments 2 Industry Conditions The Finance Department acts as a watchdog over company expenditures. Finance should review Marketing and Production The information in your Industry Conditions Report will help you decisions. Finance should cross-check Marketing’s forecasts and understand your customers. pricing. Are forecasts too high or too low? Will customers be willing to pay the prices Marketing has set? Is Production manufacturing Your customers fall into different groups, which are represented by too many or too few units? Does Production need additional market segments. Customers within a market segment have similar capacity? Has Production considered lowering labor costs by needs. The segments are named for the customer’s primary purchasing automation? requirements such as: Low Tech 1.5 Practice and Competition Rounds High Tech Practice Rounds allow you to organize workflow among the members The Industry Conditions Report lists market segment sales of your company. You will begin to compete against the other percentages and projected growth rates unique to your simulation. companies in your simulation or, if you are in a Footrace competition, against a common set of computer-run companies. The Industry Conditions Report is published once at the beginning of the simulation. It is available from your simulation Dashboard. Don’t confuse the Rehearsal Tutorial with the Practice Rounds! During the Rehearsal Tutorial, you are shown how to make decisions in a scripted environment. During the 2.1 Buying Criteria Practice Rounds, you can experiment with your decisions in a Customers within each market segment employ different standards competitive environment. as they evaluate products. They consider four buying criteria: Price, Age, MTBF (Mean Time Before Failure) and Positioning. Team Member Guide 3  Buying Criteria A product with a 2.1.1 Price performance of 8 Each segment has different price expectations. Low Tech wants and a size of 12 is inexpensive products while High Tech, seeking advanced technology, positioned here is willing to pay higher prices. 2.1.2 Age Each segment has different age expectations, that is, the length of time since the product was invented or revised. High Tech wants new technology while Low Tech prefers proven technology that has been in the market for a few years. 2.1.3 MTBF (Mean Time Before Failure) or Reliability MTBF (Mean Time Before Failure) is a rating of reliability measured in hours. Segments have different MTBF criteria. High Tech prefers Figure 2.1  The Perceptual Map Used in the higher MTBF ratings while Low Tech is satisfied with lower ratings. Simulation: The Perceptual Map plots product size and performance characteristics. 2.1.4 Positioning Sensors vary in their dimensions (size) and the speed/sensitivity 2.1.5 Market Segment Positions on the with which they respond to changes in physical conditions Perceptual Map (performance). Combining size and performance creates a product Market segments have different positioning preferences. The Low attribute called positioning. Tech segment is satisfied with inexpensive products that are large in size and slow performing. It wants products that fall inside the The Perceptual Map upper-left set of dashed and solid circles in Figure 2.2. The High Tech Positioning is such an important concept that marketers developed a segment wants products that are faster performing and smaller in tool to track the position of their products and those of their size. It wants products that fall within the lower-right set of dashed competitors. This tool is called a Perceptual Map. and solid circles. Note the Perceptual Map in Figure 2.1. You will see this map quite Over time, your customers expect products that are smaller and often through the course of the simulation. faster. This causes the segments to move or drift a little each month. The map measures size on the vertical axis and performance on the As the years progress the locations of the circles significantly change. horizontal axis. Each axis extends from 0 to 20 units. The arrow in The example in Figure 2.3 shows the location of the market segments Figure 2.1 points to a product called Able with a performance at the end of the fourth year. Figure 2.4 shows the segments at the end measurement of 8.0 and a size of 12.0. of the eighth year. Example! See your Industry Conditions Report for exact segment locations. Figure 2.2  Beginning Segment Positions: Figure 2.3  Segment Positions at the End Figure 2.4  Segment Positions at the End At the beginning of the simulation, segment of Year 4: The segments have moved of Year 8: The segments have moved to the positions are clustered in the upper-left to the middle of the map. The overlap lower right; very little overlap remains. portion of the perceptual map. between the segments decreases because the Low Tech segment moves more slowly than the High Tech segment. 4  Buying Criteria by Segment Each year, the High Tech segment demands greater improvement In the simulation, there are zero customers interested in than the Low Tech segment. Therefore they drift at different rates. products positioned outside of the dashed circles. High Tech moves faster and farther than Low Tech. As time goes by, the overlap between the segments diminishes. Your R&D and Marketing Departments have to make sure your products keep up with changing customer preferences. To do this, Drift rates are published in the Industry Conditions Report. R&D must reposition products, keeping them within the moving segment circles. See “4.1 Research & Development (R&D)” for Market segments will not move faster to catch up with products that more information. are better than customer expectations. Customers will refuse to buy a product positioned outside the circles. Customers are only interested 2.2 Buying Criteria by Segment in products that satisfy their needs. This includes being within the circles on the Perceptual Map! Buyers in each segment place a different emphasis upon the four buying criteria. For example, some customers are more interested in price, while others are more interested in positioning. Perceptual Maps Can Be Used for Many Types of Products... Positioning criteria change every