strategic reportsadf on practice round 6

Analysis of Daniel Renick’s

Practice Round Six Results

Authorized by: Dr. Miceli

Prepared by: Michael C. Jewell

Submission Date: May 2, 2010

May 2, 2010

Dr. Miceli

PO Box 1000

Athens, WV 24712-1000

Dear Dr. Miceli:

I am pleased to submit this analytical report on Daniel Renick’s

practice round six results. The report systematically reviews the

decisions made my Mr. Renick within each of the seven decision modules

that are available in the simulation.

The areas that are dissected in this analysis are Research and

Development, Marketing, Production, Finance, Human Resources, Total

Quality Management, and Labor Negotiations. Following the analysis of

these sections, recommendations for improvement follow.

The analysis found that Mr. Renick’s company is experiencing some

financial shortfalls that are a result of products not being

positioned well in relation to the competition and overspending on

plant improvements. These two factors have led to large amounts of

debt and emergency loans.

I thank you for your review of this analytical report and have found

that through its preparation I have a better understanding of the

material that exists within the Capsim Capstone Simulation.

Sincerely,

Michael C. Jewell

pg. i

Table of Contents

Executive Summary .................................................... 1

Highlights ......................................................... 1

Conclusions ........................................................ 1

Recommendations .................................................... 2

Introduction ......................................................... 3

Limitations and Delimitations ...................................... 3

Assumptions ........................................................ 4

Methods and Procedures ............................................. 4

Research and Development ............................................. 4

Traditional Market Segment ......................................... 4

Low Tech Market Segment ............................................ 5

High Tech Market Segment ........................................... 5

Performance Market Segment ......................................... 6

Size Market Segment ................................................ 6

Marketing ............................................................ 7


Low Tech Market Segment ............................................ 7

High Tech Market Segment ........................................... 8

Performance Market Segment ......................................... 8

Size Market Segment ................................................ 9

Production ........................................................... 9


Low Tech Market Segment ........................................... 10

High Tech Market Segment .......................................... 10

Performance Market Segment ........................................ 10

Size Market Segment ............................................... 11

Finance ............................................................. 11

pg. ii

Cash Flow Statement ............................................... 11

Balance Sheet ..................................................... 11

Income Statement .................................................. 12

Financial Ratios .................................................. 12

Human Resources ..................................................... 13

Total Quality Management ............................................ 14

Labor Negotiations .................................................. 15

Summary ............................................................. 15

Conclusion .......................................................... 16

Recommendations ..................................................... 16

Research and Development .......................................... 16

Marketing ......................................................... 16

Production ........................................................ 17

Finance ........................................................... 18

Human Resources ................................................... 19

Total Quality Management .......................................... 19

Labor Negotiations ................................................ 20

pg. 1

Executive Summary

The purpose of this paper is to analyze, draw conclusions, and

offer recommendations after reviewing my classmate Daniel Renick’s

practice round six results. This analysis follows a systematic

approach similar to making decisions within the Capsim Capstone

Simulation Program.

The problem to be investigated within this analysis is to

highlight decisions made by Mr. Renick that need improvement in order

help his company become more profitable. By completing this analysis

and offering recommendations, both my and Mr. Renick’s understanding

of business operations within a company should be improved.

Highlights

During this round, Mr. Renick was attempting to catch up with his

competitors because his market share had fallen to 14.46% and he was

trying to gain it back. His strategy of broad differentiation fell

short with four out of the five products his company offers falling to

last place in sales within their respective segments. This led to a

loss of $13,108,602 when combined with excessive spending on plant

improvements and having to pay off large amounts of current debt.

Conclusions

Although attempting to regain lost market share, the prices for

Mr. Renick’s products were too high and his positioning of products

relative to the competition was substandard. Also, automation levels

for production were too low and labor costs were too high on half of

his products to create a substantial enough contribution margin to go

pg. 2

toward earnings. These occurrences combined with overspending on plant

improvements led to the inevitable necessity of a large emergency loan

to keep the company operational.

Recommendations

Recommendations for Research and Development include positioning

products more closely with the top selling competition. On half of the

products Mr. Renick offers, the revision date was in the middle of the

year and could have been further improved during the year to better

meet the competition’s standards and achieve more sales.

Marketing recommendations include lowering the prices on four out

of the five products offered because they were higher than competing

products with better performance and size coordinates.

Production recommendations encompass increasing the automation

levels on products with contribution margins below 30% to reduce the

effect of increasing labor costs and increase earnings.

Finance recommendations include improving earnings through

increased sales as a result of better product placement and pricing.

Also, spending on plant improvements should be funded through long

term debt and should take a gradual approach toward improvement.

Human Resources recommendations are such that recruiting spending

and training hours be increased to improve the productivity index.

Total Quality Management recommendations include focusing more on

reducing material, labor, and administrative costs.

Labor Negotiations recommendations include positioning the

starting and ceiling negotiation positions with the labor demands in

between them to avoid the strike days that were incurred.

pg. 3

Introduction

The Capsim Capstone Simulation Program is a great tool for

students to put their acquired business knowledge to work. This

program presents real world challenges that reveal the strengths and

weaknesses within business students and get them ready for workplace

situations after graduation.

The purpose of this report is to analyze the results of my

classmate Daniel Renick’s round six practice decisions for the Capsim

Business Simulation and offer potential recommendations for

improvement. The scope of this analysis will include and discuss the

Capsim Simulation decision areas of Research and Development,

Marketing, Production, Finance, Human Resources, Total Quality

Management, and Labor Negotiations. Upon completing the analysis of

these decision sections within the simulation, recommendations for

improvement within the listed decision areas will follow.

Limitations and Delimitations

Limitations within this report include interpreting the decisions

made by Mr. Renick in an objective manner. Also, these interpretations

should offer constructive criticism for improvement in the form of

recommendations and not ridicule.

The delimitations of this report are constrained to the analysis

and interpretation of the main decision modules listed above and the

outcomes that are a result of Mr. Renick’s decisions within each

module.

pg. 4

Assumptions

Within this report it is assumed that Mr. Renick is attempting to

accomplish what is best for his company. This includes profitability,

a contribution margin above thirty percent, and having enough

production capacity and suitable products to please customers.

Methods and Procedures

With this business simulation program students must make

decisions each round within the seven decision modules listed

previously by analyzing the results of the previous round. Each module

has its own series of decision possibilities ranging from Research and

Development revision dates to financing activities such as issuing

stocks or bonds.

This report will follow a similar systematic approach to

analyzing Mr. Renick’s round six results as if potential decisions for

round seven were to be made. Each module will be dissected in order to

arrive at recommendations for improved results.

Research and Development

Traditional Market Segment

The positioning of the product Able is set at 9.5 performance and

10.6 size. This positioning is above the target position within the

segment of 9.2 and 10.8, but competing top products have their

positioning placed at 10.1 and 9.9. Furthermore, the revision date on

Able is 8/30/2016. This shows that there was available time to make

Able more competitive. Able’s mean time before failure is where it

should be comparative to the top selling products at 18,000 hours.

pg. 5

Mr. Renick’s placement of Able below the specifications of his

better selling competitors caused him to become fifth in sales within

the traditional segment, but third in December customer surveys. This

placement within December customer surveys shows that there may be an

increase in sales next round.

Low Tech Market Segment

The positioning of Acre within this segment is 4.4 performance

and 16.2 size. It is below the target of 4.7 and 15.3, but this is a

good approach within this segment due to the importance of age

perception by customers purchasing low tech products. This has made

Acre the top selling product within this segment and has gained the

most favorable December customer surveys as well. The mean time before

failure is at 12,000 hours where it should be to be competitive within

this segment. Overall, Mr. Renick’s decisions for Research and

Development pertaining to Acre have garnered desirable results.

High Tech Market Segment

Mr. Renick’s positioning of his high tech product Adam is at 14

performance and 6.2 size. This positioning is close to the target of

14.3 and 5.7. However, the top selling products in the segment are

positioned at 14.7 and 5.4. This has caused Adam to fall to sixth in

both sales and December customer surveys. The mean time before failure

is in line with the competition at 25,000 hours.

With Adam, Mr. Renick fell behind the curve for improvements of

this product in earlier rounds and is now not able to keep up. This is

evidenced by his late revision date of 11/1/2016 that could have been

pg. 6

extended another month, but still most likely would not have made a

significant increase in sales.