year. Price, age and MTBF Perceptual Maps can be used to plot any two product criteria always remain the same. characteristics. For example, cereal manufacturers could plot nutrition and taste. The dots in the figure below represent Buying Criteria for the previous year are reported in the Foundation sales of breakfast cereals based on ratings of taste and FastTrack’s Segment Analysis pages. As you take over the company to nutrition. There are few sales in the lower-left corner– not make decisions for Round 1, your reports reflect customer many consumers want products that have poor taste and expectations as of December 31, Round 0 (yesterday). The Industry poor nutrition. Conditions Report displays the Round 0 buying criteria for each As they review product sales, marketers would notice three market segment. Here are two example segments. distinct clusters. The cluster to the upper left indicates a Example 1: Customers seek proven products at a modest price. group of customers that is more interested in nutrition than taste. The cluster to the lower right indicates a group that is Age, 2 years– importance: 47% more interested in taste than nutrition. The cluster to the Price, $15.00-$35.00– importance: 23% upper right indicates a group that wants both good taste and Ideal Position, size 16.0/performance 4.0– importance: 21% good nutrition. MTBF, 14,000-20,000– importance: 9% Example 2: Customers seek cutting-edge technology in size/ performance and new designs. Ideal Position, size 12.4/performance 6.6– importance: 43% Age, 0 years– importance: 29% MTBF, 20,000-26,000– importance: 19% Price, $20.00-$40.00– importance: 9% 3 The Customer Survey Score In any month, a product’s demand The clusters, or market segments, could then be named is driven by its monthly customer “Taste,” “Nutrition” and “Taste/Nutrition.” The simulation uses survey score. Assuming it does not Watch a video overview at: a similar positioning method to name its market segments. run out of inventory, a product with http://capsim.com/go/v/fcss a higher score will outsell a product with a lower score. Team Member Guide 5 Buying Criteria and the Customer Survey Score 3.1.1 Positioning Score Customer survey scores are calculated 12 times a year. The Marketers must understand both what customers want and their December customer survey scores are reported in the boundaries. In terms of a product’s size and performance (as Foundation FastTrack’s Segment Analysis pages. discussed in “Section 2.1.5”), the Perceptual Map illustrates these ideas with circles. Each segment is described with a dashed A customer survey score reflects how well a product meets its outer circle, a solid inner circle and a dot we call the ideal spot segment’s buying criteria. Company promotion, sales and accounts (Figure 3.1). receivable policies also affect the survey score. Rough Cut Circle Scores are calculated once each month because a product’s age and The dashed outer circle defines the outer limit of the segment. positioning change a little each month. If during the year a product is Customers are saying, “I will NOT purchase a product outside this revised by Research and Development, the product’s age, positioning boundary.” We call the dashed circle the rough cut boundary because and MTBF characteristics can change quite a bit. As a result, it is any product outside of it “fails the rough cut” and is dropped from possible for a product with a very good December customer survey consideration. Rough cut circles have a diameter of 4.0 units. score to have had a much poorer score–and therefore poorer sales– in the months prior to an R&D revision. Fine Cut Circle Prices, set by Marketing at the beginning of the year, will not change The solid inner circle defines the heart of the segment. Customers during the year. prefer products within this circle. We call the inner circle the fine cut because products within it “make the fine cut.” Fine cut circles have a diameter of 2.5 units. 3.1 Buying Criteria and the Customer Survey Score Ideal Spot The customer survey starts by evaluating each product against the The ideal spot is that point in the heart of the segment where, all other buying criteria. Next, these assessments are weighted by the criteria’s things being equal, demand is highest. level of importance. For example, one segment can assign a higher importance to positioning than the other. A well-positioned product Segment Movement in a segment where positioning is important will have a greater Each segment moves across the Perceptual Map a little each month. overall impact on its survey score than a well-positioned product in a In a perfect world your product would be positioned in front of the segment where positioning is not important. ideal spot in January, on top of the ideal spot in June and trail the The Industry Conditions Report and the FastTrack’s Market Segment Analysis pages break down each segment’s criteria in order of importance. A perfect customer survey score of 100 requires that the product: Be positioned at the ideal spot (the segment drifts each month, so this can occur only one month per year); be priced at the bottom of the expected range; have the ideal age for that segment (unless they are revised, products grow older each month, so this can occur only one month per year); and have an MTBF specification at the top of the expected range. Example! Your customers want perfection, but it is impractical to See your Industry Conditions Report for exact information. have “perfect” products. In many cases you will have to settle for “great” products, but the better the products, the Figure 3.1  Positioning Scores: The dashed outer circle defines the edge of the higher the costs. Your task is to give customers great rough cut. It measures 4.0 units from the center of the circle. The inner circle products while still making a profit. Your competitors face defines the edge of the fine cut. It measures 2.5 units from the center. Segment the same dilemma. ideal spots are represented by the black dots. The example on the left displays a positioning score for a segment that prefers products with slower performance and larger size. The example on the right displays a score for a segment that demands cutting-edge products with high performance and small size. The orange areas represent the segment rough cuts, where scores rapidly decrease towards zero. 6  Buying Criteria and the Customer Survey Score ideal spot in December. In December it would complete an R&D Price Rough Cut project to jump in front of the ideal spot for next year. Sensors priced $10.00 above or below the segment guidelines will not be considered for purchase. Those products fail the price rough cut. Positioning Rough Cut Sensors priced $1.00 above or below the segment guidelines lose Products placed in the rough cut area (orange rings, Figure 3.1) are about 10% of their customer survey score (orange lines, Figure 3.2). between 2.5 and 4.0 units from the center of the circle. Products here Sensors continue to lose approximately 10% of their customer survey are poorly positioned and they will have reduced customer survey score for each dollar above or below the guideline, on up to $9.99, scores. The farther they are from the fine cut circle, the more the where the score is reduced by approximately 99%. At $10.00 outside scores are reduced. Just beyond the fine cut, scores drop 1%. Halfway the range, demand for the product is zero. across the rough cut, scores drop 50%. Scores drop 99% for products that are almost to the edge of the rough cut. Price Fine Cut Within each segment’s price range, price scores follow a classic Sensors that are about to enter the rough cut can be revised economic demand curve (green curve, Figure 3.2): As price goes by Research & Development (see “4.1.1 Changing down, the price score goes up. Performance, Size and MTBF”). 3.1.3 MTBF Score The location of each segment’s rough cut and fine cut circles Each segment sets a 6,000 hour range for MTBF (Mean Time Before as of December 31 of the previous year appears on page 8 of Failure), the number of hours a product is expected to operate the FastTrack. before it malfunctions. Customers prefer products towards the top of the range. Positioning Fine Cut MTBF Rough Cut Products inside the fine cut (green areas, Figure 3.1) are within 2.5 Demand scores fall rapidly for products with MTBFs beneath the units of the center of the circle. Ideal spots for each segment are segment’s guidelines. Products with an MTBF 1,000 hours below the illustrated by the black dots. The example on the left illustrates a segment guideline lose 20% of their customer survey score. Products segment that prefers proven, inexpensive technology. The ideal spot is continue to lose approximately 20% of their customer survey score to the upper left of the segment center, where material costs are for every 1,000 hours below the guideline, on down to 4,999 hours, lower. The example on the right illustrates a segment that prefers where the customer survey score is reduced by approximately 99%. cutting-edge technology. The ideal spot is to the lower right of the At 5,000 hours below the range, demand for the product falls to zero. segment center, where material costs are higher (see Figure 4.1 for an illustration of material positioning costs). MTBF Fine Cut Within the segment’s MTBF range, the customer survey score Participants often ask, “Why are some ideal spots ahead of improves as MTBF increases (Figure 3.3). However, material costs the segment centers?” The segments are moving. From a increase $0.30 for every additional 1,000 hours of reliability. customer’s perspective, if they buy a product at the ideal spot, it will still be a cutting-edge product when it wears out. For contrast, if they buy a product at the trailing edge, it will not be inside the segment when it wears out. A product’s positioning score changes each month because segments and ideal spots drift a little each month. Placing a product in the path of the ideal spot will return the greatest benefit through the course of a year. 3.1.2 Price Score Each segment has a $20.00 price range. Customers prefer products–the ideal–towards the bottom of the range. Segment price expectations correlate with the segment’s position on the Perceptual Map. High Tech customers are willing to pay higher Figure 3.2  Classic Price/Demand Figure 3.3  Mean Time Before Failure Curve (Green Bow): As price drops, (MTBF) Score: As MTBF increases, the prices than Low Tech customers. demand (price score) rises. Scores score increases. Customers are drop above and below the price range indifferent to MTBFs above the (orange lines). segment range. Team Member Guide 7  Estimating the Customer Survey Score Customers ignore reliability above the expected range– demand builds “accessibility,” the ease with which customers can work with plateaus at the top of the range. you after they begin sourcing. To the 4 P’s we can add two additional elements– credit terms and availability. Credit terms are expressed 3.1.4 Age Score by your accounts receivable (A/R) policy. Availability addresses The age criteria do not have a rough cut; a product will never be too inventory shortages. young or too old to be considered for purchase. 3.2.1 Base Scores High Tech customers demand cutting-edge technology. They prefer To estimate the customer survey score, begin with the buying criteria newer products. Low Tech customers prefer older products with available in the FastTrack’s Segment Analysis reports. For example, proven technology. suppose the buying criteria are: Each month, customers assess a product’s age and award a score based upon their preferences. Examples of age preferences are Age, 2 years– importance: 47% illustrated in Figure 3.4. Price, $20.00-$40.00– importance: 23% Ideal Position, size 16.0 /performance 4.0– importance: 21% MTBF, 14,000-20,000– importance: 9% Age preferences for each segment are published in the A perfect score of 100 requires that the product have an age of 2.0 Industry Conditions Report and the Segment Analysis pages years, a price of $20.00, a position at the ideal spot (16.0 and 4.0) and of the Foundation FastTrack. an MTBF of 20,000 hours. 