Performance Market Segment

Mr. Renick’s positioning of the product Aft is at 14.4

performance and 12.4 size. This is well below the target of 15.4 and

11.8. The top products in the segment are positioned at 15.7 and 11.5

and are much closer to the target coordinates. Similar to the results

for the high tech segment, Aft came in sixth in both sales and

December customer surveys. Also, the mean time before failure on Aft

is well placed with the competition at 27,000 hours.

The revision date for Aft is 5/11/2016. This shows that almost

seven months of time for revisions were available to improve the

product more during this round. Failure to take advantage of this has

let Aft fall behind the curve in development and ability to compete

with other products in the segment.

Size Market Segment

As with Adam and Aft within their respective segments, the

positioning of Agape within the size segment is below the competition.

Agape’s 8.5 performance is above the target of 8.2, but its 5.0 size

is behind the target of 4.6. Furthermore, the competition’s

positioning is ahead of the curve in both performance and size.

The positioning of Agape behind the competition has also caused

it to become sixth in both sales and December customer surveys. The

mean time before failure is in line at 19,000 hours, but is not enough

to create more sales.

pg. 7

Mr. Renick’s positioning of Agape and results are most likely due

to falling behind in Research and Development in earlier rounds. The

11/22/2016 revision date for this product shows that not much time was

available for further product improvement and is a direct result of

falling behind early.

Marketing


The price of Able within this segment is $28 while the top

competing products are at $27. These two prices are close, but

reduction to the top product’s pricing could improve sales with the

moderately price conscious customers within the traditional segment.

Also, a reduction in price should be considered for Able because its

positioning is not up to par with the top products.

The promotion budget for Able at $1,300,000 has created a

competitive accessibility rating of 78%. The sales budget of

$2,142,000 resulted in an 86% customer awareness rating, but may be a

little excessive during these later rounds.

Forecasting for Able was well done with 15,000 units left in

inventory. Overall, the forecasting has helped this product create

income.


The price for Acre is at $19 and is the top product in this

segment. Mr. Renick’s promotion budget for this product is good at

$1,300,000 and yields the second best customer awareness rating of

79%. Acre’s sales budget at $2,053,000 has created an accessibility

pg. 8

rating of 72%, but could be reduced a little during these later

rounds.

Forecasting for Acre during this round was good, but it stocked

out. This is not such a bad result for this product though because it

still was the top selling product within the low tech market segment.


Pricing for Adam within this segment is set at $38 while the top

products are at $37. Reductions in price could have helped sales not

only just to keep up with the competition, but because Adam’s

positioning is not as good as the top products.

The promotion budget is at $850,000, yet still yields the highest

customer awareness in this segment at 84%. It was smart to leave the

promotion budget low because customer awareness was already high. Mr.

Renick’s sales budget for Adam was also well placed at $1,607,000 and

created a comparable accessibility rating of 70%.

Forecasting for Adam was off the mark and resulted in 206,000

units left in inventory. However, some of this excess inventory could

be a result of the bad economy variable that is placed within the

circumstances of round six.


The pricing for Aft is $33. As with Adam, lowering the price of

Aft should be considered because the competition’s price is at $32 and

Aft’s positioning is worse than the competition.

Aft’s promotion budget is in line with the competition at

$1,100,000 and resulted in the third best customer awareness rating of

pg. 9

77%. The sales budget is set at $1,428,000 and only yields an

accessibility rating of 61%.

Mr. Renick’s forecasting for Aft was good with only 47,000 units

remaining in inventory at the end of the year.

Size Market Segment

The pricing of Agape is at $34 and should be lowered to compete

with the top products priced at $32 and $31. Lowering the price should

also be considered because Agape is positioned below the competition.

Agape’s promotion budget is well set at $1,000,000 because it has

the highest customer awareness rating of 79%. The sales budget is also

well placed at $1,696,000 because it yields a competitive

accessibility rating within the segment at 70%.

The forecasting for Agape was well off the mark with 560,000

units left over in inventory. Some of this excess inventory can be

attributed to the poor economy in round six, but most of it is

probably a result of not taking into account the reductions in sales

that occur with a bad economy.