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. For example, price is worth 23 points. The perfect price of $20.00 would get 23 points, but at the opposite end of the price range, a price of $40.00 would only get one point. You can use the age and positioning charts in your Industry Conditions Report to estimate average points for those criteria. Example! However, the base score can fall because of poor awareness See your Industry Conditions Report for exact information. (promotion), accessibility (place) or the credit terms you extend to your customers. Figure 3.4  Age Scores: The example on the left displays a score for a segment that prefers products with an age of one year. The example on the right displays a score for a segment that prefers products with an age of two years. 3.2.2 Accounts Receivable A company’s accounts receivable policy sets the amount of time customers have to pay for their purchases. At 90 days there is no 3.2 Estimating the Customer Survey Score reduction to the base score. At 60 days the score is reduced 0.7%. At The customer survey score drives demand for your product in each 30 days the score is reduced 7%. Offering no credit terms (0 days) segment. Your demand in any given month is your score divided by reduces the score by 40% (see “4.4.5 Credit Policy”). the sum of the scores. For example, if your product’s score in April is 20 and your competitors’ scores are 27, 19, 21 and 3, then your 3.2.3 Awareness and Accessibility product’s April demand is: After your product leaves the factory and enters the marketplace, the calculations for its score become less exact. The score will be 20 / (20+27+19+21+3) = 22% affected by the level of the product’s awareness (the percentage of Assuming you had enough inventory to meet demand, you would people who know about your product) and its segment’s receive 22% of segment sales for April. accessibility (the number of customers who can easily interact with your company). What generates the score itself? Marketers speak of “the 4 P’s”–price, product, promotion and place. Price and product are found in the Awareness is built over time by the product’s promotion budget. buying criteria. Together they present a price-value relationship. Your Promotion budgets fund advertising and public relations campaigns. promotion budget builds “awareness,” the number of customers who know about your product before sourcing. Your sales budget (place) 8  Research & Development (R&D) Accessibility is built over time by the product’s sales budget. Sales How can you be sure of a seller’s market? You can’t, unless you are budgets fund salespeople and distribution systems to service certain that industry capacity, including a second shift, cannot meet customers within the product’s market segment. demand for the segment. In that case, even very poor products will stock out as customers search for anything that will meet their needs. Similar products with higher awareness and accessibility will score better than those with lower percentages (see “4.2 Marketing” for more information on awareness and accessibility). See “How Is the Customer Survey Score Calculated?” in the Online Guide’s FAQ|Reports section for more information on assessing your products. If the TQM/Sustainability module is enabled, some initiatives can increase the customer survey score (see “7.1 TQM/ Sustainability”). 3.3 Stock Outs and Seller’s Market 4 Managing Your Company What happens when a product generates high demand but runs out of It’s time to unlock the doors and turn on the lights. Welcome to your inventory (“stocks out”)? The company loses sales as customers turn company. The Rehearsal Tutorial (described in Section 1.2.1) shows to its competitors. This can happen in any month. you the mechanics of the company departments described below. Remember, entering decisions is the easy part; determining what The Market Share Report of the Foundation decisions to enter requires some thought. This chapter and the FastTrack (page 7) can help you diagnose stock outs Rehearsal Tutorial will help you get started. and their impacts. Every company starts the simulation with one sensor product. The product sells to both Low Tech and High Tech customers. Products Usually, a product with a low customer survey score has low sales. can be terminated or added. Your company must have at least one However, if a segment’s demand exceeds the supply of products product and cannot have more than five. Products can be targeted to available for sale, a seller’s market emerges. In a seller’s market, one segment or both segments. Your decisions, made every year on customers will accept low-scoring products as long as they fall within January 1, are carried out by your employees throughout the year. the segment’s rough cut limits. For example, desperate customers with no better alternatives will buy: Your simulation might also include additional modules A product positioned just inside the rough cut circle on and plug-ins. Your simulation Dashboard will notify you if the Perceptual Map– outside the circle they say “no” to these decisions are scheduled. the product; A product priced $9.99 above the price range– at $10.00 customers reach their tolerance limit and refuse to buy 4.1 Research & the product; and Development (R&D) A product with an MTBF 4,999 hours below the range– The Research and Development (R&D) at 5,000 hours below the range customers refuse to buy Department oversees invention and redesign. It the product. develops the innovations needed to keep the Watch out for two common tactical mistakes in a seller’s market: company ahead of the competition. R&D is responsible for the Watch a video overview at: 1. A company disregards products that are in the positioning rough “product” portion of the 4 P’s of http://capsim.com/go/v/frd cut. These products normally can be ignored because they have Marketing (“product, price, place low customer survey scores. However, when the company and promotion”). This makes R&D increases the price, the customer survey score falls below the an essential part of any marketing process. products in the rough cut areas, which are suddenly more attractive than their product. Your R&D Department invents new products and changes specifications for existing products. Changing size and/or 2. The company fails to add capacity for the next round. A seller’s performance repositions a product on the Perceptual Map. market sometimes