Production


The capacity for Able is 2,285,000 units and 1,670,000 units sold

during this round. This capacity is a little high when compared to

what actually sold, but will soon be used during the normal economy

rounds of seven and eight. Overall, keeping the capacity for Able

where it is should be sufficient for the next round.

pg. 10

Automation for Able is at 5.0 and resulted in a contribution

margin of 35% for the product. This is good, but could be increased to

6.0 when funding allows.


The capacity for Acre is at 3,950,000 units for the next round

because Mr. Renick purchased more due to the threat of stocking out.

This new capacity amount should be sufficient for the next rounds

production.

Acre’s automation rating is 5.0 and only results in a

contribution margin of 21%. Consideration should be placed on

increasing this to 6.0 or 7.0 in the future to increase the

contribution margin overall.


Adam’s capacity is 900,000 units for this round and the next

round. 678,000 units sold during this round, so leaving the capacity

where it is was a good move by Mr. Renick.

The automation rating for Adam is at 5.0 and results in a 34%

contribution margin. This is acceptable for this round, but increasing

it to 6.0 may be necessary to help increase the contribution margin

when material costs rise as improvements are made.


Capacity for Aft within this segment is 1,000,000 units for the

next round with 748,000 units selling this round. This amount of

capacity should be enough for the next round. However, more capacity

may need to be purchased for round eight.

pg. 11

The automation rating for Aft is at 3.0. This automation rating

is insufficient and only results in a contribution margin of 20% for

the product because of increased labor costs. The automation rating

should potentially be placed at 5.0 or 6.0 to alleviate this problem.

Size Market Segment

The capacity for Agape is 1,190,000 for the next round. This

amount of capacity is a little excessive due to the fact that only

496,000 units sold during round six. Therefore, keeping the capacity

at this level through the end of the simulation should be considered.

Agape’s automation rating is at 5.0, but only helps to produce a

contribution margin of 27%. Increasing the automation rating to 6.0

would help this by reducing labor costs associated with this product.

Finance

Cash Flow Statement

This statement shows that Mr. Renick’s company incurred an

overall loss of $13,109,000 during this round. This can be attributed

to the $64,760,000 spent on plant improvements during the bad economy

round. Also, within this round $48,406,000 worth of current debt had

to be paid off. All of this spending without enough income led to the

$111,224,000 emergency loan that was required to break even.

Balance Sheet

Mr. Renick’s cash being at $0 is a direct result of incurring too

much debt and having to take out an excessive emergency loan. Also as

a result of having no cash on hand, total assets are $67,000,000 below

the average of the competition. The excessive amount of current debt

pg. 12

that Mr. Renick’s company is carrying at $132,074,000 is dangerous and

will still have to be paid off very soon even though funds will most

likely not be available.

Income Statement

Sales for this round are low when compared to the competition.

Mr. Renick’s sales were only at $180,000,000 while four out of the

five competing companies were well above $200,000,000 in sales. This

low figure has also contributed to the necessity of excessive debt and

emergency loans to stay afloat.

Financial Ratios

ROS = Net Income/Net Sales

The return on sales was very low at -7.3%. This is attributed to

the lack of income that Mr. Renick’s company is experiencing due to

decreased sales, increased costs, and an overall loss.

ROA = (Net Income + Interest Expense)/Average Total Assets

Return on assets was equally low at -7.7%. The extremely low

value of this ratio is directly related to a lack of overall earnings

and operating income. Because the company experienced a loss and not a

profit, the ratio is extremely low.

INV Turnover = COGS/INV

The value of the inventory turnover ratio for this round was

1.06. This value is just barely above being equal and is a result of

having excessive inventory on hand for the products Adam and Agape.

Leverage

Mr. Renick’s leverage rating was 6.2. This is not very good and

is a result of carrying too much debt. This essentially means that the

pg. 13

amount of debt in comparison to assets is much too high. This of

course comes from the excessive emergency loans and other current debt

items that have been incurred.

ROE = Earnings Available to Common Stockholders

Common Stock Equity

The return on equity is extremely low at -48.1%. This means that

for every dollar invested in this company, 48.1 cents will be lost.

This is a direct result of sales, earnings, and net income being

severely insufficient to maintain the operations of the company

without having to take out excessive amounts of debt.

SGA/Sales

The value for this ratio is 11.5% and is not too far out of line

with the competition. It is a little higher than the competition, but

is not enough to cause the major cash deficiencies that Mr. Renick’s

company is experiencing.

Contribution Margin% = Contribution Margin$/Sales Revenue$

Mr. Renick’s overall contribution margin is 26.8%. This is not

terribly bad, but should be improved to be above 30%. With this

percentage being below 30% it does not leave a large amount of money

earned from products sold to pay for fixed costs or contribute to

operating income after all variable costs are paid for. Overall, this

contribution margin below 30% has slightly played a role in the

financial woes that occurred in round six.

Human Resources

The Human Resources module was set to where the number of

employees matched the needed complement for the round. This number

pg. 14

came to 1,163 employees with 900 working on the first shift and 263 on

the second shift. Therefore, no overtime was incurred.

The training hours per employee per year are thirty and the

recruiting spending per new employee is set at $2,000 for the round.

Although these numbers seem relatively suitable, the productivity

index of Mr. Renick’s company is still only 100.00%. This appears to

be a result of increasing training hours and recruiting spending to

the current levels recently within later rounds instead of doing so

early to achieve a more efficient productivity index.

Total Quality Management

During round six Mr. Renick spent a total of $9,000,000 on TQM.

The cumulative impacts of this round’s and previous spending resulted

in a material cost reduction of 2.69%. Other companies within the

simulation were experiencing material cost reductions of around 5%.

Increasing this percentage could be beneficial to Mr. Renick’s company

when money allows.

Labor cost reduction cumulative impacts were at 3.44% for the

round. This figure is close to the majority of the competition, which

had labor cost reduction figures of 4%. Improving this percentage

would also be beneficial to Mr. Renick’s company.

Reductions in research and development cycle time were right in

line with the competition at 21.43%, showing that some emphasis has

been placed on trying to catch products up with the competition.

However, this may be too little too late for Mr. Renick as the

majority of his products are still positioned behind the competition.

pg. 15

Reductions in administrative costs of 15.16% were far below the

competition’s reduction of 29%. This percentage could easily be

increased to help improve the bottom line of Mr. Renick’s company.

The demand increase for round six was 8.09% and was the highest

among the companies within the simulation. This figure helps Mr.

Renick’s company achieve more sales, but still is not enough to

overcome the massive amounts of debt it is carrying.

Labor Negotiations

Mr. Renick has lower labor wages per hour than the competition at

$28.83, a higher benefits package at $2,818, equal profit sharing at

2.2%, and a higher annual raise of 5.7%. These numbers were achieved

through a twenty five day strike though. Although this strike length

is relatively short, it is still a month’s worth of time with no

employee production. Therefore, in future rounds Mr. Renick should

concentrate more on placing the starting and ceiling negotiating

positions with the labor demands in between them to avoid potential

strikes that are more significant.

Summary

In an attempt to catch up with the competition, Mr. Renick has

lost the edge in competing with the other companies in the simulation.

Four out of his five products are behind the development curve in

comparison to competing products and poor sales and customer

perception are the result. Furthermore, poor financing activities have

placed the company in severe debt and have made it necessary to take

out emergency loans that only add to the total amount of debt.

pg. 16

Conclusion

Mr. Renick’s decisions in the areas of Research and Development,

Marketing, Production, Finance, Human Resources, Total Quality

Management, and Labor Negotiations have some good reasoning and

thought behind them. However, lackluster positioning of products, low

automation ratings, and excessive debt has caused his company to

produce a loss instead of a profit. Correction of these problems is

advised in order achieve improved results during competition rounds.

Recommendations

Research and Development

The main problem for Mr. Renick in the Research and Development

department is that four out of his five products are positioned behind

the competition. Emphasis needs to be placed on keeping product

performance and size in coordination with the target numbers in early

rounds so products will not fall behind. This is one of the most

important aspects of product development and should be emphasized.

Also, attention needs to be given to what the actual revision

dates are for the products. Both Able and Aft had multiple months

available for revisions because their revision dates were in the

middle of the year. This action left useful time to keep product

positioning up with the competition on the table and ultimately caused

these products to fall behind in sales.