appears because a competitor Improving performance and shrinking size moves the product unexpectedly exits a segment. This creates a windfall towards the lower right on the map (see “2.1.4 Positioning”). opportunity for the remaining companies. (However, a well-run company will always have enough capacity to meet demand from its customers.) Team Member Guide 9 Research & Development (R&D) Your R&D decisions are fundamental to your Marketing and Inventing Sensors Production plans. In Marketing, R&D addresses: New products are assigned a name (click in the first cell that reads NA in the name column), performance, size and MTBF. Of course, these The positioning of each product inside a market segment on specifications should conform to the criteria of the intended market the Perceptual Map segment. The name of all new products must have the same first letter The number of products in each segment of the company name. The age of your products The reliability (MTBF rating) of each product The Production Department must order production capacity to build the new product one year in advance. Invention projects take at least In Production, R&D affects or is affected by: one year to complete. The cost of material The purchase of new facilities to build new products Automation levels (The higher the automation level, the All new products require capacity and automation, which should be purchased by the Production Department in the longer it takes to complete an R&D project.) year prior to the product’s revision (release) date. If you don’t All R&D projects begin on January 1. If a product does not have a buy the assembly line the year prior to its introduction, you project already under way, you can launch a new project for that cannot manufacture your new product! product. However, if a project begun in a previous year has not finished by December 31 of last year, you will not be able to launch a It is not possible to produce new products prior to the revision date. A new project for that product (the decision entry cells in the R&D area new product with a revision date of July 1 will be produced in the of the Foundation Spreadsheet will be locked). second half of the year. The capacity and automation will stand idle for the first half of the year. 4.1.1 Changing Performance, Size and MTBF A repositioning project moves an existing product from one location on the Perceptual Map to a new location, generally (but not always) down and to the right. Repositioning requires a new size attribute and/or a new performance attribute. To keep up with segment drift, a product must be made smaller (that is, decrease its size) and better 0 performing (that is, increase its performance)..5 $1 Positioning Costs Positioning affects material costs (Figure 4.1). The more advanced 5.7 the positioning, the higher the cost. At the beginning of the $5 simulation, the trailing edge of the Low Tech fine cut has the lowest positioning cost of approximately $1.50; the leading edge of the 00 High Tech fine cut has the highest positioning cost of 1. $1 approximately $10.00. Reliability (MTBF) Costs The reliability rating, or MTBF, for existing products can be adjusted up or down. Each 1,000 hours of reliability (MTBF) adds $0.30 to the material cost. A product with 20,000 hours of reliability includes $6.00 in reliability costs: Figure 4.1  Approximate Material Positioning Costs: Material costs are driven by two factors, reliability (MTBF) and positioning. ($0.30 × 20,000) / 1,000 = $6.00 Positioning costs vary depending on the product’s location on the Perceptual Map. Products placed at the trailing edge of the seg- Improving positioning and reliability will make a product more ments have a positioning cost of approximately $1.50; products appealing to customers, but doing so increases material costs. placed on the arc of the leading edge have a positioning cost of approximately $10.00. Products placed on the arc halfway between the trailing and leading edges have a positioning material cost of approximately $5.75. Material costs displayed in the spreadsheet and reports are the combined positioning and reliability (MTBF) costs. While the segments will drift apart and the distance between the leading and trailing edges will increase, the positioning cost range will not change. The leading edge will always be approximately $10.00, the trailing edge will always be approximately $1.50 and the midpoint will always be approximately $5.75. 10  Marketing 4.1.2 Project Management product drops the age from 3 to 1.5 years, and customers will become The Low Tech segment circles move on the Perceptual Map at a speed interested again. of 0.5 units per year. The High Tech segment circles move at 0.7 units per year. You must plan to move your products (or retire them) as the Log into the Foundation Spreadsheet and click the Decisions simulation progresses. Generally, the longer the move on the menu. Select Research & Development. To change a product’s Perceptual Map, the longer it takes the R&D Department to complete performance, enter a number in the New Pfmn cell; to change the project. its size, enter a number in the New Size cell. To change the reliability rating, enter a number in the MTBF cell. As you vary Project lengths can be as short as three months or as long as three the specifications, observe the effect upon the revision date, years. Project lengths will increase when the company puts two or project cost, material cost and age. more products into R&D at the same time. When this happens each R&D project takes longer. Assembly line automation levels also affect project lengths. 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 The Rehearsal Tutorial’s R&D Tactics show you how to run the project costs $1,000,000. department. Log in at the Capsim website and go to the Sensors will continue to produce and sell at the old performance, size Dashboard for information about the Rehearsal. and MTBF specifications up until the day the project completes, shown on the spreadsheet as the revision date. Unsold units built prior to the revision date are reworked free of charge to match the new specifications. 