Marketing

The pricing on every product except for Acre is too high to be

competitive with rival products within specific segments. Each of

pg. 17

these products is one to two dollars above the top selling products.

To go along with this, these four products are all positioned with

lower performance and size coordinates than the competition, thus

making them less desirable to customers.

To correct this problem, pricing on each of these products must

be reduced to at or below what the competition’s prices are. This must

be done because the positioning of each product is too low. Lowering

the prices should help in gaining more sales in intended and possibly

other market segments even though the positioning is off target.

Some forecasting corrections need to occur as well. For the most

part the forecasting was well done if this round were a normal economy

round. However, some scaling back on forecasting numbers should have

occurred due to the knowledge that round six is a bad economy round.

Interpretation of potential factors such as this on forecasting in the

future will help to alleviate excess inventory levels for Adam and

Agape.

All sales budgets above $2,000,000 should be cut back some as

well. During these later rounds spending excess amounts within the

sales budgets will have diminishing returns. Therefore, reductions

within this expenditure would help save Mr. Renick’s company some much

needed funding.

Production

The main problem in the Production department is that automation

levels are too low to help reduce labor costs and improve the overall

contribution margin. This is especially prevalent with the products

Acre, Aft, and Agape. Each of these products has a contribution margin

pg. 18

below 30% and is dragging down the overall contribution margin of the

company.

These three product lines need increases in automation of 2.0

points or 20% in order to help Mr. Renick’s company. Doing this would

reduce the labor costs of each of these products and boost their

contribution margins as well. Ultimately, this would be a step in the

right direction toward helping the company become more profitable.

Finance

Virtually all the financial ratios and debt levels of Mr.

Renick’s company need improvement. The three main areas that must be

emphasized to improve the financial status of Mr. Renick’s company are

selling more inventories, reducing liabilities, and improving overall

earnings.

In order to sell more inventories or reduce the amount of

inventory left over at the end of the year, forecasting and correct

product positioning must occur. More emphasis must be placed on being

aware of potential forecasting hardships such as poor economy rounds.

Along with this the product placement has to be close or equal to the

competition’s in order to be competitive and get more inventories out

of the warehouse and into the customer’s hands. This includes

comparable pricing of products as well.

Reductions and better management of the company’s liabilities

must be completed. For example, spending on plant improvements should

not be so extravagant during a poor economy round. Also, current debt

should be avoided unless completely necessary. The excessively high

level of current debt that exists within Mr. Renick’s company is the

pg. 19

main contributing factor to why the company incurred a major loss

instead of a profit this round.

By completing the tasks of selling more inventory and managing

liabilities in a more responsible manner, it becomes easier to focus

on improving overall earnings for the company. If these three things

are focused on from the beginning of the simulation, such large losses

and emergency loans can be avoided.

Human Resources

As stated earlier, the productivity index of Mr. Renick’s company

remains at 100.00% even though 30 training hours per employee per year

and $2,000 recruiting costs are set within the module. In order to

boost this productivity index and become a more efficient workforce,

the training hours per employee per year should be increased to 40.

Also, the recruiting spending on each new employee should be raised to

$3,000 so more productive talent can be brought into the workforce and

improve the overall productivity index.

Total Quality Management

In order to receive better cumulative impacts from TQM, more

emphasis should be placed on reducing material costs, labor costs, and

administrative costs. Increasing the reductions in these areas would

help improve the overall contribution margin of Mr. Renick’s company

and would help to improve earnings as well. Overall, this would be a

good start at trying to catch up with the competition in terms of

lowering expenses.

pg. 20

Labor Negotiations

Mr. Renick had twenty five strike days at the end of this round

that were a result of unsatisfied workers during the negotiation of

their labor contract. Their dissatisfaction was a direct result of the

starting and ceiling negotiations being too low.

To correct this problem and avoid labor strikes in future rounds,

consideration should be placed on positioning the starting and ceiling

negotiating levels with the labor demands being more directly in

between them. This would better satisfy the labor demands and reduce

overall strike days or even eliminate them. This will also help to

reduce the turnover rate of 9.9% to a more manageable level.

strategic reportsadf on practice round 6

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