4.2 Marketing Marketing functions vary widely depending on If the project length takes more than a year, the revision date the industry and company. In general, the will be reported in the next Foundation FastTrack. However, department drums up interest in the company’s the new performance, size and MTBF will not appear; old products or services through a mix product attributes are reported prior to project completion. of activities. These can include advertising, public relations and Watch a video overview at: When products are created or moved close to existing products, R&D good old-fashioned salesmanship. http://capsim.com/go/v/fmrk completion times diminish. This is because your R&D Department Your Marketing Department is can take advantage of existing technology. If the module is active, concerned with the remaining P’s (beyond R&D’s product): price, TQM/Sustainability investments can also decrease R&D times (see place and promotion. Your Marketing Department is also in charge of “7.1 TQM/Sustainability”). It is important to verify completion dates sales forecasting. after all decisions have been entered. Usually you want repositioning projects to finish in less than a year. For example, consider breaking 4.2.1 Pricing Sensors an 18-month project into two separate projects, with the first stage Price was discussed in 3.1.2. To review, appeal falls to zero when ending just before the end of the current year and the second ending prices go $10.00 above or below the expected price range. Price halfway through the following year. drives the product’s contribution to profit margin. Dropping the price increases appeal but reduces profit per unit. 4.1.3 A Sensor’s Age It is possible for a product to go from an age of 4 years to 2 years. How 4.2.2 Promotion and Sales Budgets can that be? When a product is moved on the Perceptual Map, Promotion and sales budgets affect customer awareness and customers perceive the repositioned product as newer and improved, accessibility. They also affect the customer survey score. See “3.2 but not brand new. As a compromise, customers cut the age in half. If Estimating the Customer Survey Score” for more information. the product’s age is 4 years, on the day it is repositioned, its age becomes 2 years. Therefore, you can manage the age of a product by Promotion repositioning the product. It does not matter how far the product Each product’s promotion budget determines its level of awareness. A moves. Aging commences from the revision date. product’s awareness percentage reflects the number of customers who know about the product. An awareness of 50% indicates half of Changing the MTBF alone will not affect a product’s age. the potential customers know it exists. From one year to the next, a third (33%) of those who knew about a product forget about it. Age criteria vary from segment to segment. For example, if a segment Last Year’s Awareness - (33% × Last Year’s Awareness) = prefers an age of 2 years and the product’s age approaches 3 years, Starting Awareness customers will lose interest (see Figure 3.4). Repositioning the Team Member Guide 11  Marketing If a product ended last year with an awareness of 50%, this year it will If you have two or more products that meet a segment’s fine cut start with an awareness of approximately 33%. This year’s promotion criteria, the sales budget for each product contributes to that budget would build from a starting awareness of approximately 33%. segment’s accessibility. The more products you have in the segment’s fine cut, the stronger your distribution channels, support systems, Starting Awareness + Additional Awareness from etc. This is because each product’s sales budget contributes to the Figure 4.2 = New Awareness segment’s accessibility. Figure 4.2 indicates a $1,500,000 promotion budget would add If you have one product in a segment, there is no additional benefit to 36% to the starting awareness, for a total awareness of 69% (33 + spending more than $3,000,000. If you have two or more products in 36 = 69). a segment, there is no additional benefit to spending more than a Figure 4.2 indicates a $3,000,000 budget would add just under 50% $4,500,000 split between the products, for example, two products to the starting awareness, roughly 14% more than the $1,500,000 with sales budgets of $2,250,000 each (see Figure 4.3). expenditure (33 + 50 = 83). This is because further expenditures tend to reach customers who already know about the product. Once Sales budgets are less effective when products are not your product achieves 100% awareness, you can scale back the completely positioned in the fine cut circle, when prices rise product’s promotion budget to around $1,400,000. This will maintain above segment guidelines or when MTBFs fall below 100% awareness year after year. segment guidelines. The FastTrack’s Segment Analysis reports (pages 5-6) Achieving 100% accessibility is difficult. You must have two or publish awareness percentages. more products in the segment’s fine cut. Once 100% is reached, you can scale back the combined budgets to around $3,500,000 to New products are newsworthy events. The buzz creates 25% maintain 100%. awareness at no cost. The 25% is added to any additional awareness you create with your promotion budget. The FastTrack’s Segment Analysis reports (pages 5-6) Sales publish accessibility percentages. Each product’s sales budget contributes to segment accessibility. A segment’s accessibility percentage indicates the number of customers who can easily interact with your company via Awareness and Accessibility salespeople, customer support, delivery, etc. Like awareness, if your Think of awareness and accessibility as “before” and “after” the sale. sales budgets drop to zero, you lose one third of your accessibility The promotion budget drives awareness, which persuades the each year. Unlike awareness, accessibility applies to the segment, not customer to look at your product. The sales budget drives the product. If your product exits a segment, it leaves the old accessibility, which governs everything during and after the sale. The accessibility behind. When it enters a different segment, it gets that promotion budget is spent on advertising and public relations. The segment’s accessibility. sales budget is spent on distribution, order entry, customer service, etc. Awareness and accessibility go hand in hand towards making the Figure 4.2  Promotion Budget: Increases in promotion budgets Figure 4.3  Sales Budget: For budgets above $3,000,000, the dotted red line indicates there have diminishing returns. The first $1,500,000 buys 36% aware- is no additional benefit for companies that have only one product in a segment; the dashed ness; spending another $1,500,000 (for a total of $3,000,000) red line indicates returns for companies with two or more products in a segment. Increases buys just under 50%. The second $1,500,000 buys less than in sales budgets have diminishing returns. The first $2,000,000 buys 22% accessibility. For 14% more awareness. companies with two or more products in a segment, spending $4,000,000 buys just under 35%. The second $2,000,000 buys less than 13% additional accessibility. 12  Production sale. The former is about encouraging the customer to choose your 4.3 Production product; the latter is about closing the deal via your salespeople and For manufacturers, production literally puts distribution channels. everything together. The department coordinates and plans manufacturing runs, 4.2.3 Sales Forecasting making sure that products get out Accurate sales forecasting is a key element to company success. the door. Manufacturing too many units results in higher inventory carrying Watch a video overview at: costs. Manufacturing too few units results in stock outs and lost sales In your Production Department, http://capsim.com/go/v/fprd opportunities, which can cost even more (see “10 Forecasting”). each product has its own assembly line. You cannot move a product Log into the Foundation Spreadsheet and click the Decisions from one line to another because automation levels vary and each menu. Select Marketing. Use this area to determine each product requires special tooling. product’s Price, Promotion Budget, Sales Budget and Sales As it determines the number of units to produce for the upcoming Forecast. What’s the difference between the Computer year, Production needs to consider the sales forecasts developed by Prediction and Your Sales Forecast? The Computer Prediction Marketing minus any inventory left unsold from the previous year. cannot consider what your competitors are doing. It does not know. Instead, it assumes each of your competitors will offer 4.3.1 Capacity one mediocre product (with a customer survey score of 20) in First-shift capacity is defined as the number of units that can be each segment. It benchmarks how your product would do produced on an assembly line in a single year with a daily eight-hour against this mediocre playing field. shift. An assembly line can produce up to twice its first-shift capacity with a second shift. An assembly line with a capacity of 2,000,000 The Computer Prediction, expressed as units demanded, units per year could produce 4,000,000 units with a second shift. changes as you make decisions about your product. Use the However, second-shift labor costs are 50% higher than the first shift. Computer Prediction to evaluate the impact your decisions will have upon your product’s appeal. For example, you can Each new unit of capacity costs $6.00 for the floor space plus $4.00 estimate the impact a price change will have upon demand. multiplied by the automation rating. The Production spreadsheet will calculate the cost and display it for you. Increases in capacity require The Your Sales Forecast column overrides the Computer a full year to take effect– increase it this year, use it next year. Prediction with your own prediction (see Chapter 10). Until Capacity can be sold at the beginning of the year for $0.65 on the you provide a sales forecast, the computer uses its mediocre dollar value of the original investment. You can replace the capacity Computer Prediction to predict your proforma financial in later years, but you have to pay full price. If you sell capacity for statements. Always override the Computer Prediction with less than its depreciated value, you lose money, which is reflected your own forecast. as a write-off on your income statement. If you sell capacity for more than its depreciated value, you make a gain on the sale. This The remaining cells display the financial impacts of will be reflected as a negative write-off on the income statement your decisions: (see “6.3 Income Statement”). Gross Revenue Forecast (Price multiplied by either the Computer Prediction or, if entered, Your Sales Forecast.) Variable Costs (Labor, Material and Inventory Carrying The dollar value limit of capacity and automation purchases is largely determined by the maximum amount of capital that costs subtracted from the Gross Revenue Forecast.) Contribution Margin Forecast (Gross Revenue Forecast can be raised through stock and bond issues plus excess working capital. The decision area displays this amount. minus variable costs.) Less Promotion and Sales (Contribution Margin Forecast minus the product’s Promotion Budget and Sales Budget.) 4.3.2 Discontinuing a Sensor If you sell all the capacity on an assembly line, Foundation interprets this as a liquidation instruction and will sell your remaining The Rehearsal Tutorial’s Marketing Tactics show you how to inventory for half the average cost of production. Foundation writes run the department. Log in at the Capsim website and go to off the loss on your income statement. If you want to sell your the Dashboard for information about the Rehearsal. inventory at full price, sell all but one unit of capacity. Team Member Guide 13 Production 4.3.3 Automation Reducing automation costs money. If you reduce automation, you will As automation levels increase, the number of labor hours required to be billed for a retooling cost. The net result is you will be spending produce each unit falls. The lowest automation rating is 1.0; the money to make your plant less efficient. While reduced automation highest rating is 10.0. will speed R&D redesigns, by and large, it is not wise to reduce an automation level. At an automation rating of 1.0, labor costs are highest. Each additional point of automation decreases labor costs approximately 10%. At a rating of 10.0, labor costs fall about 90%. Whenconsidering When you buy automation, automation youand might want toon its impact determine cost, it isthe returnto useful onconsider investment the (ROI). On your production income process asstatement, a series of find 10 tasks. If you last year’s werecost labor planning for theon making product a cell you are phone, you could automating. Labor costs increase each year because of an Annual Raise in complete Your labor allcost 10 savings tasks yourself. This equates to10% will be approximately an automation for each the workers’ contract. level of 1, as new point of you (the labor automation. unit) would Multiply be doing the savings by all thethe work, number and of rounds remaining in your simulation then divide it by thean there would be a very low level of automation (maybe electric screwdriver). Despite its attractiveness, two factors should be considered before total cost of the automation. If you bought a machine that automated the first 5 tasks, this raising automation: (Savings × by Remaining Rounds)level / Automation Cost = ROI is represented an automation of 5. 1. Automation is expensive: At $4.00 per point of automation, The higher your automation level, the longer it takes to retool If your your plant plant forisproduct highly utilized upgrades.your ROIiswill This be higher especially than if important raising automation from 1.0 to 10.0 costs $36.00 per unit your plant is only partially utilized (if your in high tech segments, where positioning near the cuttingplant is under- of capacity; utilized edge you might consider of technology selling is critical. excess Automate capacity). too much and the 2. As you raise automation, it becomes increasingly difficult for product designs cannot keep up with the evolving market. Clearly, the greater the ROI, the better the investment. R&D to reposition products short distances on the Perceptual Map. For example, a project that moves a product 1.0 on the map takes significantly longer at an automation level of 8.0 than at Changes in automation require a full year to take effect– change it 5.0 (Figure 4.4). Long moves are less affected. You can move a this year, use it next year. product a long distance at any automation level, but the project will take between 2.5 and 3.0 years to complete. Log into the Foundation Spreadsheet and click the Decisions menu. Select Production. Use this area to enter for each Changing Automation product: For each point of change in automation, up or down, the company is charged $4.00 per unit of capacity. For example, if a line has a A Production Schedule capacity of 1,000,000 units, the cost of changing the automation level Increases in first-shift capacity (Put a positive number in Buy/Sell Capacity.) from 5.0 to 6.0 would be $4,000,000. Decreases in first-shift capacity (Put a negative number in Buy/Sell Capacity.) Changes in automation level (Enter a number in New Automation Rating.) The Rehearsal Tutorial’s Production Tactics show you how to run the department. Log in at the Capsim website and go to the Dashboard for information about the Rehearsal. Figure 4.4  Time Required to Move a Sensor on the Perceptual Map 1.0 Unit at Automation Levels 1 Through 10 14  Finance 4.4 Finance same amount again. There are no brokerage fees for current debt. Interest rates are a function of your debt level. The more debt you Corporate finance functions differ have relative to your assets, the more risk you present to debt holders from company to company. Duties can and the higher the current debt rates. include managing financial risk, determining borrowing levels or even simple As a general rule, companies fund short term assets like Watch a video overview at: check writing. In general, accounts receivable and inventory with current debt offered http://capsim.com/go/v/ffin the department monitors by banks. the company’s flow of money, the lifeblood of any business. Bankers will loan current debt up to about 75% of your accounts Your Finance Department is primarily concerned with five issues: receivable (found on last year’s balance sheet) and 50% of this year’s inventory. They estimate your inventory for the upcoming year by 1. Acquiring the capital needed to expand assets, particularly plant examining last year’s income statement. Bankers assume your worst and equipment. Capital can be acquired through: case scenario will leave a three- to four-month inventory and they Current Debt will loan you up to 50% of that amount. This works out to be about Stock Issues 15% of the combined value of last year’s total direct labor and total Bond Issues (Long Term Debt) direct material, which display on the income statement. Profits Bankers also realize your company is growing, so as a final step 2. Establishing a dividend policy that maximizes the return bankers increase your borrowing limit by 20% to provide you with to shareholders. room for expansion in inventory and accounts receivable. 3. Setting accounts payable policy (which can also be entered in 4.4.2 Bonds the Production and Marketing areas) and accounts receivable All bonds are 10-year notes. Your company pays a 5% brokerage policy (which can also be entered in the Marketing area). fee for issuing bonds. The first three digits of the bond, the 4. Driving the financial structure of the firm and its relationship series number, reflect the interest rate. The last four digits between debt and equity. indicate the year the bond is due. The numbers are separated by the letter S, which stands for “series.” For example, a bond with 5. Selecting and monitoring performance measures that support the number 12.6S2017 has an interest rate of 12.6% and is due your strategy. December 31, 2017. Finance decisions should be made after all other departments enter their decisions. After the management team decides what resources As a general rule, bond issues are used to fund long term the company needs, the Finance Department addresses funding investments in capacity and automation. issues and financial structure. One of the Finance Department’s fiduciary duties is to verify that sales Bondholders will lend total amounts up to 80% of the value of forecasts and prices are realistic.